UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-84068

Crum & Forster Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)

Delaware		04-3611900
(State or Other Jurisdiction of		(I.R.S. Employer Identification Number)
Incorporation or Organization)

305 Madison Avenue, Morristown, New Jersey 07962
(Address of principal executive office)

(973) 490-6600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER INSTRUCTION I.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

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

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

Class		Number of Shares Outstanding at February 25, 2010
Common Stock, $.01 Par Value		100

Documents Incorporated by Reference
None

 

 

CRUM & FORSTER HOLDINGS CORP.

Form 10-K

Index

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION			4
PART I
ITEM 1. BUSINESS
Overview			5
Corporate Structure			5
Lines of Business			7
Geographic Distribution			10
Business Development and Methods of Distribution			10
Pricing and Underwriting			11
Catastrophe Risk Management			12
Reinsurance			13
Claims Management			18
Reserves			18
Asbestos, Environmental and Other Latent Exposures			22
Investments			22
Competition			24
Ratings			25
Insurance Regulatory Matters			25
Employees			29
ITEM 1A. RISK FACTORS			29
ITEM 1B. UNRESOLVED STAFF COMMENTS			37
ITEM 2. PROPERTIES			37
ITEM 3. LEGAL PROCEEDINGS			38
Litigation			38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			38
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			38
ITEM 6. SELECTED FINANCIAL DATA			38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			40
Critical Accounting Policies and Estimates			40
Summary of Operations			50
Results of Operations			52
Liquidity and Capital Resources			60
Contractual Obligations			63
Regulatory Issues			63
Off-Balance Sheet Arrangements			63
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			63
Interest Rate Risk			64
Credit Risk			64
Equity Price Risk			66
Foreign Currency Exchange Rate Risk			67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			68
Index to Consolidated Financial Statements			68
Report of Independent Registered Public Accounting Firm			69
Consolidated Balance Sheets at December 31, 2009 and 2008			70
Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007			71
Consolidated Statements of Shareholder’s Equity for the Years Ended December 31, 2009, 2008 and 2007			72
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007			73
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007			74
Notes to Consolidated Financial Statements			76

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			111
ITEM 9A(T). CONTROLS AND PROCEDURES			111
Evaluation of Disclosure Controls and Procedures			111
Management’s Report on Internal Control Over Financial Reporting			111
ITEM 9B. OTHER INFORMATION			111
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			112
Directors and Executive Officers			112
Corporate Governance			113
Audit Committee and Audit Committee Financial Expert			113
Compensation Committee			113
Compensation of Directors			113
Code of Ethics			113
ITEM 11. EXECUTIVE COMPENSATION			113
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			113
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE			114
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			114
Audit Fees			114
Audit-Related Fees			114
Tax Fees			114
All Other Fees			114
Audit Committee Pre-Approval Policies and Procedures			114
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			114
Financial Statement Schedules			114
Exhibits			115
SIGNATURES			117
POWER OF ATTORNEY			117
INDEX TO FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULES			118
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules			119
Schedule I – Summary of Investments Other Than Investments in Related Parties			120
Schedule II – Condensed Balance Sheets of Crum & Forster Holdings Corp. at December 31, 2009 and 2008 (Parent Company Only)			121
Schedule II – Condensed Statements of Income of Crum & Forster Holdings Corp. for the Years Ended December 31, 2009, 2008 and 2007 (Parent Company Only)			122
Schedule II – Condensed Statements of Cash Flows of Crum & Forster Holdings Corp. for the Years Ended December 31, 2009, 2008 and 2007 (Parent Company Only)			123
Schedule II – Notes to Condensed Financial Statements			124
Schedule V – Valuation and Qualifying Accounts			125
Exhibit 10.47
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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

The Company’s principal executive offices are located at 305 Madison Avenue, Morristown, NJ 07962 and its telephone number at that address is (973) 490-6600. The Company’s website is http://www.cfins.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments, if any, to these reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available free of charge on this website as soon as practicable after they have been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The Company’s website and the information therein does not form a part of this Form 10-K and is not incorporated herein by reference.

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. 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 Company’s actual results, performance or achievements 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 conditions;
	•		Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;
	•		Occurrence of natural or man-made catastrophic events;
	•		Inability to realize the Company’s 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 Company’s 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 Company’s insurance subsidiaries to pay dividends;
	•		Subordination of debt securities to the obligations and liabilities of the Company’s insurance subsidiaries;
	•		Ability of Fairfax to determine the outcome of corporate action requiring stockholder approval; and
	•		Changes in governmental regulations.

Additional risks and uncertainties are described in this report in “Item 1A. Risk Factors”. Although the Company believes that its forward-looking statements are based upon reasonable assumptions, management can give no assurance that the Company’s goals will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements made in this report are made by the Company as of the date of this report. Except as otherwise required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

ITEM 1.		BUSINESS

Overview

Crum & Forster is a national commercial property and casualty insurance company with a focused underwriting strategy targeting specialty classes of business and underserved market opportunities. The Company writes numerous lines of business including general liability, workers’ compensation, commercial automobile, property, commercial multi-peril, accident and health, fidelity and surety, personal automobile and homeowners. In 2009, approximately 44% of the Company’s gross written premiums arose from the offering of general liability including umbrella, workers’ compensation, commercial automobile and property policies to middle market commercial enterprises through the Company’s regional branch network. The balance of Crum & Forster’s business is comprised of a diverse portfolio of specialty businesses in which the Company has specific product, geographic or customer group expertise. These include: products such as accident and health, directors’ and officers’ liability and bail bonds; geographic specialties such as the Company’s coverage of non-standard, inner-city risks not typically well served by the standard market and Crum & Forster’s longstanding presence in the Hawaii market; and customer group expertise in the areas of propane distributors, explosive contractors, agriculture enterprises, and construction contractors written on a non-admitted basis.

The Company generally conducts business on a brokerage basis through its home office and regional branch network, allowing it to control the underwriting process and build close relationships with producers and policyholders. The Company may also conduct business through third parties such as managing general underwriters where it is cost effective to do so and where the Company can control the underwriting process such as in the Company’s niche accident and health business. The Company has over 1,500 producers located throughout the United States including independent regional retail firms, wholesale brokers, national brokers and managing general underwriters.

The Company’s objective is to expand opportunistically into classes of business or market segments that have the potential to generate an underwriting profit. Additional growth in specialty lines is a significant element of the Company’s business strategy. Management believes the Company’s ability to identify profitable market opportunities where its underwriting expertise can be applied provides it with a competitive advantage.

In 2009, the Company generated $863.8 million of gross premiums written, $716.4 million of net premiums written and $1,095.1 million of total revenues. For the year ended December 31, 2009, the Company’s combined ratio was 102.2%. At December 31, 2009, the Company had cash and invested assets of approximately $4.0 billion, total assets of $5.3 billion, shareholder’s equity of $1.5 billion and statutory policyholders’ surplus of $1.6 billion.

Corporate Structure

Crum & Forster is a Delaware holding company that is 100% owned by Fairfax Inc., a Wyoming holding company. Fairfax Inc. is ultimately owned by Fairfax, a Canadian financial services holding company, which is publicly traded on the Toronto Stock Exchange. Crum & Forster is a major component of the U.S. commercial property and casualty insurance operations of Fairfax, which is principally engaged in property and casualty insurance, reinsurance and investment management. Crum & Forster was acquired by Fairfax on August 13, 1998.

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

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

Lines of Business

Crum & Forster offers a broad range of property and casualty insurance coverages, primarily to commercial accounts, located throughout the United States. Gross premiums written by line of business are summarized as follows:

		Years Ended December 31,
		2009								2008								2007
(dollars in millions)		$				%				$				%				$				%
General liability		$	188.5				21.8	%		$	216.3				21.2	%		$	251.5				20.2	%
Workers’ compensation			188.5				21.8				196.0				19.2				258.9				20.8
Commercial automobile			96.8				11.2				164.0				16.1				203.4				16.3
Property			87.4				10.1				155.6				15.3				272.0				21.8
Commercial multi-peril			81.5				9.5				83.8				8.2				88.2				7.1
Accident and health			190.9				22.1				159.7				15.7				127.6				10.3
Other1			30.2				3.5				44.2				4.3				43.4				3.5
Total gross premiums written		$	863.8				100.0	%		$	1,019.6				100.0	%		$	1,245.0				100.0	%

General liability provides coverage for third party liability exposures, including bodily injury and property damage arising from products sold and general business operations. These policies are written on both an admitted and non-admitted basis. General liability also includes coverage to protect policyholders against third-party personal injury. This coverage is generally written with a limit of $1 million. This line of business includes umbrella coverage, which provides additional insurance protection to businesses for amounts that exceed the limits of their primary liability policies with the Company or another insurance carrier. Approximately 76% of the Company’s umbrella premiums are for accounts for which the underlying liability coverage is provided by another insurance carrier. In 2009, approximately 69% of the Company’s umbrella gross premiums written were associated with policies having an attachment point of $1 million, while the average umbrella policy limit written was approximately $14 million. Gross limits offered on umbrella policies did not exceed $25 million. The Company also writes specialty classes, such as directors’ and officers’ liability, which involves coverage for liability arising from the actions of directors and officers in their official capacities, and employment practices liability, which protects the policyholder from liability arising from employment policies and plans, such as liability related to discrimination and harassment. The average directors’ and officers’ policy limit written in 2009 was approximately $5 million and gross limits offered generally did not exceed $10 million.

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

		Years Ended December 31,
		2009				2008				2007
Umbrella liability			48.7	%			46.3	%			42.2	%
Products liability			17.4				19.7				22.7
Directors’ and officers’ liability Directors’ and officers’ liability			8.8				8.5				7.2
Employment practices liability			3.3				2.6				2.6
All other general liability			21.8				22.9				25.3
Total general liability			100.0	%			100.0	%			100.0	%

In 2009 and 2008, the umbrella liability percentage of the total increased due to a decline in products and general liability premiums as a result of competitive market conditions, particularly for non-admitted business.

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

	•		guaranteed cost products;
	•		large deductible policies; and
	•		retrospectively rated policies.

Premiums are primarily a function of:

	•		the applicable premium rate, which varies by state according to the employee’s duties and the business of the employer;
	•		the policyholder’s experience modification factor; and
	•		the policyholder’s payroll.

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

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

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

		Years Ended December 31,
		2009				2008				2007
Guaranteed cost			89.4	%			92.4	%			91.0	%
Large deductible			7.8				6.5				7.7
Retrospectively rated			2.8				1.1				1.3
Total workers’ compensation			100.0	%			100.0	%			100.0	%

With respect to large deductible policies, the average policyholder retention is approximately $217,000 and the average premium discount from standard premium, recognizing the reduced net loss exposure, is approximately 74%.

Commercial automobile provides coverage for businesses against losses arising from bodily injury, bodily injury to third parties, property damage to a policyholder’s vehicle, property damage to other vehicles and other property resulting from the ownership, maintenance or use of vehicles in a business. The Company targets policyholders with fleets of 25 to 100 vehicles, particularly those with low driver turnover and good driving records. The majority of the Company’s commercial automobile business consists of local and intermediate operations where drivers can return to their garage location within the same day. The commercial auto business declined significantly in 2009 as a result of both soft market conditions and specific underwriting actions taken by the Company to reduce exposure to unprofitable transportation accounts.

Property provides coverage for loss or damage to buildings, inventory and equipment and financial loss due to business interruption resulting from covered property damage. Policies written are typically “all risk” in nature, providing protection from natural disasters, including losses from hurricanes, windstorms, earthquakes, hail and severe winter weather, and other events, such as theft and vandalism, fires, explosions, storms, and at the policyholder’s option, terrorism. It is industry practice, as well as that of the Company, to exclude certain risks, including war and nuclear risks, from all property policies. Gross limits offered on property business averaged approximately $14 million and generally did not exceed $25 million per policyholder. Property insurance is principally provided through fire and allied lines, inland marine and difference in conditions coverages. Fire and allied lines coverage insures real and personal property from direct physical damage from the perils covered as well as the loss of business income that might result from such loss. Inland marine covers insureds specializing mainly in, but not limited to, the transportation, communications and construction industries. Difference in conditions coverage insures real and personal property from direct physical damage and the associated loss of business income resulting primarily from earthquake and flood perils as well as other perils excluded from standard fire and allied lines policies. Policies written on an excess basis comprised approximately 4%, 8% and 9% of property gross premiums written in 2009, 2008 and 2007, respectively, with the decline in 2009 related to underwriting actions discussed below.

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

		Years Ended December 31,
		2009				2008				2007
Fire and allied lines			73.5	%			78.7	%			82.5	%
Inland marine			24.0				15.5				10.7
Earthquake			2.5				5.8				6.8
Total property			100.0	%			100.0	%			100.0	%

The significant decline in overall property gross premiums written and the change in the percentage distribution of fire and allied lines over the last two years is due to competitive market conditions and underwriting actions taken to improve the profitability of the Company’s fire business. These underwriting actions significantly reduced certain property business, primarily large garden apartment accounts and national accounts with multiple locations written on the basis of total insured value. These actions also reduced the Company’s catastrophe exposures and corresponding property reinsurance costs. The greater share of inland marine is due to the decline in fire and allied gross premiums written.

Commercial multi-peril combines property and liability coverage under one insurance policy. The Company typically writes these package policies for smaller businesses where expense advantages can be gained by combining these coverages rather than purchasing two separate policies. This business is primarily written by Seneca, which accounted for 69% of 2009 commercial multi-peril premiums. For the years ended December 31, 2009, 2008 and 2007, approximately 47.3%, 50.9% and 53.6%, respectively, of commercial multi-peril gross premiums written were attributable to liability coverage.

Accident and health includes an array of coverages as follows: employer stop loss insurance produced by agents and brokers; student medical insurance produced by agents and brokers, which includes college accident and sickness, intercollegiate sports, international student insurance and blanket special risk; pet insurance sold primarily online; travel insurance including wholesale and retail coverage, which can be sold on a brochure basis through travel agents, online or through insurance brokers; and other medical insurance, including (i) fully insured organ transplant, provider excess of loss for physician and hospital groups, and health maintenance organization reinsurance sold through insurance brokers; and (ii) limited medical coverage for associations and employer groups and short term medical insurance sold online or through agents.

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

		Years Ended December 31,
		2009				2008				2007
Employer stop loss insurance			39.5	%			27.9	%			21.8	%
Student medical insurance			24.9				30.6				29.7
Pet insurance			14.9				15.6				10.1
Retail travel and accident insurance			13.2				16.1				24.7
Other medical insurance			7.5				9.8				13.7
Total accident and health			100.0	%			100.0	%			100.0	%

Other includes bail bonds, personal insurance (including personal automobile and homeowners’ policies) and fidelity and surety coverages. Bail bonds provide for the issuance of financial security to a court to guarantee the return, at a specific date, of a person facing criminal charges. Fidelity insurance provides for loss due to misappropriation of funds by an employee. Surety coverages include contract and commercial bonds. Contract bonds secure a contractor’s performance and/or payment obligation, generally with respect to a construction project, and are typically required by federal, state and local governments for public works projects. Commercial bonds cover obligations typically required by law or regulation such as license and permit and fiduciary bonds. The Company also writes a small amount of personal automobile and homeowners’ policies which are limited to the state of Hawaii.

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

		Years Ended December 31,
		2009				2008				2007
Bail bonds			34.5	%			27.0	%			30.2	%
Personal automobile			21.8				17.5				21.8
Fidelity			21.7				40.4				30.3
Homeowners			19.8				14.0				15.4
Contract and commercial bonds			2.2				1.1				2.3
Total other			100.0	%			100.0	%			100.0	%

Geographic Distribution

The Company is licensed and currently writes insurance in all 50 states, the District of Columbia, Virgin Islands and Puerto Rico. For the year ended December 31, 2009, the top ten states represented 67.0% of direct premiums written. The distribution of direct premiums written by state, as a percentage of total direct premiums written, is summarized as follows:

		Years Ended December 31,
		2009				2008				2007
California			15.1	%			13.9	%			14.5	%
New York			10.6				10.1				9.0
Florida			8.6				9.5				9.9
Texas			7.7				8.4				8.9
New Jersey			5.9				6.9				7.2
Hawaii			4.6				4.4				4.5
Pennsylvania			4.6				4.5				4.5
Massachusetts			4.1				3.9				3.4
Illinois			3.7				3.7				3.6
Virginia			2.1				2.1				2.0
All other states			33.0				32.6				32.5
Total direct premiums written			100.0	%			100.0	%			100.0	%

As a result of significant regulatory reforms of the California workers’ compensation system enacted in 2003 and 2004 and strong rate increases, which resulted in a dramatic improvement in the industry’s workers’ compensation accident year loss ratios, the California workers’ compensation marketplace evolved to one where there were numerous carriers aggressively seeking growth in recent years. As a result, the Company was affected by declining market prices and additional competition, resulting in declining California workers’ compensation gross premiums written from 2003 to 2008. After several years of declining market prices, the Company has seen modest price increases in California workers’ compensation pricing during 2009, resulting in gross premiums in that line increasing by approximately 12% for the year ended December 31, 2009 as compared to declines of approximately 15% and 20%, for the years ended December 31, 2008 and 2007, respectively.

Business Development and Methods of Distribution

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

Crum & Forster depends on producers to provide it with access to a wide range of business opportunities. The Company’s ability to develop strong and mutually beneficial relationships, and successfully market its products and services to producers, is paramount to its success. Generally, the Company’s business is distributed through more than 1,500 producers located throughout the United States. Crum & Forster intends to continue to expand its producer force. The Company offers its producers underwriting expertise and timely policy processing, which assists them in placing business in underserved markets. The Company’s service extends to loss control and claims management services, particularly on large accounts where this expertise is highly valued by both the producer and the policyholder.

Producers are compensated principally on the basis of commissions negotiated between the producer and the Company on an individual policy basis. Additionally, the Company pays contingent commissions to certain producers based on achievement by the producer of agreed-upon targets. Total producer compensation incurred in 2009, 2008 and 2007 was $117.5 million, $132.3 million and $152.9 million, respectively, of which contingent commissions expense incurred in those years totaled $5.3 million, $4.8 million and $4.7 million, respectively.

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

The accident and health business is managed by approximately 40 producers, third party administrators and managing general underwriters. These producers, third party administrators and managing general underwriters may perform various aspects of program administration, including pricing and underwriting. Those who have underwriting authority are required to follow strict underwriting guidelines which are provided by the Company and are subject to annual audits by the Company to ensure adherence to those underwriting guidelines.

The percentage of business from these categories of producers, based on gross premiums written, excluding the accident and health and surety lines of business, is summarized as follows:

		Years Ended December 31,
		2009				2008				2007
Independent regional retail firms			47.8	%			43.3	%			38.5	%
Wholesale brokers			33.0				36.1				41.5
National brokers			19.2				20.6				20.0
Total direct premiums written			100.0	%			100.0	%			100.0	%

The increase in the percentage of gross premiums written attributable to independent regional retail firms and corresponding decrease in business from wholesale brokers in 2009 as compared to 2008 and 2007 is largely due to decreases in non-admitted business as well as property and transportation business written through wholesale brokers. The decrease is due to the combined effects of market conditions, whereby accounts previously produced by wholesale producers have moved to retail channels, the negative impact of the economy on the construction business and specific underwriting actions taken by the Company to improve profitability.

Pricing and Underwriting

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

The Company’s underwriting process is primarily controlled centrally by profit center managers in the home office who have extensive experience in the insurance industry. Each executive is held accountable for the underwriting results of his or her line of business. Underwriting authority levels are established based on characteristics such as class of business, hazard grade and policy limits and are assigned based on the experience and expertise of the underwriter. Regional underwriting product line managers generally report to the home office profit center managers on all underwriting matters.

The Company’s casualty business is either manually rated or loss rated, generally depending on the size of the risk to be priced. Manual rating begins with a classification rate provided by an industry rating bureau. Deviations from this rate based on the individual characteristics and loss history of the risk, as well as the desirability of the class of business, are then determined. Loss rating is a methodology utilized for large casualty risks wherein an individual risk’s credible loss experience is the basis for rate and premium development for the risk. A portion of the Company’s business is large enough to be rated on its own loss history. This loss rated business is within the workers’ compensation, general liability and commercial automobile lines of business and includes guaranteed cost policies, where policy premiums are fixed, and loss sensitive rating programs, where the ultimate costs to the policyholder are dependent upon its loss experience. The underwriting of loss rated business generally requires approval by home office underwriting and actuarial personnel.

For workers’ compensation business, the Company considers aggregation of insured employees during the quotation process at an account and location level. On a monthly basis, management monitors insured employee aggregations, particularly in target cities, in proximity to target sites and in earthquake-prone zones, in order to manage the Company’s potential exposure to terrorism and/or earthquake losses.

Loss sensitive business includes large deductible policies, in which the policyholder must reimburse the Company for any losses within the deductible and retrospectively rated policies, in which premiums are adjusted based on the actual loss experience of the policyholder. Both of these loss sensitive products expose Crum & Forster to potential credit risk since the Company may be due payment from the policyholder after coverage has been provided. Loss sensitive policies are subject to extensive financial analysis prior to binding and generally require that the policyholder provide collateral as a condition to writing the policy. For further discussion of such credit risk, see “Item 1A. Risk Factors—The Company bears credit risk with respect to its reinsurers and certain policyholders, and if one or more of them fails to pay, the Company could experience losses, which would reduce its net income”.

Property risks are underwritten on an individual risk basis. Underwriting considerations that factor into the pricing of individual property risks include, but are not limited to, building construction, occupancy classes and inherent internal exposures to loss, physical protection of the property and external exposures to loss, as well as past loss experience. Approximately 96% of the Company’s property business is written on a primary basis. The underwriting and pricing of such risks requires significant underwriting expertise due to the complexities of individual risk exposures. Inland marine is typically rated individually by the underwriter based on the characteristics of the risk and the class of business, without the use of an industry manual rate. The Company’s underwriting of any property risk always considers the aggregate exposures to natural and man-made catastrophic losses and attempts to mitigate such exposure. The Company monitors exposures in areas most susceptible to a hurricane, earthquake or terrorist event.

The accident and health business is a diverse portfolio of largely low policy premium specialty products. College accident and sickness policies are generally experience rated based on a minimum of three years’ historical premiums and claims experience. Travel insurance products are typically rated based on portfolio or case experience, with rates fixed on trip cost and traveler age. The various medical products are priced using industry standard, actuarially derived manuals obtained from several industry actuarial sources. Pet insurance is rated using an actuarially derived matrix based on coverage, type, policy limit, pet age and breed. Due to the short tail nature of the accident and health products, results emerge more quickly allowing for rates to be adjusted as needed.

Crum & Forster conducts its bail bond business through numerous agents across the U.S. who have authority to underwrite and issue bonds, subject to limits established by the Company. The Company must approve, prior to binding, all bail bonds with values in excess of each agent’s underwriting authority, which can range from $5 thousand to $0.5 million. While collateral may be required as a condition to writing the bond, the bail agent is required to indemnify the Company for any payments made in respect of defaulted bonds.

Catastrophe Risk Management

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

Seasonal weather variations may affect the severity and frequency of losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred, and actual losses could exceed expectations despite measures the Company might take to attempt to protect itself. It is therefore possible that a catastrophic event or multiple catastrophic events could adversely affect the Company’s net income, financial position and liquidity. Increases in the value and geographic concentration of insured exposures and the effects of inflation could increase the severity of claims from future catastrophic events. In addition, states have from time to time passed legislation that has had the effect of limiting the ability of insurers to manage catastrophic risk, such as legislation prohibiting insurers from withdrawing from catastrophe-prone areas.

The Company closely monitors catastrophe exposure on an individual risk and book of business basis. Each property risk is written in accordance with the company’s underwriting guidelines which determine the allowable limits given the buildings location and structure. Crum & Forster monitors its aggregate property exposure in catastrophe-prone areas based on total exposed policy limits, number of locations, total insured values and other information by region. In areas most susceptible to a hurricane or earthquake event, the Company also runs a catastrophe model each quarter to assess its average annual loss and its probable maximum loss for both a 250-year and 100-year return period event. The Company also monitors its aggregate exposed policy limits by target city to mitigate terrorism risk.

The Company has established underwriting guidelines regarding its concentration of workers’ compensation exposures in target cities, in proximity to target sites and in earthquake-prone areas. As a result of database enhancements and increased information gathered on the Company’s policyholders, the majority of employees are captured by location in the Company’s systems, permitting ongoing monitoring of compliance with concentration guidelines. The Company is required to provide terrorism coverage under its workers’ compensation policies and has developed specific underwriting and pricing guidelines for this coverage. For those classes where coverage is not mandatory, policyholders may choose not to accept terrorism coverage. Based on experience through December 31, 2009, approximately 30% of policyholders in the Company’s property lines of business accepted terrorism coverage. Direct premiums written from terrorism coverage in 2009 were approximately $7.2 million. The Company purchases property and workers’ compensation catastrophe reinsurance to mitigate its losses in the event of catastrophes.

Reinsurance

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

Crum & Forster’s underwriting results are significantly affected by reinsurance. The net impact of ceded reinsurance transactions for each of the fiscal years 2009, 2008 and 2007 is summarized as follows ((decrease) increase in components):

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Earned premiums ceded to reinsurers1		$	(151.1	)		$	(141.3	)		$	(149.0	)
Commissions earned on ceded reinsurance premiums			32.9				31.3				25.8
Claims incurred ceded to reinsurers			68.0				(44.4	)2			52.3
Provision for uncollectible reinsurance			(2.0	)			(7.7	)			(8.0	)
Net impact of ceded reinsurance transactions		$	(52.2	)		$	(162.1	)		$	(78.9	)

The majority of reinsurance contracts purchased by the Company provide coverage for a one year term and are negotiated annually. The ability of the Company to obtain reinsurance on terms and prices consistent with historical results reflects, among other factors, recent loss experience of the Company and the industry in general. The Company’s current maximum retention and reinsured limits per risk or per insured for the major lines of business subject to significant reinsurance are summarized as follows:

						Maximum Retained
(dollars in millions)		Maximum Retention				and Reinsured Limits
General Liability:
Umbrella		$	5.0			$	25.0
Management Protection1,2 — primary and excess policies		$	5.1			$	10.0
Property Per Insured/Per Risk		$	5.0			$	25.0
Employer Stop Loss		$	0.5			$	5.0

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

Effective April 1, 2009, the Company placed its workers’ compensation catastrophe treaty. Workers’ compensation risks are reinsured on a per occurrence basis only. This treaty provides coverage of $80 million in excess of $20 million in two layers of $30 million and $50 million, excluding California earthquake losses in the first layer, whereas the expiring treaty provided $130 million of coverage in excess of $20 million per occurrence in three layers of $30 million, $50 million and $50 million, with Company co-participation on the first layer of 30%, and excluded California earthquake losses in that layer. The reduced coverage in 2009 recognizes the Company’s reduced exposures. Odyssey America Reinsurance Corp (“Odyssey”), a Fairfax affiliate, has a 9.0% participation in the $30 million in excess of $20 million layer. Wentworth, a Fairfax affiliate, has a 5% participation in the $20 million in excess of $30 million layer and a 5% participation in the $50 million in excess of $50 million layer. The Company is obligated to pay reinstatement premiums equal to 100% of the original premium.

The Company’s property catastrophe reinsurance treaty protects it in the event of property losses arising from one defined catastrophic occurrence or series of events. Effective June 1, 2009, the Company placed its property catastrophe reinsurance treaty covering its standard property business. The new treaty provides coverage of $35 million in excess of $40 million, whereas the expiring treaty provided coverage of $85 million in excess of $65 million in two layers of $35 million and $50 million. The reduced coverage in 2009 recognizes the Company’s reduced exposures. There was no affiliate participation in this treaty. The Company is obliged to reinstate any limits used at 100% of the original premium.

Effective May 1, 2009, Seneca placed its property catastrophe treaty providing coverage for the Company’s inland marine and non-admitted fire business along with Seneca’s property business. The new treaty provides coverage of $45 million in excess of $15 million, whereas the expiring treaty provided coverage of $50 million in excess of $10 million. There was no affiliate participation in this treaty. Seneca is obliged to reinstate any limits used at 100% of the original premium.

In general, the Company’s reinsurance contracts provide coverage for domestic acts of terrorism. Certain casualty contracts have additional terrorism coverage for acts of terrorism certified under the Terrorism Risk Insurance Act of 2002 which was extended through December 31, 2014 with the passage of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively, “TRIPRA”). In particular, the workers’ compensation contract has coverage up to $80.0 million and the umbrella contract has coverage equal to two times the coverage limit, up to a maximum of $40.0 million. None of the contracts covers acts of terrorism involving use of nuclear, biological or chemical agents. For further discussion of TRIPRA, see “Insurance Regulatory Matters—Terrorism Risk Insurance Program Reauthorization Act of 2007” and “Item 1A. Risk Factors—Catastrophic events could cause unanticipated losses and reduce net income”.

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

At December 31, 2009 and 2008, reinsurance recoverable was $892.7 million and $968.2 million, respectively, net of uncollectible reinsurance reserves totaling $54.2 million and $56.0 million, respectively. Reinsurance recoverable at December 31, 2009 was due from approximately 265 reinsurers. Credit exposure exists with respect to the Company’s reinsurance recoverable balances to the extent that a reinsurer may not be able or willing to reimburse the Company under the terms of the relevant reinsurance arrangements. The Company has guidelines and a review process in place to assess the creditworthiness of the reinsurers to which it cedes. Internal guidelines generally require reinsurers to have strong A.M. Best credit ratings and maintain certain capital and surplus requirements. In addition, where contractually provided for, the Company has collateral for outstanding balances in the form of cash, letters of credit or assets held in trust accounts. This collateral may be drawn on for the amounts that remain unpaid beyond contractually specified time periods on an individual basis. The Company held total collateral of $306.9 million (excluding collateral in excess of the related recoverable exposure) at December 31, 2009, representing 34.4% of total reinsurance recoverable.

Set forth below is a table showing the ten largest reinsurance recoverable balances by reinsurer:

		At December 31, 2009
		A.M. Best		Security				Reinsurance				% of
(dollars in millions)		Rating1		Provided				Recoverable				Total
North American Specialty Insurance Company		A		$	236.3	2		$	349.0				39.1	%
TIG Insurance Company (“TIG”) 3,4		B+			—				129.4				14.5
Fairmont Specialty Insurance Company3		B++			—				37.7				4.2
Swiss Reinsurance America Corporation		A			—				29.0				3.2
Munich Reinsurance America Inc.		A+			—				20.7				2.3
Wentworth3		NR5			18.5	6			19.2				2.2
Lloyds Syndicates		A			—				17.0				1.9
nSpire Re Limited3		NR5			14.0	6			12.4				1.4
Hannover Ruckversicherungs-Aktiengesellschaft		A			11.4	7			11.6				1.3
Travelers Indemnity		A+			—				10.7				1.2
Other					48.2	8			256.0	9			28.7
Total reinsurance recoverable				$	328.4			$	892.7				100.0	%

Included in other in the table above are contingent obligations associated with structured settlements with life insurance companies with a net present value of $141.0 million and amounts recoverable from pools and associations in the amount of $15.2 million, which in the aggregate amounted to $156.2 million, or 17.5%, of the total reinsurance recoverable balance at December 31, 2009. The three largest balances associated with the structured settlements are Genworth Life & Annuity Insurance Company — $23.1 million; Life Insurance Company of North America — $20.9 million; and Metropolitan Life Insurance Company — $17.6 million each of which has an A- rating or better A.M. Best rating.

Affiliated Reinsurers

The Company has reinsurance agreements in effect with affiliates of Fairfax. As is the case with all reinsurance agreements, Crum & Forster bears credit risk regarding ceded reinsurance agreements, both with respect to reinsurance recoverable reflected on the Company’s balance sheets as well as liabilities (development) associated with reinsurance recoverable on claims. For the years ended December 31, 2009, 2008 and 2007, the Company ceded premiums of $12.9 million, $27.3 million and $36.3 million, respectively, to affiliates under these reinsurance contracts and assumed premiums of $0 million, $0.1 million and $18.8 million, respectively, from affiliates under these reinsurance contracts. The substantial decline in premiums assumed since 2007 is primarily due to Fairmont premiums, which prior to 2007 were written by Fairmont and assumed by the Company through a 100% quota share reinsurance agreement. Since the second half of 2007, substantially all Fairmont business has been written directly by Crum & Forster resulting in negligible assumed premiums in 2009 and 2008.

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

		At December 31, 2009
		Total
		Reinsurance				Paid				Outstanding
(dollars in millions)		Recoverable				Recoverable				Reserves1				Collateral
TIG		$	129.4			$	—			$	129.4			$	—
Fairmont Specialty Insurance Company			37.7				—				37.7				—
Wentworth			19.2				0.1				19.1				18.5
nSpire			12.4				—				12.4				14.0
Odyssey America Reinsurance Corp.			6.1				0.8				5.3				—
Other			1.6				0.1				1.5				3.0
Total affiliated reinsurance recoverable balances		$	206.4			$	1.0			$	205.4			$	35.5

Included in unpaid losses and loss adjustment expenses on the consolidated balance sheets are assumed losses on the Fairmont business of approximately $12.6 million and $22.8 million at December 31, 2009 and December 31, 2008, respectively. For a detailed description of the Company’s reinsurance arrangements with affiliates, see Note 10 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”.

Corporate Aggregate Reinsurance

The Company’s corporate aggregate reinsurance contracts are of the type commonly referred to as “finite” reinsurance and cover or covered, in varying amounts and on varying terms, accident years 2002 and prior. The majority of these contracts have been commuted or had limits paid. The Company has not purchased corporate aggregate reinsurance since 2001 and does not currently have plans to purchase corporate aggregate reinsurance in the future. At December 31, 2009, only one retroactive contract with a reinsurance recoverable balance of $349.0 million and a remaining limit of $51.0 million and one prospective contract with a remaining limit of $96.3 million are in force.

The effect of prospective and retroactive corporate aggregate reinsurance on components of the Company’s consolidated statements of income is summarized as follows ((decrease) increase in indicated components):

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Investment income		$	(15.5	)		$	(11.7	)		$	(16.1	)
Losses and LAE			(14.9	)			65.8				(13.7	)
Decrease in income before income taxes		$	(0.6	)		$	(77.5	)		$	(2.4	)

At December 31, 2009 and 2008, reinsurance recoverable includes $349.0 million related to the 2000 retroactive adverse development, of which $98.8 million has been recognized as a reduction of incurred losses and LAE on the Company’s consolidated statements of income.

Prospective Corporate Aggregate Reinsurance

The effect of prospective corporate aggregate reinsurance on components of the Company’s consolidated statements of income follows ((decrease) increase in indicated components):

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Funds held interest charged to investment income		$	—			$	(1.6	)		$	(2.3	)
Less: losses and LAE			—				80.5				—
Decrease in income before income taxes		$	—			$	(82.1	)		$	(2.3	)

The Company has one prospective contract in effect covering accident year 2002, which has an unused limit available of $96.3 million in the event the net loss and LAE ratio for accident year 2002, before the effect of this contract, exceeds 70%. The subject loss and LAE ratio as valued at December 31, 2009 is 63.2%. No additional premium or funds held interest is due under this contract upon usage of the remaining limit. The reinsurer under this contract is nSpire, a Fairfax affiliate.

During 2008 the Company commuted its two other prospective contracts. The first contract was a stop loss agreement, which the Company entered into in 1998, in connection with the acquisition of the Company by Fairfax. The contract was with an unaffiliated reinsurer and provided coverage of $367.5 million in excess of a retention. The contract provided coverage for loss reserve development for accident periods prior to August 13, 1998, the date of acquisition of the Company by Fairfax. In June 2008, the Company commuted this stop loss contract and the retroactive amendment to that contract. As a result of the commutation the Company received cash proceeds of $302.5 million, of which $287.4 million was recorded in prospective corporate aggregate reinsurance activity and $15.1 million related to the retroactive amendment was recorded in retroactive corporate aggregate reinsurance activity. The Company also recorded a decrease of $386.7 million in the reinsurance recoverable balance, of which $367.5 million was attributable to the prospective contract and $19.3 million was attributable to the retroactive amendment. The financial statement effect of the commutation in 2008 was a non-cash pre-tax charge of $84.3 million, offset by the release of the unamortized deferred gain balance of $8.8 million (related to the retroactive amendment), resulting in a net charge to incurred losses and LAE of $75.5 million on the consolidated statement of income. Of this amount $80.1 million was charged to prospective corporate aggregate reinsurance activity and included in losses and LAE above and $4.6 million was credited to retroactive corporate aggregate reinsurance activity.

The second contract was an aggregate stop loss agreement with unaffiliated reinsurers covering accident year 2000, which provided coverage of $118.5 million and was fully utilized by the Company at December 31, 2004. This stop loss agreement covered the casualty lines of business. The contract was on a funds held basis with interest credited at 7.5%. In March 2008, the Company commuted this contract and in accordance with the terms of the commutation agreement, the Company commuted ceded loss reserves of $32.3 million in consideration of release to the Company of the funds held balance of $31.9 million resulting in a commutation loss of $0.4 million which was charged to incurred losses and LAE on the consolidated statement of income for the year ended December 31, 2008.

Retroactive Corporate Aggregate Reinsurance

The effect of retroactive corporate aggregate reinsurance on components of the Company’s consolidated statements of income follows ((decrease) increase in indicated components):

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Funds held interest charged to investment income		$	(15.5	)		$	(10.1	)		$	(13.8	)
Less: losses and LAE			(14.9	)			(14.8	)1			(13.7	)
Increase (decrease) in income before income taxes		$	(0.6	)		$	4.7			$	(0.1	)

An analysis of retroactive corporate aggregate reinsurance and related deferred income follows:

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Decrease in reinsurance recoverable due from reinsurers		$	—			$	(20.0	)		$	(3.6	)
Less: related premiums paid			—				(8.2	)			(1.3	)
Decrease in income deferred during the year			—				(11.8	)			(2.3	)
Amortization of deferred income			(14.9	)			(18.9	)			(13.7	)
Decrease in deferred income			(14.9	)			(30.7	)			(16.0	)
Deferred income on retroactive reinsurance—beginning of year			121.3				152.0				168.0
Deferred income on retroactive reinsurance—end of year		$	106.4			$	121.3			$	152.0

The above activity arises from two retroactive contracts of which only the 2001 retroactive adverse development contract for $400 million remains in effect at December 31, 2009. This contract covers substantially all lines of business and provides $400 million of limit in excess of a retention for accident years 2000 and prior, subject to a $200 million sublimit on 1998 and prior accident years and an asbestos and environmental sublimit of $100 million. Premiums are currently based on 35% of amounts ceded plus a reinsurer margin of $8 million. The contract contains provisions that would increase the premium rate to as high as 62% under conditions that Company management considers unlikely. The contract is on a funds held basis with interest credited at 7%. At December 31, 2009, the Company had ceded cumulative losses of $349.0 million, which is comprised of $0 million in 2009, $(20.0) million in 2008, $(3.6) million in 2007 and $372.6 million prior to 2007 and paid premiums of $143.8 million, which is comprised of $0 in 2009, $(8.2) million in 2008, $(1.3) million in 2007 and $$153.3 million prior to 2007, related to this contract. At December 31, 2009 and 2008, the Company had reinsurance recoverable balances of $349.0 million, and funds held balances of $236.3 million and $220.8 million, respectively, related to this agreement.

The second contract, which was commuted on June 26, 2008, covered all lines of business and provided $100 million of limit in excess of a retention for accident periods prior to August 13, 1998, the date of acquisition of the Company by Fairfax. The contract contained sublimits relating to asbestos, environmental and latent, construction defect and other losses and is subject to a maximum economic loss provision. The contract was on a funds held basis with interest credited at 7%. The commutation had no impact on the financial statements as the Company had previously reduced the reinsurance recoverable balance by funds held pursuant to the commutation provision contained in the contract.

The premiums for the contract in effect at December 31, 2009, is included in funds held under reinsurance contracts on the consolidated balance sheets and the reinsurance recoverable due from reinsurers in excess of amounts paid for the coverage are reflected on the balance sheets as deferred income on retroactive reinsurance. Such deferred income is amortized based on the expected amount and timing of future recoveries, using the interest method. The Company amortized deferred income of $14.9 million in 2009, $10.0 million in 2008, $13.3 million in 2007 and $60.6 million prior to 2007 in respect of this contract. This amortization of deferred income is included as a reduction of losses and LAE in the consolidated statements of income.

In addition to the two contracts noted above, the Company also commuted the retroactive amendment to its prospective 1998 aggregate stop loss agreement which is more fully discussed under prospective corporate aggregate reinsurance above. The effect of this commutation was a loss of $4.2 million, offset by $8.8 million of unamortized deferred income released on commutation which resulted in a net pre-tax credit of $4.6 million included in losses and LAE on the consolidated statement of income for the year ended December 31, 2008.

For additional information on reinsurance transactions with related parties, see Note 10 to the consolidated financial statements included in “Item 8. Financial Statements and Supplemental Data”.

Claims Management

Crum & Forster has developed claims management methodologies designed to monitor, control and measure all aspects of the claims process. The Company’s claims management philosophy emphasizes:

	•		maintenance of timely and adequate reserves for claims and the cost-effective delivery of claims services by controlling losses and LAE;
	•		financial integrity through the employment of investigative specialists who attempt to limit fraudulent claims activity and a program to pursue appropriate subrogation and recovery opportunities; and
	•		exceptional customer service whereby the Company applies its resources toward pursuing timely investigation and resolution of customer claims.

Substantially all non-workers’ compensation claims are handled in the Company’s home office, with the exception of accident and health claims which are outsourced to licensed administrators. Workers’ compensation claims are handled in the regional offices. The Company has developed and implemented competitive medical management and managed care programs to control workers’ compensation claim costs. At December 31, 2009, the Company had 370 employees dedicated to claims management and administration, 206 of whom were located at the Company’s home office. These employees include adjusters, litigation specialists, regional and corporate claims management, line specialists and support staff. The Company regularly conducts internal reviews and audits to monitor adherence to claims policies and procedures, the adequacy of case reserves, LAE, productivity and service standards.

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

		At December 31,
Pending Claims		2009				2008				2007
Workers’ compensation1			8,999				9,473				10,301
General liability			3,229				3,331				3,614
Commercial automobile			3,316				4,416				5,125
All other			1,524				1,890				2,387
Total pending claims			17,068				19,110				21,427

		Years Ended December 31,
New Claims		2009				2008				2007
Workers’ compensation1			5,615				6,595				7,169
General liability			3,073				3,247				3,923
Commercial automobile			10,185				15,014				15,935
All other			2,716				3,361				3,541
Total new claims			21,589				28,217				30,568

Crum & Forster uses an internal specialized claims unit to manage its asbestos, environmental and other latent claims. For further details on the number of policyholders with open asbestos, environmental and other latent claims see “Asbestos, Environmental and Other Latent Exposures” discussed further below. Accident and health claims are handled by third party licensed administrators and are subject to independent audits both on site and at the Company. Personal automobile and homeowners claims are not material.

Reserves

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

After a claim is reported, claims personnel set up a case reserve for the estimated amount of the settlement, if any. 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. Claims personnel review and update their estimates as additional information becomes available and claims proceed towards resolution. In addition, reserves are also established, on an aggregate basis, for losses incurred but not reported to the insurer and for potential further loss development on reported claims, including LAE. At December 31, 2009, total gross reserves for unpaid losses and LAE were $2.7 billion, of which $1.0 billion related to case reserves and $1.7 billion related to IBNR reserves.

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

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

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

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

		At December 31, 2009
						Low End				High End
						of				of
						Actuarial				Actuarial
(dollars in millions)		Reserves				Range				Range
General liability		$	610.3			$	467.8			$	700.4
Workers’ compensation			622.4				542.1				679.7
Asbestos, environmental and other latent			356.3				257.7				476.1
Commercial automobile			226.4				199.0				246.9
Property			87.0				71.7				97.7
Other			236.2				192.7				239.3
Net of per risk reinsurance, gross of corporate aggregate reinsurance			2,138.6				1,731.0				2,440.1
Corporate aggregate reinsurance			98.8				79.9				106.8
Total reserves, net of per risk reinsurance and corporate aggregate reinsurance			2,039.8			$	1,651.1			$	2,333.3
Ceded unpaid losses and LAE			632.8
Gross unpaid losses and LAE		$	2,672.6

A reconciliation of the beginning and ending net liability for unpaid losses and LAE is provided in Note 5 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”. Reserves for losses and LAE were adjusted in each year based on the latest actuarial estimates.

The components of (favorable) adverse development of prior years’ loss and LAE reserves are summarized as follows:

		Years Ended December 31,
(dollars in millions)		2009				2008				2007
Workers’ compensation		$	(34.1	)		$	(86.9	)		$	(65.4	)
General liability			0.9				66.0				(20.2	)
Commercial automobile			22.9				36.6				(6.6	)
Property			(10.5	)			(17.1	)			—
Asbestos, environmental and other latent			6.7				36.2				54.5
Commercial multi-peril			(12.8	)			6.6				(18.6	)
Other			1.9				(2.4	)			6.1
Total adverse (favorable) development, net of per risk reinsurance			(25.0	)			39.0				(50.2	)
Amortization of deferred gain on retroactive corporate aggregate reinsurance			(14.9	)			(18.9	)			(13.7	)
Total (favorable) adverse development, net of per risk and corporate aggregate reinsurance			(39.9	)			20.1				(63.9	)
Add back: Per risk and corporate aggregate reinsurance			5.1				(111.6	)			(37.1	)
Total favorable development, gross of reinsurance		$	(34.8	)		$	(91.5	)		$	(101.0	)

For a discussion of loss development, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Losses and Loss Adjustment Expenses”.

The following loss and LAE reserve development table illustrates the development of balance sheet loss and LAE liabilities from 1999 through 2009 and the subsequent changes in those reserves, presented on a historical basis. The first line of the table is the estimated liability for unpaid losses and LAE, net of reinsurance recoverable, recorded at the balance sheet date for each year. The next section of the table shows the cumulative amounts paid during successive years related to the opening reserve.

For example, with respect to the net loss and LAE reserve of $2,225 million at December 31, 1999, by the end of 2009, $2,175 million had been paid in settlement of those reserves. In addition, the original reserve of $2,225 million was re-estimated to be $2,753 million at December 31, 2009. This change from the original estimate would normally result from a number of factors such as losses being settled for different amounts than originally estimated, more information becoming available about the individual claims and overall claim frequency and severity patterns. The lower section of the table shows the gross liability, reinsurance recoverable and net liability recorded at the balance sheet date for each of the indicated years and the re-estimation of these amounts at December 31, 2009.

Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry. The accompanying data is not accident year data, but rather, a display of 1999 to 2009 calendar year-end reserves and the subsequent changes in those reserves. We do not consider it appropriate to extrapolate future deficiencies or redundancies based upon the table as conditions and trends that have affected development of liability in the past may not necessarily recur in the future.

Through the year ended 2003, the subsequent adverse development of the net liability for unpaid losses and LAE was primarily due to asbestos and environmental claims, reflecting an increase in the number of claims filed, an increase in the severity of claims and an increase in litigation costs associated with these claims. Offsetting the adverse development through 2003 was favorable emergence for casualty claims, primarily non-latent umbrella claims. While the number of new claimants filing asbestos claims against the Company’s policyholders has stabilized in the last few years, the average value of alleged claims has increased. Offsetting the adverse development since 2004 was favorable emergence for most casualty lines, particularly for workers’ compensation and non-latent umbrella claims.

Ten-Year Analysis of Consolidated Loss and LAE Development Presented Net of Reinsurance With Supplemental Gross Data

		At December 31,
(dollars in millions)		1999				2000				2001				2002				2003				2004				2005				2006				2007				2008				2009
Reserves for unpaid losses and LAE (net of reinsurance recoverable)		$	2,225			$	1,770			$	1,577			$	1,494			$	1,873			$	2,010			$	1,990			$	2,016			$	1,981			$	2,304			$	2,040
Paid (cumulative) as of:
One year later			757				676				454				160				460				481				482				571				272				633
Two years later			1,300				1,026				533				521				809				815				852				637				657
Three years later			1,565				1,097				824				795				1,065				1,084				816				912
Four years later			1,626				1,328				1,049				988				1,277				985				1,025
Five years later			1,850				1,504				1,208				1,162				1,139				1,144
Six years later			2,023				1,637				1,360				986				1,269
Seven years later			2,153				1,763				1,168				1,089
Eight years later			2,277				1,563				1,263
Nine years later			2,094				1,649
Ten years later			2,175
Liability re-estimated as of:
One year later			2,258				1,953				1,596				1,611				1,942				1,941				1,894				1,952				2,001				2,264
Two years later			2,445				1,969				1,749				1,718				1,932				1,855				1,840				1,990				1,951
Three years later			2,460				2,093				1,857				1,702				1,862				1,830				1,917				1,959
Four years later			2,584				2,203				1,836				1,643				1,877				1,908				1,915
Five years later			2,680				2,180				1,787				1,660				1,968				1,934
Six years later			2,676				2,148				1,804				1,748				1,998
Seven years later			2,652				2,152				1,888				1,749
Eight years later			2,660				2,242				1,888
Nine years later			2,747				2,239
Ten years later			2,753
Cumulative (deficiency)/redundancy			(528	)			(469	)			(311	)			(255	)			(125	)			76				75				57				30				40
Gross liability – end of year		$	3,529			$	3,340			$	3,454			$	3,250			$	3,194			$	3,371			$	3,673			$	3,371			$	3,178			$	2,988			$	2,673
Reinsurance recoverable			1,304				1,570				1,877				1,756				1,321				1,361				1,683				1,355				1,197				684				633
Net liability – end of year		$	2,225			$	1,770			$	1,577			$	1,494			$	1,873			$	2,010			$	1,990			$	2,016			$	1,981			$	2,304			$	2,040
Gross re-estimated liability at December 31, 2009		$	4,221			$	3,874			$	3,652			$	3,389			$	3,276			$	3,253			$	3,445			$	3,172			$	3,047			$	2,953
Re-estimated reinsurance recoverable at December 31, 2009			1,468				1,635				1,764				1,640				1,278				1,319				1,530				1,213				1,096				689
Net re-estimated liability at December 31, 2009		$	2,753			$	2,239			$	1,888			$	1,749			$	1,998			$	1,934			$	1,915			$	1,959			$	1,951			$	2,264
Cumulative gross (deficiency)/redundancy		$	(692	)		$	(534	)		$	(198	)		$	(139	)		$	(82	)		$	118			$	228			$	199			$	131			$	35

Asbestos, Environmental and Other Latent Exposures

The Company has written general liability, commercial multi-peril and umbrella policies under which its policyholders continue to present claims alleging asbestos-related injury and claims alleging injury, damage or clean up costs arising from environmental pollution and other latent claims. The vast majority of these claims are presented under policies written many years ago.

There is a great deal of uncertainty surrounding latent liabilities. This uncertainty affects the ability of insurers and reinsurers to estimate the ultimate amount of unpaid claims and related settlement expenses. The majority of these claims differ from other types of contractual claims because there is limited consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers/reinsurers may be liable. These uncertainties are exacerbated by inconsistent court decisions and judicial interpretations of coverage that, in many cases, have expanded theories of liability. The industry as a whole is engaged in extensive litigation over these coverage and liability issues and is, thus, confronted with continuing uncertainty in its efforts to quantify latent exposures.

An analysis of gross and net reserves (net of per risk reinsurance, but before the benefit of corporate aggregate reinsurance) from asbestos, environmental and other latent exposures is presented below:

		Years Ended December 31,
		2009								2008								2007
(dollars in millions)		Gross				Net				Gross				Net				Gross				Net
Unpaid latent losses and allocated LAE (“ALAE”), beginning of the year		$	523.4			$	401.1			$	580.1			$	442.8			$	586.2			$	443.5
Latent losses and ALAE incurred during the year			27.3				6.7				56.7				36.2				55.9				54.5
Latent losses and ALAE paid during the year			91.8				51.5				113.4				77.9				62.0				55.2
Unpaid latent losses and ALAE, end of the year		$	458.9			$	356.3			$	523.4			$	401.1			$	580.1			$	442.8

Net latent losses incurred in 2009 are net of an insurance recovery of $13.8 million associated with an asbestos lawsuit which the Company settled in 2008. Excluding this recovery, net latent losses incurred of $20.5 million were primarily attributable to increasing claim values and rising legal costs associated with the asbestos liabilities of one policyholder. In 2008, net latent losses incurred were primarily attributable to the aforementioned lawsuit settlement. In 2007, net latent losses incurred were due to the combined strengthening of asbestos, environmental and other latent reserves.

An analysis of the number of policyholders with open asbestos, environmental and other latent claims is presented below:

		Asbestos				Environmental				Other Latent				Total Latent
Number of policyholders open at December 31, 2007			401				261				204				866
Opened during the year			71				80				65				216
Closed during the year			135				105				96				336
Number of policyholders open at December 31, 2008			337				236				173				746
Opened during the year			85				84				64				233
Closed during the year			66				89				78				233
Number of policyholders open at December 31, 2009			356				231				159				746