UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended:
September 30, 2009
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Commission File Number:
333-84068
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Crum & Forster
Holdings Corp.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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04-3611900
(I.R.S. Employer
Identification Number)
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305
Madison Avenue, Morristown, New Jersey 07962
(Address
of principal executive office)
(973) 490-6600
(Registrants telephone number, including area code)
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 o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ (Do
not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No þ
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date:
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Class
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Number of Shares Outstanding at
October 29, 2009
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Common Stock, $.01 Par Value
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100
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CRUM &
FORSTER HOLDINGS CORP.
Form 10-Q
Index
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
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September 30,
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December 31,
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2009
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2008
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ASSETS
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Investments:
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Fixed income securities,
available-for-sale,
at fair value (amortized cost of $1,257,546 and $1,466,114 in
2009 and 2008, respectively)
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$
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1,485,862
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$
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1,533,334
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Fixed income securities,
held-for-trading,
at fair value
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335,002
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233,998
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Equity securities,
available-for-sale,
at fair value (cost of $1,146,993 and $1,106,098 in 2009 and
2008, respectively)
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1,383,777
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1,020,154
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Investments at equity
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159,370
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117,586
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Derivatives and other invested assets, at fair value
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382,933
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412,747
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Short-term investments, at fair value
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30,971
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549,937
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Total investments
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3,777,915
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3,867,756
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Cash and cash equivalents
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330,467
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159,862
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Assets pledged for derivatives
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29,756
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4,416
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Accrued investment income
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32,626
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29,378
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Premiums receivable
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167,086
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182,158
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Reinsurance recoverable
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718,074
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759,028
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Reinsurance recoverable from affiliates
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187,893
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209,189
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Prepaid reinsurance premiums
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28,477
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28,995
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Deferred income taxes
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39,986
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239,077
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Deferred policy acquisition costs
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46,883
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52,705
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Other assets
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96,814
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66,316
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Total assets
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$
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5,455,977
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$
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5,598,880
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LIABILITIES
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Unpaid losses and loss adjustment expenses
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$
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2,739,084
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$
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2,987,803
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Unearned premiums
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319,942
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366,362
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Funds held under reinsurance contracts
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241,969
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228,835
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Accounts payable and other liabilities
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166,467
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417,669
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Deferred income on retroactive reinsurance
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110,115
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121,277
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Long-term debt
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311,695
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310,502
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Total liabilities
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3,889,272
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4,432,448
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Commitments and contingencies (Note 9)
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SHAREHOLDERS EQUITY
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Common stock, $0.01 par value; 1,000 shares
authorized; 100 issued and outstanding
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Additional paid-in capital
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740,993
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740,993
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Accumulated other comprehensive income (loss), net of tax
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311,752
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(7,455
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)
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Retained earnings
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513,960
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432,894
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Total shareholders equity
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1,566,705
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1,166,432
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Total liabilities and shareholders equity
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$
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5,455,977
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$
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5,598,880
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The accompanying notes are an integral part of the
consolidated financial statements.
3
CRUM &
FORSTER HOLDINGS CORP.
(Dollars
in thousands)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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REVENUES
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Premiums earned
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$
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182,032
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$
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232,978
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$
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589,743
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$
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767,670
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Investment income
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34,213
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14,706
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133,165
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61,792
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Net realized investment gains
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210,394
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162,369
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142,325
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327,346
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Total revenues
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426,639
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410,053
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865,233
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1,156,808
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EXPENSES
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Losses and loss adjustment expenses
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122,950
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211,506
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391,275
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666,862
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Policy acquisition costs
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27,988
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41,669
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85,329
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118,615
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Other underwriting expenses
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41,809
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42,407
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120,711
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129,836
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Interest expense
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6,958
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6,920
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20,848
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20,952
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Costs related to early retirement of debt
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392
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Other expense, net
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1,709
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2,527
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3,289
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4,179
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Total expenses
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201,414
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305,029
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621,452
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940,836
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Income before income taxes and equity in earnings of investees
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225,225
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105,024
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243,781
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215,972
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Income tax expense
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70,464
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35,296
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62,794
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71,958
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Income before equity in earnings of investees
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154,761
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69,728
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180,987
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144,014
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Equity in earnings (losses) of investees, net of tax
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79
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(461
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)
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NET INCOME
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$
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154,761
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$
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69,728
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$
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181,066
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$
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143,553
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The accompanying notes are an integral part of the
consolidated financial statements.
4
CRUM &
FORSTER HOLDINGS CORP.
(Dollars
in thousands)
(Unaudited)
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Nine Months Ended
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September 30,
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2009
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2008
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COMMON STOCK
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Balance, beginning and end of period
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$
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$
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ADDITIONAL PAID-IN CAPITAL
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Balance, beginning and end of period
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740,993
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740,993
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
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Balance, beginning of period
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(7,455
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)
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44,479
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Cumulative effect of adoption of Statements of Financial
Accounting Standards Nos. 157 and 159
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(29,897
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)
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Balance, beginning of period, after cumulative effect of
adjustments
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(7,455
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)
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14,582
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Unrealized investment gains (losses), net of transfers to
realized investment gains and losses
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319,068
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(52,920
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)
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Foreign currency translation
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309
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(311
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)
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Amortization of actuarial gain, prior service credit and
transition obligation included in net periodic benefit costs
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(170
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)
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204
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Balance, end of period
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311,752
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(38,445
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)
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RETAINED EARNINGS
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Balance, beginning of period
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|
432,894
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|
507,987
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Cumulative effect of adoption of Statements of Financial
Accounting Standards Nos. 157 and 159
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86,101
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Balance, beginning of period, after cumulative effect of
adjustments
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|
432,894
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594,088
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Net income
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181,066
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143,553
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Dividends to shareholder
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(100,000
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)
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(130,000
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)
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Balance, end of period
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513,960
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607,641
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TOTAL SHAREHOLDERS EQUITY
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$
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1,566,705
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$
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1,310,189
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The accompanying notes are an integral part of the
consolidated financial statements.
5
CRUM &
FORSTER HOLDINGS CORP.
(Dollars
in thousands)
(Unaudited)
|
|
|
|
|
|
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|
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|
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|
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|
|
|
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Three Months Ended
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Nine Months Ended
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September 30,
|
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September 30,
|
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2009
|
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2008
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2009
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2008
|
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NET INCOME
|
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$
|
154,761
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$
|
69,728
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$
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181,066
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$
|
143,553
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|
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|
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|
|
|
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|
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Change in components of other comprehensive income (loss) for
the period, before tax:
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|
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|
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|
|
|
|
|
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Unrealized investment gains (losses), net of transfers to
realized investment gains and losses
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|
|
259,405
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|
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|
(31,622
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)
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490,874
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|
|
|
(81,414
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)
|
Foreign currency translation
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|
|
(70
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)
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|
|
(607
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)
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|
475
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|
|
|
(479
|
)
|
Amortization of actuarial gain, prior service credit and
transition obligation included in net periodic benefit costs
|
|
|
(87
|
)
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|
|
105
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|
|
|
(261
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)
|
|
|
314
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other comprehensive income (loss) for the period, before tax
|
|
|
259,248
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|
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|
(32,124
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)
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|
|
491,088
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|
|
|
(81,579
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (expense) benefit for the period:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (expense) benefit from unrealized investment
gains and losses
|
|
|
(90,791
|
)
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|
11,067
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|
|
|
(171,806
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)
|
|
|
28,494
|
|
Deferred income tax (expense) benefit from foreign currency
translation
|
|
|
25
|
|
|
|
213
|
|
|
|
(166
|
)
|
|
|
168
|
|
Deferred income tax benefit (expense) from amortization of
actuarial gain, prior service credit and transition obligation
included in net periodic benefit costs
|
|
|
30
|
|
|
|
(37
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)
|
|
|
91
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total deferred income tax (expense) benefit for the period
|
|
|
(90,736
|
)
|
|
|
11,243
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|
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(171,881
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)
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|
|
28,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other comprehensive income (loss) for the period, net of tax
|
|
|
168,512
|
|
|
|
(20,881
|
)
|
|
|
319,207
|
|
|
|
(53,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
323,273
|
|
|
$
|
48,847
|
|
|
$
|
500,273
|
|
|
$
|
90,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
6
CRUM &
FORSTER HOLDINGS CORP.
(Dollars
in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
181,066
|
|
|
$
|
143,553
|
|
Adjustments to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
(Accretion of discount) amortization of premium on fixed income
securities
|
|
|
(6,409
|
)
|
|
|
1,318
|
|
Realized investment gains
|
|
|
(142,325
|
)
|
|
|
(327,346
|
)
|
(Earnings) losses of equity method investees, net of dividends
|
|
|
244
|
|
|
|
1,051
|
|
(Earnings) losses of investment companies and similar equity
method investees
|
|
|
(44,579
|
)
|
|
|
24,924
|
|
Loss on commutation
|
|
|
|
|
|
|
75,470
|
|
Depreciation and amortization
|
|
|
4,816
|
|
|
|
2,631
|
|
Deferred income tax expense (benefit)
|
|
|
27,209
|
|
|
|
(22,363
|
)
|
Costs related to early retirement of debt
|
|
|
|
|
|
|
170
|
|
Other adjustments
|
|
|
3,483
|
|
|
|
12,195
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(4,075
|
)
|
|
|
11,547
|
|
Premiums receivable
|
|
|
13,947
|
|
|
|
26,896
|
|
Reinsurance recoverable
|
|
|
61,865
|
|
|
|
398,710
|
|
Prepaid reinsurance premiums
|
|
|
518
|
|
|
|
(4,732
|
)
|
Deferred policy acquisition costs
|
|
|
5,822
|
|
|
|
12,135
|
|
Other assets
|
|
|
(312
|
)
|
|
|
15,273
|
|
Unpaid losses and loss adjustment expenses
|
|
|
(248,719
|
)
|
|
|
(65,165
|
)
|
Unearned premiums
|
|
|
(46,420
|
)
|
|
|
(76,291
|
)
|
Accounts payable and other liabilities
|
|
|
(115,630
|
)
|
|
|
35,803
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(309,499
|
)
|
|
|
265,779
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of fixed income securities
|
|
|
(356,602
|
)
|
|
|
(760,148
|
)
|
Proceeds from sales of fixed income securities
|
|
|
402,525
|
|
|
|
519,517
|
|
Proceeds from maturities of fixed income securities
|
|
|
48,300
|
|
|
|
1,260
|
|
Purchases of equity securities
|
|
|
(345,962
|
)
|
|
|
(147,403
|
)
|
Proceeds from sales of equity securities
|
|
|
227,718
|
|
|
|
9,422
|
|
Net sales (purchases) of investments at equity
|
|
|
6,769
|
|
|
|
(223
|
)
|
Purchases of derivatives and other invested assets
|
|
|
(10,050
|
)
|
|
|
(13,871
|
)
|
Proceeds from sales of derivatives and other invested assets
|
|
|
109,685
|
|
|
|
284,611
|
|
Purchases of short-term investments
|
|
|
(110,308
|
)
|
|
|
(577,565
|
)
|
Proceeds from sales and maturities of short-term investments
|
|
|
605,660
|
|
|
|
637,910
|
|
Net settlement of short-sale obligations
|
|
|
|
|
|
|
(649,517
|
)
|
Net change in cash and cash equivalents held as collateral
|
|
|
4,416
|
|
|
|
734,263
|
|
Net settlement of total return swaps and futures contracts
|
|
|
(343
|
)
|
|
|
107,305
|
|
Purchases of fixed assets
|
|
|
(1,704
|
)
|
|
|
(1,274
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
580,104
|
|
|
|
144,287
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends to shareholder
|
|
|
(100,000
|
)
|
|
|
(130,000
|
)
|
Repayment of
103/8%
long-term debt
|
|
|
|
|
|
|
(4,270
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(100,000
|
)
|
|
|
(134,270
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
170,605
|
|
|
|
275,796
|
|
Cash and cash equivalents, beginning of period
|
|
|
159,862
|
|
|
|
147,506
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
330,467
|
|
|
$
|
423,302
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
12,788
|
|
|
$
|
13,009
|
|
|
|
|
|
|
|
|
|
|
Cash paid to parent for income taxes
|
|
$
|
124,556
|
|
|
$
|
40,262
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL NON-CASH OPERATING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Fixed income securities transferred to parent as payment for
income taxes
|
|
$
|
54,008
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
7
|
|
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., a Wyoming holding
company. Fairfax Inc. is ultimately owned by Fairfax Financial
Holdings Limited (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. The Company, through its subsidiaries,
offers a full range of commercial property and casualty
insurance distributed through an independent producer force
located across the United States.
These consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP) and include the
accounts of the Company and its wholly-owned subsidiaries,
including United States Fire Insurance Company (US
Fire), The North River Insurance Company (North
River), Crum & Forster Indemnity Company
(CF Indemnity) and Crum and Forster Insurance
Company (CF Insurance). US Fire owns 100% of the
stock of Crum & Forster Specialty Insurance Company.
North River owns 100% of the stock of Seneca Insurance Company,
Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent
assets and liabilities. Such estimates and assumptions may
differ from actual results. Certain financial information that
is normally included in annual financial statements, including
certain financial statement footnotes, prepared in accordance
with GAAP, is not required for interim reporting purposes and
has been condensed or omitted herein. These consolidated
financial statements should be read in conjunction with the
Companys consolidated financial statements, and notes
related thereto, included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the
Securities and Exchange Commission (SEC) on
February 27, 2009.
The interim financial data at September 30, 2009 and for
the three and nine months ended September 30, 2009 and 2008
is unaudited. However, in the opinion of management, the interim
data includes all adjustments that are necessary for a fair
presentation of the Companys results for the interim
periods. Certain amounts from prior periods have been
reclassified to conform to the current years presentation.
The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the
full year.
|
|
2.
|
Recent
Accounting Pronouncements
|
FASB ASC
105-10. In
June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB
Accounting Standards Codification and Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162 (now known as FASB ASC
105-10,
Generally Accepted Accounting Principles). The FASB
Accounting Standards Codification (FASB ASC) has
been established as the single source of authoritative GAAP to
be applied to nongovernmental entities. The only other source of
authoritative GAAP is the rules and interpretive releases of the
SEC, which apply only to SEC registrants. The FASB ASC is
effective for interim and annual financial reporting periods
ending after September 15, 2009 and is not intended to
change or alter existing GAAP but just change the way in which
GAAP is referenced in the Companys financial statements.
The Company has adopted FASB ASC
105-10
effective this quarter and technical references to GAAP in the
report are provided under the new FASB ASC structure with the
prior references to original standards included the first time
they appear for clarification.
FASB ASC
855-10. In
May 2009, the FASB issued the SFAS No. 165,
Subsequent Events (now known as FASB ASC
855-10,
Subsequent Events), which establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are
issued or are available to be issued. The Company adopted FASB
ASC 855-10
effective June 1, 2009 and has evaluated subsequent events
after the balance sheet date of September 30, 2009 through
October 29, 2009, the date the financial statements were
issued. During this period, the Company did not have any
recognizable or disclosable subsequent events.
8
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
FASB ASC
320-10. In
April 2009, the FASB issued FASB Staff Position
(FSP)
No. 115-2
and 124-2,
Recognition and Presentation of Other Than Temporary
Impairments, (now known as FASB ASC
320-10,
Investments Debt and Equity Securities),
which amends the other than temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other than temporary impairments on debt securities in the
financial statements. The recognition provisions within FASB ASC
320-10 apply
only to fixed income securities that are other than temporarily
impaired. If the Company intends to sell or it is more likely
than not that it will be required to sell a security in an
unrealized loss position prior to recovery of its cost basis,
the security is other than temporarily impaired and the full
amount of the impairment is recognized as a loss through
earnings. If the Company asserts that it does not intend to sell
and it is more likely than not that it will not be required to
sell a security that it considers to be other than temporarily
impaired before recovery of its cost basis, the impairment must
be separated into credit and non-credit components with the
credit portion of the other than temporary impairment recognized
as a loss through earnings and the non-credit portion recognized
in other comprehensive income. FASB ASC
320-10 is
effective for interim and annual reporting periods ending after
June 15, 2009. The Company adopted FASB ASC
320-10
effective April 1, 2009 and the adoption did not affect the
Companys financial position or results of operations. FASB
ASC 320-10
requires that the Company record, as of the beginning of the
interim period of adoption, a cumulative effect adjustment to
reclassify the non-credit component of a previously recognized
other than temporary impairment on debt securities which are
still held as investments at the date of adoption from retained
earnings to accumulated other comprehensive income. The Company
reviewed other than temporary impairments it had previously
recorded through earnings on fixed income securities held at
April 1, 2009, which were $10,855, and determined that all
of these other than temporary impairments were related to
specific credit losses as the issuers had filed for bankruptcy
and were in default of interest payments, resulting in no
cumulative effect adjustment to opening retained earnings or
accumulated other comprehensive income as of April 1, 2009.
FASB ASC
820-10. In
April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability have Significantly Decreased and
Identifying Transactions That Are Not Orderly Fair Value
Measurements and Disclosure (now known as FASB ASC
820-10,
Fair Value Measurements and Disclosures) which provides
additional guidance on estimating the fair value of an asset or
liability when the volume and level of activity for the asset or
liability have significantly decreased and on identifying
transactions that are not orderly. The Company adopted FASB ASC
820-10
effective April 1, 2009 and the adoption did not have an
impact on the Companys financial position or results of
operations.
FASB ASC
825-10. In
April 2009, the FASB issued, FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value Measurement (now
known as FASB ASC
825-10,
Financial Instruments) which amends the previous guidance
to require disclosures about the fair value of financial
instruments for interim reporting periods in addition to annual
reporting periods and also requires companies to disclose the
methods and significant assumptions used to estimate the fair
value of financial instruments in financial statements on an
interim basis and to describe any changes during the period. The
Company adopted FASB ASC
825-10
effective April 1, 2009 and the adoption did not have an
impact on the Companys financial position or results of
operations, but resulted in additional disclosures which have
been made in Note 4 to the consolidated financial
statements.
FASB ASC
320-10-S99. In
April 2009, the SEC issued Staff Accounting Bulletin
(SAB) No. 111, (now known as FASB ASC
320-10-S99)
which amends and replaces SAB Topic 5.M. in the
SAB Series entitled Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities. FASB ASC
320-10-S99
maintains the SEC staffs previous views related to equity
securities and amends Topic 5.M. to exclude debt securities from
its scope. The SAB was effective upon issuance and did not
affect the Companys financial position or results of
operations.
FASB ASC
815-10. In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an Amendment of FASB Statement
No. 133 (now known as FASB ASC
815-10,
Derivatives and Hedging) which is intended to improve
financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures about: (a) how
and why an entity uses derivative instruments; (b) how
derivative instruments and related hedged items are accounted
for under FASB ASC
815-10 and
its related interpretations; and (c) how derivative
instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. The
Company adopted FASB ASC
815-10
effective January 1, 2009, which did not affect the
Companys financial position or results of operations;
however, the Company has expanded its disclosures regarding the
effects of hedging activities.
9
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The aggregate carrying value of the Companys investment
portfolio was $4,138,138 and $4,032,034 at September 30,
2009 and December 31, 2008, respectively, and is comprised
of
available-for-sale
securities,
held-for-trading
securities, investments at equity, derivatives and other
invested assets, short-term investments, cash and cash
equivalents and assets pledged for derivatives.
Available-For-Sale
Securities
Investments in
available-for-sale
fixed income and equity securities are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
$
|
82,673
|
|
|
$
|
14,616
|
|
|
$
|
|
|
|
$
|
97,289
|
|
States, municipalities and political
subdivisions1
|
|
|
1,090,264
|
|
|
|
189,635
|
|
|
|
26
|
|
|
|
1,279,873
|
|
Other corporate
|
|
|
108,618
|
|
|
|
29,838
|
|
|
|
|
|
|
|
138,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,281,555
|
|
|
|
234,089
|
|
|
|
26
|
|
|
|
1,515,618
|
|
Equity securities common stocks
|
|
|
1,146,993
|
|
|
|
244,600
|
|
|
|
7,816
|
|
|
|
1,383,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
2,428,548
|
|
|
$
|
478,689
|
|
|
$
|
7,842
|
|
|
$
|
2,899,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes assets pledged for
derivatives at a fair value of $29,756 (amortized cost of
$24,009).
|
Included in equity securities at September 30, 2009 are a
$188,320 investment in Dell Inc. common stock and a $159,340
investment in Johnson & Johnson common stock, which
represent 12.0% and 10.2%, respectively, of shareholders
equity at that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
$
|
136,551
|
|
|
$
|
32,879
|
|
|
$
|
|
|
|
$
|
169,430
|
|
States, municipalities and political subdivisions
|
|
|
1,279,232
|
|
|
|
54,230
|
|
|
|
17,997
|
|
|
|
1,315,465
|
|
Other corporate
|
|
|
50,331
|
|
|
|
2,603
|
|
|
|
4,495
|
|
|
|
48,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,466,114
|
|
|
|
89,712
|
|
|
|
22,492
|
|
|
|
1,533,334
|
|
Equity securities common stocks
|
|
|
1,106,098
|
|
|
|
29,422
|
|
|
|
115,366
|
|
|
|
1,020,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
2,572,212
|
|
|
$
|
119,134
|
|
|
$
|
137,858
|
|
|
$
|
2,553,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in equity securities at December 31, 2008 is a
$156,642 investment in Johnson & Johnson common stock,
which represents 13.4% of shareholders equity at that date.
The Company holds significant investments in equities and equity
related securities. The market values and liquidity of these
investments are volatile and may vary dramatically either up or
down in short periods, and their ultimate value will therefore
only be known over the long term. Certain individual
available-for-sale
securities had gross unrealized losses at September 30,
2009 totaling $7,842, which represented 2.6% of the cost or
amortized cost of such securities in the aggregate.
10
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The following table summarizes, for those securities in an
unrealized loss position, the fair value and gross unrealized
loss by length of time those securities have been in an
unrealized loss position at September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
|
|
Unrealized
|
|
|
Number of
|
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Securities
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Securities
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months or less
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months or less
|
|
|
489
|
|
|
|
1
|
|
|
|
2
|
|
|
|
385,140
|
|
|
|
16,865
|
|
|
|
27
|
|
7 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,462
|
|
|
|
1,132
|
|
|
|
3
|
|
Greater than 12 months
|
|
|
535
|
|
|
|
25
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
|
|
26
|
|
|
|
3
|
|
|
|
400,602
|
|
|
|
17,997
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade, other corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months or less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,100
|
|
|
|
4,495
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,024
|
|
|
|
26
|
|
|
|
3
|
|
|
|
436,702
|
|
|
|
22,492
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months or less
|
|
|
269,892
|
|
|
|
7,684
|
|
|
|
4
|
|
|
|
519,602
|
|
|
|
115,366
|
|
|
|
14
|
|
7 12 months
|
|
|
21,441
|
|
|
|
132
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
291,333
|
|
|
|
7,816
|
|
|
|
5
|
|
|
|
519,602
|
|
|
|
115,366
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in an unrealized loss position
|
|
$
|
292,357
|
|
|
$
|
7,842
|
|
|
|
8
|
|
|
$
|
956,304
|
|
|
$
|
137,858
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair values and gross
unrealized losses of equity securities categorized first by
length of time those equity securities have been in an
unrealized loss position and then further categorized by the
severity of the unrealized loss position at September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss as a Percentage of Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
0-10%
|
|
|
10-20%
|
|
|
20-30%
|
|
|
30-40%
|
|
|
40-50%
|
|
|
>50%
|
|
|
Losses
|
|
|
6 months or less
|
|
$
|
269,892
|
|
|
$
|
1,567
|
|
|
$
|
|
|
|
$
|
1,507
|
|
|
$
|
|
|
|
$
|
4,610
|
|
|
$
|
|
|
|
$
|
7,684
|
|
7 12 months
|
|
|
21,441
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities fair value and gross unrealized losses
|
|
$
|
291,333
|
|
|
$
|
1,699
|
|
|
$
|
|
|
|
$
|
1,507
|
|
|
$
|
|
|
|
$
|
4,610
|
|
|
$
|
|
|
|
$
|
7,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The aggregate severity of the total unrealized losses in the
equity portfolio at September 30, 2009 was approximately
2.6% of their cost, including one security with losses totaling
$4,610, or 40.8% of its cost, that has been in an unrealized
loss position for less than six months. Management has evaluated
the financial condition and near-term prospects of the issuers
of equity securities in an unrealized loss position and the
price volatility of the equity securities themselves, as well as
recoveries or additional declines in fair value subsequent to
the balance sheet date, and believes they have the potential for
recovery within a reasonable period of time and therefore does
not consider them to be other than temporarily impaired.
At each reporting date, and more frequently when conditions
warrant, management evaluates all
available-for-sale
securities with unrealized losses to determine whether an other
than temporary decline in value exists and whether losses should
be recognized in earnings rather than in accumulated other
comprehensive income (loss). The process for determining whether
a security is other than temporarily impaired requires judgment
and involves analyzing many factors. These factors include but
are not limited to (i) the length of time and extent to
which the fair value has been less than its cost or amortized
cost; (ii) the severity of the impairment; (iii) the
cause of the impairment; (iv) the financial condition and
near-term prospects of the issuer as well as specific credit
issues related to the issuer such as changes in credit rating,
reduction or elimination of dividends or non-payment of
scheduled interest payments; and (v) for fixed income
securities, the Companys intent to sell a security or
whether it is more likely than not that the Company will be
required to sell the security before recovery of its amortized
cost, which in some cases, may extend to maturity, and for
equity securities, the Companys intent and ability to hold
the security for a period of time sufficient to allow for any
anticipated recovery of fair value in the near term. To the
extent management determines that a security is deemed to be
other than temporarily impaired, an impairment loss is
recognized.
Management reviewed currently available information regarding
all securities where the estimated fair value was less than cost
or amortized cost at September 30, 2009 and based thereon,
recorded other than temporary impairment charges of $26 and
$105,980 in the three and nine months ended September 30,
2009, respectively. For the nine months ended September 30,
2009, of the $105,980 of other than temporary impairments,
$3,507 was in respect of fixed income securities, all of which
was credit related, and the remaining $102,473 was due to write
downs of equity securities. There were no credit related losses
for which a portion of the other than temporary impairment has
been recognized in accumulated other comprehensive income. For
the three and nine months ended September 30, 2008, the
Company recorded other than temporary impairment charges of
$34,698 and $75,776, respectively, primarily related to write
downs of equity securities.
Fixed
Income Securities Designated as
Held-for-Trading
Fixed income securities classified as
held-for-trading
include those purchased for short-term investment objectives and
those designated as such by management pursuant to the fair
value option under FASB ASC
815-15,
Embedded Derivatives (formerly SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an Amendment of FASB Statements Nos. 133
and 140). These securities, which are recorded at fair value
on the consolidated balance sheets, include convertible
securities with embedded derivatives, mortgage-backed securities
purchased at deep discounts to par and certain corporate fixed
income securities. Changes in fair value of
held-for-trading
securities 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 of $41,749 and $64,878,
and losses of $(34,073) and $(32,296), for the three and nine
months ended September 30, 2009 and 2008, respectively. The
fair values of these securities were $335,002 and $233,998 at
September 30, 2009 and December 31, 2008,
respectively, which include convertible securities of $191,305
and $166,131 at September 30, 2009 and December 31,
2008, respectively, mortgage-backed securities of $106,284 and
$66,393 at September 30, 2009 and December 31, 2008,
respectively, and other corporate bonds of $37,413 and $1,474 at
September 30, 2009 and December 31, 2008, respectively.
Included in
held-for-trading
securities are two convertible securities issued by Level 3
Communications, Inc. with a combined value of $142,333, which
together with an investment in Level 3 Communications, Inc.
common stock of $33,657, represented 11.2% of shareholders
equity at September 30, 2009 (12.8% at December 31,
2008).
12
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Investments
at Equity
Investments at equity include investments in entities that are
consolidated subsidiaries of Fairfax, but are less than 50%
owned by the Company, as well as investments in certain
partnerships, accounted for under the equity method of
accounting. These investments consist of equity interests of
between approximately 1.0% and 47.0% at September 30, 2009,
with a total carrying value of $159,370 and $117,586 at
September 30, 2009 and December 31, 2008, respectively.
Derivatives
and Other Invested Assets
Derivative
Securities
The Company utilizes derivative securities to mitigate financial
risks arising principally from its investment holdings and
receivables. Effective January 1, 2009, the Company adopted
FASB ASC
815-10,
Derivatives and Hedging, which requires enhanced
disclosures about derivatives and hedging activities. The
Companys derivative securities are principally comprised
of credit default swaps and total return swaps, none of which
are designated as hedges, and are included in derivatives and
other invested assets on the consolidated balance sheets at fair
value. The Company had no derivative liabilities at
September 30, 2009 or December 31, 2008. Changes in
fair value of derivative securities are included in realized
investment gains and losses on the consolidated statements of
income in the period in which they occur.
The following table summarizes the Companys derivative
securities at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Notional
|
|
|
|
|
|
Fair Value
|
|
|
Notional
|
|
|
|
|
|
Fair Value
|
|
|
|
Amount
|
|
|
Cost
|
|
|
Asset
|
|
|
Amount
|
|
|
Cost
|
|
|
Asset
|
|
|
Credit default swaps
|
|
$
|
1,597,093
|
|
|
$
|
21,624
|
|
|
$
|
23,116
|
|
|
$
|
3,044,313
|
|
|
$
|
42,477
|
|
|
$
|
138,830
|
|
Total return swaps
|
|
|
452,319
|
|
|
|
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
derivatives1
|
|
|
101,201
|
|
|
|
10,225
|
|
|
|
1,903
|
|
|
|
1,114,201
|
|
|
|
10,225
|
|
|
|
|
|
|
|
|
1
|
|
At September 30, 2009, other
derivatives are comprised of warrants. At December 31,
2008, other derivatives are comprised of warrants and Eurodollar
futures contracts, both of which had no fair value.
|
Credit
Default Swaps
The Company has purchased credit default swaps, referenced to
various issuers in the banking, mortgage and insurance sectors
of the financial services industry which serve as economic
hedges against declines in the fair value of the Companys
financial assets. Under a credit default swap, as the buyer, the
Company agrees to pay to a specific counterparty, fixed premium
amounts based on an agreed notional principal amount in exchange
for protection against default by the issuers of specified
referenced debt securities. The credit events, as defined by the
respective credit default swap contracts establishing the rights
to recover amounts from the counterparties, include events such
as bankruptcy, obligation acceleration, obligation default,
failure to pay, repudiation/moratorium and restructuring. As of
September 30, 2009, all credit default swap contracts held
by the Company have been purchased from and entered into with
either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as
the counterparty, with positions on certain covered risks with
more than one of these counterparties.
The credit default swaps are recorded at fair value with changes
in fair value recognized as realized investment gains or losses
in the period in which they occur. The Company obtains
broker-dealer quotes for its credit default swaps from
third-party providers. In addition, the Company assesses the
reasonableness of the fair values obtained from these providers
by comparing the fair values to values produced using individual
issuer credit default swap yield curves, by referencing them to
movements in credit spreads and by comparing them to recent
market transaction prices for similar credit default swaps where
available. The fair values of credit default swaps are subject
to significant volatility arising from the potential differences
in the perceived risk of default of the underlying issuers,
movements in credit spreads and the length of time to the
contracts maturity. The fair value of the credit default
swaps may vary materially either up or down in short periods,
and their ultimate value may therefore only be known upon their
disposition.
13
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Counterparties to the credit default swaps expose the Company to
credit risk in the event of non-performance, which the Company
endeavors to limit through the terms of agreements negotiated
with the counterparties. Pursuant to the swap agreements, the
counterparties are required to pledge cash or U.S. Treasury
securities as collateral, in the event that appreciation in the
fair value of the credit default swaps meets certain thresholds.
The fair value of this collateral, which is not reflected on the
Companys balance sheet, is held by an independent
custodian in the name of the Company, and amounted to $6,872 at
September 30, 2009. The Company has the right to sell or
repledge this collateral, which it has not exercised. The
Company believes that any remaining credit risk exposure,
represented by the uncollateralized fair value of the credit
default swaps ($16,244 at September 30, 2009), is low given
the diversification among the various counterparties. The
Company funds all its obligations relating to the credit default
swaps through the initial premium paid at purchase and as a
result there are no requirements for the Company to provide
collateral. At September 30, 2009, the credit default swap
portfolio had an average term to expiry of 2.5 years. A
maturity analysis of the credit default swaps at
September 30, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Expiring in one year or less
|
|
$
|
713,918
|
|
|
$
|
2,136
|
|
Expiring after 1 year through 5 years
|
|
|
883,175
|
|
|
|
20,980
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
|
|
|
The Companys credit default swaps have declined
significantly in 2009 relative to prior years, largely as a
result of significant sales in 2008. In the latter part of 2008,
the Company reviewed the financial objectives of its economic
hedging program and decided not to replace closed credit default
swaps based on: (i) the Companys judgment that its
exposure to elevated levels of credit risk had moderated and
that its historical approaches to managing credit risk were
satisfactory in mitigating the Companys exposure to credit
risk arising from its financial assets; (ii) the
significant increase in the cost of purchasing credit
protection; and (iii) the fact that the Companys
capital and liquidity had benefited from approximately
$450 million in realized gains from credit default swaps
since inception of the hedge program. As a result, the effects
that credit default swaps as hedging instruments may be expected
to have on the Companys future financial position,
liquidity and results of operations may be expected to diminish
significantly relative to the effects in recent years. The
Company may initiate new credit default swap contracts as an
effective hedging mechanism in the future, but there can be no
assurance that it will do so.
14
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The following tables summarize the effect of the credit default
swaps and related hedged items on the Companys financial
position and results of operations as of and for the three and
nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
1,850,620
|
|
|
$
|
1,850,620
|
|
|
$
|
92,248
|
|
|
$
|
71,728
|
|
|
$
|
163,976
|
|
Warrants
|
|
|
1,903
|
|
|
|
1,903
|
|
|
|
|
|
|
|
1,901
|
|
|
|
1,901
|
|
Premiums receivable
|
|
|
167,086
|
|
|
|
167,086
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
(375
|
)
|
Reinsurance recoverable
|
|
|
905,967
|
|
|
|
905,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
2,925,576
|
|
|
$
|
2,925,576
|
|
|
|
92,248
|
|
|
|
73,254
|
|
|
|
165,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(19,504
|
)
|
|
|
(19,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(19,504
|
)
|
|
|
(19,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
92,248
|
|
|
$
|
53,750
|
|
|
$
|
145,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
premiums receivable and reinsurance recoverable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,463,470
|
|
|
$
|
2,463,470
|
|
|
$
|
9,921
|
|
|
$
|
(26,671
|
)
|
|
$
|
(16,750
|
)
|
Warrants
|
|
|
3,250
|
|
|
|
3,250
|
|
|
|
|
|
|
|
818
|
|
|
|
818
|
|
Premiums receivable
|
|
|
187,166
|
|
|
|
187,166
|
|
|
|
|
|
|
|
(675
|
)
|
|
|
(675
|
)
|
Reinsurance recoverable
|
|
|
1,025,144
|
|
|
|
1,025,144
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
3,679,030
|
|
|
$
|
3,679,030
|
|
|
|
9,921
|
|
|
|
(28,528
|
)
|
|
|
(18,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
3,731,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
119,316
|
|
|
|
119,316
|
|
Eurodollar futures contracts
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
4,219,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
119,120
|
|
|
|
119,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
9,921
|
|
|
$
|
90,592
|
|
|
$
|
100,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
premiums receivable and reinsurance recoverable.
|
15
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
1,850,620
|
|
|
$
|
1,850,620
|
|
|
$
|
166,843
|
|
|
$
|
141,945
|
|
|
$
|
308,788
|
|
Warrants
|
|
|
1,903
|
|
|
|
1,903
|
|
|
|
|
|
|
|
1,903
|
|
|
|
1,903
|
|
Premiums receivable
|
|
|
167,086
|
|
|
|
167,086
|
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
(1,125
|
)
|
Reinsurance recoverable
|
|
|
905,967
|
|
|
|
905,967
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
2,925,576
|
|
|
$
|
2,925,576
|
|
|
|
166,843
|
|
|
|
140,723
|
|
|
|
307,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(6,054
|
)
|
|
|
(6,054
|
)
|
Eurodollar futures contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(6,397
|
)
|
|
|
(6,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
166,843
|
|
|
$
|
134,326
|
|
|
$
|
301,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
premiums receivable and reinsurance recoverable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,463,470
|
|
|
$
|
2,463,470
|
|
|
$
|
(18,137
|
)
|
|
$
|
(13,416
|
)
|
|
$
|
(31,553
|
)
|
Warrants
|
|
|
3,250
|
|
|
|
3,250
|
|
|
|
|
|
|
|
(2,652
|
)
|
|
|
(2,652
|
)
|
Premiums receivable
|
|
|
187,166
|
|
|
|
187,166
|
|
|
|
|
|
|
|
575
|
|
|
|
575
|
|
Reinsurance recoverable
|
|
|
1,025,144
|
|
|
|
1,025,144
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
3,679,030
|
|
|
$
|
3,679,030
|
|
|
|
(18,137
|
)
|
|
|
(21,493
|
)
|
|
|
(39,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
3,731,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
275,961
|
|
|
|
275,961
|
|
Eurodollar futures contracts
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
4,219,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
275,765
|
|
|
|
275,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
(18,137
|
)
|
|
$
|
254,272
|
|
|
$
|
236,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
premiums receivable and reinsurance recoverable.
|
16
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Total
Return Swaps
During much of 2008 and immediately preceding years, the Company
had been concerned about the valuation of worldwide equity
markets, uncertainty resulting from credit issues in the
U.S. and global economic conditions. As protection against
a decline in equity markets, the Company held short positions in
Standard & Poors Depositary Receipts
(SPDRs) and U.S. listed common stocks and
equity index and equity total return swaps, referred to in the
aggregate as equity hedges. The Company also in the past
purchased S&P Index call options to limit the potential
loss on its equity index total return swaps and SPDRs short
positions and to provide general protection against the short
position in common stocks. In the latter half of 2008, following
significant declines in global equity markets, the Company
reviewed the financial objectives of its hedging program and
determined that elevated risks in the global equity markets had
moderated and subsequently closed all of its equity hedge
positions, realizing substantial gains. During the fourth
quarter of 2008, the Company increased its investments in
equities as a result of the opportunities presented by
significant declines in the global equity markets.
During the third quarter of 2009, as a result of the rapid
increase in the valuation level of worldwide equity markets, the
Company once again determined to protect a portion of its equity
and equity related holdings against a decline in equity markets
and entered into equity index total return swaps with a notional
value of $452,319. These total return swaps contain contractual
reset provisions requiring counterparties to cash-settle on a
monthly basis any market value movements arising since the prior
settlement. Any cash paid to settle unfavorable market value
changes and, conversely, any cash received in settlement of
favorable market value changes are recognized as realized
investment gains and losses on the consolidated statements of
income in the period in which they occur. To the extent that a
contractual reset date of a contract does not correspond to the
balance sheet date, the Company records additional net realized
investment gains or losses on the consolidated statements of
income to adjust the carrying value of the derivative asset or
liability associated with each total return swap contract to
reflect its fair value at the balance sheet date.
The Company is required to post collateral equivalent to 6% of
the notional value of the total return swaps at the time the
swap is opened. These assets are recorded at fair value in
assets pledged for derivatives on the consolidated balance
sheets. At September 30, 2009, the fair value of the
collateral posted, in the form of municipal bonds, was $29,756.
The following tables summarize the effect of equity risk hedging
instruments and related hedged items on the Companys
financial position and results of operations as of and for the
three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,383,777
|
|
|
$
|
1,383,777
|
|
|
$
|
166,508
|
|
|
$
|
22,251
|
|
|
$
|
188,759
|
|
Investments at equity
|
|
|
159,370
|
|
|
|
159,370
|
|
|
|
577
|
|
|
|
8,956
|
|
|
|
9,533
|
|
Other invested assets
|
|
|
355,303
|
|
|
|
355,303
|
|
|
|
|
|
|
|
131,407
|
|
|
|
131,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,898,450
|
|
|
$
|
1,898,450
|
|
|
|
167,085
|
|
|
|
162,614
|
|
|
|
329,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
167,085
|
|
|
$
|
165,225
|
|
|
$
|
332,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
17
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
691,577
|
|
|
$
|
691,577
|
|
|
$
|
(41,309
|
)
|
|
$
|
(30,618
|
)
|
|
$
|
(71,927
|
)
|
Investments at equity
|
|
|
126,713
|
|
|
|
126,713
|
|
|
|
(841
|
)
|
|
|
(15,072
|
)
|
|
|
(15,913
|
)
|
Other invested assets
|
|
|
239,369
|
|
|
|
239,369
|
|
|
|
|
|
|
|
(41,575
|
)
|
|
|
(41,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,057,659
|
|
|
$
|
1,057,659
|
|
|
|
(42,150
|
)
|
|
|
(87,265
|
)
|
|
|
(129,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
845,392
|
|
|
$
|
45,558
|
|
|
|
|
|
|
|
141,263
|
|
|
|
141,263
|
|
S&P Index call options
|
|
|
310,464
|
|
|
|
1
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
1,155,856
|
|
|
$
|
45,559
|
|
|
|
|
|
|
|
141,218
|
|
|
|
141,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
(42,150
|
)
|
|
$
|
53,953
|
|
|
$
|
11,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,383,777
|
|
|
$
|
1,383,777
|
|
|
$
|
322,728
|
|
|
$
|
(71,518
|
)
|
|
$
|
251,210
|
|
Investments at equity
|
|
|
159,370
|
|
|
|
159,370
|
|
|
|
1,776
|
|
|
|
44,579
|
|
|
|
46,355
|
|
Other invested assets
|
|
|
355,303
|
|
|
|
355,303
|
|
|
|
|
|
|
|
73,902
|
|
|
|
73,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,898,450
|
|
|
$
|
1,898,450
|
|
|
|
324,504
|
|
|
|
46,963
|
|
|
|
371,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
324,504
|
|
|
$
|
49,574
|
|
|
$
|
374,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
18
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Exposure/
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Notional Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
691,577
|
|
|
$
|
691,577
|
|
|
$
|
(35,130
|
)
|
|
$
|
(71,696
|
)
|
|
$
|
(106,826
|
)
|
Investments at equity
|
|
|
126,713
|
|
|
|
126,713
|
|
|
|
(28,626
|
)
|
|
|
(24,924
|
)
|
|
|
(53,550
|
)
|
Other invested assets
|
|
|
239,369
|
|
|
|
239,369
|
|
|
|
|
|
|
|
(83,472
|
)
|
|
|
(83,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,057,659
|
|
|
$
|
1,057,659
|
|
|
|
(63,756
|
)
|
|
|
(180,092
|
)
|
|
|
(243,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
845,392
|
|
|
$
|
45,558
|
|
|
|
|
|
|
|
153,060
|
|
|
|
153,060
|
|
S&P Index call options
|
|
|
310,464
|
|
|
|
1
|
|
|
|
|
|
|
|
(498
|
)
|
|
|
(498
|
)
|
SPDRs short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,506
|
|
|
|
65,506
|
|
Common stock short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,749
|
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
1,155,856
|
|
|
$
|
45,559
|
|
|
|
|
|
|
|
222,817
|
|
|
|
222,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
(63,756
|
)
|
|
$
|
47,275
|
|
|
$
|
(21,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
Other
Derivatives
The Company has investments in warrants, which are contracts
that grant the holder the right to purchase an underlying
financial instrument at a given price and time. Warrants are
recorded at fair value with changes in fair value recognized as
realized investment gains or losses in the period in which they
occur.
The following table summarizes the changes in fair value of the
Companys derivative securities and short positions
included in net realized investment gains and losses in the
consolidated statements of income for the three and nine months
ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Credit default swaps
|
|
$
|
(19,504
|
)
|
|
$
|
119,316
|
|
|
$
|
(6,054
|
)
|
|
$
|
275,961
|
|
Total return swaps
|
|
|
2,611
|
|
|
|
141,263
|
|
|
|
2,611
|
|
|
|
153,060
|
|
SPDRs short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,506
|
|
Common stock short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,749
|
|
Other1
|
|
|
1,901
|
|
|
|
577
|
|
|
|
1,560
|
|
|
|
(3,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment (losses) gains
|
|
$
|
(14,992
|
)
|
|
$
|
261,156
|
|
|
$
|
(1,883
|
)
|
|
$
|
495,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Other includes warrants, Eurodollar
futures contracts and S&P Index call options.
|
19
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Further analysis of the realized gains for the three and nine
months ended September 30, 2009 and 2008 is set forth in
the tables below. The realized gains (losses) on disposal
represent inception to date gains (losses) on positions closed
in the periods. The reversal of the
mark-to-market
gains (losses) represents changes in fair value recognized in
prior periods on securities sold and the
mark-to-market
gains on losses in the current period represents changes in fair
value on credit default swaps still outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
Credit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Default
|
|
|
Return
|
|
|
Other
|
|
|
|
|
|
|
Swaps
|
|
|
Swaps
|
|
|
Derivatives
|
|
|
Total
|
|
|
Realized gains on disposal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reversal of
mark-to-market
gains recognized in prior periods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market
(losses) gains recognized in period
|
|
|
(19,504
|
)
|
|
|
2,611
|
|
|
|
1,901
|
|
|
|
(14,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains
|
|
$
|
(19,504
|
)
|
|
$
|
2,611
|
|
|
$
|
1,901
|
|
|
$
|
(14,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
Credit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Default
|
|
|
Return
|
|
|
Other
|
|
|
|
|
|
|
Swaps1
|
|
|
Swaps
|
|
|
Derivatives
|
|
|
Total
|
|
|
Realized gains (losses) on disposal
|
|
$
|
107,710
|
|
|
$
|
110,119
|
|
|
$
|
(362
|
)
|
|
$
|
217,467
|
|
Reversal of
mark-to-market
(gains) losses recognized in prior periods
|
|
|
(55,486
|
)
|
|
|
(14,414
|
)
|
|
|
362
|
|
|
|
(69,538
|
)
|
Mark-to-market
gains recognized in period
|
|
|
67,092
|
|
|
|
45,558
|
|
|
|
577
|
|
|
|
113,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
119,316
|
|
|
$
|
141,263
|
|
|
$
|
577
|
|
|
$
|
261,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
During the three months ended
September 30, 2008, the Company sold credit default swaps
with a cost of $12,869 and notional amount of $739,653 for
proceeds of $120,579.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
Credit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Default
|
|
|
Return
|
|
|
Other
|
|
|
|
|
|
|
Swaps1
|
|
|
Swaps
|
|
|
Derivatives
|
|
|
Total
|
|
|
Realized gains (losses) on disposal
|
|
$
|
88,807
|
|
|
$
|
|
|
|
$
|
(343
|
)
|
|
$
|
88,464
|
|
Reversal of
mark-to-market
gains recognized in prior periods
|
|
|
(60,119
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,119
|
)
|
Mark-to-market
(losses) gains recognized in period
|
|
|
(34,742
|
)
|
|
|
2,611
|
|
|
|
1,903
|
|
|
|
(30,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains
|
|
$
|
(6,054
|
)
|
|
$
|
2,611
|
|
|
$
|
1,560
|
|
|
$
|
(1,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
During the nine months ended
September 30, 2009, the Company sold credit default swaps
with a cost of $20,853 and notional amount of $1,387,500 for
proceeds of $109,660.
|
20
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
SPDRs
|
|
|
Total
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
Default
|
|
|
Short-
|
|
|
Return
|
|
|
Short-
|
|
|
Other
|
|
|
|
|
|
|
Swaps1
|
|
|
Sales
|
|
|
Swaps
|
|
|
Sales
|
|
|
Derivatives
|
|
|
Total
|
|
|
Realized gains (losses) on disposal
|
|
$
|
257,228
|
|
|
$
|
(22,523
|
)
|
|
$
|
107,502
|
|
|
$
|
5,116
|
|
|
$
|
(1,977
|
)
|
|
$
|
345,346
|
|
Reversal of
mark-to-market
(gains) losses recognized in prior periods
|
|
|
(125,975
|
)
|
|
|
88,029
|
|
|
|
|
|
|
|
(367
|
)
|
|
|
1,555
|
|
|
|
(36,758
|
)
|
Mark-to-market
gains (losses) recognized in period
|
|
|
144,708
|
|
|
|
|
|
|
|
45,558
|
|
|
|
|
|
|
|
(2,924
|
)
|
|
|
187,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
275,961
|
|
|
$
|
65,506
|
|
|
$
|
153,060
|
|
|
$
|
4,749
|
|
|
$
|
(3,346
|
)
|
|
$
|
495,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
During the nine months ended
September 30, 2008, the Company sold credit default swaps
with a cost of $33,128 and notional amount of $1,518,544 for
proceeds of $290,356.
|
Other
Invested Assets
Other invested assets are comprised of investments for which the
Company has elected the fair value option under FASB ASC
825-10,
Financial Instruments (formerly SFAS No. 159,
The Fair Value Option for Financial Assets and
Liabilities). These investments, which include the
Companys investments in Odyssey Re Holdings Corp.
(Odyssey) common and preferred stock and Advent
Capital (Holdings) PLC (Advent) common stock, are
recorded at fair value with changes in fair value recorded as
realized investment gains or losses in the period in which they
occur. At September 30, 2009 and December 31, 2008,
other invested assets had a fair value of $355,303 and $273,917,
respectively. For the three and nine months ended
September 30, 2009 and 2008, the change in fair value of
other invested assets resulted in realized investment gains of
$130,944 and $71,337, and realized investment losses of
$(41,088) and $(81,504), respectively. For the three and nine
months ended September 30, 2009, the gain was primarily
attributable to the change in fair value of the Companys
investment in Odyssey common stock, which was acquired in the
fourth quarter of 2008. For the three and nine months ended
September 30, 2008 the loss on other invested assets was
primarily due to the change in fair value of the Companys
investment in Northbridge Financial Corp. which was sold in the
fourth quarter of 2008.
For the nine months ended September 30, 2009, Odyssey was a
significant subsidiary as defined in the SECs
Regulation S-X.
The Companys aggregate share of Odysseys statement
of operations which would have been reported in the
Companys results for the three months ended
September 30, 2009, had Odyssey still been accounted for
under the equity method of accounting, is summarized as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
2009
|
|
Total revenues
|
|
$
|
52,812
|
|
Total expenses
|
|
$
|
38,320
|
|
Income from continuing operations
|
|
$
|
14,492
|
|
Net income
|
|
$
|
10,232
|
|
21
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Related
Party Transactions
In September 2009, Fairfax announced a formal offer to acquire
all of the outstanding common shares of Odyssey, other than
those shares not already owned by Fairfax and its affiliates,
for $65 in cash per common share. The Company recognized a
mark-to-market gain of $124,405 on its investment in Odyssey in
the third quarter of 2009.
In July 2009, Fairfax announced a formal offer to acquire all of
the outstanding common shares of Advent, other than those shares
not already owned by Fairfax and its affiliates, for 220 U.K.
pence in cash per common share. The Company recognized a
mark-to-market gain of $6,539 on its investment in Advent in the
third quarter of 2009. As part of the acquisition, the Company
purchased additional Advent shares in September 2009 for cash
consideration of $10,050. The Companys ownership of Advent
increased to 17.5% with the purchase of the additional shares
(11.7% at December 31, 2008).
In May 2009, the Company sold municipal securities with a fair
market value of $14,725 to nSpire Re Limited, a Fairfax
affiliate, for cash consideration and a pre-tax gain of $875.
In March 2009, the Company sold municipal securities with a fair
market value of $97,112 to certain Fairfax affiliates, for cash
consideration and a pre-tax gain of $4,236. Also in March 2009,
the Company transferred municipal securities with a fair market
value of $54,008 to Fairfax Inc., as partial settlement of its
tax liability, resulting in a pre-tax gain of $5,907.
|
|
4.
|
Fair
Value Disclosures
|
Fair
Value Hierarchy
In accordance with FASB ASC
820-10,
Fair Value Measurements and Disclosures, the Company has
categorized its financial instruments into the three-level fair
value hierarchy, based on priority of inputs to the valuation
technique. FASB ASC
820-10
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. FASB ASC
820-10 also
clarifies that fair value is the exit price, representing the
amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants and establishes a fair value hierarchy that
prioritizes the inputs used in valuation techniques. The fair
value hierarchy is designed to indicate the relative reliability
of fair value measurement. The highest priority is given to
quoted prices in active markets and the lowest to unobservable
data. In certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In
such cases, the level in the hierarchy within which the fair
value measurement falls is determined based on the lowest level
significant input. The hierarchy is broken down into three
levels based on the reliability of inputs as follows:
Level 1 Valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities. A
quoted price for an identical asset or liability in an active
market provides the most reliable fair value measure and,
whenever available, should be used to measure fair value,
provided that (1) the market is the principal (or most
advantageous) market and (2) the entity has the ability to
access the principal (or most advantageous) market.
Level 2 Valuations based on information (other
than quoted prices included within Level 1) that is
observable for the asset and liability, either directly or
indirectly. This includes quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
observable inputs other than quoted prices, such as interest
rates and yield curves.
Level 3 Valuations based on inputs that are
unobservable and significant to the overall fair value
measurement.
The Company is responsible for determining the fair value of its
investment portfolio by utilizing market driven fair value
measurements obtained from active markets where available, by
considering other observable and unobservable inputs and by
employing valuation techniques which make use of current market
data.
For determining the fair value of its Level 1 investments
(approximately 46% of total investment portfolio at fair value),
the Company utilizes quoted market prices in active markets for
identical securities. All but $2,611 of the Companys
Level 1 investments are exchange-traded equity securities
in active markets.
22
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The Companys Level 2 investments (approximately 53%
of total investment portfolio at fair value), the majority of
which are in U.S. government, municipal and corporate
securities, are priced using publicly traded
over-the-counter
prices or broker-dealer quotes. Observable inputs such as
benchmark yields, reported trades, broker-dealer quotes, issuer
spreads and bids are available for these investments. The
Companys Level 2 investments also include certain
mortgage-backed securities, purchased at deep discounts to par,
that are priced using broker-dealer quotes, credit default swaps
that are priced using broker-dealer quotes which include
observable credit spreads and inactively traded convertible
corporate debentures which are valued using a pricing model, the
inputs of which are derived principally from, or corroborated
by, observable market data such as credit spreads and discount
rates. For credit default swaps, the Company assesses the
reasonableness of the fair values obtained from the
broker-dealers by comparing to values produced using individual
issuer credit default swap yield curves, by referencing them to
movements in credit spreads and by comparing them to recent
market transaction prices for similar credit default swaps where
available. During the three months ended March 31, 2009,
the Company transferred $47,611 of Level 3 investments to
Level 2 investments, after determining that broker-dealer
quotes would be used to determine the fair value of the
instruments.
The Companys Level 3 investments are comprised of
mortgage-backed securities purchased at deep discounts to par
(less than 1% of total investment portfolio at fair value),
which are valued using an internal discounted cash flow model.
The cash flow model incorporates actual cash flows on the
mortgage-backed securities through the current period and
projects the remaining cash flows from the underlying mortgages,
using a number of assumptions and inputs that are based on the
security-specific collateral. The Company assesses the
reasonableness of the fair values of these securities by
comparing to models validated by qualified personnel, by
reference to movements in credit spreads and by comparing the
fair values to recent transaction prices for similar assets
where available. During the nine months ended September 30,
2009, the Company purchased $19,830 of investments that are
classified as Level 3.
The following tables present the Companys investment
portfolio (excluding cash and cash equivalents and investments
at equity) measured at fair value on a recurring basis, within
the fair value hierarchy, at September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
$
|
|
|
|
$
|
97,289
|
|
|
$
|
|
|
|
$
|
97,289
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
1,279,873
|
1
|
|
|
|
|
|
|
1,279,873
|
|
Other corporate
|
|
|
|
|
|
|
138,456
|
|
|
|
|
|
|
|
138,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
fixed income securities
|
|
|
|
|
|
|
1,515,618
|
|
|
|
|
|
|
|
1,515,618
|
|
Fixed income securities,
held-for-trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
89,844
|
|
|
|
16,440
|
|
|
|
106,284
|
|
Other corporate
|
|
|
|
|
|
|
228,718
|
|
|
|
|
|
|
|
228,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-for-trading
fixed income securities
|
|
|
|
|
|
|
318,562
|
|
|
|
16,440
|
|
|
|
335,002
|
|
Equity securities
|
|
|
1,355,651
|
|
|
|
28,126
|
|
|
|
|
|
|
|
1,383,777
|
|
Derivatives and other invested assets
|
|
|
333,457
|
|
|
|
49,476
|
|
|
|
|
|
|
|
382,933
|
|
Short-term investments
|
|
|
|
|
|
|
30,971
|
|
|
|
|
|
|
|
30,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,689,108
|
|
|
$
|
1,942,753
|
|
|
$
|
16,440
|
|
|
$
|
3,648,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Includes securities pledged for
derivatives at a fair value of $29,756.
|
23
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
$
|
|
|
|
$
|
169,430
|
|
|
$
|
|
|
|
$
|
169,430
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
1,315,465
|
|
|
|
|
|
|
|
1,315,465
|
|
Other corporate
|
|
|
|
|
|
|
48,439
|
|
|
|
|
|
|
|
48,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
fixed income securities
|
|
|
|
|
|
|
1,533,334
|
|
|
|
|
|
|
|
1,533,334
|
|
Fixed income securities,
held-for-trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
66,393
|
|
|
|
66,393
|
|
Other corporate
|
|
|
|
|
|
|
167,605
|
|
|
|
|
|
|
|
167,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-for-trading
fixed income securities
|
|
|
|
|
|
|
167,605
|
|
|
|
66,393
|
|
|
|
233,998
|
|
Equity securities
|
|
|
998,582
|
|
|
|
21,572
|
|
|
|
|
|
|
|
1,020,154
|
|
Derivatives and other invested assets
|
|
|
262,310
|
|
|
|
164,064
|
|
|
|
|
|
|
|
426,374
|
|
Short-term investments
|
|
|
|
|
|
|
549,937
|
|
|
|
|
|
|
|
549,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,260,892
|
|
|
$
|
2,436,512
|
|
|
$
|
66,393
|
|
|
$
|
3,763,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 and December 31, 2008, the
Company did not carry any liabilities at fair value. The fair
value of the Companys long-term debt, determined from
market prices, was $305,250 and $244,200 at September 30,
2009 and December 31, 2008, respectively.
The following table provides a summary of changes in fair value
of Level 3 financial assets for the three and nine months
ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning of period
|
|
$
|
21,913
|
|
|
$
|
2,498
|
|
|
$
|
66,393
|
|
|
$
|
2,500
|
|
Purchases, issuances and settlements
|
|
|
(8,591
|
)
|
|
|
6,440
|
|
|
|
(10,026
|
)
|
|
|
6,440
|
|
Transfers to Level 2
|
|
|
|
|
|
|
|
|
|
|
(47,611
|
)
|
|
|
|
|
Realized gains (losses) included in net income
|
|
|
3,118
|
|
|
|
186
|
|
|
|
7,684
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
16,440
|
|
|
$
|
9,124
|
|
|
$
|
16,440
|
|
|
$
|
9,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains for the period recognized in earnings attributable
to the change in unrealized gains or losses relating to assets
held at period end
|
|
$
|
4,498
|
|
|
$
|
186
|
|
|
$
|
5,471
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Fair
Value Option
In accordance with the provisions of FASB ASC
825-10,
Financial Instruments, the Company has elected the fair
value option for certain investments that would have otherwise
been accounted for under the equity method of accounting. FASB
ASC 825-10
provides the option to elect irrevocably to measure many
financial instruments and certain other items at fair value
primarily on an
instrument-by-instrument
basis, that are not otherwise accounted for at fair value under
other accounting standards. The fair value option election is
permitted at initial recognition of an asset or liability or
upon occurrence of an event that gives rise to a new basis of
accounting for that instrument. Changes in the fair value of
assets and liabilities for which the election is made are
recognized in net income as they occur.
In determining the eligible financial instruments for which to
elect the fair value option, the Company considered all of its
equity method investments. These investments are often carried
at values that do not reflect current fair market value. The
Company decided that the fair value option would be appropriate
for equity method investments for which there is a publicly
quoted market price. The Company concluded that the election
would be inappropriate for those equity method investments that
do not have quoted market prices due to the degree of judgment
that would be needed to measure their fair values and the
additional accounting risk associated with those valuations. The
Company elected the fair value option for its investments in
Advent, an affiliated company formerly traded on the Alternative
Investment Market of the London Stock Exchange
(AIM), and Odyssey, an affiliated company traded on
the New York Stock Exchange, both of which would otherwise be
subject to the equity method of accounting as they are
subsidiaries of Fairfax. The Companys investments in
Odyssey include investments in Odysseys common and
preferred stock. During the third quarter of 2009, Fairfax
completed the acquisition of all of the outstanding shares of
Advent that Fairfax and its affiliates did not previously own
and as a result of the acquisition, Advent became a private,
wholly-owned subsidiary of Fairfax. At September 30, 2009,
the Company has valued its investment in Advent based on its
most recent purchase price of Advent shares.
At September 30, 2009 and December 31, 2008, the
Companys investment in Advent is recorded in derivatives
and other invested assets on the consolidated balance sheets at
a fair value of $26,360 and $11,607, respectively. For the three
and nine months ended September 30, 2009 the change in fair
value of the Companys investment in Advent was a gain of
$6,539 and $4,703, respectively, which was recorded through
realized investment gains and losses in the consolidated
statements of income.
At September 30, 2009 and December 31, 2008, the
Companys investments in Odysseys common and
preferred stock are recorded in derivatives and other invested
assets on the consolidated balance sheets at fair values of
$321,134 and $7,810, and $256,570 and $5,740, respectively. For
the three and nine months ended September 30, 2009, the
total change in fair value of the Companys investments in
Odyssey common and preferred stock was a gain of $124,405 and
$66,634, respectively, which was recorded through realized
investment gains and losses in the consolidated statements of
income. Dividends of $519 and $1,573 were recorded from Odyssey
for the three and nine months ended September 30, 2009,
respectively, and have been recorded as investment income in the
consolidated statements of income.
25
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
5.
|
Unpaid
Losses and Loss Adjustment Expenses
|
Changes in the Companys liability for unpaid losses and
loss adjustment expenses (LAE) are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Gross unpaid losses and LAE, beginning of period
|
|
$
|
2,806,683
|
|
|
$
|
3,119,544
|
|
|
$
|
2,987,803
|
|
|
$
|
3,178,506
|
|
Less ceded unpaid losses and LAE
|
|
|
663,097
|
|
|
|
724,587
|
|
|
|
684,239
|
|
|
|
1,197,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, beginning of period
|
|
|
2,143,586
|
|
|
|
2,394,957
|
|
|
|
2,303,564
|
|
|
|
1,981,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
129,884
|
|
|
|
246,842
|
|
|
|
419,984
|
|
|
|
629,824
|
|
Prior years
|
|
|
(6,934
|
)
|
|
|
(35,336
|
)
|
|
|
(28,709
|
)
|
|
|
37,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and LAE incurred
|
|
|
122,950
|
|
|
|
211,506
|
|
|
|
391,275
|
|
|
|
666,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
49,559
|
|
|
|
69,761
|
|
|
|
122,997
|
|
|
|
155,373
|
|
Prior years
|
|
|
118,806
|
|
|
|
137,497
|
|
|
|
473,671
|
|
|
|
93,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and LAE paid
|
|
|
168,365
|
|
|
|
207,258
|
|
|
|
596,668
|
|
|
|
248,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, end of period
|
|
|
2,098,171
|
|
|
|
2,399,205
|
|
|
|
2,098,171
|
|
|
|
2,399,205
|
|
Add ceded unpaid losses and LAE
|
|
|
640,913
|
|
|
|
711,991
|
|
|
|
640,913
|
|
|
|
711,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, end of period
|
|
$
|
2,739,084
|
|
|
$
|
3,111,196
|
|
|
$
|
2,739,084
|
|
|
$
|
3,111,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant catastrophe losses incurred during the
three and nine months ended September 30, 2009 as compared
to the three and nine months ended September 30, 2008 which
include catastrophe losses of $71,500 associated with Hurricanes
Gustav and Ike. For the three months ended September 30,
2009, the Company reported lower favorable prior year loss
development as compared to the three months ended
September 30, 2008, primarily due to lower favorable loss
experience in the general liability and workers compensation
lines as well as adverse loss emergence in the commercial auto
liability line, partially offset by a recovery of $13,750
associated with an asbestos lawsuit that was settled in 2008.
For the nine months ended September 30, 2009, the Company
reported favorable prior years loss development as
compared to adverse loss development in the nine months ended
September 30, 2008. The adverse loss development in the
2008 period was primarily attributable to a loss on commutation
of a finite reinsurance contract of $75,470 in the second
quarter as well as a $25,500 loss attributable to the settlement
of the aforementioned asbestos lawsuit in the first quarter,
partially offset by favorable prior year loss development
primarily in the workers compensation line of business.
Losses and LAE paid related to prior years for the nine months
ended September 30, 2008 include proceeds from the
aforementioned commutation of $302,500.
A reconciliation of the ceded unpaid losses and LAE in the table
above to the reinsurance recoverable reflected on the
consolidated balance sheet follows:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Ceded unpaid losses and LAE in the table above
|
|
$
|
640,913
|
|
Reconciling items:
|
|
|
|
|
Reinsurance receivable on paid losses and LAE
|
|
|
11,091
|
|
Retroactive reinsurance recoverable
|
|
|
253,963
|
|
|
|
|
|
|
Reinsurance recoverable on the consolidated balance sheet
|
|
$
|
905,967
|
|
|
|
|
|
|
26
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
|
|
6.
|
Asbestos
and Environmental Losses and Loss Adjustment Expenses
|
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 such issues as whether or not coverage exists,
definition of an occurrence, determination of ultimate damages
and allocation of such damages to financially responsible
parties.
Changes in the Companys liability for asbestos and
environmental exposures are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and allocated LAE (ALAE),
beginning of period
|
|
$
|
380,196
|
|
|
$
|
421,617
|
|
|
$
|
387,224
|
|
|
$
|
428,139
|
|
Less ceded unpaid losses and ALAE
|
|
|
113,671
|
|
|
|
82,349
|
|
|
|
85,336
|
|
|
|
94,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and ALAE, beginning of period
|
|
|
266,525
|
|
|
|
339,268
|
|
|
|
301,888
|
|
|
|
333,642
|
|
Net losses and ALAE incurred
|
|
|
(13,750
|
)
|
|
|
|
|
|
|
(13,750
|
)
|
|
|
25,500
|
|
Net paid losses and ALAE
|
|
|
(7,595
|
)
|
|
|
27,128
|
|
|
|
27,768
|
|
|
|
47,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and ALAE, end of period
|
|
|
260,370
|
|
|
|
312,140
|
|
|
|
260,370
|
|
|
|
312,140
|
|
Add ceded unpaid losses and ALAE
|
|
|
98,458
|
|
|
|
83,488
|
|
|
|
98,458
|
|
|
|
83,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and ALAE, end of period
|
|
$
|
358,828
|
|
|
$
|
395,628
|
|
|
$
|
358,828
|
|
|
$
|
395,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009, net
losses and ALAE incurred and paid reflect a recovery of $13,750
associated with an asbestos lawsuit that the Company settled in
2008 and for which it incurred a charge of $25,500 in the nine
months ended September 30, 2008 as reflected in the table
above. In addition, for the nine months ended September 30,
2009 and the three and nine months ended September 30,
2008, net paid losses and ALAE reflect a payment of $18,333 in
each period, related to the asbestos lawsuit settlement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses ALAE, beginning of period
|
|
$
|
104,962
|
|
|
$
|
109,740
|
|
|
$
|
107,948
|
|
|
$
|
117,768
|
|
Less ceded unpaid losses and ALAE
|
|
|
29,665
|
|
|
|
30,887
|
|
|
|
28,969
|
|
|
|
32,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and ALAE, beginning of period
|
|
|
75,297
|
|
|
|
78,853
|
|
|
|
78,979
|
|
|
|
85,043
|
|
Net losses and ALAE incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid losses and ALAE
|
|
|
5,090
|
|
|
|
2,815
|
|
|
|
8,772
|
|
|
|
9,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and ALAE, end of period
|
|
|
70,207
|
|
|
|
76,038
|
|
|
|
70,207
|
|
|
|
76,038
|
|
Add ceded unpaid losses and ALAE
|
|
|
23,188
|
|
|
|
28,550
|
|
|
|
23,188
|
|
|
|
28,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and ALAE, end of period
|
|
$
|
93,395
|
|
|
$
|
104,588
|
|
|
$
|
93,395
|
|
|
$
|
104,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also maintains reserves for other latent exposures
such as those associated with silica, lead, mold, chemical, gas
and vapors and welding fumes of $17,116 and $20,258, net of
reinsurance, at September 30, 2009 and December 31,
2008, respectively.
27
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The components of the Companys net premiums written and
premiums earned are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
188,738
|
|
|
$
|
224,533
|
|
|
$
|
628,593
|
|
|
$
|
777,357
|
|
Assumed from other companies, pools or associations
|
|
|
8,200
|
|
|
|
7,142
|
|
|
|
24,753
|
|
|
|
16,550
|
|
Ceded to other companies, pools or associations
|
|
|
(31,579
|
)
|
|
|
(35,962
|
)
|
|
|
(109,505
|
)
|
|
|
(107,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
165,359
|
|
|
$
|
195,713
|
|
|
$
|
543,841
|
|
|
$
|
686,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
209,655
|
|
|
$
|
260,031
|
|
|
$
|
674,113
|
|
|
$
|
852,646
|
|
Assumed from other companies, pools or associations
|
|
|
8,372
|
|
|
|
7,444
|
|
|
|
25,653
|
|
|
|
17,552
|
|
Ceded to other companies, pools or associations
|
|
|
(35,995
|
)
|
|
|
(34,497
|
)
|
|
|
(110,023
|
)
|
|
|
(102,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
182,032
|
|
|
$
|
232,978
|
|
|
$
|
589,743
|
|
|
$
|
767,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net impact of ceded reinsurance transactions for the three
and nine months ended September 30, 2009 and 2008 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Earned premiums ceded to reinsurers
|
|
$
|
(35,995
|
)
|
|
$
|
(34,497
|
)
|
|
$
|
(110,023
|
)
|
|
$
|
(102,528
|
)
|
Commissions earned on ceded reinsurance premiums
|
|
|
6,991
|
|
|
|
8,163
|
|
|
|
24,558
|
|
|
|
22,287
|
|
Claims incurred ceded to reinsurers
|
|
|
14,439
|
|
|
|
13,555
|
|
|
|
55,363
|
|
|
|
(45,549
|
)
|
Provision for uncollectible reinsurance
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of ceded reinsurance transactions
|
|
$
|
(14,565
|
)
|
|
$
|
(14,779
|
)
|
|
$
|
(32,102
|
)
|
|
$
|
(131,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys total reinsurance
recoverable are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Reinsurance recoverable on unpaid losses and LAE
|
|
$
|
894,876
|
|
|
$
|
949,364
|
|
Reinsurance receivable on paid losses and LAE
|
|
|
11,091
|
|
|
|
18,853
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverable
|
|
$
|
905,967
|
|
|
$
|
968,217
|
|
|
|
|
|
|
|
|
|
|
The reinsurance recoverable balances above are net of reserves
for uncollectible reinsurance of $55,499 and $55,999 at
September 30, 2009 and December 31, 2008,
respectively. Included in reinsurance recoverable is $141,030
and $142,213 at September 30, 2009 and December 31,
2008, respectively, representing the present value of amounts
due from insurance companies from which the Company has
purchased annuities to settle certain claim liabilities.
28
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Corporate
Aggregate Reinsurance
The Companys 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 September 30, 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. This prospective contract had no effect on
operations for the three and nine months ended
September 30, 2009 and 2008.
The effect of retroactive corporate aggregate reinsurance on
components of the Companys consolidated statements of
income follows ((decrease) increase in indicated component):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Funds held interest charged to investment income
|
|
$
|
(3,896
|
)
|
|
$
|
(3,862
|
)
|
|
$
|
(11,495
|
)
|
|
$
|
(11,394
|
)
|
Losses and LAE
|
|
|
(3,720
|
)
|
|
|
(3,693
|
)
|
|
|
(11,162
|
)
|
|
|
(15,952
|
)1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in income before income taxes
|
|
$
|
(176
|
)
|
|
$
|
(169
|
)
|
|
$
|
(333
|
)
|
|
$
|
4,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
For the nine months ended
September 30, 2008, losses and LAE is comprised of a loss
on commutation of $4,123 offset by $8,778 of unamortized
deferred income released on commutation as well as $11,297 of
recurring deferred income amortization.
|
An analysis of activity in deferred income related to
retroactive corporate aggregate reinsurance contracts follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Increase in reinsurance recoverable due from insurers
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Less: related premiums paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income deferred during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred income
|
|
|
(3,720
|
)
|
|
|
(3,693
|
)
|
|
|
(11,162
|
)
|
|
|
(20,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in deferred income
|
|
|
(3,720
|
)
|
|
|
(3,693
|
)
|
|
|
(11,162
|
)
|
|
|
(20,075
|
)
|
Deferred income on retroactive reinsurance beginning
of period
|
|
|
113,835
|
|
|
|
135,659
|
|
|
|
121,277
|
|
|
|
152,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income on retroactive reinsurance end of
period
|
|
$
|
110,115
|
|
|
$
|
131,966
|
|
|
$
|
110,115
|
|
|
$
|
131,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009, the above
activity arises from the 2001 retroactive adverse development
contract for $400,000, which is the only retroactive reinsurance
contract that remains in effect. The reinsurance recoverable and
funds held balances in respect of this contract were $349,000
and $232,338, respectively, at September 30, 2009 ($349,000
and $220,843, respectively, at December 31, 2008).
For additional information on the Companys prospective and
retroactive corporate aggregate reinsurance contracts, refer to
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
February 27, 2009.
29
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The effective income tax rate was 31.3% and 25.8% in the three
and nine months ended September 30, 2009, respectively. The
effective rate differs from the statutory federal income tax
rate of 35% primarily because of the benefit of tax-exempt
interest and dividends received deductions.
|
|
9.
|
Commitments
and Contingencies
|
Crum & Forster Holdings Corp. and US Fire, among
numerous other insurance company and insurance broker
defendants, have been named as defendants in a class action suit
filed by policyholders alleging, among other things, that the
defendants used the contingent commission structure to deprive
policyholders of free competition in the market for insurance.
The action was filed in the U.S. District Court for the
District of New Jersey. Plaintiffs seek certification of a
nationwide class consisting of all persons who between
August 26, 1994 and the date of the class certification
engaged the services of any one of the broker defendants and who
entered into or renewed a contract of insurance with one of the
insurer defendants. The trial court dismissed the federal
antitrust claims and RICO claims with prejudice and declined to
accept supplemental jurisdiction over plaintiffs state law
claims. On October 24, 2007, plaintiffs filed an appeal
with the U.S. Court of Appeals for the Third Circuit. The
briefing on appeal has been completed. The court heard oral
arguments on April 21, 2009 in Philadelphia, Pennsylvania.
The court took the matter under submission. A final ruling is
not expected from the Court of Appeals before late 2009.
Crum & Forster Holdings Corp. and US Fire continue to
be named as defendants and intend to vigorously defend the
action.
In the ordinary course of their business, Crum &
Forsters subsidiaries receive claims asserting alleged
injuries and damages from asbestos and other hazardous waste and
toxic substances and are subject to related coverage litigation.
The conditions surrounding the final resolution of these claims
and the related litigation continue to change. Currently, it is
not possible to predict judicial and legislative changes and
their impact on the future development of asbestos and
environmental claims and litigation. This trend will be affected
by future court decisions and interpretations, as well as
changes in applicable legislation and the possible
implementation of a proposed federal compensation scheme for
asbestos-related injuries. As a result of these uncertainties,
additional liabilities may arise for amounts in excess of
current reserves for asbestos, environmental and other latent
exposures. These additional amounts, or a range of these
additional amounts, cannot currently be reasonably estimated. As
a result of these claims, management continually reviews
required reserves and reinsurance recoverable. In each of these
areas of exposure, the Company litigates individual cases when
appropriate and endeavors to settle other claims on favorable
terms.
The Companys subsidiaries are involved in various lawsuits
and arbitration proceedings arising in the ordinary course of
business. While the outcome of such matters cannot be predicted
with certainty, in the opinion of management, no such matter is
likely to have a material adverse effect on the Companys
consolidated net income, financial position or liquidity.
However, it should be noted that the frequency of large damage
awards in some jurisdictions, including punitive damage awards
that bear little or no relation to actual economic damages
incurred by plaintiffs, continues to create the potential for an
unpredictable judgment in any given matter.
30
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The Company operates primarily in the commercial property and
casualty insurance business. Premiums earned for the
Companys lines of business are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
General liability
|
|
$
|
35,245
|
|
|
$
|
45,661
|
|
|
$
|
111,412
|
|
|
$
|
152,225
|
|
Workers compensation
|
|
|
46,556
|
|
|
|
55,332
|
|
|
|
141,193
|
|
|
|
173,685
|
|
Commercial automobile
|
|
|
27,053
|
|
|
|
44,781
|
|
|
|
95,552
|
|
|
|
146,588
|
|
Property
|
|
|
20,690
|
|
|
|
35,962
|
|
|
|
75,560
|
|
|
|
136,872
|
|
Commercial multi-peril
|
|
|
18,442
|
|
|
|
19,687
|
|
|
|
57,162
|
|
|
|
60,461
|
|
Accident and health
|
|
|
27,828
|
|
|
|
24,608
|
|
|
|
89,936
|
|
|
|
76,832
|
|
Other1
|
|
|
6,218
|
|
|
|
6,947
|
|
|
|
18,928
|
|
|
|
21,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
182,032
|
|
|
$
|
232,978
|
|
|
$
|
589,743
|
|
|
$
|
767,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other includes surety, homeowners
and personal automobile lines of business.
|
The losses and LAE and losses and LAE ratios of the
Companys lines of business are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Accident year loss and LAE ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General liability
|
|
$
|
25,615
|
|
|
|
72.7
|
%
|
|
$
|
32,744
|
|
|
|
71.7
|
%
|
|
$
|
80,115
|
|
|
|
71.9
|
%
|
|
$
|
110,574
|
|
|
|
72.6
|
%
|
Workers compensation
|
|
|
37,793
|
|
|
|
81.2
|
%
|
|
|
41,323
|
|
|
|
74.7
|
%
|
|
|
113,556
|
|
|
|
80.4
|
%
|
|
|
136,504
|
|
|
|
78.6
|
%
|
Commercial automobile
|
|
|
19,627
|
|
|
|
72.6
|
%
|
|
|
32,589
|
|
|
|
72.8
|
%
|
|
|
70,007
|
|
|
|
73.3
|
%
|
|
|
107,605
|
|
|
|
73.4
|
%
|
Property
|
|
|
14,184
|
|
|
|
68.6
|
%
|
|
|
107,991
|
|
|
|
300.3
|
%
|
|
|
54,140
|
|
|
|
71.7
|
%
|
|
|
175,849
|
|
|
|
128.5
|
%
|
Commercial multi-peril
|
|
|
10,626
|
|
|
|
57.6
|
%
|
|
|
12,420
|
|
|
|
63.1
|
%
|
|
|
32,737
|
|
|
|
57.3
|
%
|
|
|
37,636
|
|
|
|
62.2
|
%
|
Accident and health
|
|
|
19,380
|
|
|
|
69.6
|
%
|
|
|
16,576
|
|
|
|
67.4
|
%
|
|
|
61,849
|
|
|
|
68.8
|
%
|
|
|
52,313
|
|
|
|
68.1
|
%
|
Other
|
|
|
2,659
|
|
|
|
42.8
|
%
|
|
|
3,199
|
|
|
|
46.0
|
%
|
|
|
7,580
|
|
|
|
40.0
|
%
|
|
|
9,343
|
|
|
|
44.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accident year losses and LAE
|
|
|
129,884
|
|
|
|
71.4
|
%
|
|
|
246,842
|
|
|
|
106.0
|
%
|
|
|
419,984
|
|
|
|
71.2
|
%
|
|
|
629,824
|
|
|
|
82.0
|
%
|
Prior years loss development
|
|
|
(6,934
|
)
|
|
|
(3.8
|
)
|
|
|
(35,336
|
)
|
|
|
(15.2
|
)
|
|
|
(28,709
|
)
|
|
|
(4.8
|
)
|
|
|
37,038
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year losses and LAE
|
|
$
|
122,950
|
|
|
|
67.6
|
%
|
|
$
|
211,506
|
|
|
|
90.8
|
%
|
|
$
|
391,275
|
|
|
|
66.4
|
%
|
|
$
|
666,862
|
|
|
|
86.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not allocate investment results or certain
corporate expenses for purposes of evaluating financial
performance of each line of business.
31
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to the critical accounting
policies and estimates, the consolidated results of operations,
financial condition, liquidity and capital resources of the
Company for the interim periods indicated. Within this
discussion, the terms 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 and
Crum and Forster Insurance Company. 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 (Seneca). The term
Fairfax refers to Fairfax Inc., Crum &
Forsters parent company, and Fairfax Financial Holdings
Limited, which holds a 100% indirect interest in Fairfax Inc.
Certain financial information that is normally included in
annual financial statements, including certain financial
statement footnotes, prepared in accordance with generally
accepted accounting principles in the United States of America
(GAAP), is not required for interim reporting
purposes and has been condensed or omitted herein. This
discussion, and the related consolidated financial statements,
should be read in conjunction with the Companys
consolidated financial statements, and notes related thereto,
included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the
Securities and Exchange Commission (SEC) on
February 27, 2009. The results of operations for interim
periods are not necessarily indicative of the results to be
expected for the full year.
All dollar amounts are in thousands, unless otherwise indicated.
Statements
Regarding Forward-Looking Information
Certain statements contained herein may constitute
forward-looking statements and are made pursuant to the
safe-harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. These are statements
that relate to future periods and include statements regarding
the Companys anticipated performance. 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 factors that could cause the Companys 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 factors, which
are described elsewhere in this report, include, but are not
limited to, the following:
|
|
|
|
|
Competitive conditions in the insurance market and the ability
to attract and retain new business;
|
|
|
|
Adverse effect of volatility in the global financial markets
including changes in interest rates, credit spreads, foreign
currency exchange rates and other factors;
|
|
|
|
Current economic downturn;
|
|
|
|
Insufficient loss reserves, including reserves for asbestos,
environmental and other latent claims;
|
|
|
|
Occurrence of natural or man-made catastrophic events;
|
|
|
|
Inability to realize the Companys investment objectives;
|
|
|
|
Inability to obtain reinsurance coverage on reasonable terms and
prices, particularly property catastrophe reinsurance;
|
|
|
|
Exposure to credit risk, in the event reinsurers or
policyholders fail to pay the Company amounts owed to it;
|
|
|
|
Lowering or loss of one of the Companys financial strength
ratings;
|
|
|
|
Loss of key producers;
|
|
|
|
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;
|
|
|
|
Exposure to emerging claims and coverage issues;
|
|
|
|
Restrictions on the ability of the Companys insurance
subsidiaries to pay dividends;
|
|
|
|
Subordination of debt securities to the obligations and
liabilities of the Companys insurance subsidiaries;
|
|
|
|
Ability of Fairfax to determine the outcome of corporate action
requiring stockholder approval;
|
|
|
|
Changes in governmental regulations; and
|
|
|
|
Exposure to credit risks on novated policies.
|
32
Although the Company believes that its forward-looking
statements are based upon reasonable assumptions, management can
give no assurance that the Companys 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. Additional information
regarding these factors, that could cause actual results to
differ materially from expectations, is included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
February 27, 2009. The information appearing under
Risk Factors in such Annual Report is incorporated
by reference into, and made a part of, Part II of this
Form 10-Q.
Critical
Accounting Policies and Estimates
The Companys consolidated financial statements and related
notes thereto are prepared in accordance with GAAP. GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of material contingent assets and liabilities at the
balance sheet date and the revenues and expenses reported during
the relevant period. In general, managements estimates are
based on historical experience, evaluation of current trends,
information from third party professionals and various other
assumptions that are believed to be reasonable under the known
facts and circumstances.
The accounting policies and estimates discussed below are those
that require management to make assumptions about highly
uncertain matters. If management were to make different
assumptions about those matters, or if actual results were to
differ significantly from managements estimates, the
Companys reported consolidated results of operations and
financial condition could be materially affected.
The Companys significant accounting policies are described
in detail in Note 2 to the Companys consolidated
financial statements included in its Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
February 27, 2009.
Unpaid
Losses and Loss Adjustment Expenses
The most significant accounting estimates relate to the
Companys reserves for unpaid losses and loss adjustment
expenses (LAE). Unpaid losses and LAE include
reserves for both reported (case reserves) and unreported losses
and LAE.
When the Company is notified of insured losses, claims personnel
set up case reserves for the estimated amount of settlement, if
any, which excludes estimates of expenses to settle claims, such
as legal and other fees and the general expenses of
administering the claims adjustment process. The estimate
reflects the judgment of claims personnel, or of independent
claims adjusters hired by the Company, the scope of coverage
available for the reported claim under each individual policy
assuming application of controlling state contract law, general
reserving practices, the experience and knowledge of such
personnel regarding the nature of the specific claim and, where
appropriate, advice of counsel, with the goal of setting the
reserve at the ultimate expected loss amount as soon as
sufficient information becomes available.
The Companys internal actuaries conduct full reserve
studies using generally accepted actuarial methods for each line
of business except asbestos, environmental and other latent,
every six months, and for asbestos, environmental and other
latent, annually. For all lines of business other than asbestos,
environmental and other latent, ultimate losses and allocated
LAE (ALAE), including incurred but not reported
losses and development of reported losses, are projected by line
of business by accident year using several standard actuarial
methodologies. At each balance sheet date, Company management
establishes its best estimate based on the actuarial
central estimates by line of business from the most recent
internal actuarial reserve review, together with the actual loss
emergence since such most recent review. At September 30,
2009, the Companys actuaries concurred with the
reasonableness of managements best estimate.
Losses and LAE are charged to income as they are incurred.
During the loss settlement period, reserves established in prior
years are adjusted as loss experience develops and new
information becomes available. Adjustments to previously
estimated reserves, both positive and negative, are reflected in
the Companys financial results in the periods in which
they are made, and are referred to as prior period development.
Due to the high level of uncertainty, revisions to these
estimated reserves could have a material impact on the
Companys results of operations in the period recognized
and actual payments for claims and LAE could ultimately be
significantly different from estimates.
33
The Company has written general liability, commercial
multi-peril and umbrella policies under which its policyholders
continue to present asbestos, environmental and other latent
claims. The vast majority of these claims, particularly with
respect to asbestos and environmental claims, are presented
under policies written many years ago. There are significant
uncertainties in estimating the amount of reserves required for
asbestos, environmental and other latent claims. Reserves for
these exposures cannot be estimated solely with traditional loss
reserving techniques, which rely on historical accident year
development factors. Among the uncertainties relating to
asbestos, environmental and other latent reserves are a lack of
historical data, long reporting delays and complex unresolved
legal issues regarding policy coverage and the extent and timing
of any such contractual liability. Courts have reached
different, and frequently inconsistent, conclusions as to when
losses occurred, what claims are covered, under what
circumstances the insurer has an obligation to defend, how
policy limits are determined and how policy exclusions are
applied and interpreted.
No adjustment was made to asbestos, environmental or other
latent reserves in the three and nine months ended
September 30, 2009. Gross and net incurred loss and ALAE
were reduced by an unaccrued recovery of $13,750 associated with
an asbestos lawsuit that was settled in 2008. In 2008 and 2007,
based on the Companys internal actuarial reviews, the
Company strengthened its asbestos, environmental and other
latent reserves by $36,215 and $54,547, respectively.
Investments
The Company is responsible for determining the fair value of its
investment portfolio by utilizing market-driven fair value
measurements obtained from active markets where available, by
considering observable and unobservable inputs and by employing
valuation techniques that make use of current market data.
In accordance with FASB ASC
820-10,
Fair Value Measurements and Disclosures, the Company has
categorized its financial instruments, based on the priority of
the inputs to the valuation technique, into a three-level fair
value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). For further details on the
fair value hierarchy refer to Note 4 to the consolidated
financial statements. The Companys Level 3
investments are comprised of mortgage-backed securities
purchased at deep discounts to par (less than 1% of total
investment portfolio at fair value), which are valued using an
internal discounted cash flow model. The cash flow model
incorporates actual cash flows on the mortgage-backed securities
through the current period and projects the remaining cash flows
from the underlying mortgages, using a number of assumptions and
inputs that are based on the security-specific collateral. The
Company assesses the reasonableness of the fair values of these
securities by comparing to models validated by qualified
personnel, by reference to movements in credit spreads and by
comparing the fair values to recent transaction prices for
similar assets where available. Other mortgage-backed
securities, purchased at deep discounts to par (approximately
2.5% of total investment portfolio at fair value), are included
in Level 2 investments as they are priced using
broker-dealer quotes. At September 30, 2009, the total fair
value of the Companys Level 2 and Level 3
mortgage-backed securities was $106,284. Gains or losses arising
from changes in the fair value of the mortgage-backed securities
are recorded in realized investment gains and losses in the
consolidated statements of income. For the three and nine months
ended September 30, 2009, realized investment gains
resulting from the net change in fair value of the
mortgage-backed securities were $24,176 and $30,069,
respectively.
Derivative securities held by the Company at September 30,
2009 are principally credit default swaps. These credit default
swaps are carried at estimated fair values on the consolidated
balance sheets with changes in fair value recorded in net income
in the period in which they occur. The Company obtains
broker-dealer quotes for its credit default swaps from
third-party providers, principally broker-dealers. In addition,
the Company assesses the reasonableness of the fair values
obtained from these providers by comparing the fair values to
values produced using individual issuer credit default swap
yield curves, by referencing them to movements in credit spreads
and by comparing them to recent market transaction prices for
similar credit default swaps where available. The fair values of
credit default swaps are subject to significant volatility
arising from the potential differences in the perceived risk of
default of the underlying issuers, movements in credit spreads
and the length of time to the contracts maturity. Due to
the inherent uncertainties of these valuations as well as the
volatility in interest rates and stock market conditions,
realized values may differ from estimates reflected in the
consolidated financial statements. At September 30, 2009
and December 31, 2008, the fair value of the credit default
swaps was $23,116 and $138,830, respectively. Gains or losses
arising from changes in the fair value of the credit default
swaps are recorded in realized investment gains and losses in
the consolidated statements of income. For the three and nine
months ended September 30, 2009 and 2008, realized
investment gains and losses resulting from the net change in
fair value of the credit default swaps were losses of $(19,504)
and $(6,054) and gains of $119,316 and $275,961, respectively.
34
The Company holds significant investments in equities and equity
related securities. The market values of these investments are
volatile and may vary dramatically either up or down in short
periods, and their ultimate value will therefore only be known
over the long term. At each reporting date, and more frequently
when conditions warrant, management evaluates all
available-for-sale
securities with unrealized losses to determine whether an other
than temporary decline in value exists and whether losses should
be recognized in earnings rather than in accumulated other
comprehensive income (loss). The process for determining whether
a security is other than temporarily impaired requires judgment
and involves analyzing many factors. These factors include but
are not limited to (i) the length of time and extent to
which the fair value has been less than its cost or amortized
cost; (ii) the severity of the impairment; (iii) the
cause of the impairment; (iv) the financial condition and
near-term prospects of the issuer as well as specific credit
issues related to the issuer such as changes in credit rating,
reduction or elimination of dividends or non-payment of
scheduled interest payments; and (v) for fixed income
securities, the Companys intent to sell a security or
whether it is more likely than not that the Company will be
required to sell the security before recovery of its amortized
cost, which in some cases, may extend to maturity, and for
equity securities, the Companys intent and ability to hold
the security for a period of time sufficient to allow for any
anticipated recovery of fair value in the near term. To the
extent management determines that a security is deemed to be
other than temporarily impaired, an impairment loss is
recognized.
There are risks and uncertainties associated with determining
whether declines in the fair value of investments are other than
temporary such as significant subsequent changes in general
economic conditions, as well as specific business conditions
affecting particular issuers; subjective assessments of
issuer-specific factors (seniority of claims, collateral value,
etc.); future financial market effects; stability of foreign
governments and economies; future rating agency actions; and
significant disclosures relating to accounting, fraud or
corporate governance issues that may adversely affect certain
investments. In addition, significant assumptions and management
judgment regarding these risks and uncertainties are involved in
determining if a decline is other than temporary. As a result of
the volatility in the financial markets that occurred during
2008 and that has continued into 2009, the duration and severity
of unrealized losses on many of the Companys investments
has exceeded historical norms making it particularly difficult
for management to evaluate whether impairments are other than
temporary. Management will continue to monitor these unrealized
losses and will assess all available facts and circumstances for
each security as they become known, which may result in changes
to the conclusions reached at September 30, 2009 based on
current facts and circumstances existing at that date, resulting
in additional other than temporary impairments in future periods.
During the three and nine months ended September 30, 2009
and 2008, the Company recorded other than temporary impairment
charges of $26 and $105,980, and $34,698 and $75,776,
respectively, primarily related to write-downs of equity
securities.
Reinsurance
Recoverable
Amounts recoverable from reinsurers are initially estimated in
conjunction with the establishment of reserves for unpaid losses
and LAE. These amounts may be adjusted as actual case reserves
are recorded and reinsured claims are settled. The ceding of
risk to reinsurers does not relieve the insurance companies of
their primary obligation to policyholders as the direct insurer.
Accordingly, the Company is exposed to the risk that any
reinsurer may be unable, or unwilling, to meet the obligations
assumed under its reinsurance agreements. Management attempts to
mitigate this risk by obtaining collateral and by entering into
reinsurance arrangements only with reinsurers that have credit
ratings and statutory surplus above certain levels.
In certain circumstances, the Company may engage in commutation
discussions with an individual reinsurer, essentially canceling
and settling the contract at its net realizable value. The
outcome of such discussions may result in a lump sum settlement
that is less than the recorded recoverable balance. Losses
arising from commutations could have an adverse impact on the
Companys results of operations. An estimated allowance for
uncollectible reinsurance recoverable is recorded on the basis
of periodic evaluation of balances due from reinsurers,
judgments regarding reinsurer solvency, known disputes,
reporting characteristics of the underlying reinsured business,
historical experience, current economic conditions and the state
of insurer/reinsurer relations in general, and at the
Crum & Forster companies in particular.
At September 30, 2009 and December 31, 2008,
reinsurance recoverable was $905,967 and $968,217, net of
reserves for uncollectible reinsurance of $55,499 and $55,999,
respectively. Included in reinsurance recoverable is $141,030
and $142,213 at September 30, 2009 and December 31,
2008, respectively, representing the present value of amounts
due from insurance companies from which the Company has
purchased annuities to settle certain claim liabilities. The
provision for uncollectible reinsurance for the three and nine
month periods ended September 30, 2009 and 2008 was $0 and
$2,000, and $2,000 and $6,000, respectively. While management
believes the allowance for uncollectible reinsurance recoverable
is adequate based on information currently available, failure of
reinsurers to meet their obligations could have a material
adverse impact on the Companys financial position and
results of operations.
35
Deferred
Income Tax Assets
The Company recognizes deferred tax assets and liabilities based
on differences between the financial statement carrying amounts
and the tax bases of assets and liabilities. Management
regularly reviews the Companys deferred tax assets for
recoverability based on history of earnings, expectations for
future earnings and expected timing of reversals of temporary
differences.
Although realization is not assured, management believes the
recorded deferred tax assets are fully recoverable based on
estimates of the future profitability of Crum &
Forsters operating subsidiaries and current forecasts for
the periods through which losses may be carried back
and/or
forward. The Company has several material deferred tax assets
arising from investments (a significant portion of which relates
to impairments), loss reserve discounting, deferred income on
retroactive reinsurance and unearned premium adjustments. The
realizability of these reversing deferred tax assets is
considered in conjunction with similar originating deferred tax
assets and other taxable income.
At September 30, 2009, there are no valuation allowances
against the Companys gross deferred tax assets of
$146,895. The Company has determined that a valuation allowance
is not required with respect to temporary differences that would
reverse as capital losses because the Company realized
substantial capital gains in 2007 and 2008 that can be offset by
capital losses incurred in 2009 or 2010. In addition, the
Company has the ability and intent to hold its
available-for-sale
securities until maturity or recovery in value. The
Companys current projections of future taxable income are
based on assumptions of declining premium volumes and relatively
stable combined ratios, with portfolio yields approximating
current levels. Should the assumptions of future profitability
change significantly, however, or the taxable income of these
entities fall below expectations, a valuation allowance, which
could be significant, may have to be established if management
believes any portion of the deferred tax asset will not be
realized. A valuation allowance may also be required if there is
a material change in the tax laws such that the actual effective
tax rate or the time periods within which the underlying
temporary differences become taxable or deductible change.
Realization of the deferred tax asset under FASB ASC
740-10,
Income Taxes (formerly SFAS No. 109,
Accounting for Income Taxes) ultimately depends on the
existence of sufficient taxable income available under tax law,
including future reversals of existing temporary differences,
future taxable income exclusive of reversing differences,
taxable income in prior carryback years and tax planning
strategies. Future profitability, as it relates to taxable
income expectations discussed above, can be negatively affected
by factors including substantial changes in premium volume,
underwriting losses resulting from significant events such as
severe natural disasters or large settlements for asbestos or
environmental claims, or materially lower investment results.
Summary
of Operations
Overview
The Company is a national commercial property and casualty
insurance company with a focused underwriting strategy,
targeting specialty classes of business and underserved market
opportunities. Operating through its home office and regional
branch network, the Company writes a broad range of commercial
coverage, including general liability, workers
compensation, commercial automobile, property, commercial
multi-peril, accident and health and other lines of business.
The Company generally conducts business on a brokerage basis
through more than 1,400 producers located throughout the United
States.
The Companys 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 Companys
ability to identify and react to changing market conditions
provides it with a competitive advantage. Based on the
experience and underwriting expertise of its underwriters, the
Company seeks to write new lines of business and expand existing
classes of business based on market conditions and expected
profitability. The Company offers insurance products designed to
meet specific insurance needs of targeted policyholder groups
and underwrites specific types of coverage for markets that are
generally underserved by the industry.
The profitability of property and casualty insurance companies
is primarily determined by their underwriting results and
investment performance. Underwriting results are the net result
of a companys premiums earned and amounts paid, or
expected to be paid, to settle insured claims and policy
acquisition costs and other underwriting expenses. The insurance
business is unique in that premiums charged for insurance
coverage are set without certainty of the ultimate claim costs
to be incurred on a given policy. This requires that liabilities
be estimated and recorded in recognition of future loss and
settlement obligations. Due to the inherent uncertainty in
estimating these liabilities, there can be no assurance that
actual liabilities will not exceed recorded amounts or premiums
received. The ultimate adequacy of premium rates is affected
mainly by the severity and frequency of claims, which are
influenced by many factors, including natural and man-made
disasters, regulatory measures and court decisions that define
and expand the extent of coverage. Insurance premium rates are
also influenced by available insurance capacity or the
industrys willingness to deploy capital to cover each
insurable risk.
36
Premiums collected are invested until funds are required to pay
settled claims. Insurance company investment portfolios
generally must provide a balance among total return, capital
preservation and liquidity in order to generate sufficient funds
for payment of claims as they are settled. The Company follows a
long-term, value-oriented investment philosophy, with the goal
of optimizing investment returns viewed on a total return basis,
without reaching for yield, while maintaining sensitivity to
liquidity requirements. The Company attempts to protect its
capital from loss. Management believes that investing in debt
and equity securities selling at prices below intrinsic value
better protects the Companys capital.
Management monitors the contribution to earnings of underwriting
operations and investment results separately. The ability to
achieve underwriting profitability on a consistent basis is the
core competency of a property and casualty insurance company,
demonstrating discipline, individual risk selection and pricing
skills, and effective risk management on a portfolio basis. The
underwriting functions of the Company are managed separately
from the investment operations. Accordingly, in assessing the
Companys results of operations, management evaluates
underwriting results separately from investment performance.
With respect to the Companys underwriting operations,
management monitors key indicators of growth and profitability.
Growth is generally measured in terms of gross premiums written.
Management further monitors growth in its gross premiums written
in terms of its rate of retention of existing policyholders,
increases or decreases in the pricing of renewed policies and
the growth in new business premiums. Underwriting profitability
is measured both in dollars and by the combined ratio, a
standard industry measure. Underwriting profit or loss equals
premiums earned, less losses and LAE, policy acquisition costs
and other underwriting expenses. The combined ratio expresses
underwriting results as a percentage of premiums earned and
generally is comprised of two components: the loss ratio, which
is the percentage of losses and LAE to premiums earned, and the
expense ratio, which is the percentage of the sum of policy
acquisition costs and other underwriting expenses to premiums
earned. A combined ratio less than 100% indicates an
underwriting profit; a combined ratio greater than 100%
indicates an underwriting loss.
Underwriting profit or loss expressed in dollars is considered a
non-GAAP financial measure. The table at the beginning of the
Results of Operations section that follows presents the separate
contribution of underwriting and investment operations to income
before income taxes on a GAAP basis. An understanding of a
property and casualty insurance companys financial
condition, results of operations and profit and growth prospects
begins with an assessment of the entitys ability to
underwrite effectively. Underwriting is the core business of
such companies; investment operations are a separate function.
Management monitors the Companys consolidated results on
this basis and likewise reports such results to its board of
directors. Rating agencies and securities analysts also focus
separately on underwriting and investment results. In annual and
quarterly statements to state insurance regulators prepared in
accordance with Statutory Accounting Principles, underwriting
profit or loss is presented separately from investment results.
Underwriting profit or loss, together with the related combined
ratio, are widely followed measures in the property and casualty
insurance industry.
Investment results are generally measured in terms of total
return on assets under management both in absolute terms and
relative to appropriate benchmarks. Growth in the Companys
cash and invested assets is also a key measure of investment
performance.
Market
Conditions
The property and casualty insurance business is cyclical and
influenced by many factors, including price competition,
economic conditions, natural and man-made disasters (for example
hurricanes, earthquakes and terrorism), availability and cost of
reinsurance, credit conditions and interest rates, state
regulations, court decisions and changes in the law. For the
last several years, the property and casualty market has
experienced challenging market conditions characterized by
intense competition and downward pricing trends. These soft
market conditions heightened in 2008 and the Company has
continued to see soft market pricing through all lines of
business in the first nine months of 2009 with competitors in
some cases writing accounts at levels below average developed
losses with multi-year rate lock deals and frequently terms and
conditions are expanded without much price consideration.
Although there were some signs earlier in the year that the
market was in transition, as evidenced by stable or slightly
increasing rates across certain lines of business such as
California workers compensation, overall market conditions
still remain competitive and have deteriorated during the third
quarter of 2009. Throughout the first half of the year, some
property insurers were reducing available limits in peak
catastrophe zones as a result of significant catastrophe losses
sustained by the industry in 2008, primarily from Hurricane Ike,
and increases in reinsurance costs, resulting in property rates
stabilizing. However, more recently, there has been an increase
in available capacity in these catastrophe zones, attributable
to the light hurricane season to date and improved capital
position of many insurers, which may put downward pressure on
property pricing.
37
During the first nine months of 2009, the Companys renewal
retention rates, renewal pricing and new business growth all
declined compared to the first nine months of 2008; however, the
rates of decline for retention and pricing appear to have
moderated since the latter half of 2008. Renewal retention rates
declined by approximately 1 percentage point in the nine
months ended September 30, 2009, as compared to declines of
approximately 4 percentage points in each of the third and
fourth quarters of 2008. Specifically, renewal retention rates
for casualty lines remained stable and renewal retention rates
for property lines declined by approximately 7 percentage
points in the first nine months of 2009 as compared to 2008,
with the property renewal rates continuing to be depressed by
underwriting actions intended to improve profitability. Renewal
pricing declined by approximately 1% in the nine months ended
September 30, 2009, as compared to rate declines of
approximately 5% and 4% in the third and fourth quarters of
2008, respectively. New business growth continues to be
adversely impacted by the weak economy and declined by
approximately 18% in the first nine months of 2009, attributable
to a reduction in both casualty and property business.
Although there is some evidence of deceleration in rate
decreases, the Company expects the market to remain competitive
for the remainder of 2009 and well into 2010, attributable to
the combined effects of the light catastrophe season to date,
the restoration of capital throughout the industry, resulting
from the improvement in the financial markets, and additional
competitors in some lines of business placing downward pressure
on price levels. Under such conditions, the Company will
continue to reject underpriced new business submissions and to
shed accounts and classes of business that are unprofitable. As
a consequence, it is likely that the Companys premium
volume may decline further and the expense ratio will increase
as the shrinkage of premium revenues outpaces cost-cutting
measures. In addition, as premium receipts decline and claim
payments continue at or near historical norms, the Company is
likely to continue to have negative cash flow from operations in
the near future.
Results
of Operations
The components of the Companys net income, and certain
ratios based thereon, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Gross premiums written
|
|
$
|
196,938
|
|
|
$
|
231,675
|
|
|
$
|
653,346
|
|
|
$
|
793,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
165,359
|
|
|
$
|
195,713
|
|
|
$
|
543,841
|
|
|
$
|
686,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
182,032
|
|
|
$
|
232,978
|
|
|
$
|
589,743
|
|
|
$
|
767,670
|
|
Losses and LAE
|
|
|
122,950
|
|
|
|
211,506
|
|
|
|
391,275
|
|
|
|
666,862
|
|
Underwriting expenses
|
|
|
69,797
|
|
|
|
84,076
|
|
|
|
206,040
|
|
|
|
248,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss
|
|
|
(10,715
|
)
|
|
|
(62,604
|
)
|
|
|
(7,572
|
)
|
|
|
(147,643
|
)
|
Investment income and net realized investment gains and losses
|
|
|
244,607
|
|
|
|
177,075
|
|
|
|
275,490
|
|
|
|
389,138
|
|
Interest and other expense
|
|
|
8,667
|
|
|
|
9,447
|
|
|
|
24,137
|
|
|
|
25,131
|
|
Costs related to early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in earnings of investees
|
|
|
225,225
|
|
|
|
105,024
|
|
|
|
243,781
|
|
|
|
215,972
|
|
Income tax expense
|
|
|
70,464
|
|
|
|
35,296
|
|
|
|
62,794
|
|
|
|
71,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings of investees
|
|
|
154,761
|
|
|
|
69,728
|
|
|
|
180,987
|
|
|
|
144,014
|
|
Equity in earnings (losses) of investees, net of tax
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
154,761
|
|
|
$
|
69,728
|
|
|
$
|
181,066
|
|
|
$
|
143,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio
|
|
|
67.6
|
%
|
|
|
90.8
|
%
|
|
|
66.4
|
%
|
|
|
86.9
|
%
|
Underwriting expense ratio
|
|
|
38.3
|
|
|
|
36.1
|
|
|
|
34.9
|
|
|
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
105.9
|
%
|
|
|
126.9
|
%
|
|
|
101.3
|
%
|
|
|
119.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
The increase in net income in the three months ended
September 30, 2009 as compared to the three months ended
September 30, 2008 was primarily attributable to higher
investment earnings and improved underwriting results. The
increase in investment earnings was primarily due to higher
income from investments at equity, including partnership
investments, and higher net realized investment gains, which
include a $124,405
mark-to-market
gain on the Companys investment in Odyssey Re Holdings
Corp. (Odyssey), an affiliated company, for which
the Company has elected the fair value option. The improvement
in underwriting income and corresponding loss and LAE ratios was
principally due to a lack of major catastrophes and a recovery
of $13,750 (7.6 loss ratio points) associated with an asbestos
lawsuit that was settled in 2008, partially offset by lower
favorable prior year loss development. By comparison, third
quarter 2008 underwriting results were adversely affected by
significant catastrophe losses associated with Hurricanes Gustav
and Ike of $71,500 (30.7 loss ratio points).
The increase in net income in the nine months ended
September 30, 2009, as compared to the nine months ended
September 30, 2008, was primarily attributable to improved
underwriting results, partially offset by lower investment
earnings. The increase in underwriting income and corresponding
improvement in the loss and LAE and combined ratios was
principally due to the effect of one-time charges recorded in
the nine months ended September 30, 2008, including:
(i) a charge of $75,470 arising from the commutation of a
reinsurance contract (9.8 loss ratio points);
(ii) catastrophe losses associated with Hurricanes Gustav
and Ike of $71,500 (9.3 loss ratio points); and (iii) a
charge of $25,500 associated with the settlement of an asbestos
related lawsuit (3.3 loss ratio points). Excluding the effects
of the reinsurance commutation, Hurricanes Gustav and Ike and
the asbestos lawsuit activity, the loss ratio was 68.7% for the
nine months ended September 30, 2009 as compared to 64.5%
for the nine months ended September 30, 2008, the increase
being primarily due to lower favorable prior year loss
development and the cumulative effect of the weak economy and
challenging market conditions that have persisted for the last
several quarters. Investment earnings were lower in the nine
months ended September 30, 2009 as compared to 2008,
primarily due to lower net realized gains on derivative and
short-sale securities, partially offset by higher realized gains
from other invested assets and higher income from investments at
equity, including partnership investments.
39
Underwriting
Results
Gross
Premiums Written
Gross premiums written by line of business are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
General liability
|
|
$
|
42,953
|
|
|
$
|
49,254
|
|
|
$
|
(6,301
|
)
|
|
|
(12.8)%
|
Workers compensation
|
|
|
47,303
|
|
|
|
50,793
|
|
|
|
(3,490
|
)
|
|
|
(6.9)%
|
Commercial automobile
|
|
|
18,452
|
|
|
|
36,864
|
|
|
|
(18,412
|
)
|
|
|
(49.9)%
|
Property
|
|
|
19,060
|
|
|
|
31,858
|
|
|
|
(12,798
|
)
|
|
|
(40.2)%
|
Commercial multi-peril
|
|
|
19,990
|
|
|
|
21,411
|
|
|
|
(1,421
|
)
|
|
|
(6.6)%
|
Accident and health
|
|
|
41,812
|
|
|
|
33,077
|
|
|
|
8,735
|
|
|
|
26.4%
|
Other1
|
|
|
7,368
|
|
|
|
8,418
|
|
|
|
(1,050
|
)
|
|
|
(12.5)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$
|
196,938
|
|
|
$
|
231,675
|
|
|
$
|
(34,737
|
)
|
|
|
(15.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
General liability
|
|
$
|
146,312
|
|
|
$
|
172,768
|
|
|
$
|
(26,456
|
)
|
|
|
(15.3)%
|
Workers compensation
|
|
|
149,268
|
|
|
|
158,433
|
|
|
|
(9,165
|
)
|
|
|
(5.8)%
|
Commercial automobile
|
|
|
80,501
|
|
|
|
136,772
|
|
|
|
(56,271
|
)
|
|
|
(41.1)%
|
Property
|
|
|
68,660
|
|
|
|
138,574
|
|
|
|
(69,914
|
)
|
|
|
(50.5)%
|
Commercial multi-peril
|
|
|
61,349
|
|
|
|
63,764
|
|
|
|
(2,415
|
)
|
|
|
(3.8)%
|
Accident and health
|
|
|
129,134
|
|
|
|
103,900
|
|
|
|
25,234
|
|
|
|
24.3%
|
Other1
|
|
|
18,122
|
|
|
|
19,696
|
|
|
|
(1,574
|
)
|
|
|
(8.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$
|
653,346
|
|
|
$
|
793,907
|
|
|
$
|
(140,561
|
)
|
|
|
(17.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Other includes surety, homeowners
and personal automobile lines of business.
|
For the three months ended September 30, 2009, gross
premiums written associated with the Companys commercial
lines of business (excluding accident and health and
other lines of business in the table above),
declined by $42,422, or 22.3%, as compared to the three months
ended September 30, 2008, primarily due to a lower renewal
premium base, whereas pricing and renewal retention rates
remained stable and new business increased by approximately 6%.
For the nine months ended September 30, 2009, gross
premiums written associated with the Companys commercial
lines of business (excluding accident and health and
other lines of business in the table above),
declined by $164,221, or 24.5%, as compared to the nine months
ended September 30, 2008, primarily due to a decline in new
business of approximately 18%, a decline in renewal retention
rates of approximately 1 percentage point and price
decreases on renewal policies of approximately 1%. The year to
date decline in new business is attributable to a reduction in
both property and casualty writings. The prolonged soft market
conditions and weak economy continue to adversely affect premium
growth and make it very challenging to write new business at
acceptable rates. In addition to competitive market conditions,
the decline in gross premiums written is also attributable to
underwriting actions taken by the Company to reduce unprofitable
classes of business, most notably a reduction in the property
and commercial automobile lines of business. The Company
continues to maintain its disciplined approach to underwriting
in this highly competitive market, renewing business and writing
new business only where it believes rates are acceptable and
terms and conditions are appropriate for the exposure.
The decline in gross premiums written in the commercial lines
was partially offset by growth from the accident and health
business.
40
Casualty
Gross Premiums Written
For the three and nine months ended September 30, 2009,
gross premiums written in casualty lines, which include the
general liability, workers compensation and commercial
automobile lines of business, decreased by $28,203, or 20.6%,
and $91,892, or 19.6%, respectively, as compared to the three
and nine months ended September 30, 2008. For the three
months ended September 30, 2009, the decrease was primarily
due to a lower renewal premium base, although renewal retention
rates increased by approximately 2 percentage points and
prices on renewal policies remained stable, partially offset by
an increase in new business of approximately 8%. For the nine
months ended September 30, 2009, the decrease was primarily
due to a reduction in new business of approximately 17% and
price decreases on renewal policies of approximately 1%, while
renewal retention rates remained stable. Aside from modest
improvement in California workers compensation rates,
casualty business across the industry is continuing to suffer
from inadequate rates.
For the nine months ended September 30, 2009, the
significant reduction in commercial auto gross premiums written
as compared to the prior year period is due to the Company more
aggressively reducing its exposure to transportation accounts
where loss experience was unfavorable. The reduction in general
liability largely reflects a decrease in the non-admitted
casualty business, primarily related to the impact of the
recession on the Companys construction business.
Property
Gross Premiums Written
For the three and nine months ended September 30, 2009,
gross premiums written in property lines, which include the
property and commercial multi-peril lines of business, decreased
by $14,219, or 26.7%, and $72,329, or 35.7%, respectively, as
compared to the three and nine months ended September 30,
2008. For the three months ended September 30, 2009, the
decrease was primarily due to a lower renewal premium base,
although renewal retention rates remained stable, and price
decreases on renewal policies of approximately 1%. For the nine
months ended September 30, 3009, the decrease was primarily
due to a decline in new business of approximately 19%, a
reduction in renewal retention rates of approximately
7 percentage points and price decreases on renewal policies
of approximately 1%. In addition to soft market conditions which
have significantly affected the Companys property
business, the decrease in property gross premiums written is
also due to a continued reduction in habitational business,
where our loss ratios are higher than the remainder of the book
of business, as well as a reduction in accounts with larger
total insured values.
Earlier in the year there were some signs of property rates
stabilizing, or even increasing in a few cases, driven by
reduced capacity in peak catastrophe zones as a result of
significant catastrophe losses sustained in 2008 from Hurricane
Ike and increased property catastrophe reinsurance costs.
However, the light catastrophe season to date may result in
downward pricing pressure on property rates for the remainder of
2009.
Other
Gross Premiums Written
For the three and nine months ended September 30, 2009, the
increase in other gross premiums written of $7,685, or 18.5%,
and $23,660, or 19.1%, was primarily due to significant growth
in the Companys accident and health book of business.
Previously written in the B++ rated Fairmont
companies, the accident and health business continues to benefit
from Crum & Forsters A
A.M. Best rating, which has resulted in the Company
acquiring several new programs since 2007 that have contributed
to business growth. The growth in 2009 has primarily come from
the employer stop loss business.
Net
Premiums Written
For the three and nine months ended September 30, 2009, net
premiums written decreased by $30,354, or 15.5%, and $142,806,
or 20.8%, compared to the three and nine months ended
September 30, 2008, respectively, reflective of the decline
in gross premiums written in the corresponding periods.
Premiums
Earned
Premiums earned reflect the amount of net premiums written
applicable to the portion of the policy term that expires in a
given period. The Company generally earns premiums on a pro-rata
basis over the period in which the coverage is provided. For the
three and nine months ended September 30, 2009, premiums
earned decreased by $50,946, or 21.9%, and $177,927, or 23.2%,
as compared to the three and nine months ended
September 30, 2008. The decrease was generally comparable
to the decrease in net premiums written.
41
Losses
and Loss Adjustment Expenses
For the three and nine months ended September 30, 2009, the
Companys calendar period loss and LAE ratio improved to
67.6% and 66.4%, respectively, from 90.8% and 86.9% for the
three and nine months ended September 30, 2008,
respectively. For the three months ended September 30,
2009, the improvement in the calendar year loss and LAE ratio
was principally due to the lower catastrophe losses, partially
offset by lower prior year favorable loss development as
compared to three months ended September 30, 2008.
Catastrophes contributed 1.8 and 31.7 percentage points in
the three months ended September 30, 2009 and 2008,
respectively, of which 30.7 points were associated with
Hurricanes Gustav and Ike in the three months ended
September 30, 2008. The lower prior year favorable loss
development is primarily attributable to lower favorable loss
experience in the workers compensation and general
liability lines of business as well as adverse loss development
in the commercial auto line of business, partially offset by
favorable development of $13,750 associated with the settlement
of an asbestos lawsuit in 2008.
For the nine months ended September 30, 2009, the
improvement in the calendar year loss and LAE ratio was
principally due to the combined effects of one-time charges
recorded in the nine months ended September 30, 2008,
including: (i) a charge of $75,470 arising from the
commutation of a reinsurance contract (9.8 loss ratio points) in
the second quarter; (ii) catastrophe losses associated with
Hurricanes Gustav and Ike of $71,500 (9.3 loss ratio points) in
the third quarter; and (iii) a charge of $25,500 associated
with the aforementioned asbestos lawsuit settlement (3.3
combined ratio points) in the first quarter. Excluding the
effects of the reinsurance commutation, Hurricanes Gustav and
Ike and the asbestos lawsuit activity, the loss ratio was 68.7%
for the nine months ended September 30, 2009 as compared to
64.5% for the nine months ended September 30, 2008, the
increase being primarily due to lower favorable prior year loss
development and the cumulative effect of the weak economy and
challenging market conditions that have persisted over the past
several quarters.
The accident year loss and LAE ratio was 71.2% for the first
nine months of 2009 as compared to 82.0% for the first nine
months of 2008. The improvement is primarily attributable to a
reduction in catastrophe losses. The full year accident year
2008 loss ratio was 80.4%, inclusive of 7.2 loss ratio points
from Hurricanes Gustav and Ike.
Underwriting
Expenses
Underwriting expenses include policy acquisition costs (costs
that vary with and are primarily related to the acquisition of
new and renewal policies and are comprised of commissions paid
to producers and premium taxes) and other operating expenses
associated with the Companys underwriting activities, such
as salaries and benefits, information technology costs and rent.
For the three and nine months ended September 30, 2009, the
Companys underwriting expense ratio increased to 38.3% and
34.9%, respectively, from 36.1% and 32.3% for the three and nine
months ended September 30, 2008, respectively. Despite
reduced other operating expenses, primarily reflecting the
combined effects of cost saving initiatives in 2009 and a
write-off of software development costs of $3,185 in 2008, the
increase in the underwriting expense ratio in 2009 relative to
prior year, is primarily attributable to a reduction in net
earned premium in both the three and nine month periods ended
September 30, 2009. Continued soft market conditions and a
weak economy continue to adversely affect the Companys
underwriting expense ratio.
Investment
Results
Information on the Companys investment results is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Average investments, including cash and cash equivalents, at
book
value1
|
|
$
|
3,607,800
|
|
|
$
|
4,291,043
|
|
|
$
|
3,718,109
|
|
|
$
|
4,419,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
34,213
|
|
|
$
|
14,706
|
|
|
$
|
133,165
|
|
|
$
|
61,792
|
|
Realized investment gains
|
|
|
210,394
|
|
|
|
162,369
|
|
|
|
142,325
|
|
|
|
327,346
|
|
Pre-tax equity in earnings (losses) of investees
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
(709
|
)
|
Change in unrealized investment gains (losses) and foreign
currency translation
|
|
|
259,335
|
|
|
|
(32,229
|
)
|
|
|
491,349
|
|
|
|
(81,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return on investments
|
|
$
|
503,942
|
|
|
$
|
144,846
|
|
|
$
|
766,960
|
|
|
$
|
306,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized total return on investments
|
|
|
55.9
|
%
|
|
|
13.5
|
%
|
|
|
27.5
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes book value of assets
pledged for derivatives of $24,009 and $243,445 at
September 30, 2009 and 2008, respectively.
|
42
The Company manages its investment portfolio with an emphasis on
total return on assets under management. Total return for the
period is the sum of investment income (including pre-tax equity
in earnings of investees), realized investment gains and losses
and changes in the market value of the portfolio expressed as a
percentage of the average book value of the portfolio during the
period. General economic conditions, stock market conditions,
fluctuations in interest rates and many other factors can affect
the returns on investments and the Companys ability to
control the timing of the realization of investment income. In
2008, the Company significantly reduced its credit default swap
portfolio and closed out its total return swap positions and
equity and equity index short positions, realizing significant
gains and reinvesting the proceeds to a large extent in equity
securities. As a result, the investment portfolio is exposed, to
a much larger degree than in previous reporting periods, to
volatility in the equity markets. The significant increase in
the annualized total return on investments for the three and
nine months ended September 30, 2009 as compared to the
corresponding prior year periods, is primarily attributable to
the improvement in financial market conditions in recent months,
resulting in an unrealized appreciation of the investment
portfolio.
The year over year decline in the average book value of
investments is largely attributable to cash used in operations
in the first nine months of 2009 of $309,499, as well as
dividends paid to Fairfax of $100,000, both of which were funded
from the proceeds of sales of fixed income securities.
Investment
Income
The components of investment income for the three and nine
months ended September 30, 2009 and 2008 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest on fixed income securities
|
|
$
|
25,310
|
|
|
$
|
28,092
|
|
|
$
|
78,900
|
|
|
$
|
78,779
|
|
Dividends from equity securities
|
|
|
7,064
|
|
|
|
5,693
|
|
|
|
28,403
|
|
|
|
16,393
|
|
Earnings (losses) from investments at equity and other invested
assets
|
|
|
9,477
|
|
|
|
(13,810
|
)
|
|
|
46,152
|
|
|
|
(19,896
|
)
|
Other, primarily interest on cash and cash equivalents
|
|
|
184
|
|
|
|
6,566
|
|
|
|
1,288
|
|
|
|
22,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
42,035
|
|
|
|
26,541
|
|
|
|
154,743
|
|
|
|
97,713
|
|
Interest on funds held under reinsurance contracts
|
|
|
(3,897
|
)
|
|
|
(3,862
|
)
|
|
|
(11,496
|
)
|
|
|
(12,969
|
)
|
Investment expenses
|
|
|
(3,925
|
)
|
|
|
(7,973
|
)
|
|
|
(10,082
|
)
|
|
|
(22,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
34,213
|
|
|
$
|
14,706
|
|
|
$
|
133,165
|
|
|
$
|
61,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009, the
increase in investment income of $19,507, or 132.6%, and
$71,373, or 115.5%, as compared to the corresponding prior year
periods, was primarily due to the combined effects of:
(i) higher earnings from the Companys investments at
equity, attributable to the underlying improvement in the equity
markets in 2009; (ii) higher dividends from equity
securities due to a shift in portfolio composition to equity
securities since the fourth quarter of 2008; and
(iii) lower investment expenses related principally to the
Standard & Poors Depositary Receipts
(SPDRs) short-sales which were closed out in the
second quarter of 2008. Offsetting these year over year
increases in investment income was a decline in interest on cash
and cash equivalents due to lower cash collateral held in 2009
as compared to 2008, related to the SPDRs short-sales and a
decline in year over year short-term interest rates.
43
Net
Realized Investment Gains and Losses
Net realized investment gains in the three and nine months ended
September 30, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Fixed income securities
|
|
$
|
71,728
|
|
|
$
|
(25,406
|
)
|
|
$
|
145,452
|
|
|
$
|
(12,151
|
)
|
Equity securities
|
|
|
22,277
|
|
|
|
2,815
|
|
|
|
30,955
|
|
|
|
2,815
|
|
Derivatives and short-sale obligations
|
|
|
(14,992
|
)
|
|
|
261,156
|
|
|
|
(1,883
|
)
|
|
|
495,930
|
|
Investments at equity and other invested assets
|
|
|
131,407
|
|
|
|
(41,498
|
)
|
|
|
73,781
|
|
|
|
(83,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,420
|
|
|
|
197,067
|
|
|
|
248,305
|
|
|
|
403,122
|
|
Other than temporary impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
(3,507
|
)
|
|
|
(1,265
|
)
|
Equity securities
|
|
|
(26
|
)
|
|
|
(34,698
|
)
|
|
|
(102,473
|
)
|
|
|
(74,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
(34,698
|
)
|
|
|
(105,980
|
)
|
|
|
(75,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax net realized investment gains
|
|
$
|
210,394
|
|
|
$
|
162,369
|
|
|
$
|
142,325
|
|
|
$
|
327,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net realized investment gains for the three
months ended September 30, 2009 of $48,025, or 29.6%, as
compared to the corresponding prior year period, primarily
reflects: (i) lower net gains on credit default swaps and
total return swaps. During the three months ended
September 30, 2009, the Company recorded net losses of
$19,504 on credit default swaps and net gains of $2,611 on total
return swaps as compared to net gains of $119,316 on credit
default swaps and net gains of $141,263 on total return swaps in
the three months ended September 30, 2008; (ii) higher
mark-to-market
gains on other invested assets, principally attributable to a
gain of $124,405 on the Companys investment in Odyssey,
for which the Company has elected the fair value option; and
(iii) an increase in net gains on fixed income and equity
securities, which include $33,480 of net gains related to sales
of fixed income securities and $38,248 of net
mark-to-market
gains on
held-for-trading
fixed income securities in the third quarter of 2009.
The decrease in net realized investment gains of $185,021 or
56.5% for the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008,
primarily reflects: (i) lower gains on derivatives and
short-sale obligations, primarily due to significant gains
recognized in 2008 related to credit default swaps, SPDRs
short-sales and total return swaps. For the nine months ended
September 30, 2009, net losses on derivatives and
short-sale obligations include net losses of $6,054 related to
credit default swaps and net gains of $2,611 related to total
return swaps as compared to net gains of $275,961 related to
credit default swaps and net gains of $218,566 related SPDRs
short-sales and total return swaps in the nine months ended
September 30, 2008; (ii) higher
mark-to-market
gains on other invested assets, principally attributable to a
gain of $64,564 on the Companys investment in Odyssey,
whereas the 2008 period included a loss on the Companys
investment in Northbridge Financial Corp., an affiliated
Company, of $75,558; and (iii) higher net gains on fixed
income and equity securities, which include $87,881 of net gains
related to sales of fixed income securities and $57,571 of net
mark-to-market
gains on
held-for-trading
fixed income securities. During 2008, the Company significantly
reduced its credit default swap portfolio and closed out its
total return swaps, SPDRs and equity short-sales, removing the
hedge on its investment portfolio and realizing significant
gains. With the recent improvement in the equity markets, the
Company has recently re-entered into total return swaps
transactions as an economic hedge against a decline in the
U.S. equity markets.
Interest
and Other Expense
For the three and nine months ended September 30, 2009,
interest and other expenses, excluding costs related to early
retirement of debt in 2008, were $8,667 and $24,137, and $9,447
and $25,131, respectively. The lower expense in the three and
nine months ended September 30, 2009, was primarily due to
lower severance payments.
44
Income
Taxes
The effective income tax rate was 25.8% and 33.3% for the nine
months ended September 30, 2009 and 2008, respectively. For
2009, the effective rate differs from the statutory federal
income tax rate of 35% primarily because of the benefit of
tax-exempt interest of $14,627 or 6.0% and dividends received
deductions of $5,221 or 2.1%.
Liquidity
and Capital Resources
Holding
Company
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. The Company
requires cash to meet its annual debt service obligations
($25,575 per year), to pay corporate expenses, including income
taxes, and, ultimately, to repay the $330,000 aggregate
principal amount of senior notes due in 2017.
The Companys ability to satisfy its corporate obligations
is primarily dependent on the dividend paying capacity of its
subsidiaries. State insurance laws restrict the amount of
shareholder dividends that insurance companies may pay without
prior approval of regulatory authorities. The ability of the
Companys insurance subsidiaries to pay dividends depends,
among other things, on such subsidiaries having positive
statutory earned surplus. The Companys principal insurance
subsidiaries are US Fire and North River. At September 30,
2009, US Fire reported statutory earned surplus of $591,338 and
North River reported statutory earned surplus of $208,331. In
March 2009, both US Fire and North River received approval from
the Delaware Department of Insurance and New Jersey Department
of Banking and Insurance, respectively, to pay extraordinary
dividends. Although the amount of the dividend for both
companies was 10% of prior year-end surplus (the amount of an
ordinary dividend), the extraordinary dividend approvals allowed
acceleration of the dividend payments from October to March for
US Fire and from May to March for North River. On March 27,
2009, North River paid a cash dividend in the amount of $44,100
to the Company and on March 30, 2009, US Fire paid a cash
dividend in the amount of $94,300 to the Company. Neither US
Fire nor North River may pay any further dividends in 2009
without prior regulatory approval. On April 16, 2009, the
Company paid a cash dividend to Fairfax of $100,000.
Cash used in financing activities in the nine months ended
September 30, 2009, was comprised of dividends paid to
Fairfax of $100,000. Cash used in financing activities in the
nine months ended September 30, 2008, was comprised of
dividends paid to Fairfax of $130,000 and retirement of the
remaining outstanding $4,270 senior notes due 2013.
Shareholders equity was $1,566,705 at September 30,
2009, as compared to $1,166,432 at December 31, 2008. The
increase in shareholders equity reflects net unrealized
investment gains of $319,377 and current year net income of
$181,066, partially offset by dividends paid to Fairfax of
$100,000. Statutory surplus was $1,592,928 at September 30,
2009 and $1,410,612 at December 31, 2008. The increase from
prior year end is principally attributable to net unrealized
capital gains of $199,500 and net income of $138,947 partially
offset by dividends paid by the insurance companies to
Crum & Forster Holdings Corp. of $138,400.
Insurance
Subsidiaries
At Crum & Forsters insurance subsidiaries, cash
provided by operating activities primarily consists of premium
collections, reinsurance recoveries and investment income. Cash
provided from these sources is generally used for payment of
losses and LAE, policy acquisition costs, operating expenses,
ceded reinsurance premiums, income taxes and shareholder
dividends, when permitted. Variability in cash provided by and
used in operations can occur for many reasons, including changes
in gross premiums written, changes in the Companys
underwriting results, natural or man-made catastrophes,
settlements of large claims including asbestos and environmental
claims, commutation of reinsurance contracts and the timing of
recoveries from reinsurers, particularly as related to claim
payments for natural or man-made catastrophes and asbestos and
environmental claims.
45
The prolonged soft market conditions in which the insurance
subsidiaries are currently operating have resulted in double
digit percentage declines in premium volume over the last two
years. In addition, the Company initiated actions in 2008 to
eliminate unprofitable classes of business. The Companys
property business is declining most markedly; however, due to
the short tail nature of the claims, it is expected that claim
payments will also decline in the relative near term as the
exposures run off. The Companys casualty business
(approximately 58% of total gross premiums written year to date
in 2009) in general has a longer tail, meaning the period
of time from the occurrence of a claim through the settlement of
a liability may extend several years into the future and as a
result cash flow may be adversely affected by claims from prior
years. Additionally, the lapse of time between payments to
claimants and recoveries from reinsurers, if collections from
reinsurers are not received on a timely basis, will directly
affect cash flows. Due to this uncertainty regarding the amount
and timing of settlement of unpaid claims and ultimate
recoveries from reinsurers, the insurance subsidiaries
cash flow from operations and liquidity needs may vary from
period to period. If premium receipts continue to decline and
claim payments continue at historical norms, the Company is
likely to have negative cash flow from operations in the near
future.
Cash used in operations was $309,499 for the nine months ended
September 30, 2009 as compared to cash provided from
operations of $265,779 for the nine months ended
September 30, 2008, which included $302,500 of proceeds
from the commutation of a finite reinsurance contract. Excluding
the commutation proceeds, cash out flow from operations was
worse by $272,778. The unfavorable variance from prior year is
primarily attributable to lower premium collections (related to
the decline in premiums written, approximately $141,400), higher
income tax payments which are substantially related to 2008
realized investment gains (approximately $84,300), and higher
net paid losses (approximately $28,300). The higher net paid
losses are primarily related to net paid losses associated with
the 2008, 2005 and 2004 hurricanes, whereas results for 2008
included loss recoveries of $13,800 associated with the 2004 and
2005 hurricanes and proceeds of $10,400 from commutation of a
reinsurance treaty. The Companys underwriting cash flows
continue to be negative, reflecting declining premiums as a
result of the continued soft market and recent underwriting
actions in the face of steady or only marginally declining paid
losses, ceded reinsurance costs and fixed operating expenses.
During the fourth quarter of 2008 and the first quarter of 2009,
the Company made significant purchases of fixed income and
equity securities, when the Company determined that market price
levels were attractive. In doing so, it reduced its historically
high levels of cash, cash equivalents and short-term investments
to lower levels. During the first quarter of 2009, the Company
sold several municipal securities with a fair market value of
approximately $146,200 to third-parties and Fairfax affiliates
to meet operating needs and restore its cash and short-term
investments position to more normal levels. At
September 30, 2009, the insurance subsidiaries held
$332,921 in highly liquid, short-term and other marketable
securities to meet their operating needs and provide available
cash in the event of unanticipated large claim payments.
Management believes that the insurance subsidiaries have
sufficient cash and short-term investments, that together with
cash generated from future investing operations, will meet their
operating liquidity needs.
The aggregate carrying value of the Companys investment
portfolio, including cash and cash equivalents and assets
pledged for derivatives, was $4,138,138 and $4,032,034 at
September 30, 2009 and December 31, 2008,
respectively, of which $361,438 and $709,799 was held in cash,
cash equivalents and short-term investments at
September 30, 2009 and December 31, 2008, respectively.
The Companys investment portfolio has exposure to credit
risk primarily related to fixed income securities. Management
attempts to control this exposure by emphasizing investment
grade credit quality in the fixed income securities purchased,
although at times the Company may invest, to a limited extent,
in non-investment grade fixed income securities if market
opportunities avail. Management believes that this concentration
in investment grade securities reduces the Companys
exposure to credit risk to an acceptable level. The Company
holds mortgage-backed securities (approximately 3% of the total
investment portfolio of $4.1 billion), purchased at deep
discounts to par. In addition, the Company has purchased credit
default swaps, referenced to various issuers in the banking,
mortgage and insurance sectors of the financial services
industry, which serve as economic hedges against declines in the
fair value of the Companys financial assets.
Counterparties to the credit default swaps expose the Company to
credit risk in the event of non-performance, which the Company
endeavors to limit through the terms of agreements negotiated
with the counterparties. Pursuant to the swap agreements, the
counterparties are required to pledge cash or U.S. Treasury
securities as collateral, in the event that appreciation in the
fair value of the credit default swaps meets certain thresholds.
The fair value of this collateral, which is not reflected on the
Companys balance sheet, is held by an independent
custodian in the name of the Company, and amounted to $6,872 at
September 30, 2009. The Company has the right to sell or
repledge this collateral, which it has not exercised. The
Company believes that any remaining credit risk exposure,
represented by the uncollateralized fair value of the credit
default swaps ($16,244 at September 30, 2009), is low given
the diversification among the various counterparties. The
Company funds all its obligations relating to the credit default
swaps through the initial premium paid at purchase and as a
result there are no requirements for the Company to provide
collateral.
At September 30, 2009 and December 31, 2008, 82.8% and
86.7% of the Companys fixed income securities were rated
investment grade, respectively.
46
Ratings
Financial strength ratings issued by third party rating agencies
are used by insurance consumers and insurance intermediaries as
an important means of assessing the financial strength and
quality of insurers. Higher ratings generally indicate relative
financial stability and a strong ability to pay claims. Ratings
focus on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance
business, credit analysis, systems development, marketing,
investment operations, minimum policyholders surplus
requirements and capital sufficiency to meet projected growth,
as well as access to such traditional capital as may be
necessary to continue to meet standards for capital adequacy.
Crum & Forsters insurance subsidiaries are
assigned financial strength ratings from major rating agencies
which include A.M. Best Company
(A.M. Best), Standard & Poors
(S&P) Insurance Rating Services and
Moodys Investors Service (Moodys).
Crum & Forsters insurance subsidiaries have an
A financial strength rating (the third highest of
fifteen rating categories) with a stable outlook from
A.M. Best, a BBB+ financial strength rating
(the fourth highest of nine major rating categories) with a
stable outlook from S&Ps Insurance Rating Services
and a Baa1 financial strength rating from
Moodys (the fourth highest of nine major rating
categories) with a stable outlook.
The financial strength ratings assigned by rating agencies to
insurance companies represent independent opinions of an
insurers financial strength and its ability to meet
ongoing obligations to policyholders, and are not directed
toward the protection of investors. Ratings by rating agencies
of insurance companies are not ratings of securities or
recommendations to buy, hold or sell any security.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
All dollar amounts are in thousands, unless otherwise indicated.
The Company is exposed to several types of market risk related
to its investment operations. These risks are principally
interest rate risk, credit risk, equity price risk and foreign
currency exchange risk. The term market risk refers
to the risk of loss arising from adverse changes in the fair
value of financial instruments. All market sensitive instruments
discussed here relate to the Companys investment portfolio.
Computations of the prospective effects of hypothetical interest
rate, equity price and foreign exchange rate changes shown below
are based on numerous assumptions, including the maintenance of
the existing level and composition of fixed income, equity and
foreign securities, and should not be relied on as indicative of
future results. Certain shortcomings are inherent in the methods
of analyses presented in the computations of the fair value of
fixed rate instruments and in the computations of the impact of
potential market movements on equity securities and foreign
securities.
Actual values may differ from those projections presented should
market conditions vary from assumptions used in the calculation
of the fair value of individual securities, including, but not
limited to, non-parallel shifts in the term structure of
interest rates, changing individual issuer credit spreads and
non-parallel movements of foreign exchange rates or equity
prices.
Interest
Rate Risk
At September 30, 2009, the fair value of Crum &
Forsters investment portfolio included $1,850,620 of fixed
income securities, the majority of which are subject to interest
rate risk. Fluctuations in interest rates have a direct impact
on the market values of these securities. As interest rates
rise, market values of fixed income portfolios fall, and vice
versa. The table below displays the potential impact of market
value fluctuations on the Companys fixed income portfolio
based on parallel 200 basis point shifts in interest rates
up and down, in 100 basis point increments. This analysis
was performed on each security individually.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
At December 31, 2008
|
|
|
Fair Value of
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
Fixed Income
|
|
Hypothetical
|
|
Hypothetical
|
|
Fixed Income
|
|
Hypothetical
|
|
Hypothetical
|
|
|
Securities
|
|
$ Change
|
|
% Change
|
|
Securities
|
|
$ Change
|
|
% Change
|
|
200 basis point decline
|
|
$
|
2,133,324
|
|
|
$
|
282,704
|
|
|
|
15.3
|
%
|
|
$
|
2,106,515
|
|
|
$
|
339,183
|
|
|
|
19.2
|
%
|
100 basis point decline
|
|
$
|
1,995,992
|
|
|
$
|
145,372
|
|
|
|
7.9
|
%
|
|
$
|
1,958,505
|
|
|
$
|
191,173
|
|
|
|
10.8
|
%
|
Base scenario
|
|
$
|
1,850,620
|
|
|
|
|
|
|
|
|
|
|
$
|
1,767,332
|
|
|
|
|
|
|
|
|
|
100 basis point increase
|
|
$
|
1,730,619
|
|
|
$
|
(120,001
|
)
|
|
|
(6.5
|
)%
|
|
$
|
1,584,304
|
|
|
$
|
(183,028
|
)
|
|
|
(10.4
|
)%
|
200 basis point increase
|
|
$
|
1,561,269
|
|
|
$
|
(289,351
|
)
|
|
|
(15.6
|
)%
|
|
$
|
1,425,703
|
|
|
$
|
(341,629
|
)
|
|
|
(19.3
|
)%
|
47
Credit
Risk
Credit risk is the risk of loss resulting from the failure of a
counterparty to honor its financial or contractual obligations
to the Company. Credit risk arises predominantly with respect to
investments in debt instruments, reinsurance recoverable,
premiums receivable and balances due from counterparties to
derivative contracts (primarily credit default swaps). There
were no significant changes to the Companys exposure to
credit risk at September 30, 2009 compared to
December 31, 2008.
The Company has purchased credit default swaps, referenced to
various issuers in the banking, mortgage and insurance sectors
of the financial services industry which serve as economic
hedges against declines in the fair value of the Companys
financial assets. Under a credit default swap, as the buyer, the
Company agrees to pay to a specific counterparty, fixed premium
amounts based on an agreed notional principal amount in exchange
for protection against default by the issuers of specified
referenced debt securities. The credit events, as defined by the
respective credit default swap contracts establishing the rights
to recover amounts from the counterparties, include events such
as bankruptcy, obligation acceleration, obligation default,
failure to pay, repudiation/moratorium and restructuring. As of
September 30, 2009, all credit default swap contracts held
by the Company have been purchased from and entered into with
either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as
the counterparty, with positions on certain covered risks with
more than one of these counterparties.
The credit default swaps are recorded at fair value with changes
in fair value recorded as realized investment gains or losses in
the period in which they occur. The Company obtains
broker-dealer quotes for its credit default swaps from
third-party providers. In addition, the Company assesses the
reasonableness of the fair values obtained from these providers
by comparing the fair values to values produced using individual
issuer credit default swap yield curves, by referencing them to
movements in credit spreads and by comparing them to recent
market transaction prices for similar credit default swaps where
available. The fair values of credit default swaps are subject
to significant volatility arising from the potential differences
in the perceived risk of default of the underlying issuers,
movements in credit spreads and the length of time to the
contracts maturity. The fair value of the credit default
swaps may vary materially either up or down in short periods,
and their ultimate value may therefore only be known upon their
disposition.
Counterparties to the credit default swaps expose the company to
credit risk in the event of non-performance, which the Company
endeavors to limit through the terms of agreements negotiated
with the counterparties. Pursuant to the swap agreements, the
counterparties are required to pledge cash or U.S. Treasury
securities as collateral, in the event that appreciation in the
fair value of the credit default swaps meets certain thresholds.
The fair value of this collateral, which is not reflected on the
Companys balance sheet, is held by an independent
custodian in the name of the Company, and amounted to $6,872 at
September 30, 2009. The Company has the right to sell or
repledge this collateral, which it has not exercised. The
Company believes that any remaining credit risk exposure,
represented by the uncollateralized fair value of the credit
default swaps ($16,244 at September 30, 2009), is low given
the diversification among the various counterparties. The
Company funds all its obligations relating to the credit default
swaps through the initial premium paid at purchase and as a
result there are no requirements for the Company to provide
collateral.
The Companys credit default swaps have declined
significantly in 2009 relative to prior years, largely as a
result of significant sales in 2008. In the latter part of 2008,
the Company reviewed the financial objectives of its economic
hedging program and decided not to replace closed credit default
swaps based on: (i) the Companys judgment that its
exposure to elevated levels of credit risk had moderated and
that its historical approaches to managing credit risk were
satisfactory in mitigating the Companys exposure to credit
risk arising from its financial assets; (ii) the
significant increase in the cost of purchasing credit
protection; and (iii) the fact that the Companys
capital and liquidity had benefited from approximately
$450 million in realized gains from credit default swaps
since inception of the hedge program. As a result, the effects
that credit default swaps as hedging instruments may be expected
to have on the Companys future financial position,
liquidity and results of operations may be expected to diminish
significantly relative to the effects in recent years. The
Company may initiate new credit default swap contracts as an
effective hedging mechanism in the future, but there can be no
assurance that it will do so.
48
The following tables summarize the effect of the credit default
swaps and related hedged items on the Companys financial
position and results of operations as of and for the three and
nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
1,850,620
|
|
|
$
|
1,850,620
|
|
|
$
|
92,248
|
|
|
$
|
71,728
|
|
|
$
|
163.976
|
|
Warrants
|
|
|
1.903
|
|
|
|
1,903
|
|
|
|
|
|
|
|
1,901
|
|
|
|
1,901
|
|
Premiums receivable
|
|
|
167,086
|
|
|
|
167,086
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
(375
|
)
|
Reinsurance recoverable
|
|
|
905,967
|
|
|
|
905,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
2,925,576
|
|
|
$
|
2,925,576
|
|
|
|
92,248
|
|
|
|
73,254
|
|
|
|
165,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(19,504
|
)
|
|
|
(19,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(19,504
|
)
|
|
|
(19,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
92,248
|
|
|
$
|
53,750
|
|
|
$
|
145,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
uncollectible premiums receivable and reinsurance recoverable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,463,470
|
|
|
$
|
2,463,470
|
|
|
$
|
9,921
|
|
|
$
|
(26,671
|
)
|
|
$
|
(16,750
|
)
|
Warrants
|
|
|
3,250
|
|
|
|
3,250
|
|
|
|
|
|
|
|
818
|
|
|
|
818
|
|
Premiums receivable
|
|
|
187,166
|
|
|
|
187,166
|
|
|
|
|
|
|
|
(675
|
)
|
|
|
(675
|
)
|
Reinsurance recoverable
|
|
|
1,025,144
|
|
|
|
1,025,144
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
3,679,030
|
|
|
$
|
3,679,030
|
|
|
|
9,921
|
|
|
|
(28,528
|
)
|
|
|
(18,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
3,731,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
119,316
|
|
|
|
119,316
|
|
Eurodollar futures contracts
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
4,219,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
119,120
|
|
|
|
119,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
9,921
|
|
|
$
|
90,592
|
|
|
$
|
100,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
uncollectible premiums receivable and reinsurance recoverable.
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
1,850,620
|
|
|
$
|
1,850,620
|
|
|
$
|
166,843
|
|
|
$
|
141,945
|
|
|
$
|
308,788
|
|
Warrants
|
|
|
1,903
|
|
|
|
1,903
|
|
|
|
|
|
|
|
1,903
|
|
|
|
1,903
|
|
Premiums receivable
|
|
|
167,086
|
|
|
|
167,086
|
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
(1,125
|
)
|
Reinsurance recoverable
|
|
|
905,967
|
|
|
|
905,967
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
2,925,576
|
|
|
$
|
2,925,576
|
|
|
|
166,843
|
|
|
|
140,723
|
|
|
|
307,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(6,054
|
)
|
|
|
(6,054
|
)
|
Eurodollar futures contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
1,597,093
|
|
|
$
|
23,116
|
|
|
|
|
|
|
|
(6,397
|
)
|
|
|
(6,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
166,843
|
|
|
$
|
134,326
|
|
|
$
|
301,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
uncollectible premiums receivable and reinsurance recoverable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Credit risk exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,463,470
|
|
|
$
|
2,463,470
|
|
|
$
|
(18,137
|
)
|
|
$
|
(13,416
|
)
|
|
$
|
(31,553
|
)
|
Warrants
|
|
|
3,250
|
|
|
|
3,250
|
|
|
|
|
|
|
|
(2,652
|
)
|
|
|
(2,652
|
)
|
Premiums receivable
|
|
|
187,166
|
|
|
|
187,166
|
|
|
|
|
|
|
|
575
|
|
|
|
575
|
|
Reinsurance recoverable
|
|
|
1,025,144
|
|
|
|
1,025,144
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
3,679,030
|
|
|
$
|
3,679,030
|
|
|
|
(18,137
|
)
|
|
|
(21,493
|
)
|
|
|
(39,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
$
|
3,731,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
275,961
|
|
|
|
275,961
|
|
Eurodollar futures contracts
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments
|
|
$
|
4,219,964
|
|
|
$
|
244,258
|
|
|
|
|
|
|
|
275,765
|
|
|
|
275,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net exposure
|
|
|
|
|
|
|
|
|
|
$
|
(18,137
|
)
|
|
$
|
254,272
|
|
|
$
|
236,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings charges for
uncollectible premiums receivable and reinsurance recoverable.
|
50
Equity
Price Risk
At September 30, 2009, the Companys investment
portfolio included $1,807,297 of equity securities comprised of
$1,383,777 of
available-for-sale
equity securities, $355,303 of equity securities for which the
Company has elected the fair value option under FASB ASC
825-10,
Financial Instruments (formerly SFAS No. 159,
The Fair Value Option for Financial Assets and
Liabilities) and $68,216 of equities owned by its equity
method investees. This equity portfolio, which represented
approximately 43.7% of the Companys investment portfolio,
including cash and cash equivalents and assets pledged for
derivatives, is exposed to equity price risk, which is defined
as the potential for loss in market value owing to declines in
equity prices. A hypothetical 10% decline in the price of each
of these equity securities would result in a total decline of
$180,730 in the fair value of the equity portfolio at
September 30, 2009. At December 31, 2008, a
hypothetical 10% decline in the price of each of these equity
securities would have resulted in a total decline of $139,841 in
the fair value of the equity portfolio.
During much of 2008 and immediately preceding years, the Company
had been concerned about the valuation of worldwide equity
markets, uncertainty resulting from credit issues in the
U.S. and global economic conditions. As protection against
a decline in equity markets, the Company held short positions in
SPDRs and U.S. listed common stocks and equity index and
equity total return swaps, referred to in the aggregate as
equity hedges. The Company also in the past purchased S&P
Index call options to limit the potential loss on its equity
index total return swaps and SPDRs short positions and to
provide general protection against the short position in common
stocks. In the latter half of 2008, following significant
declines in global equity markets, the Company reviewed the
financial objectives of its hedging program and determined that
elevated risks in the global equity markets had moderated and
subsequently closed all of its equity hedge positions, realizing
substantial gains. During the fourth quarter of 2008, the
Company increased its investments in equities as a result of the
opportunities presented by significant declines in the global
equity markets. During the third quarter of 2009, as a result of
the rapid increase in the valuation level of worldwide equity
markets, the Company once again determined to protect a portion
of its equity and equity related holdings against a decline in
equity markets and entered into equity index total return swaps
with a notional value of $452,319.
The Company is required to post collateral equivalent to 6% of
the notional value of the total return swaps at the time the
swap is opened. These assets are recorded at fair value in
assets pledged for derivatives on the consolidated balance
sheets. At September 30, 2009, the fair value of the
collateral posted, in the form of municipal bonds, was $29,756.
The following tables summarize the effect of equity risk hedging
instruments and related hedged items on the Companys
historical financial position and results of operations as of
and for the three and nine months ended September 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,383,777
|
|
|
$
|
1,383,777
|
|
|
$
|
166,508
|
|
|
$
|
22,251
|
|
|
$
|
188,759
|
|
Investments at equity
|
|
|
159,370
|
|
|
|
159,370
|
|
|
|
577
|
|
|
|
8,956
|
|
|
|
9,533
|
|
Other invested assets
|
|
|
355,303
|
|
|
|
355,303
|
|
|
|
|
|
|
|
131,407
|
|
|
|
131,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,898,450
|
|
|
$
|
1,898,450
|
|
|
|
167,085
|
|
|
|
162,614
|
|
|
|
329,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
167,085
|
|
|
$
|
165,225
|
|
|
$
|
332,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
691,577
|
|
|
$
|
691,577
|
|
|
$
|
(41,309
|
)
|
|
$
|
(30,618
|
)
|
|
$
|
(71,927
|
)
|
Investments at equity
|
|
|
126,713
|
|
|
|
126,713
|
|
|
|
(841
|
)
|
|
|
(15,072
|
)
|
|
|
(15,913
|
)
|
Other invested assets
|
|
|
239,369
|
|
|
|
239,369
|
|
|
|
|
|
|
|
(41,575
|
)
|
|
|
(41,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,057,659
|
|
|
$
|
1,057,659
|
|
|
|
(42,150
|
)
|
|
|
(87,265
|
)
|
|
|
(129,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
845,392
|
|
|
$
|
45,558
|
|
|
|
|
|
|
|
141,263
|
|
|
|
141,263
|
|
S&P Index call options
|
|
|
310,464
|
|
|
|
1
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
1,155,856
|
|
|
$
|
45,559
|
|
|
|
|
|
|
|
141,218
|
|
|
|
141,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
(42,150
|
)
|
|
$
|
53,953
|
|
|
$
|
11,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,383,777
|
|
|
$
|
1,383,777
|
|
|
$
|
322,728
|
|
|
$
|
(71,518
|
)
|
|
$
|
251,210
|
|
Investments at equity
|
|
|
159,370
|
|
|
|
159,370
|
|
|
|
1,776
|
|
|
|
44,579
|
|
|
|
46,355
|
|
Other invested assets
|
|
|
355,303
|
|
|
|
355,303
|
|
|
|
|
|
|
|
73,902
|
|
|
|
73,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,898,450
|
|
|
$
|
1,898,450
|
|
|
|
324,504
|
|
|
|
46,963
|
|
|
|
371,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
452,319
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
2,611
|
|
|
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
324,504
|
|
|
$
|
49,574
|
|
|
$
|
374,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
Effect on Pre-tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized
|
|
|
|
|
|
|
Exposure/
|
|
|
|
|
|
Other
|
|
|
Investment
|
|
|
|
|
|
|
Notional
|
|
|
Carrying
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Income
|
|
|
(Losses)1
|
|
|
Net Equity
|
|
|
Equity exposures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
691,577
|
|
|
$
|
691,577
|
|
|
$
|
(35,130
|
)
|
|
$
|
(71,696
|
)
|
|
$
|
(106,826
|
)
|
Investments at equity
|
|
|
126,713
|
|
|
|
126,713
|
|
|
|
(28,626
|
)
|
|
|
(24,924
|
)
|
|
|
(53,550
|
)
|
Other invested assets
|
|
|
239,369
|
|
|
|
239,369
|
|
|
|
|
|
|
|
(83,472
|
)
|
|
|
(83,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity exposure
|
|
$
|
1,057,659
|
|
|
$
|
1,057,659
|
|
|
|
(63,756
|
)
|
|
|
(180,092
|
)
|
|
|
243,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
$
|
845,392
|
|
|
$
|
45,558
|
|
|
|
|
|
|
|
153,060
|
|
|
|
153,060
|
|
S&P Index call options
|
|
|
310,464
|
|
|
|
1
|
|
|
|
|
|
|
|
(498
|
)
|
|
|
(498
|
)
|
SPDRs short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,506
|
|
|
|
65,506
|
|
Common stock short-sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,749
|
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity hedging instruments
|
|
$
|
1,155,856
|
|
|
$
|
45,559
|
|
|
|
|
|
|
|
222,817
|
|
|
|
222,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity exposure
|
|
|
|
|
|
|
|
|
|
$
|
(63,756
|
)
|
|
$
|
47,275
|
|
|
$
|
(21,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes earnings from investments
at equity.
|
Foreign
Currency Exchange Rate Risk
Through investments in foreign securities, including those owned
by certain equity method investees, the Company is exposed to
foreign currency exchange rate risk. Foreign currency exchange
rate risk is the potential for loss in value owing to a decline
in the U.S. dollar value of these investments due to a
change in the exchange rate of the foreign currency in which
these assets are denominated. At September 30, 2009, the
Companys total exposure to foreign currency denominated
securities in U.S. dollar terms was approximately $273,360,
or 6.6%, of the Companys total investment portfolio,
including cash and cash equivalents and assets pledged for
derivatives. The primary foreign currency exposures were in Hong
Kong dollar denominated securities, which represented 2.3% of
the Companys investment portfolio, including cash and cash
equivalents and assets pledged for derivatives. The potential
impact of a hypothetical 10% decline in each of the foreign
exchange rates on the valuation of investment assets denominated
in those respective foreign currencies would result in a total
decline in the fair value of the total investment portfolio of
$27,336 at September 30, 2009. At December 31, 2008, a
hypothetical 10% decline in foreign currency exchange rates
would have resulted in a total decline of $29,499 in the fair
value of the total investment portfolio.
|
|
ITEM 4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Companys principal executive officer and its principal
financial officer have evaluated the effectiveness of the
Companys disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report. Based on that
evaluation, such officers have concluded that the Companys
disclosure controls and procedures are effective as of the end
of such period.
Internal
Control Over Financial Reporting
During the period covered by this report, there has been no
change in the Companys internal control over financial
reporting that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over
financial reporting.
The design of any system of controls and procedures is based, in
part, upon certain assumptions about the likelihood of future
events. There can be no assurance that any design will succeed
in achieving its stated goals under all potential future
conditions, regardless of how remote.
53
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Crum & Forster Holdings Corp. and US Fire, among
numerous other insurance company and insurance broker
defendants, have been named as defendants in a class action suit
filed by policyholders alleging, among other things, that the
defendants used the contingent commission structure to deprive
policyholders of free competition in the market for insurance.
The action was filed in the U.S. District Court for the
District of New Jersey. Plaintiffs seek certification of a
nationwide class consisting of all persons who between
August 26, 1994 and the date of the class certification
engaged the services of any one of the broker defendants and who
entered into or renewed a contract of insurance with one of the
insurer defendants. The trial court dismissed the federal
antitrust claims and RICO claims with prejudice and declined to
accept supplemental jurisdiction over plaintiffs state law
claims. On October 24, 2007, plaintiffs filed an appeal
with the U.S. Court of Appeal for the Third Circuit. The
briefing on appeal has been completed. The court heard oral
arguments on April 21, 2009 in Philadelphia, Pennsylvania.
The court took the matter under submission. A final ruling is
not expected from the Court of Appeals before late 2009.
Crum & Forster Holdings Corp. and US Fire continue to
be named as defendants and intend to vigorously defend the
action.
In the ordinary course of their business, Crum &
Forsters subsidiaries receive claims asserting alleged
injuries and damages from asbestos and other hazardous waste and
toxic substances and are subject to related coverage litigation.
The conditions surrounding the final resolution of these claims
and the related litigation continue to change. Currently, it is
not possible to predict judicial and legislative changes and
their impact on the future development of asbestos and
environmental claims and litigation. This trend will be affected
by future court decisions and interpretations, as well as
changes in applicable legislation and the possible
implementation of a proposed federal compensation scheme for
asbestos-related injuries. As a result of these uncertainties,
additional liabilities may arise for amounts in excess of
current reserves for asbestos, environmental and other latent
exposures. These additional amounts, or a range of these
additional amounts, cannot currently be reasonably estimated. As
a result of these claims, management continually reviews
required reserves and reinsurance recoverable. In each of these
areas of exposure, the Company litigates individual cases when
appropriate and endeavors to settle other claims on favorable
terms.
The Companys subsidiaries are involved in various lawsuits
and arbitration proceedings arising in the ordinary course of
business. While the outcome of such matters cannot be predicted
with certainty, in the opinion of management, no such matter is
likely to have a material adverse effect on the Companys
consolidated net income, financial position or liquidity.
However, it should be noted that the frequency of large damage
awards in some jurisdictions, including punitive damage awards
that bear little or no relation to actual economic damages
incurred by plaintiffs, continues to create the potential for an
unpredictable judgment in any given matter.
|
|
ITEM 5.
|
OTHER
INFORMATION
|
Changes
to Board of Directors and Audit Committee
Effective October 7, 2009, the following changes took place
to the board of directors and audit committee of the Company:
Mr. Bradley P. Martin retired as a director of the Company;
Mr. Brandon W. Sweitzer was elected to the board of
directors of the Company and also elected as a member of its
audit committee; and Mr. Douglas M. Libby, President and
Chief Executive Officer of the Company and Ms. Mary Jane
Robertson, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, were elected to the board of directors
of the Company. A
Form 8-K
was neither filed nor required to be filed in connection with
these changes.
See Index to Exhibits.
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CRUM & FORSTER HOLDINGS CORP.
(Registrant)
|
|
|
Date: October 29, 2009
|
|
By: /s/ Douglas
M. Libby
Douglas
M. Libby
President and Chief Executive Officer
|
|
|
|
Date: October 29, 2009
|
|
By: /s/ Mary
Jane Robertson
Mary
Jane Robertson
Executive Vice President, Chief
Financial Officer and Treasurer
|
55
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
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|
|
|
|
* 31
|
.1
|
|
Certification of President and Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
* 31
|
.2
|
|
Certification of Executive Vice President, Chief Financial
Officer and Treasurer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
* 32
|
.1
|
|
Certification of President and Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
* 32
|
.2
|
|
Certification of Executive Vice President, Chief Financial
Officer and Treasurer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
99
|
.1
|
|
Risk Factors (incorporated into Part II of this
Form 10-Q
by reference to the section entitled Risk Factors in
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the
Securities and Exchange Commission on February 27, 2009).
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56