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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

Crum & Forster Holdings Corp.

Crum & Forster Holdings Corp.

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.     YES o          NO þ

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).     YES o          NO þ

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

CRUM & FORSTER HOLDINGS CORP.

FORM 10-Q

INDEX

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CRUM & FORSTER HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

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CRUM & FORSTER HOLDINGS CORP.

The accompanying notes are an integral part of the consolidated financial statements.

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CRUM & FORSTER HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

The accompanying notes are an integral part of the consolidated financial statements.

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CRUM & FORSTER HOLDINGS CORP.

The accompanying notes are an integral part of the consolidated financial statements.

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CRUM & FORSTER HOLDINGS CORP.

The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization and Basis of Presentation

	Crum & Forster Holdings Corp. (the “Company” or “Crum & Forster”) is a Delaware holding company which is 100% owned by Fairfax Inc. (“Fairfax”), a Wyoming holding company. Fairfax is wholly-owned by FFHL Group Ltd., a Canadian holding company, which is, in turn, owned by Fairfax Financial Holdings Limited (“Fairfax Financial”), a Canadian financial services holding company which is publicly traded on the Toronto Stock Exchange and on the New York Stock Exchange under the symbol “FFH”. The Company, through its subsidiaries, provides a full range of commercial property and casualty insurance distributed through an independent producer force located across the United States.
	Crum & Forster Holdings Corp. was established for the purpose of holding the capital stock of Crum & Forster Holding Inc. (“Holding”), another wholly-owned subsidiary of Fairfax, and had no operations prior to becoming the parent of Holding. On June 5, 2003, a merger of entities under common control occurred at historical cost, whereby the capital stock of Holding was contributed to Crum & Forster Holdings Corp. and, accordingly, Crum & Forster Holdings Corp. became the parent of Holding. The consolidated financial statements of Holding and its subsidiaries have become the Company’s historical financial statements.
	These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company, Holding and their wholly-owned subsidiaries, including United States Fire Insurance Company (“US Fire”), The North River Insurance Company (“North River”), Crum & Forster Indemnity Company, Crum and Forster Insurance Company and Crum & Forster Underwriters Co. of Ohio. US Fire owns 100% of the stock of Crum & Forster Specialty Insurance Company. North River owns 100% of the stock of Seneca Insurance Company, Inc. and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
	The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Such estimates and assumptions may differ from actual results.
	These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as of December 31, 2003 and related notes thereto included in the Company’s Registration Statement on Form S-4 (Registration No. 333-107722), to which Amendment No. 4 was filed with the Securities and Exchange Commission on March 15, 2004. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted herein. The accompanying consolidated financial statements reflect, in the opinion of management, all necessary adjustments for their fair statement. All such adjustments were of a normal and recurring nature. The financial results for interim periods may not be indicative of financial results for a full year.
	Certain amounts in the Company’s prior year consolidated financial statements have been reclassified to conform to the 2004 presentation.

2.   Summary of Significant Accounting Policy

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”) to address when it is appropriate to consolidate financial interests in a variable interest entity (“VIE”), a new term to define a business structure that either does not have equity investors with voting or other similar rights or has equity investors that do not provide sufficient financial resources to support its activities. For such entities, FIN 46 imposes a consolidation model that focuses on the relative exposures of the participants to the economic risks or rewards associated with a VIE’s activities, including those conveyed by derivatives, credit enhancements and other arrangements, where one party is the “primary beneficiary” and, therefore, is required to consolidate the VIE.

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The consolidation requirements of FIN 46 began to be phased-in during the first quarter of 2003, with immediate application to all new VIEs created after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46 which, among other things, delayed the required implementation for VIEs existing prior to February 1, 2003 and held by public companies to the first interim period ending after March 15, 2004. The adoption of FIN 46 had no impact on the Company’s consolidated financial statements.

3.   Investments

	Investments in available-for-sale fixed income and equity securities as of March 31, 2004 are summarized as follows:

	All securities with unrealized losses as of March 31, 2004 have been in a loss position for less than twelve months.
	The amortized cost and fair value of fixed income securities as of March 31, 2004, by contractual maturity, are shown below. Actual maturities may differ from maturities shown below due to the existence of call or put features. At March 31, 2004, securities containing call and put features represented 1.7% and 2.3%, respectively, of total fair value of the fixed income portfolio.

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	In January, March and April 2004, the Company invested $25,000, $20,000 and $30,000, respectively, in shares of HWIC Asia Fund Limited (“HWIC”) bringing the total investment in HWIC to $76,210 as of April 30, 2004. HWIC is an investment fund owned 100% by Fairfax Financial affiliates that invests in a diversified portfolio of listed equity and equity-related securities in Asia.

4.   Unpaid Losses and Loss Adjustment Expenses

	Changes in the Company’s liability for unpaid losses and loss adjustment expenses (“LAE”) are summarized as follows:

	The Company has exposure to asbestos and environmental claims arising from the sale of general liability, commercial multi-peril and umbrella insurance policies, the majority of which were written for accident years 1985 and prior.
	Estimation of ultimate liabilities for these exposures is unusually difficult due to outstanding issues such as whether or not coverage exists, definition of an occurrence, determination of ultimate damages and allocation of such damages to financially responsible parties.

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	Changes in the Company’s liability for asbestos and environmental exposures are summarized as follows:

	The Company also maintains reserves for other latent exposures such as those associated with chemicals, sick building syndrome, lead, gas and vapors and pharmaceutical products of $24,831 and $26,701, net of reinsurance, as of March 31, 2004 and December 31, 2003, respectively.

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6.   Reinsurance

	The components of the Company’s net premiums written and premiums earned are summarized as follows:

	The components of the Company’s total reinsurance recoverable are summarized as follows:

7.   Long-Term Debt

On June 5, 2003, concurrent with the merger of entities under common control described in Note 1 above, Crum & Forster Funding Corp., an unaffiliated special purpose entity, issued $300,000 aggregate principal amount of senior notes (the “Notes”) in a private placement, with the sole intent of having obligations under such Notes only until the Company could assume such obligations. On June 30, 2003, the Company assumed Crum & Forster Funding Corp.’s obligations under the Notes. The Notes, which bear interest payable semi-annually at 10.375%, mature on June 15, 2013. The net proceeds from the offering of approximately $290,955 were used to fund an interest escrow account in the amount of approximately $63,115 to make the first four semi-annual interest payments on the Notes and to pay a dividend to Fairfax in the amount of $217,885, with the remainder used to pay related financing costs. The Notes contain certain restrictions on incurrence of additional indebtedness, dividend payments to Fairfax, asset sales and certain transactions with affiliates. In addition, the Company was required by the terms of the Notes to use its best efforts to register the Notes, or similar instruments with substantially the same terms to be exchanged for the Notes, with the Securities and Exchange Commission. Pursuant to an exchange offer, which was completed on April 20, 2004, the Company issued $300,000 aggregate principal amount of registered notes with substantially the same terms as the Notes, in exchange for all of the outstanding Notes. As required under the terms of the Notes, additional interest of $208 was incurred for the period from December 28, 2003 through March 31, 2004. Additional interest of $83 was also incurred for the period from April 1, 2004 through April 20, 2004, after which such additional interest is no longer payable on the Notes.

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	For the three months ended March 31, 2004, total interest expense on the Notes was $8,439, including additional interest described above, accretion of the discount on the Notes and amortization of related deferred financing costs.
	Concurrent with the issuance of the Notes, the Company entered into a non-interest bearing standby credit agreement, subordinate to the Notes, whereby Fairfax Financial agreed, under certain conditions, to lend up to $40,000 to Crum & Forster in order to meet certain corporate obligations. Borrowings under this agreement, if any, are due and payable in June 2018. Through March 31, 2004, there have been no borrowings under this agreement.

8.   Commitments and Contingencies

The Company’s subsidiaries are involved in various lawsuits and arbitration proceedings arising in the ordinary course of business. While the ultimate outcome of such matters cannot be predicted with certainty, in the opinion of management, no such matter is likely to have a material adverse effect on the Company’s consolidated financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given matter.

9.   Segment Reporting

	The Company operates in the commercial property and casualty insurance business. Premiums earned for the Company’s lines of business are summarized as follows:

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	The losses and LAE and loss and LAE ratios of the Company’s lines of business are summarized as follows:

	The Company does not allocate investment results or certain corporate expenses for the purpose of evaluating the financial performance of each line of business.

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The following discussion relates to the consolidated results of operations, financial condition, liquidity and capital resources and critical accounting policies and estimates of the Company for the interim period indicated. References within this discussion to the “Company” or “Crum & Forster” refer to Crum & Forster Holdings Corp. and its direct and indirect subsidiaries, including United States Fire Insurance Company (“US Fire”), The North River Insurance Company (“North River”), Crum & Forster Indemnity Company (“CF Indemnity”), Crum and Forster Insurance Company (“CF Insurance”) and Crum & Forster Underwriters Co. of Ohio (“CF Underwriters”). US Fire owns 100% of the stock of Crum & Forster Specialty Insurance Company. North River owns 100% of the stock of Seneca Insurance Company, Inc. and its subsidiaries. References to “Fairfax” refer to Fairfax Inc., Crum & Forster’s parent company. References to “Fairfax Financial” refer to Fairfax Financial Holdings Limited, which holds 100% indirect ownership of Fairfax Inc.

This discussion, and the related consolidated financial statements, should be read in conjunction with the Company’s Registration Statement on Form S-4 (Registration No. 333-107722), to which Amendment No. 4 was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2004, and the consolidated financial statements as of December 31, 2003 and related notes contained therein. Certain financial information that is included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is not required for interim reporting and has been condensed or omitted herein. The financial results for interim periods may not be indicative of financial results for a full year. All dollar amounts are in thousands, unless otherwise indicated.

Forward-looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These are statements that relate to future periods and include statements regarding the Company’s anticipated performance. In addition, the outcome of pending motions or appeals, if any, related to litigation discussed herein is unknown.

Generally, the words, “anticipates”, “believes”, “expects”, “intends”, “estimates”, “projects”, “plans”, “target”, “potential”, “likely”, “may”, “could”, “should” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the Company’s actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, but are not limited to, the following:

	•	Lowering or loss of one of the Company’s financial strength ratings;
	•	Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;
	•	Occurrence of natural or unnatural catastrophic events;
	•	Exposure to emerging claims and coverage issues;
	•	Competitive conditions in the insurance market;
	•	Inability of certain of the Company’s insurance subsidiaries to pay dividends;
	•	Inability to obtain reinsurance coverage on reasonable terms and prices;
	•	Exposure to credit risk, in the event reinsurers or insureds that owe the Company premiums or reimbursement of deductibles paid by the Company on their behalf fail to pay;
	•	Inability to realize the Company’s investment objectives;
	•	Adverse developments in the prospects or results of operations of Fairfax or its affiliates;
	•	Loss of key employees;

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	•	Loss of key producers;
	•	Changes in governmental regulations;
	•	Exposure to credit risks on novated policies; and
	•	Limited ability to borrow.

Additional information regarding these factors, and others that could cause actual results to differ materially from expectations, is included in the Company’s Registration Statement on Form S-4 (Registration No. 333-107722), to which Amendment No. 4 was filed with the SEC on March 15, 2004. The information appearing under “Risk factors” in such Registration Statement is incorporated by reference into, and made a part of, Part II of this Form 10-Q. Any forward-looking statements made in this quarterly report are made by the Company as of the date of this quarterly report. Except as otherwise required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

The Company is a national commercial property and casualty insurance company with a focused underwriting strategy, targeting specialty classes of business and overlooked market opportunities. Operating through its home office and regional branch network, the Company writes a broad range of commercial coverage, including workers’ compensation, property, general liability, commercial automobile, commercial multi-peril and surety. The Company generally conducts business on a brokerage basis through approximately 1,000 producers located throughout the United States.

The Company’s management believes that the key drivers to sustained profitability at Crum & Forster include, but are not limited to, strict adherence to focused underwriting guidelines and pricing policies, continued cost containment and loss reserve adequacy. To that end, management continues to implement many changes in these and other operational areas. Specific progress includes improving pricing in each of the last three years, increasing premiums per policy, increasing the Company’s distribution network through national and wholesale brokers and reducing headcount, payroll and information technology expenses, while increasing annual premiums per employee. Management has also instituted changes to the Company’s claims and actuarial processes to improve the timeliness and accuracy of the recording of its case reserves and the adequacy of its total loss and loss adjustment expense (“LAE”) reserves.

Market conditions in the first quarter of 2004 continued to be generally favorable, characterized by price increases and improved terms and conditions in the casualty lines. Renewal pricing in the casualty lines increased in 2004 by approximately 13%, but at reduced rates over those achieved in 2003. Renewal pricing in the property lines declined in 2004 by approximately 13%; however, management believes rates remain adequate relative to the risks assumed in this line. The Company’s renewal retention ratio has declined overall in the first quarter of 2004 compared to the first quarter of 2003, primarily as a result of more competitive conditions affecting the casualty lines. New business for the first quarter of 2004 was approximately 3% lower than the prior year, principally in the property lines due to market conditions, including expanded availability of coverage from higher rated companies.

As the market softens, the Company will likely face more competition in the classes of business it writes. In the past, this competition often has resulted in less attractive pricing, terms and conditions. The Company’s underwriting strategy under such conditions is to identify and capitalize on profitable classes of business while exiting those classes and lines that no longer offer a reasonable prospect of underwriting profits, even at the expense of revenue loss. The ability to discern when to participate in and when to withdraw from the marketplace is fundamental for sustained profitability in the industry. The Company’s results in each of the last three years have been adversely affected by development of prior years’ loss and LAE reserves, particularly for asbestos liabilities. Management performs exhaustive and continuous analyses of the Company’s loss emergence and loss reserve levels and believes the Company’s reserves are adequate. However, because it takes many years for losses to be ultimately reported and paid, there is inherent uncertainty in the estimation process, particularly for asbestos exposures.

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Results of Operations

The components of the Company’s net income, and certain ratios based thereon, are summarized as follows: