UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

___________________________________________

Form 10-K

Crum & Forster Holdings Corp.

Crum & Forster Holdings Corp.
305 Madison Avenue, Morristown, New Jersey 07962
(973) 490-6600
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.              Yes [X]     No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                      [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.       Not applicable

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

Documents Incorporated by Reference
     None

CRUM & FORSTER HOLDINGS CORP.

Form 10-K

Index

2

3

The following annual report on Form 10-K relates to the business operations and financial results of Crum & Forster Holdings Corp. and subsidiaries. References in this report to the “Company” or “Crum & Forster” refer to Crum & Forster Holdings Corp. and its direct and indirect subsidiaries, including United States Fire Insurance Company (“US Fire”), The North River Insurance Company (“North River”), Crum & Forster Indemnity Company (“CF Indemnity”), Crum and Forster Insurance Company (“CF Insurance”) and Crum & Forster Underwriters Co. of Ohio (“CF Underwriters”). Effective July 1, 2004, CF Underwriters was merged into US Fire. US Fire owns 100% of the stock of Crum & Forster Specialty Insurance Company (“CF Specialty”). North River owns 100% of the stock of Seneca Insurance Company Inc. (“Seneca”) and its subsidiaries. References to “Fairfax” refer to Fairfax Financial Holdings Limited, which holds a 100% indirect interest in Fairfax Inc., Crum & Forster’s parent company.

The Company’s principal executive offices are located at 305 Madison Avenue, Morristown, NJ 07962 and its telephone number at that address is (973) 490-6600. The Company’s website is http://www.cfins.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to these reports filed or furnished pursuant to Section 13(c) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on this website as soon as practicable after they have been electronically filed with, or furnished to, the Securities and Exchange Commission.

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These are statements that relate to future periods and include statements regarding the Company’s anticipated performance. Generally, the words “anticipates”, “believes”, “expects”, “intends”, “estimates”, “projects”, “plans”, “target”, “potential”, “likely”, “may”, “could”, “should” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the Company’s actual results, performance or achievements or industry results, to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors, which are described elsewhere in this report, include, but are not limited to, the following:

	•	Lowering or loss of one of the Company’s financial strength ratings;
	•	Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;
	•	Occurrence of natural or man-made catastrophic events;
	•	Competitive conditions in the insurance market;
	•	Changes in the business or regulatory environment in which the Company operates as a result of recent insurance industry investigations by government authorities and other parties;
	•	Loss of key producers;
	•	Exposure to emerging claims and coverage issues;
	•	Inability to realize the Company’s investment objectives;
	•	Inability of certain of the Company’s insurance subsidiaries to pay dividends;
	•	Inability to obtain reinsurance coverage on reasonable terms and prices;
	•	Exposure to credit risk, in the event reinsurers or insureds that owe the Company premiums or reimbursement of deductibles paid by the Company on their behalf fail to pay;
	•	Adverse developments in the prospects or results of operations of Fairfax or its affiliates;
	•	Loss of key employees;
	•	Changes in governmental regulations;
	•	Exposure to credit risks on novated policies; and
	•	Limited ability to borrow.

Although the Company believes that these statements are based upon reasonable assumptions, management can give no assurance that the Company’s goals will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements made in this report are made by the Company as of the date of this report. Except as otherwise required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

4

PART I

ITEM 1. BUSINESS

Overview

Crum & Forster is a national commercial property and casualty insurance company with a focused underwriting strategy, targeting specialty classes of business and underserved market opportunities. The Company writes a broad range of commercial coverage, including workers’ compensation, general liability, property, commercial automobile, commercial multi-peril and surety. The Company generally conducts business on a brokerage basis through its home office and a regional branch network, allowing it to centrally control the underwriting process, respond to local market conditions and build close relationships with producers and insureds. The Company has over 1,000 producers located throughout the United States. These producers include national brokers, independent regional retail firms and wholesale brokers. The Company’s two largest producers accounted for 14% and 6% of gross premiums written in 2004.

The Company’s objective is to expand opportunistically into classes of business or market segments that are consistent with its underwriting expertise and have the potential to generate an underwriting profit. Management believes the Company’s ability to identify and react to changing market conditions provides it with a competitive advantage. Based on the experience and underwriting expertise of management, the Company seeks to write new lines of business and expand existing classes of business depending upon market conditions and expected profitability. The Company offers insurance products designed to meet specific insurance needs of targeted insured groups and underwrites specific types of coverage for markets that are generally underserved by the industry.

In 2004, the Company generated $1,139 million of gross premiums written, $918.3 million of net premiums written and $1,072.3 million of total revenues. Approximately 66% of the Company’s 2004 business related to casualty coverage and 34% to property coverage, as measured by gross premiums written. For the year ended December 31, 2004, the Company’s combined ratio was 111.8%, including a 10.6 percentage point impact from hurricanes Charley, Frances, Jeanne and Ivan. As of December 31, 2004, the Company had cash and invested assets of $3.2 billion, total assets of $6.0 billion, stockholder’s equity of $881.2 million and policyholders’ surplus of $1.2 billion.

Corporate Structure

Crum & Forster is a Delaware holding company, which is 100% owned by Fairfax Inc., a Wyoming holding company. Fairfax Inc. is wholly-owned by FFHL Group Ltd., a Canadian holding company, which is owned by Fairfax, a Canadian financial services holding company, which is publicly traded on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “FFH”.

Crum & Forster was established for the purpose of holding the capital stock of Crum & Forster Holding Inc. (“Holding”), another wholly-owned subsidiary of Fairfax Inc., and had no operations prior to becoming the parent of Holding. On June 5, 2003, a merger of entities under common control occurred at historical cost, whereby the capital stock of Holding was contributed to Crum & Forster and, accordingly, Crum & Forster became the parent of Holding.

Crum & Forster is a major component of the U.S. commercial property and casualty insurance operations of Fairfax, which is principally engaged in property and casualty insurance and reinsurance, investment management and insurance claims management. Crum & Forster was acquired by Fairfax on August 13, 1998.

5

Each of the Company’s major subsidiaries is depicted below:

6

The Company acquired Seneca and its subsidiaries in August 2000 and acquired CF Specialty (formerly Transnational Insurance Company) in December 2000. US Fire and CF Indemnity completed a redomestication from New York to Delaware in December 2003. The Company merged Crum & Forster Underwriters Co. of Ohio into US Fire effective July 1, 2004.

Crum & Forster’s insurance subsidiaries, except CF Specialty and Seneca and its subsidiaries, participate in an intercompany pooling arrangement pursuant to which the premiums, losses and other underwriting expenses of each participant are pooled by means of mutual reinsurance on a fixed-percentage basis as follows: US Fire, 76%, North River, 22%, CF Insurance, 1% and CF Indemnity, 1%. The intercompany agreement provides that US Fire, acting as the lead company, assumes from the other pool participants 100% of their premiums, losses and other underwriting expenses, and, in turn, cedes to each pool participant its participating percentage of premiums, losses and other underwriting expenses. The pooling arrangement permits each pool participant to rely on the capacity of the entire pool, rather than solely on its own capital and surplus. Further, it prevents any one pool participant from suffering undue losses, as all pool participants share underwriting profits and losses in proportion to their respective pool participation percentages. CF Specialty and Seneca and its subsidiaries operate independently from the pool.

Lines of Business

Crum & Forster offers a broad range of property and casualty insurance coverage to commercial accounts located throughout the United States. In 2004, 2003 and 2002, the Company reported $1,139 million, $1,104.2 million and $898.4 million, respectively, of gross premiums written in six major lines of business. Gross premiums written for each of these lines of business are summarized as follows:

Workers’ compensation provides coverage for the obligations of an employer under state law to provide its employees with specified benefits for work-related injuries, deaths and diseases, regardless of fault. Typically, there are four types of benefits payable under workers’ compensation policies: medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The benefits payable and the duration of such benefits are set by statute and vary by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee. The Company offers three types of workers’ compensation products:

	•	guaranteed cost products, in which policy premiums are fixed for the period of coverage and do not vary as a result of the insured’s loss experience;
	•	large deductible policies; and
	•	retrospectively rated policies.

Generally, premiums are primarily a function of:

	•	the applicable premium rate, which varies according to the employee’s duties and the business of the employer;
	•	the insured employer’s experience modification factor (where applicable); and
	•	the insured employer’s payroll.

Generally, a deposit premium is paid at the beginning of the policy period and periodic installments are paid during the policy period. The final premium is determined at the end of the policy period and after the employer’s payroll records are audited. Premiums are continually reviewed for adequacy using an actuarial analysis of current and anticipated trends.

7

The Company applies a comprehensive approach to workers’ compensation business that benefits both Crum & Forster and its insureds. Loss prevention services focused on workplace safety and the prevention of accidents are provided to the Company’s insureds. The Company emphasizes loss cost containment methods, which involve employers, employees and care providers that focus on cost-effective quality care and early return to work for injured employees. The Company also strives to prevent costs associated with fraudulent claims by applying a proactive approach to investigation and litigation of claims, where appropriate.

The distribution of total workers’ compensation gross premiums written by type of coverage is summarized as follows:

With respect to deductible policies, the average insured retention is approximately $250,000 and the average premium discount from standard premium, recognizing the reduced net loss exposure, is approximately 72%. The apparent increase in retrospectively rated premium as a percentage of the workers’ compensation total is primarily due to several larger policies which were written on a modified retrospectively rated plan, whereby all final premium is determined within approximately 18 months from the inception date of the policy.

General liability provides coverage for liability exposures, including bodily injury and third-party property damage arising from products sold and general business operations. General liability also includes coverage to protect insureds against third-party personal injury. This includes umbrella coverage, which provides additional insurance protection to businesses for amounts that exceed the limits of their primary liability policies with the Company or another insurance carrier. Approximately 77% of the Company’s umbrella premiums are for accounts for which the underlying liability coverage is provided by another insurance carrier. In 2004, approximately 85% of the Company’s umbrella gross premiums written were associated with policies having an attachment point of $1 million. The average umbrella policy limit written in 2004 was approximately $10 million. The Company also writes specialty classes, such as directors’ and officers’ liability, which involves coverage for liability arising from the actions of directors and officers in their official capacities, and employment practices liability, which protects the insured from liability arising from employment policies and plans, such as discrimination and harassment. The distribution of the Company’s total general liability gross premiums written by type of coverage is summarized as follows:

Property provides coverage for loss or damage to buildings, inventory and equipment and financial loss due to business interruption resulting from covered property damage. Policies are typically “all risk” in nature, providing protection from natural disasters, including losses from hurricanes, windstorms, earthquakes, hail and severe winter weather, and other events, such as theft and vandalism, fires, explosions and storms. Certain risks, such as war and nuclear risk, are generally excluded from all policies. Property insurance is principally provided through fire and allied lines and inland marine coverage. Fire and allied lines insure business property for damage and protect businesses from financial loss due to business interruption. Inland marine provides coverage for goods in transit and builders’ risk for buildings in the course of construction and for tools and contractors’ equipment. Policies written on an excess basis comprised approximately 18%, 23% and 38% of property gross premiums written in 2004, 2003 and 2002, respectively. The proportion of property writings comprised of policies written on an excess basis decreased in 2003 principally due to the willingness of some competitors to offer large primary limits of coverage, thereby reducing the insured’s need to purchase excess property policies.

8

The distribution of total property gross premiums written, by type of coverage, is summarized as follows:

Commercial automobile provides coverage for businesses against losses arising from bodily injury, bodily injury to third parties, property damage to an insured’s vehicle, property damage to other vehicles and other property resulting from the ownership, maintenance or use of automobiles and trucks in a business. The Company targets insureds with fleets of 25 to 75 vehicles, particularly those with newer model year vehicles, low driver turnover and good driving records.

Commercial multi-peril combines property and liability coverage under one insurance policy. The Company typically writes these package policies for smaller businesses where expense advantages can be gained by combining these coverages rather than purchasing two separate policies. For the years ended December 31, 2004, 2003 and 2002, approximately 44.5%, 46.1% and 55.2%, respectively, of commercial multi-peril gross premiums written were attributable to property coverage.

Surety involves third-party agreements in which the issuer of the bond (the “surety”) joins with a second party (the “principal”) in guaranteeing to a third party (the “owner/obligee”) the fulfillment of some obligation on the part of the principal. The surety generally has a right to recover from the principal any losses or expenses paid to the owner/obligee.

Surety is generally classified into two broad types: contract bonds and commercial bonds. Contract bonds secure a contractor’s performance and/or payment obligation, generally with respect to a construction project, and are typically required by federal, state and local governments for public works projects. The Company’s average contract bond amount was approximately $1.7 million in 2004, with an average job length of approximately 1.2 years. Commercial bonds cover obligations typically required by law or regulation such as bail bonds and license and permit bonds. Bail bonds provide for the issuance of financial security to a court to guarantee the return, at specific dates, of a person facing criminal charges.

The distribution of the Company’s total surety gross premiums written, by type of coverage, is summarized as follows:

Geographic Distribution

The Company is licensed and currently writes insurance in all 50 states. For the year ended December 31, 2004, the top ten states represented 74.7% of direct premiums written.

9

The distribution of direct premiums written by state, as a percentage of total direct premiums written, is summarized as follows:

1	No other state comprised more than 1.9% of total direct premiums written in 2004, 2003 or 2002.

The Company has significantly expanded its workers’ compensation writings in California since 2000. Despite the fact that California workers’ compensation results have historically been unprofitable for much of the industry, the Company saw an opportunity for profitable growth based on: (a) a displaced workers’ compensation market in California which enabled the Company to be very conservative in risk selection and pricing; (b) the establishment of newly staffed underwriting centers in Los Angeles and San Francisco with very technically strong and experienced local workers’ compensation underwriters; (c) freedom from loss experience legacy issues in the state; and (d) high workers’ compensation rates in California relative to other states and a promising environment for regulatory reform that should further improve the state’s performance.

In 2003 and 2004, significant insurance regulatory reform took place in California. The combination of these reform efforts and strong rate increases over the past few years has led to a dramatic improvement in the industry’s workers’ compensation accident year loss ratios. As of September 30, 2004, the Worker’s Compensation Insurance Rating Bureau of California projects the workers’ compensation ultimate accident year loss ratio to fall from 138.4% in 2000 to 57.3% in 2003.

Business Development and Methods of Distribution

The Company’s gross premiums written are derived from renewal of in-force policies, generation of new policies and endorsement activity, including additional or return premiums due upon audit. Central to the Company’s premium production management are efforts to maintain or improve renewal retention rates and to increase the Company’s new business production through improvements in the “quote ratio” (the ratio of quotes issued to submissions received) and the “hit ratio” (the ratio of new policies bound to quotes issued), while first and foremost maintaining adequate rates for the exposures.

Crum & Forster depends on producers to provide it with access to a wide range of business opportunities. The Company’s ability to develop strong and mutually beneficial relationships, and successfully market its products and services to producers, is paramount to its success. Generally, the Company’s business is distributed through more than 1,000 producers located throughout the United States. Crum & Forster intends to continue to expand its producer force. The Company offers its producers underwriting expertise and timely policy processing, which assists them in placing business in underserved markets. The Company’s service extends to loss control and claims services, particularly on large accounts where this expertise is highly valued by both the producer and the insured.

Producers are compensated principally on the basis of commissions negotiated between the producer and the Company on an individual policy basis. Additionally, the Company pays contingent commissions to certain producers based on achievement by the producer of agreed-upon targets in such areas as renewal retention and new business production. Out of total producer compensation incurred in 2004, 2003 and 2002 of $128.2 million, $125.2 million and $99.9 million respectively, contingent commissions paid to producers in those years totaled $12 million, $8.9 million and $4.4 million, respectively. Due to early termination in 2004 of such agreements by certain producers, payments in 2005 related to 2004 will be lower by approximately $2 million.

Crum & Forster’s producers generally fall into three categories: national brokers, independent regional retail firms and wholesale brokers. Each of these channels has its own distinct distribution characteristics and customers. National brokers generally have a significant number of locations throughout the United States and target larger risks requiring complex insurance analysis and placement. The Company’s policies with these producers tend to be larger, loss rated casualty products and excess property policies. Independent regional retail firms generally operate in a limited geographic region. These producers often focus on mid-size accounts. Wholesale brokers primarily produce business that retail firms have difficulty placing because it is unique, unusual or hazardous.

10

The percentage of business from these categories of producers, based on gross premiums written, is summarized as follows:

Gross premiums written from new business by producer category are as follows:

During 2004, the Company’s new business production decreased by approximately 22% as the market has softened and competition for new business, particularly from higher rated companies, has intensified. The Company’s business strategy is designed to increase gross premiums written through increasing volume with existing producers, while selectively adding new producers. Renewal retention rates have increased by five percentage points despite the softening market.

For discussions of recent investigations by governmental authorities into certain business practices within the insurance industry, see “—Risk Factors—Certain business practices of the insurance industry have become the subject of investigations by government authorities and other parties” and “Item 3. Legal Proceedings”.

Pricing and Underwriting

The Company adheres to a disciplined underwriting strategy that focuses on profitability without regard to premium growth or market share. Each policy is individually underwritten based on the particular risk and class of business. Prices are set based on these risk characteristics and consider other factors such as estimated frequency and severity of expected losses, the expenses of producing the business and managing claims and an allowance for an underwriting profit. The Company’s disciplined underwriting strategy may restrict its premium growth when market conditions do not meet pricing and underwriting standards.

The Company’s underwriting process is centrally controlled by profit center executives in the home office, who have extensive experience in the insurance industry. Each executive is held accountable for the underwriting results of his or her line of business. Underwriting authority levels are established based on characteristics such as class of business, hazard grade and policy limit and are assigned based on the experience and expertise of the underwriter. Regional underwriting profit center managers report to the home office executives on all underwriting matters. Field underwriters have limited authority to underwrite policies, with the result that a significant amount of business is underwritten directly by underwriters in the home office.

The Company’s business is either manually rated or loss-rated, generally depending on the size of the risk to be priced. Manual rating begins with a classification rate provided by an industry-rating bureau. Deviations from this rate based on the individual characteristics and loss history of the risk, as well as the desirability of the class of business, are then determined. Loss rating is used where there is no appropriate classification rate, and the rate is developed entirely on the basis of the specific characteristics of the individual risk. A significant portion of the Company’s business is large enough to be rated on its own loss history. This loss rated business is within the workers’ compensation, general liability and commercial automobile lines of business and includes guaranteed cost policies, where policy premiums are fixed, and loss sensitive rating programs, where the ultimate costs to the insured are dependent upon its loss experience. The underwriting of larger loss rated business requires approval by home office underwriting and actuarial personnel.

Loss sensitive business includes retrospectively rated policies, in which premiums are adjusted based on the actual loss experience of the insured, and large deductible policies, where the insured must reimburse the Company for any losses within the deductible. Both of these loss sensitive products expose Crum & Forster to potential credit risk since the Company may be due payment from the insured after coverage has been provided. Loss sensitive policies are subject to extensive financial analysis prior to binding, and generally require that the insured provide collateral as a condition to writing the policy. For further discussion of such credit risk, see "—Risk Factors”.

11

A significant amount of the Company’s current property business is written in excess of one or more underlying insurance policies. Pricing of excess property business requires significant underwriting expertise. Consideration is also given to pricing as a percentage of total insured value. Inland marine is typically rated individually by the underwriter based on the characteristics of the risk and the class of business, without the use of an industry manual rate. The Company’s underwriting of property also considers the aggregate exposures to natural catastrophic losses and attempts to mitigate such exposure. The Company monitors total insured values in areas most susceptible to a hurricane or earthquake event and uses modeling software to quantify the probable maximum loss on such events. Catastrophe exposure is also considered when pricing individual property risks.

Surety underwriting requires significant financial analysis, as well as underwriting expertise. Collateral may be required as a condition to writing the bond. In the Company’s bail bond business, Crum & Forster deals with one agent, who, in turn, deals with a significant number of agents nationally. These obligations are secured by both the one agent Crum & Forster deals with and its agents. The Company must approve, prior to binding, all bail bonds with values in excess of $500,000.

The Company closely monitors its underwriting on an ongoing basis to enforce compliance with standards throughout the field organization. At the Company’s principal insurance subsidiaries, a premium register, which lists each policy processed on the prior day, is distributed daily to senior management and to the home office underwriting executives. On larger policies, a more detailed underwriting summary sheet is prepared and distributed to senior management and the home office underwriting executives on a timely basis. This report identifies the insured name, line of business, policy premium, commission, prior loss history and other relevant information relating to the risk. A detailed price monitoring process is conducted by actuarial personnel, with region and line of business pricing results released on a weekly and monthly basis. These pricing results include price increases on policies that are renewed and new business prices versus established targets that are intended to produce an underwriting profit. Large accounts, which are rated based on their own loss history, are monitored separately with an expected combined ratio quantified for each account.

Catastrophe Management

Catastrophes can be caused by various natural and man-made events. Natural catastrophic events include hurricanes, tornados, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires, and man-made catastrophic events include terrorist acts, riots, crashes and derailments. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, tornados, windstorms and earthquakes may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of property and casualty lines for which the Company provides insurance. For example, the terrorist attacks on September 11, 2001 caused losses in several of the Company’s lines, including business interruption, business personal property and workers’ compensation.

Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect upon the Company’s net income and financial condition. Increases in the value and geographic concentration of insured property and the effects of inflation could increase the severity of claims from future catastrophic events. In addition, states have, from time to time, passed legislation that has had the effect of limiting the ability of insurers to manage catastrophic risk, such as legislation prohibiting insurers from withdrawing from catastrophe-prone areas.

The Company closely monitors catastrophe exposure on an individual risk and book of business basis. Each property risk is written with an occurrence limit and every policy with catastrophe exposure has a significant minimum deductible for the catastrophe exposure. A catastrophe risk analysis is run on each account with catastrophe exposure to assess the potential loss.

On a book of business basis, Crum & Forster monitors its aggregate property exposure each month. The Company runs an extensive catastrophe model each quarter to assess its probable maximum loss on both a 250-year and 100-year event basis. After September 11, 2001, the Company began to monitor its concentration of workers’ compensation exposures in more detail. As a result of database enhancements and increased information gathered on the Company’s insureds, a significant majority of employees are captured by location in the systems. Accumulations are managed by zip code and monitored during the quoting process.

The Company has entered into property and workers’ compensation catastrophe reinsurance arrangements that are designed to protect it in the event of catastrophes.

12

Reinsurance

In order to control the exposure to losses and protect capital resources, the Company cedes a portion of its gross policy premiums to reinsurers in exchange for the reinsurer’s agreement to share a portion of the covered losses. Reinsurance is a practice whereby one insurer, called the “reinsurer”, agrees to indemnify another insurer, called the “ceding insurer”, for all or part of the potential liability arising from one or more insurance policies issued by the ceding insurer. The purchase of reinsurance does not discharge the Company from primary liability to its policyholders. The net liability retained on individual risks varies by product and by the nature of the risk. Insured liabilities can be reinsured either by treaty, wherein reinsurers agree in advance to provide coverage above retained limits or for a specified percentage of losses attributable to specific policies, or by facultative arrangements, wherein reinsurance is provided for individual risks based on individual negotiations.

The Company’s maximum retention and reinsured limits for policies currently being written are summarized as follows:

1	Represents the amount of loss protection above the net retention on an excess of loss basis, unless otherwise noted. Certain layers within these reinsured limits are subject to aggregate limits and reinstatement provisions.
2	The Company retains 40% of policies with limits up to $5 million and 20% of policies with limits in excess of $5 million up to $10 million.
3	The Company’s maximum retention is 80% of $20 million, or $16 million. The average retention at December 31, 2004 for bonds ceded to the current treaty year was approximately $127,000 per bond.
4	The Company’s percentage retention varies based on the bond limit, from 80% of bond limits up to $2 million to 22.5% of bond limits in excess of $15 million up to $35 million. The average retention at December 31, 2004 for bonds ceded to the current treaty year was approximately $1 million per bond.

In general, other general liability policies and commercial automobile policies are written with limits of $1 million per occurrence and are not reinsured. General liability policies typically contain a $2 million aggregate limit.

The Company manages its exposure to catastrophes by monitoring the accumulation of insured value in catastrophe-prone areas. The Company’s property catastrophe reinsurance treaty protects it in the event of property losses arising from one defined catastrophic occurrence or series of events. This treaty provides $295 million of aggregate coverage in excess of the $25 million net retention. There is approximately 2.5% co-participation on the reinsured layer, which amounts to an additional retained loss of $7.4 million in the event that the entire treaty limit is utilized. Under certain conditions, the Company may recover $22.5 million of the $25 million net retention per occurrence.

From March 19, 2003 to December 31, 2004, the Company purchased terrorism coverage from nSpire Re Limited (“nSpire”, formerly ORC Re Limited), a subsidiary of Fairfax, for acts certified in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA”) in an amount and on terms which reduced the Company’s exposure to such acts to the amount of the deductible based on Crum & Forster’s pro-forma stand-alone direct premiums earned. The contract was not renewed for 2005. As a result, in the event of a TRIA-certified terrorist act in 2005, the Company could incur a loss of up to the aggregate deductible of participating Fairfax insurers, or $300 million, subject to terrorism reinsurance coverage provided by the Company’s other reinsurance contracts. For further discussion of TRIA, see “—Catastrophe Management”, “—Regulatory Matters—Terrorism Risk Insurance Act of 2002” and “—Risk Factors”.

For a detailed discussion of the Company’s reinsurance agreements, see Note 7 and Note 10 to the consolidated financial statements included in “Item 8. Financial Statements and Supplemental Data”.

13

As of December 31, 2004 and 2003, reinsurance recoverable was $1.8 billion and $1.7 billion, respectively, net of uncollectible reinsurance reserves. Included in net reinsurance recoverable at December 31, 2004 and 2003 are reserves for uncollectible paid and unpaid reinsurance totaling $40.9 million and $39.9 million, respectively.

Reinsurance recoverable at December 31, 2004 was due from approximately 315 reinsurers. Set forth below is a table showing the ten largest reinsurance recoverable balances by reinsurer. Amounts recoverable from pools and associations and contingent obligations associated with structured settlements with life insurance companies amounted to an additional $178.6 million, or 9.9% of the total reinsurance recoverable balance at December 31, 2004.

1	The A.M. Best rating system includes ratings of “A++” and “A+” (which are “Superior” ratings), “A” and “A-” (which are “Excellent” ratings), “B++” and “B+” (which are “Very Good” ratings) and nine lower ratings categories.
2	Includes the value of Delaware Reg. 1003 compliant trust accounts (“Trusts”) as of December 31, 2004 in the amount of $323.3 million and $128.7 million in letters of credit.
3	Funds held balances as of December 31, 2004.
4	Effective December 16, 2002, International Insurance Company merged with TIG, a Fairfax subsidiary. TIG had capital and surplus as of December 31, 2004 of $742 million. These recoverable balances arise principally from a restructuring in 1993, prior to Fairfax’s acquisition of Crum & Forster.
5	Includes $20.6 million in letters of credit and the value of Trusts as of December 31, 2004 in the amount of $5.9 million.
6	Includes $39.5 million of letters of credit and $14.0 million of funds held.
7	92% of these recoverable balances, after applying the associated collateral, are from companies having an A.M. Best rating of “A-” or better.
8	Includes reserve for uncollectible reinsurance of $40.9 million.
9	Not rated.

Affiliated reinsurers

The Company has reinsurance agreements in effect with affiliates of Fairfax. As is the case with all reinsurance agreements, Crum & Forster bears credit risk regarding these agreements, both with respect to reinsurance recoverable reflected on the Company’s balance sheet as well as to contingent liabilities associated with reinsurance recoverable on future claims. For the years ended December 31, 2004, 2003 and 2002, the Company ceded premiums of $51 million, $54.8 million and $63.8 million, respectively, to affiliates under these reinsurance contracts.

Reinsurance recoverable balances from affiliated reinsurers reflected on the balance sheet are summarized as follows:

1	Includes case reserves and IBNR.

14

For a detailed description of the Company’s reinsurance arrangements with affiliates, see Note 10 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” and “Item 13. Certain Relationships and Related Transactions—Reinsurance Arrangements”.

Corporate aggregate reinsurance

Crum & Forster’s underwriting results are significantly affected by reinsurance. The Company purchases reinsurance to limit its exposure to loss from any one claim or occurrence (“per risk reinsurance”), from aggregate loss experience for an accident year that exceeds an amount the Company is willing to accept and from adverse development of prior years’ loss and LAE reserves (the latter two types of reinsurance are referred to herein as “corporate aggregate reinsurance”, as distinct from the aforementioned “per risk reinsurance”). The Company’s corporate aggregate reinsurance contracts are of the type commonly referred to as “finite” reinsurance and cover or covered, in varying amounts and on varying terms, accident years 2002 and prior. No such reinsurance has been purchased for subsequent accident years. Per risk reinsurance designed to limit exposure to loss from any one claim or occurrence generally responds at the individual claim or occurrence level and is priced based on underlying loss costs and exposures. As a result, loss experience, net of the effect of this reinsurance, is generally consistent with the underlying gross loss experience. Reinsurance designed to limit accident year losses in the aggregate or adverse development of prior years’ loss and LAE reserves may significantly affect the reported loss experience for a given period in amounts or directions that are not consistent with the loss experience of the underlying policies. The prices paid for corporate aggregate reinsurance may also affect the underwriting expense ratios by reducing the net premiums earned, upon which the ratio is calculated. Therefore, management believes that presenting the Company’s results net of per risk reinsurance but before benefit of corporate aggregate reinsurance generally provides a more accurate portrayal of the actual loss experience of the underlying policies.

The Company’s corporate aggregate reinsurance contracts provide either current accident year protection or adverse development protection related to prior accident years. In general, contracts covering past insurable events, such as adverse loss development covers, are categorized as “retroactive reinsurance”, as opposed to contracts covering future insurable events, which are referred to as “prospective reinsurance”. Coverage under these contracts is generally triggered when the loss ratio for the subject period exceeds a specified level, or when reserves related to all periods prior to a certain date exceed a stated amount. The Company will recover ceded losses and LAE from its reinsurers as it settles the related claims, which may occur over several years. These contracts may provide for future payments to be made by Crum & Forster when it cedes losses under such policies and generally provide that interest expense is charged to the Company, for the benefit of the reinsurers, on any premiums withheld. Interest rates specified in these contracts are 7.0% to 7.5%.

Amounts ceded under prospective contracts are recognized, as to premiums, as a reduction of premiums written and earned in the period in which premiums are ceded and, as to losses, as a reduction of incurred losses as the losses are ceded to the reinsurer. Under retroactive contracts, the excess of reinsurance recoverable due from reinsurers pursuant to the contract over premiums paid for coverage is deferred and amortized as a reduction to incurred losses over the expected period of recovery, generally many years, using the interest method. Under both prospective and retroactive contracts, funds held interest, if applicable, is recognized as a reduction of investment income in the period in which the interest is credited to the funds held account.

An analysis of activity in prospective corporate aggregate reinsurance contracts follows:

As of December 31, 2004, one prospective contract, covering accident year 2002 only, has an unused limit available of $96.3 million in the event the net loss and LAE ratio for accident year 2002, before the effect of this contract, exceeds 70%. The subject loss and LAE ratio as valued at December 31, 2004 is 63.2%. No additional premium or funds held interest will be due under this contract upon usage of the remaining limit. The reinsurer under this contract is nSpire, a Fairfax affiliate. For further discussion of reinsurance contracts with affiliates, see Note 10 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” and “Item 13. Certain Relationships and Related Transactions—Reinsurance Arrangements”.

15

An analysis of activity in retroactive corporate aggregate reinsurance contracts follows:

As of December 31, 2004, the Company has available unused limits under two retroactive contracts with unaffiliated reinsurers. One contract covers accident periods prior to August 13, 1998 and has an unused limit available of $34.8 million, subject to sub-limits by line of business. There are no additional premiums or funds held interest due when the remaining coverage is used. The second contract, under which limits of approximately $29 million are available, covers accident years 2000 and prior. Premiums of approximately $12.2 million and funds held interest at an annual rate of 7% from October 1, 2001 to the end of the quarter in which the losses are ceded will be due upon usage of the remaining limit.

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

The Company estimates, assuming no additional premiums are credited to the funds held accounts, that the amount of interest to be charged against investment income on prospective and retroactive corporate aggregate reinsurance contracts will be approximately $19.2 million, $18.6 million and $17.6 million in 2005, 2006 and 2007, respectively.

As of December 31, 2004, reinsurance recoverable includes $444.1 million and $455.5 million related to prospective and retroactive corporate aggregate reinsurance contracts, respectively, of which $507.2 million has been recognized as a reduction of incurred losses and LAE on the Company’s consolidated statements of income.

Claims Management

Crum & Forster has developed claims cost management methodologies designed to monitor, control and measure all aspects of the claims resolution process. The Company has also developed and implemented competitive medical management and managed care programs to control workers’ compensation claim costs. The Company’s claims management philosophy emphasizes:

	•	maintenance of timely and adequate reserves for claims and the cost-effective delivery of claims services by controlling losses and LAE;
	•	financial integrity through the employment of investigative specialists, who attempt to limit fraudulent claims activity, and a program to pursue appropriate subrogation and recovery opportunities; and

16

•

exceptional customer service whereby the Company applies its resources toward pursuing timely investigation and resolution of customer claims and reducing claims costs.

Substantially all claims are handled by regional offices, with the exception of umbrella, high-value casualty and large property claims, which are handled in the home office. As of December 31, 2004, the Company had 350 employees dedicated to claims management and administration, 74 of whom were located at the Company’s headquarters, principally providing supervisory and control functions and certain claims handling. These employees include adjusters, litigation specialists, regional and corporate claims management, line specialists and support staff. The Company regularly conducts internal reviews and audits to monitor the regional offices’ adherence to claims policies and procedures, the adequacy of case reserves, LAE, productivity and service standards.

Pending and new claim counts by line of business, excluding asbestos, environmental and other latent claims, are summarized as follows:

1

Excludes medical only claim counts

1

Excludes medical only claim counts of 17,957, 17,333 and 17,669 for the years ended December 31, 2004, 2003 and 2002, respectively.

Since 1985, Crum & Forster has used a specialized claims unit to manage its asbestos, environmental and other latent claims. Currently, the Company employs RiverStone Claims Management LLC (“RiverStone”), a Fairfax affiliate focused on providing claim and reinsurance recovery services with respect to asbestos, environmental and other latent exposure claims to Fairfax and its affiliates.

Reserves

Property and casualty insurers establish reserves to provide for future amounts needed to pay claims with respect to insured events that have occurred, including events that have not yet been reported to the insurer. Reserves are also established for LAE, representing the estimated expenses of adjusting claims, including legal and other fees, and general expenses of administering the claims settlement process.

After a claim is reported, claims personnel establish a “case reserve”, where appropriate, for the estimated amount of the ultimate loss payment. The estimate reflects the informed judgment of management based on reserving practices and management’s experience and knowledge regarding the nature and value of the specific type of claim with the goal of setting reserves at the ultimate expected loss amount as information becomes available. Claims personnel review and update their estimates as additional information becomes available and claims proceed towards resolution. In addition, reserves are also established, on an aggregate basis, for losses incurred but not reported (“IBNR”) to the insurer and for potential further loss development on reported claims, including LAE. As of December 31, 2004, total gross reserves for unpaid losses and LAE were $3.4 billion, of which $1.5 billion related to case reserves and $1.9 billion related to IBNR reserves.

17

The Company derives estimates for unreported claims and development on reported claims principally from actuarial analyses of historical patterns of loss development by accident year for each type of exposure and market segment. Similarly, the Company derives estimates of unpaid LAE principally from actuarial analyses of historical development patterns of the relationship of LAE to losses for each line of business and type of exposure. Management compares historical and current case, settlement and payment patterns by business line to establish loss trends that recognize the new development patterns and retention levels.

The Company has instituted organizational and process improvements over the past five years that have affected its claims settlement philosophy and its historical paid and incurred claims patterns. The historical patterns upon which management typically would rely to develop reserves are not consistent with current lines of business, net retention levels, premium sizes, risk profiles of insureds and other operational changes. During the same time period, soft market conditions in the immediate prior accident years caused deteriorating trends in the Company’s underwriting results. The combination of these factors over the past five years has made interpretation of the underlying data trends and quantification of reserve adequacy extremely difficult.

The process of estimating loss reserves is imprecise due to a number of variables. These variables are affected by both internal and external events such as changes in claims handling procedures, inflation, judicial trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer. The Company continually refines reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The Company reflects adjustments to reserves in the results of operations in the periods in which the estimates are changed. In establishing reserves, estimated recoveries for reinsurance, salvage and subrogation are taken into account. The aggregate reserves are also reviewed at least annually by a nationally recognized actuarial firm.

The Company’s internal actuaries conduct full reserve studies using generally accepted actuarial methods every six months, from which point estimates of ultimate losses and LAE by line of business are selected. These “target” loss ratios are used to determine loss and allocated LAE expectations each month by accident year within each line of business. Each month, reported losses are reviewed against these expectations to evaluate loss emergence trends.

The recorded estimate and the high and low ends of the Company’s internal actuaries’ range of reserves for each line of business is summarized as follows:

Loss development data

A reconciliation of the net liability for unpaid losses and LAE is provided in Note 5 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”. Reserves for losses and LAE were increased in each year based on the latest actuarial estimates. The components of development of prior years’ loss and LAE reserves are summarized as follows:

18

For a detailed discussion of adverse development, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Losses and loss adjustment expenses”.

The following loss and LAE reserve development table illustrates the development of balance sheet liabilities from 1994 through 2004 and the subsequent changes in those reserves, presented on a historical basis. The first line of the table is the estimated liability for unpaid losses and LAE, net of reinsurance recoverable, recorded at the balance sheet date for each year. The lower section of the table shows the updated amount of the previously recorded liability based on experience, as of the close of each succeeding year. Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry. The accompanying data is not accident year data, but rather, a display of 1994 to 2004 calendar year-end reserves and the subsequent changes in those reserves.

Ten-year analysis of consolidated loss and LAE development presented net of reinsurance with supplemental gross data

19