UNITEDTable STATES SECURITIESof AND EXCHANGE COMMISSION Washington, D.C. 20549 Contents

~~Form 10-Q~~UNITED STATES

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

~~For the Quarterly Period Ended: June 30, 2009 Commission File Number: 333~~ Form 10-~~84068~~Q

Crum & Forster Holdings Corp.


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

~~(Exact~~For ~~Name~~the ofQuarterly ~~Registrant~~Period ~~as Specified~~Ended: inSeptember ~~its~~30, ~~Charter)~~ 2009 Commission File Number: 333-84068

~~Delaware~~ Crum & ~~(State~~Forster Holdings ~~or Other Jurisdiction of Incorporation or Organization) 04-3611900 (I~~Corp.~~R.S. Employer Identification Number)~~

~~305 Madison~~(Exact ~~Avenue,~~Name ~~Morristown,~~of ~~New~~Registrant ~~Jersey 07962~~as ~~(Address of~~Specified ~~principal~~in ~~executive~~its ~~office~~Charter)

Delaware (~~973~~State or Other Jurisdiction of Incorporation or Organization) ~~490~~ 04-~~6600~~ 3611900 (I.R.S. Employer Identification Number)

~~(Registrant’s~~305 Madison ~~telephone~~Avenue, ~~number~~Morristown, ~~including~~New ~~area~~Jersey ~~code~~07962 (Address of principal executive office)

~~Indicate by check mark whether the registrant: (1) has~~ ~~filed all reports required to be filed by Section 13 or 15~~(d973) ~~of the Securities Exchange Act of 1934 during the preceding 12~~ ~~months (or for such shorter period that the~~490-6600 ~~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~~(Registrant’s bytelephone ~~check mark whether the registrant has submitted electronically and posted on its corporate Web site~~number, ifincluding ~~any, every~~area ~~Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter~~code) ~~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~~(1) has ~~accelerated~~filed ~~filer,~~all anreports ~~accelerated~~required ~~filer,~~to abe ~~non-accelerated~~filed ~~filer~~by Section 13 or or15(d) aof ~~smaller~~the ~~reporting~~Securities ~~company.~~Exchange ~~See~~Act ~~the~~of ~~definitions~~1934 ofduring the ~~“large~~preceding ~~accelerated~~12 months ~~filer”,~~(or ~~“accelerated filer”~~for ~~and~~such ~~“smaller~~shorter ~~reporting~~period ~~company”~~that inthe ~~Rule 12b-~~registrant was required to file such reports), and (2) has ofbeen subject to the ~~Exchange~~filing ~~Act.~~requirements ~~(Check~~for ~~one):~~the past 90 days. Yes o No þ

~~Large~~ Indicate ~~accelerated~~by ~~filer~~check omark ~~Accelerated~~whether ~~filer~~the oregistrant ~~Non-accelerated~~has ~~filer~~submitted electronically þand ~~(Do~~posted ~~not~~on ~~check~~its corporate Web site, if aany, every ~~smaller~~Interactive ~~reporting~~Data ~~company~~File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) ~~Smaller~~during ~~reporting~~the ~~company~~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 ~~shell~~large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ~~(as~~“large ~~defined~~accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). ~~Yes o No þ~~ (Check one):

~~Indicate~~Large ~~the~~accelerated ~~number~~filer ofo ~~shares~~Accelerated ~~outstanding~~filer ofo ~~each~~Non-accelerated offiler ~~the registrant’s~~þ ~~classes~~(Do ofnot ~~common~~check ~~stock,~~if asa ofsmaller ~~the~~reporting ~~latest practicable~~company) ~~date:~~ Smaller reporting company o

Class		Number of Shares Outstanding at July 30, 2009
Common Stock, $.01 Par Value			100

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

~~CRUM &~~Indicate the number of shares outstanding of each of the ~~FORSTER~~registrant’s ~~HOLDINGS~~classes ~~CORP.~~of common stock, as of the latest practicable date:

Form 10-Q


Class	Number of Shares Outstanding at October 29, 2009

Common Stock, $.01 Par Value		100

~~Index~~CRUM & FORSTER HOLDINGS CORP.

		Page
		Number
PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets at June 30, 2009 (Unaudited) and December 31, 2008		3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)		4
	Consolidated Statements of Shareholder’s Equity for the Six Months Ended June 30, 2009 and 2008 (Unaudited)		5
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)		7
	Notes to Consolidated Financial Statements		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		43
ITEM 4T.	CONTROLS AND PROCEDURES		45
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		46
ITEM 6.	EXHIBITS		46
	SIGNATURES		47
	INDEX TO EXHIBITS		48

Form 10-Q

2Index

PART I FINANCIAL INFORMATION


		Page
		Number

	PART I FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets at September 30, 2009 (Unaudited) and December 31, 2008		3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)		4
	Consolidated Statements of Shareholder’s Equity for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)		5
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)		7
	Notes to Consolidated Financial Statements		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		32

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		47

ITEM 4T.	CONTROLS AND PROCEDURES		53

	PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		54

ITEM 5.	OTHER INFORMATION		54

ITEM 6.	EXHIBITS		54

	SIGNATURES		55

	INDEX TO EXHIBITS		56
EX-31.1
EX-31.2
EX-32.1
EX-32.2

~~ITEM 1. FINANCIAL STATEMENTS~~ 2

CRUM & FORSTERTable HOLDINGSof CORP. Contents

~~CONSOLIDATED~~PART I ~~BALANCE~~FINANCIAL ~~SHEETS~~INFORMATION

~~(Dollars in thousands, except per share amounts)~~ITEM 1. FINANCIAL STATEMENTS

CRUM & FORSTER HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited)

	June 30,		December 31,
	September 30,		December 31,
	2009		2008
ASSETS
Investments:
Fixed income securities, available-for-sale, at fair value (amortized cost of $1,301,450 and $1,466,114 in 2009 and 2008, respectively)	$	1,443,265	$	1,533,334
Fixed income securities, available-for-sale, at fair value (amortized cost of $1,257,546 and $1,466,114 in 2009 and 2008, respectively)	$	1,485,862	$	1,533,334
Fixed income securities, held-for-trading, at fair value		~~331~~335,~~022~~002		233,998
Equity securities, available-for-sale, at fair value (cost of $1,187,484 and $1,106,098 in 2009 and 2008, respectively)		1,257,760		1,020,154
Equity securities, available-for-sale, at fair value (cost of $1,146,993 and $1,106,098 in 2009 and 2008, respectively)		1,383,777		1,020,154
Investments at equity		~~150~~159,~~009~~370		117,586
Derivatives and other invested assets, at fair value		~~256~~382,~~932~~933		412,747
Short-term investments, at fair value		4530,~~707~~971		549,937
Total investments		3,~~484~~777,~~695~~915		3,867,756
Cash and cash equivalents		~~215~~330,~~813~~467		159,862
Assets pledged for derivatives		—29,756		4,416
Accrued investment income		3132,~~680~~626		29,378
Premiums receivable		~~183~~167,~~619~~086		182,158
Reinsurance recoverable		~~737~~718,~~028~~074		759,028
Reinsurance recoverable from affiliates		~~194~~187,~~992~~893		209,189
Prepaid reinsurance premiums		3228,~~893~~477		28,995
Deferred income taxes		~~189~~39,~~444~~986		239,077
Deferred policy acquisition costs		4846,~~895~~883		52,705
Other assets		9096,~~963~~814		66,316
Total assets	$	5,~~210~~455,~~022~~977	$	5,598,880
LIABILITIES
Unpaid losses and loss adjustment expenses	$	2,~~806~~739,~~683~~084	$	2,987,803
Unearned premiums		~~341~~319,~~031~~942		366,362
Funds held under reinsurance contracts		~~236~~241,~~745~~969		228,835
Accounts payable and other liabilities		~~157~~166,~~007~~467		417,669
Deferred income on retroactive reinsurance		~~113~~110,~~835~~115		121,277
Long-term debt		311,~~289~~695		310,502
Total liabilities		3,~~966~~889,~~590~~272		4,432,448
Commitments and contingencies (Note 9)
SHAREHOLDER’S EQUITY
Common stock, $0.01 par value; 1,000 shares authorized; 100 issued and outstanding		—		—
Additional paid-in capital		740,993		740,993
Accumulated other comprehensive income (loss), net of tax		~~143~~311,~~240~~752		(7,455	)
Retained earnings		~~359~~513,~~199~~960		432,894
Total shareholder’s equity		1,~~243~~566,~~432~~705		1,166,432
Total liabilities and shareholder’s equity	$	5,~~210~~455,~~022~~977	$	5,598,880

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

CRUM & FORSTERTable HOLDINGSof CORP. Contents

~~CONSOLIDATED~~CRUM & ~~STATEMENTS~~FORSTER OFHOLDINGS ~~OPERATIONS~~CORP.

~~(Dollars~~CONSOLIDATED STATEMENTS inOF ~~thousands)~~INCOME

(~~Unaudited~~Dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
REVENUES
Premiums earned	$	200,281		$	262,882		$	407,711		$	534,692
Investment income		63,682			31,245			98,952			47,086
Net realized investment gains (losses)		23,002			9,709			(68,069	)		164,977
Total revenues		286,965			303,836			438,594			746,755
EXPENSES
Losses and loss adjustment expenses		132,475			245,746			268,325			455,356
Policy acquisition costs		27,786			38,497			57,341			76,946
Other underwriting expenses		41,020			44,821			78,902			87,429
Interest expense		6,951			7,012			13,890			14,032
Costs related to early retirement of debt		—			392			—			392
Other expense (income), net		783			(490	)		1,580			1,652
Total expenses		209,015			335,978			420,038			635,807
Income (loss) before income taxes and equity in earnings of investees		77,950			(32,142	)		18,556			110,948
Income tax expense (benefit)		20,697			(12,564	)		(7,670	)		36,662
Income (loss) before equity in earnings of investees		57,253			(19,578	)		26,226			74,286
Equity in (losses) earnings of investees, net of tax		(1	)		2			79			(461	)
NET INCOME (LOSS)	$	57,252		$	(19,576	)	$	26,305		$	73,825

(Unaudited)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

REVENUES
Premiums earned	$	182,032	$	232,978	$	589,743	$	767,670
Investment income		34,213		14,706		133,165		61,792
Net realized investment gains		210,394		162,369		142,325		327,346

Total revenues		426,639		410,053		865,233		1,156,808

EXPENSES
Losses and loss adjustment expenses		122,950		211,506		391,275		666,862
Policy acquisition costs		27,988		41,669		85,329		118,615
Other underwriting expenses		41,809		42,407		120,711		129,836
Interest expense		6,958		6,920		20,848		20,952
Costs related to early retirement of debt		—		—		—		392
Other expense, net		1,709		2,527		3,289		4,179

Total expenses		201,414		305,029		621,452		940,836

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

The accompanying notes are an integral part of the 4consolidated financial statements.

~~CRUM &~~ ~~FORSTER HOLDINGS CORP.~~4

CONSOLIDATED STATEMENTSTable OFof SHAREHOLDER’S EQUITY Contents

~~(Dollars~~CRUM & FORSTER inHOLDINGS ~~thousands)~~CORP.

~~(Unaudited)~~CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

	Six Months Ended
	June 30,
	2009			2008
COMMON STOCK
Balance, beginning and end of period	$	—		$	—
ADDITIONAL PAID-IN CAPITAL
Balance, beginning and end of period		740,993			740,993
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Balance, beginning of period		(7,455	)		44,479
Cumulative effect of adoption of Statements of Financial Accounting Standards Nos. 157 and 159		—			(29,897	)
Balance, beginning of period, after cumulative effect of adjustments		(7,455	)		14,582
Unrealized investment gains (losses), net of transfers to realized investment gains and losses		150,454			(32,365	)
Foreign currency translation		354			83
Amortization of actuarial gain, prior service credit and transition obligation included in net periodic benefit costs		(113	)		136
Balance, end of period		143,240			(17,564	)
RETAINED EARNINGS
Balance, beginning of period		432,894			507,987
Cumulative effect of adoption of Statements of Financial Accounting Standards Nos. 157 and 159		—			86,101
Balance, beginning of period, after cumulative effect of adjustments		432,894			594,088
Net income		26,305			73,825
Dividends to shareholder		(100,000	)		(130,000	)
Balance, end of period		359,199			537,913
TOTAL SHAREHOLDER’S EQUITY	$	1,243,432		$	1,261,342

(Dollars in thousands)

~~The accompanying notes are an integral part of the~~ ~~consolidated financial statements.~~(Unaudited)


	Nine Months Ended
	September 30,
	2009			2008

COMMON STOCK
Balance, beginning and end of period	$	—		$	—

ADDITIONAL PAID-IN CAPITAL
Balance, beginning and end of period		740,993			740,993

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Balance, beginning of period		(7,455	)		44,479
Cumulative effect of adoption of Statements of Financial Accounting Standards Nos. 157 and 159		—			(29,897	)

Balance, beginning of period, after cumulative effect of adjustments		(7,455	)		14,582
Unrealized investment gains (losses), net of transfers to realized investment gains and losses		319,068			(52,920	)
Foreign currency translation		309			(311	)
Amortization of actuarial gain, prior service credit and transition obligation included in net periodic benefit costs		(170	)		204

Balance, end of period		311,752			(38,445	)

RETAINED EARNINGS
Balance, beginning of period		432,894			507,987
Cumulative effect of adoption of Statements of Financial Accounting Standards Nos. 157 and 159		—			86,101

Balance, beginning of period, after cumulative effect of adjustments		432,894			594,088
Net income		181,066			143,553
Dividends to shareholder		(100,000	)		(130,000	)

Balance, end of period		513,960			607,641

TOTAL SHAREHOLDER’S EQUITY	$	1,566,705		$	1,310,189

~~CRUM &~~The accompanying notes are an integral part of the ~~FORSTER~~consolidated ~~HOLDINGS~~financial ~~CORP~~statements.

~~CONSOLIDATED~~ ~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~5

(DollarsTable inof thousands) Contents

~~(Unaudited)~~CRUM & FORSTER HOLDINGS CORP.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
NET INCOME (LOSS)	$	57,252		$	(19,576	)	$	26,305		$	73,825
Change in components of other comprehensive loss for the period, before tax:
Unrealized investment gains (losses), net of transfers to realized investment gains and losses		350,407			(36,074	)		231,469			(49,792	)
Foreign currency translation		334			(187	)		545			128
Amortization of actuarial gain and transition obligation included in net periodic benefit costs		(87	)		91			(174	)		209
Other comprehensive income (loss) for the period, before tax		350,654			(36,170	)		231,840			(49,455	)
Deferred income tax benefit for the period:
Deferred income tax (expense) benefit from unrealized investment gains and losses		(122,643	)		12,626			(81,015	)		17,427
Deferred income tax (expense) benefit from foreign currency translation		(117	)		65			(191	)		(45	)
Deferred income tax benefit (expense) from amortization of actuarial gain, prior service credit and transition obligation included in net periodic benefit costs		31			(31	)		61			(73	)
Total deferred income tax (expense) benefit for the period		(122,729	)		12,660			(81,145	)		17,309
Other comprehensive income (loss) for the period, net of tax		227,925			(23,510	)		150,695			(32,146	)
COMPREHENSIVE INCOME (LOSS)	$	285,177		$	(43,086	)	$	177,000		$	41,679

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

~~The accompanying notes are an integral part of the~~(Dollars ~~consolidated~~in ~~financial statements.~~thousands)

6(Unaudited)

CRUM & FORSTER HOLDINGS CORP.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

NET INCOME	$	154,761		$	69,728		$	181,066		$	143,553


Change in components of other comprehensive income (loss) for the period, before tax:
Unrealized investment gains (losses), net of transfers to realized investment gains and losses		259,405			(31,622	)		490,874			(81,414	)
Foreign currency translation		(70	)		(607	)		475			(479	)
Amortization of actuarial gain, prior service credit and transition obligation included in net periodic benefit costs		(87	)		105			(261	)		314

Other comprehensive income (loss) for the period, before tax		259,248			(32,124	)		491,088			(81,579	)

Deferred income tax (expense) benefit for the period:
Deferred income tax (expense) benefit from unrealized investment gains and losses		(90,791	)		11,067			(171,806	)		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	)		91			(110	)

Total deferred income tax (expense) benefit for the period		(90,736	)		11,243			(171,881	)		28,552

Other comprehensive income (loss) for the period, net of tax		168,512			(20,881	)		319,207			(53,027	)


COMPREHENSIVE INCOME	$	323,273		$	48,847		$	500,273		$	90,526

~~CONSOLIDATED~~The accompanying notes are an integral part of the ~~STATEMENTS~~consolidated OFfinancial ~~CASH FLOWS~~statements.

~~(Dollars in thousands)~~ 6

(Unaudited) Table of Contents

	Six Months Ended
	June 30,
	2009			2008
OPERATING ACTIVITIES
Net income	$	26,305		$	73,825
Adjustments to reconcile net income to net cash from operating activities:
(Accretion of discount) amortization of premium on fixed income securities		(5,038	)		929
Realized investment losses (gains)		68,069			(164,977	)
Losses of equity method investees, net of dividends		121			944
(Earnings) losses of investment companies and similar equity method investees		(35,621	)		9,853
Loss on commutation		—			75,470
Depreciation and amortization		3,142			1,752
Deferred income tax benefit		(31,512	)		(7,387	)
Costs related to early retirement of debt		—			170
Other adjustments		2,922			9,325
Changes in:
Accrued investment income		(3,163	)		(3,005	)
Premiums receivable		(2,211	)		933
Reinsurance recoverable		34,493			373,479
Prepaid reinsurance premiums		(3,898	)		(3,268	)
Deferred policy acquisition costs		3,810			6,227
Other assets		572			16,698
Unpaid losses and loss adjustment expenses		(181,120	)		(58,962	)
Unearned premiums		(25,331	)		(40,490	)
Accounts payable and other liabilities		(124,160	)		(23,988	)
Net cash (used in) provided by operating activities		(272,620	)		267,528
INVESTING ACTIVITIES
Purchases of fixed income securities		(348,832	)		(263,148	)
Proceeds from sales of fixed income securities		309,151			228,089
Proceeds from maturities of fixed income securities		48,300			760
Purchases of equity securities		(308,343	)		(113,091	)
Proceeds from sales of equity securities		133,189			—
Net sales (purchases) of investments at equity		6,255			(11,240	)
Purchases of derivatives and other invested assets		—			(4,993	)
Proceeds from sales of derivatives and other invested assets		109,684			158,085
Purchases of short-term investments		(108,564	)		(474,450	)
Proceeds from sales of short-term investments		584,248			549,862
Proceeds from maturities of short-term investments		—			25
Net change in obligation to return short-sale obligations		—			(649,517	)
Net change in cash and cash equivalents held as collateral		4,416			783,114
Net settlement of total return swaps		(343	)		(2,616	)
Purchases of fixed assets		(590	)		(1,039	)
Net cash provided by investing activities		428,571			199,841
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		55,951			333,099
Cash and cash equivalents, beginning of period		159,862			147,506
Cash and cash equivalents, end of period	$	215,813		$	480,605
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	12,788		$	13,009
Cash paid to parent for income taxes	$	119,365		$	34,802
SUPPLEMENTAL NON-CASH OPERATING AND INVESTING ACTIVITIES
Fixed income securities transferred to parent as payment for income taxes	$	54,008		$	—

CRUM & FORSTER HOLDINGS CORP.

~~The~~CONSOLIDATED STATEMENTS ~~accompanying~~OF ~~notes~~CASH ~~are an integral part of the~~FLOWS ~~consolidated financial statements.~~

(Dollars 7in thousands)

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ (Unaudited~~, dollars in thousands~~)

1. Organization and Basis of Presentation


	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		$	—

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,~~accompanying ~~through~~notes ~~its~~are ~~subsidiaries, offers~~an aintegral ~~full~~part ~~range~~ of ~~commercial property and casualty~~the ~~insurance~~consolidated ~~distributed~~financial ~~through an independent producer force located across the United States~~statements.

~~These consolidated financial statements have been prepared in~~ ~~conformity with accounting principles generally accepted in the~~7 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.

TheTable 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 Company’s consolidated financial statements, and notes related thereto, included in the Company’s 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. Contents

~~The interim financial data at June 30, 2009 and for the~~ ~~three and six months ended June~~NOTES ~~30, 2009 and 2008 is~~TO ~~unaudited.~~CONSOLIDATED ~~However,~~FINANCIAL ~~in the opinion of management, the interim~~STATEMENTS ~~data includes all adjustments~~(Unaudited, ~~consisting~~dollars ofin ~~normal recurring~~thousands) items, that are necessary for a fair presentation of the Company’s results for the interim periods. Certain amounts from prior periods have been reclassified to conform to the current year’s presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

21. ~~Recent~~Organization ~~Accounting~~and ~~Pronouncements~~Basis of Presentation

~~SFAS~~Crum ~~No. 168.~~& InForster ~~June~~Holdings ~~2009,~~Corp. (the ~~Financial~~“Company” ~~Accounting~~or ~~Standards Board (~~“~~FASB~~Crum & Forster”) ~~issued~~is ~~Statement of~~a ~~Financial~~Delaware ~~Accounting Standards (“SFAS”)~~holding ~~No. 168~~company, ~~The~~which ~~FASB~~is ~~Accounting~~100% ~~Standards~~owned ~~Codification~~by ~~and Hierarchy~~Fairfax ~~of Generally Accepted Accounting Principles~~Inc., a Wyoming holding ~~replacement~~company. ofFairfax ~~FASB~~Inc. ~~Statement~~is ~~No.~~ultimately ~~162 (“SFAS 168”).~~owned ~~SFAS 168~~by ~~establishes~~Fairfax ~~the~~Financial ~~FASB~~Holdings ~~Standards~~Limited ~~Accounting Codification~~ (“~~Codification~~Fairfax”), asa ~~the~~Canadian ~~source of authoritative GAAP~~financial ~~recognized~~services byholding ~~the~~company, ~~FASB~~which tois bepublicly ~~applied~~traded toon ~~nongovernmental~~the ~~entities.~~Toronto ~~The~~Stock ~~only~~Exchange ~~other source of authoritative GAAP is the rules~~ and ~~interpretive releases of~~ the ~~SEC~~New ~~which~~York ~~only~~Stock ~~apply~~Exchange tounder the ~~SEC~~symbol ~~registrants~~“FFH”. The ~~Codification~~Company, ~~will~~through ~~supersede~~its ~~all the~~subsidiaries, ~~existing~~offers ~~non-SEC~~a ~~accounting~~full ~~and~~range ~~reporting standards upon its effective date. Since the issuance~~ of ~~the~~commercial ~~Codification~~property isand ~~not~~casualty ~~intended~~insurance todistributed ~~change~~through ~~or alter existing GAAP, adoption of this statement will not have~~ an ~~impact~~independent onproducer ~~the Company’s~~force ~~financial~~located ~~position~~across ~~or results of operations, but will change~~ the ~~way~~ inUnited ~~which GAAP is referenced in the Company’s financial statements~~States. ~~SFAS 168 is effective for interim and annual~~ ~~reporting periods ending after September 15, 2009.~~

~~SFAS No. 165.~~These Inconsolidated ~~May~~financial ~~2009,~~statements ~~the~~have ~~FASB~~been ~~issued~~prepared in ~~SFAS No. 165,~~conformity ~~Subsequent~~with ~~Events~~accounting principles generally accepted in the United States of America (“~~SFAS 165~~GAAP”), ~~which~~and ~~establishes~~include ~~general~~the ~~standards~~accounts of ~~accounting~~the ~~for~~Company and ~~disclosure~~its ofwholly-owned ~~events that occur~~subsidiaries, ~~after~~including ~~the~~United ~~balance~~States ~~sheet~~Fire ~~date~~Insurance ~~but~~Company ~~before the financial statements~~(“US ~~are~~Fire”), ~~issued~~The orNorth ~~are~~River ~~available~~Insurance toCompany be(“North River”), ~~issued.~~Crum & ~~The~~Forster ~~Company~~Indemnity ~~adopted~~Company ~~SFAS 165~~(“CF ~~effective~~Indemnity”) ~~April 1,~~and ~~2009~~Crum and ~~has~~Forster ~~evaluated~~Insurance ~~subsequent~~Company ~~events~~(“CF ~~after~~Insurance”). ~~the~~US ~~balance~~Fire ~~sheet~~owns ~~date~~100% of ~~June 30,~~the ~~2009~~stock ~~through~~of ~~July~~Crum ~~30,~~& ~~2009,~~Forster ~~the~~Specialty ~~date~~Insurance ~~the financial~~Company. ~~statements~~North ~~were~~River ~~issued.~~owns ~~During~~100% ~~this~~of ~~period,~~ the stock of Seneca Insurance Company, Inc. ~~did~~and ~~not~~its subsidiaries. All material intercompany accounts ~~have~~and ~~any~~transactions ~~recognizable~~have orbeen ~~disclosable~~eliminated ~~subsequent~~in ~~events~~consolidation.

The preparation of consolidated financial statements in 8conformity 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 Company’s consolidated financial statements, and notes related thereto, included in the Company’s 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.

~~NOTES~~The interim financial data at September TO30, 2009 and for ~~CONSOLIDATED~~the ~~FINANCIAL~~three ~~STATEMENTS~~and nine months ended September 30, 2009 and 2008 ~~(Unaudited,~~is ~~dollars~~unaudited. However, in ~~thousands)~~the opinion of management, the interim data includes all adjustments that are necessary for a fair presentation of the Company’s results for the interim periods. Certain amounts from prior periods have been reclassified to conform to the current year’s presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

In2. ~~April~~Recent ~~2009,~~Accounting the FASB issued three FASB Staff Positions (“FSP”) that are intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities as follows: Pronouncements

~~(i) FSP~~FASB ASC ~~FAS 115~~105-~~2 and FAS~~10. ~~124-2,~~In ~~Recognition~~June ~~and~~2009, ~~Presentation~~the ofFinancial ~~Other~~Accounting ~~Than~~Standards ~~Temporary~~Board ~~Impairments~~ (“~~FSP FAS 115-2~~FASB”)~~, which~~ ~~amends~~issued ~~the~~Statement ~~other~~of ~~than~~Financial ~~temporary impairment guidance in~~Accounting UStandards (“SFAS”) No.S. ~~GAAP~~168, ~~for~~The ~~debt securities to make the guidance more~~FASB ~~operational~~Accounting ~~and~~Standards toCodification ~~improve the presentation~~ and ~~disclosure~~Hierarchy of Generally ~~other~~Accepted ~~than~~Accounting ~~temporary~~Principles, ~~impairments~~a onreplacement ~~debt~~of ~~and~~FASB ~~equity securities~~Statement ~~in the financial statements~~No. 162 ~~The~~(now ~~recognition~~known ~~provision~~as ~~within~~FASB ASC ~~FSP FAS 115~~105-210, ~~applies~~Generally ~~only~~Accepted toAccounting ~~fixed income securities that are other than temporarily impaired~~Principles). IfThe ~~the Company intends to sell or it is~~FASB ~~more~~Accounting ~~likely~~Standards ~~than~~Codification ~~not~~(“FASB ~~that~~ASC”) ~~it will be required to sell an~~has ~~impaired~~been ~~security~~established ~~prior~~as ~~to recovery of its cost basis,~~ the ~~security~~ issingle ~~other~~source ~~than temporarily impaired and the full amount~~ of ~~the~~authoritative ~~impairment~~GAAP ~~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~~applied to ~~sell~~nongovernmental ~~an other~~entities. ~~than~~The ~~temporarily~~only ~~impaired~~other ~~security~~source ~~before recovery~~ of ~~its~~ ~~cost~~authoritative ~~basis,~~GAAP is the ~~impairment~~rules ~~must be separated into credit~~ and ~~non-credit~~ ~~components~~interpretive ~~with~~releases ~~the credit portion~~ of the ~~other than~~ ~~temporary~~SEC, ~~impairment~~which ~~recognized~~apply asonly ato ~~loss~~SEC ~~through~~registrants. ~~earnings~~The ~~and the~~FASB ~~non-credit~~ASC ~~portion recognized in other comprehensive income.~~is ~~FSP FAS 115-2 is~~ effective for interim and annual financial reporting periods ~~ending~~ ending after ~~June~~September 15, 2009. ~~The Company adopted FSP FAS 115-2 effective April 1, 2009~~ and ~~the~~is ~~adoption did~~ not ~~affect~~intended ~~the~~to ~~Company’s~~change ~~financial position~~ or ~~results~~alter ofexisting ~~operations.~~GAAP ~~FSP FAS 115-2 requires~~but ~~that~~just ~~the~~change ~~Company record, as of~~ the ~~beginning~~way ofin ~~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~~GAAP ~~held~~is asreferenced ~~investments~~in at the ~~date~~Company’s offinancial ~~adoption from retained~~statements. ~~earnings to accumulated other comprehensive income.~~ The Company ~~reviewed~~ ~~other~~has ~~than~~adopted ~~temporary~~FASB ~~impairments it had previously~~ASC ~~recorded through earnings on fixed income securities held at~~105-10 ~~April 1,~~effective ~~2009,~~this ~~which~~quarter ~~were $10,855,~~ and ~~determined~~technical ~~that~~references ~~all of~~to ~~these~~GAAP ~~other~~in ~~than temporary impairments were related to~~the ~~specific~~report ~~credit~~are ~~losses~~provided asunder the ~~issuers~~new ~~had~~FASB ~~filed~~ASC ~~for~~structure ~~bankruptcy~~with the ~~and~~prior ~~were~~references into ~~default~~original ofstandards ~~interest~~included ~~payments,~~the ~~resulting~~first ~~in no~~time ~~cumulative~~they ~~effect~~appear ~~adjustment~~for ~~to opening retained earnings or accumulated other comprehensive income as of April 1, 2009~~clarification.

~~(ii) FSP~~FASB ASC ~~FAS 157~~855-4,10. In ~~Determining~~May ~~Fair~~2009, ~~Value When~~ the ~~Volume~~FASB ~~and~~issued ~~Level~~the ~~of Activity~~SFAS No. 165, ~~for~~Subsequent ~~the~~Events ~~Asset~~(now orknown ~~Liability~~as ~~have~~FASB ~~Significantly Decreased and~~ASC ~~Identifying Transactions That Are Not Orderly~~855-10, ~~which~~ ~~provides~~Subsequent ~~additional~~Events), ~~guidance~~which onestablishes ~~estimating~~general ~~the fair value of an~~standards ~~asset~~of oraccounting ~~liability~~for ~~when the volume~~ and ~~level~~disclosure of ~~activity~~events ~~for~~that occur after the ~~asset~~balance orsheet ~~liability~~date ~~have~~but ~~significantly~~before ~~decreased~~the ~~and~~financial onstatements are ~~identifying~~issued ~~transactions~~or ~~that~~ are ~~not~~available ~~orderly~~to be issued. ~~FSP~~The Company adopted FASB ~~FAS 157~~ASC 855-410 is effective ~~for~~June 1, ~~interim~~2009 and ~~annual~~has ~~reporting~~evaluated ~~periods~~subsequent ~~ending~~events after ~~June 15,~~the ~~2009.~~balance ~~The~~sheet ~~Company~~date ~~adopted~~of ~~FSP FAS~~September ~~157-4~~30, 2009 through ~~effective April~~October 129, 2009, ~~and~~ the ~~adoption~~date ~~did~~the ~~not~~financial ~~have~~statements awere ~~material~~issued. ~~impact~~During onthis period, the Company’s ~~financial~~did ~~position~~not orhave any ~~results~~recognizable ofor ~~operations~~disclosable subsequent events.

~~(iii) FSP~~ ~~FAS 107-1~~8 and APB 28-1, Interim disclosures about Fair Value Measurement, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. This FSP 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. FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 effective April 1, 2009 and the adoption did not have a material impact on the Company’s financial position or results of operations. See Note 4 to the consolidated financial statements for further details.

SAB 111.Table In April 2009, the SEC issued Staff Accounting Bulletin No. 111 (“SAB 111”), 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. SAB 111 maintains the SEC staff’s 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 Company’s financial position or results of operations. Contents

NOTES TO 9CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

FASB ASC ~~NOTES~~320-10. TOIn ~~CONSOLIDATED~~April ~~FINANCIAL~~2009, ~~STATEMENTS~~the FASB issued FASB Staff Position (~~Unaudited~~“FSP”) No. 115-2 and 124-2, Recognition ~~dollars~~and inPresentation ~~thousands~~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 Company’s 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.

~~SFAS No~~FASB ASC 820-10. ~~161.~~ In April ~~March 2008~~2009, the FASB issued FSP ~~SFAS~~FAS ~~No. 161~~157-4, ~~Disclosures about Derivative~~ ~~Instruments~~Determining ~~and~~Fair ~~Hedging~~Value ~~Activities —~~When anthe ~~Amendment~~Volume ~~of FASB~~and ~~Statement~~Level ~~No. 133~~of ~~(“SFAS 161”),~~Activity ~~which~~for isthe ~~intended~~Asset toor ~~improve~~Liability ~~financial~~have ~~reporting~~Significantly ~~about~~Decreased and ~~derivative~~Identifying ~~instruments~~Transactions ~~and~~That ~~hedging~~Are ~~activities~~Not byOrderly ~~requiring~~Fair Value ~~enhanced~~Measurements ~~disclosures~~and ~~about:~~Disclosure (~~a) how~~now ~~and~~known ~~why~~as anFASB ~~entity uses~~ASC ~~derivative instruments; (b) how derivative instruments and~~820-10, ~~related~~Fair ~~hedged~~Value ~~items~~Measurements ~~are~~and ~~accounted~~Disclosures) ~~for~~which ~~under FASB Statement~~provides ~~No. 133,~~additional ~~Accounting~~guidance ~~for~~on ~~Derivative~~estimating ~~Instruments~~the ~~and Hedging~~fair ~~Activities,~~value ~~and~~of ~~its~~an ~~related~~asset ~~interpretations; and~~or ~~(c) how~~liability ~~derivative~~when ~~instruments~~the volume and ~~related~~level ~~hedged~~of ~~items affect~~activity anfor ~~entity’s~~the ~~financial~~asset ~~position, financial~~or ~~performance~~liability ~~and~~have ~~cash~~significantly ~~flows.~~decreased ~~SFAS 161~~and ison ~~effective for~~identifying ~~fiscal~~transactions ~~years~~that ~~and~~are ~~interim~~not ~~periods beginning after November 15, 2008~~orderly. The Company adopted ~~SFAS~~FASB ~~161 effective~~ASC ~~January~~820-10 effective April 1, 2009, ~~which~~and the adoption did not ~~affect~~have an impact on the Company’s financial position or results of ~~operations and did not result~~ ~~in any material changes to its disclosures of derivative securities and hedging activities~~operations.

3 FASB ASC 825-10. In April ~~Investments~~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 Company’s financial position or results of operations, but resulted in additional disclosures which have been made in Note 4 to the consolidated financial statements.

~~The~~FASB ~~aggregate~~ASC 320-10-S99. In April ~~carrying~~2009, ~~value~~the ofSEC ~~the~~issued ~~Company’s~~Staff ~~investment~~Accounting Bulletin ~~portfolio~~(“SAB”) ~~was $3~~No. 111,~~700,508~~ ~~and~~(now ~~$4,032,034~~known atas ~~June 30,~~FASB ~~2009~~ASC 320-10-S99) which amends and ~~December~~replaces SAB ~~31,~~Topic ~~2008,~~5.M. ~~respectively,~~in ~~and~~the SAB Series isentitled ~~comprised~~Other Than Temporary Impairment of ~~available-for-sale~~Certain Investments in Debt and Equity Securities. FASB ASC ~~securities, held~~320-~~for~~10-~~trading~~S99 ~~securities,~~maintains ~~investments~~the atSEC ~~equity,~~staff’s ~~derivatives~~previous views related to equity securities and ~~other~~amends Topic 5.M. to exclude debt securities from ~~invested~~its ~~assets,~~scope. ~~short-term~~The ~~investments,~~SAB ~~cash~~was effective upon issuance and ~~cash~~did not ~~equivalents~~affect ~~and~~the ~~assets~~Company’s ~~pledged~~financial ~~for~~position ~~derivatives~~or results of operations.

FASB ASC ~~Available~~815-~~For~~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-~~Sale~~10, ~~Securities~~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 entity’s financial position, financial performance and cash flows. The Company adopted FASB ASC 815-10 effective January 1, 2009, which did not affect the Company’s financial position or results of operations; however, the Company has expanded its disclosures regarding the effects of hedging activities.

~~Investments in~~ ~~available-for-sale~~9 ~~fixed income and equity securities are summarized below:~~

	At June 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	$	82,072	$	10,819	$	75	$	92,816
States, municipalities and political subdivisions		1,090,602		98,832		3,870		1,185,564
Other corporate		128,776		36,109		—		164,885
Total fixed income securities		1,301,450		145,760		3,945		1,443,265
Equity securities — common stocks		1,187,484		116,327		46,051		1,257,760
Total available-for-sale securities	$	2,488,934	$	262,087	$	49,996	$	2,701,025

~~Included in equity securities at June~~NOTES ~~30,~~TO CONSOLIDATED ~~2009~~FINANCIAL ~~is a~~STATEMENTS ~~$148~~(Unaudited,~~676~~ ~~investment~~dollars in ~~Johnson & Johnson common stock,~~thousands) ~~which represents 12.0% of shareholder’s 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


3.	Investments

The aggregate carrying value of the Company’s investment 10portfolio 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.

~~NOTES TO~~Available-For-Sale ~~CONSOLIDATED FINANCIAL STATEMENTS~~Securities ~~(Unaudited, dollars in thousands)~~

~~Included~~Investments in ~~equity securities at December 31, 2008 is a~~ ~~$156,642 investment in Johnson & Johnson common stock,~~available-for-sale ~~which~~fixed ~~represents~~income ~~13.4%~~and ~~of shareholder’s~~ equity atsecurities ~~that~~are ~~date.~~summarized below:

The global financial crisis has increased the volatility of most investments. As a result, the market values of these investments 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 June 30, 2009 totaling $49,996, which represented 8.3% of the cost or amortized cost of such securities in the aggregate. 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 June 30, 2009 and December 31, 2008.


	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

	June 30, 2009						December 31, 2008
	Fair		Unrealized		Number of		Fair		Unrealized		Number of
	Value		Loss		Securities		Value		Loss		Securities
Fixed income securities:
Investment grade:
U.S. government and government agencies and authorities:
6 months or less	$	11,702	$	75		3	$	—	$	—		—
States, municipalities and political subdivisions:
6 months or less		106,888		2,769		10		385,140		16,865		27
7 – 12 months		19,927		768		4		15,462		1,132		3
Greater than 12 months		16,216		333		2		—		—		—
		143,031		3,870		16		400,602		17,997		30
Non-investment grade, other corporate:
6 months or less		—		—		—		36,100		4,495		1
Total fixed income securities		154,733		3,945		19		436,702		22,492		31
Equity securities:
6 months or less		377,397		45,042		13		519,602		115,366		14
7 – 12 months		22,990		1,009		2		—		—		—
Total equity securities		400,387		46,051		15		519,602		115,366		14
Total securities in an unrealized loss position	$	555,120	$	49,996		34	$	956,304	$	137,858		45


¹		Includes assets pledged for derivatives at a fair value of $29,756 (amortized cost of $24,009).

~~Substantially~~Included ~~all of the gross unrealized losses of $3,945~~ in ~~the~~ ~~fixed~~equity ~~income~~securities ~~portfolio~~ at ~~June~~September 30, 2009 are a ~~attributable~~$188,320 to investment ~~grade~~in ~~municipal~~Dell ~~bonds, over 79% of which are fully insured by Berkshire Hathaway Assurance Corp~~Inc. ~~for~~ ~~the~~common ~~payment~~stock ~~of interest~~ and ~~principal~~a ~~in the event of issuer~~$159,340 ~~default.~~investment ~~Of the 19 fixed income securities~~ in ~~a loss position at June~~Johnson ~~30,~~& ~~2009,~~Johnson ~~only~~common ~~one had a loss that exceeded 10% of its cost~~stock, ~~in an immaterial amount of $60. The aggregate severity of~~which ~~the~~represent ~~total unrealized losses in the fixed income portfolio at June 30, 2009 was approximately 2~~12.50% ofand ~~their amortized cost~~10.2%, ~~Management has determined that the unrealized losses on its fixed income portfolio at June 30~~respectively, ~~2009 are principally attributable to changes in interest rates and widening credit spreads. Management has based this conclusion on its current understanding~~ of ~~the issuers of these securities and has~~shareholder’s ~~determined~~equity ~~that~~at ~~it does not have the intent to sell these securities and it is more likely than not~~ that ~~it will not be required to sell these securities before recovery of their cost bases~~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

~~NOTES~~Included in equity securities at December ~~TO CONSOLIDATED~~31, ~~FINANCIAL~~2008 ~~STATEMENTS~~is a ~~(Unaudited~~$156,642 ~~dollars~~investment in ~~thousands)~~Johnson & Johnson common stock, which represents 13.4% of shareholder’s equity at that date.

The ~~following~~Company ~~table~~holds ~~summarizes~~significant ~~the~~investments ~~fair~~in ~~values~~equities and ~~gross~~equity ~~unrealized~~related ~~losses~~securities. ofThe ~~equity~~market ~~securities~~values ~~categorized~~and ~~first~~liquidity byof these ~~length~~investments ofare ~~time~~volatile ~~those~~and ~~equity~~may ~~securities~~vary ~~have~~dramatically ~~been~~either inup anor ~~unrealized~~down ~~loss~~in ~~position~~short periods, and ~~then~~their ~~further~~ultimate ~~categorized~~value bywill ~~the~~therefore ~~severity~~only ofbe known over the ~~unrealized~~long ~~loss~~term. ~~position~~Certain individual available-for-sale securities had gross unrealized losses at ~~June~~September 30, 2009 totaling $7,842, which represented 2.6% of the cost or amortized cost of such securities in the aggregate.

	Unrealized Loss as a Percentage of Cost
															Gross
															Unrealized
	Fair Value		0-10%		10-20%		20-30%		30-40%		40-50%		>50%		Losses
6 months or less	$	377,397	$	15,683	$	6,302	$	22,943	$	—	$	—	$	114	$	45,042
7 – 12 months		22,990		132		—		—		877		—		—		1,009
Total equity securities fair value and gross unrealized losses	$	400,387	$	15,815	$	6,302	$	22,943	$	877	$	—	$	114	$	46,051
Number of securities		15		7		3		2		1		—		2		15

TheTable aggregate severity of the total unrealized losses in the equity portfolio at June 30, 2009 was approximately 10.3% of their cost, including one security with aggregate losses totaling $19,660, or 21.7% 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. Contents

~~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)NOTES ~~the length of time and extent to~~TO ~~which~~CONSOLIDATED ~~the~~FINANCIAL ~~fair value has been less than its cost or amortized~~STATEMENTS ~~cost;~~ (~~ii) the~~Unaudited, ~~severity~~dollars 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~~thousands) ~~for fixed income~~ securities, the Company’s 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 Company’s 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~~The ~~reviewed~~following ~~currently~~table ~~available~~summarizes, ~~information~~for ~~regarding all~~those securities ~~where the estimated fair value was less than cost or amortized cost at June 30, 2009 and based thereon, recorded other than temporary impairment charges of $51,553 and $105,954~~ in ~~the three and six months ended June 30, 2009,~~an ~~respectively.~~unrealized ~~For~~loss ~~the three months ended June 30~~position, ~~2009, all other than temporary impairments were due to write downs of equity securities. For~~ the ~~six~~fair ~~months~~value ~~ended~~and ~~June 30,~~gross ~~2009,~~unrealized ofloss ~~the~~by ~~$105,954~~length of ~~other~~time ~~than~~those ~~temporary impairments, $3,507 was in respect of fixed income~~ securities, ~~all~~have of which was credit related, and the remaining $102,447 was due to write downs of equity securities. There are no credit related losses for which a portion of the other than temporary impairment has been ~~recognized~~ in ~~accumulated other comprehensive income. For the~~an ~~three~~unrealized ~~and~~loss ~~six~~position ~~months~~at ~~ended June~~September 30, ~~2008,~~2009 ~~the Company recorded other than temporary impairment charges of $165~~ and ~~$41~~December 31,~~078,~~ ~~respectively, primarily related to write downs of~~2008: ~~equity securities.~~


	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

~~NOTES TO~~The following table summarizes the fair values and gross ~~CONSOLIDATED~~unrealized ~~FINANCIAL~~losses ~~STATEMENTS~~of equity securities categorized first by ~~(Unaudited,~~length ~~dollars~~of time those equity securities have been in ~~thousands)~~an unrealized loss position and then further categorized by the severity of the unrealized loss position at September 30, 2009:

Fixed Income Securities Designated as Held-for-Trading


	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

~~Fixed income securities classified as~~ ~~held-for-trading~~11 include those purchased for short-term investment objectives and those designated as such by management pursuant to the fair value option under SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements Nos. 133 and 140 (“SFAS 155”). 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 operations in the period in which they occur and amounted to gains of $37,053 and $23,129, and $580 and $1,777, for the three and six months ended June 30, 2009 and 2008, respectively. The fair values of these securities were $331,022 and $233,998 at June 30, 2009 and December 31, 2008, respectively, which include convertible securities of $182,328 and $166,131 at June 30, 2009 and December 31, 2008, respectively, mortgage-backed securities of $115,493 and $66,393 at June 30, 2009 and December 31, 2008, respectively, and other corporate bonds of $33,201 and $1,474 at June 30, 2009 and December 31, 2008, respectively.

IncludedTable in held-for-trading securities are two convertible securities issued by Level 3 Communications, Inc. with a combined value of $143,854, which together with an investment in Level 3 Communications, Inc. common stock of $36,340, represented 14.5% of shareholder’s equity at June 30, 2009 (12.8% at December 31, 2008). Contents

~~Investments~~NOTES TO atCONSOLIDATED ~~Equity~~FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

~~Investments~~The ataggregate ~~equity~~severity ~~include~~of ~~investments~~the intotal ~~entities~~unrealized ~~that~~losses ~~are~~in the ~~consolidated~~equity ~~subsidiaries~~portfolio at September 30, 2009 was approximately 2.6% of ~~Fairfax~~their cost, ~~but~~including ~~are~~one ~~less~~security ~~than~~with ~~50%~~losses totaling ~~owned~~$4,610, byor ~~the~~40.8% ~~Company,~~of asits ~~well~~cost, asthat ~~investments~~has been in ~~certain~~an unrealized ~~partnerships,~~loss ~~accounted~~position for ~~under~~less ~~the~~than ~~equity~~six ~~method~~months. ofManagement has evaluated ~~accounting.~~the ~~These~~financial ~~investments~~condition ~~consist~~and near-term prospects of the issuers of equity ~~interests~~securities ofin an unrealized loss position and the ~~between~~price ~~approximately~~volatility ~~1.0%~~of ~~and~~the ~~47.0%~~equity atsecurities ~~June 30~~themselves, ~~2009,~~as ~~with~~well as arecoveries ~~total~~or ~~carrying~~additional declines in fair value ofsubsequent ~~$150~~to the balance sheet date,~~009~~ and ~~$117,586~~believes atthey ~~June 30,~~have the potential for ~~2009~~recovery within a reasonable period of time and ~~December 31,~~therefore ~~2008,~~does not ~~respectively~~consider them to be other than temporarily impaired.

At each reporting date, and more frequently when conditions ~~Significant~~warrant, management evaluates all ~~Subsidiary~~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 Company’s 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 Company’s 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.

~~Included~~Management inreviewed ~~the~~currently ~~Company’s~~available ~~investments~~information ~~at equity is its~~regarding ~~investment~~all insecurities ~~HWIC~~where ~~Asia~~the ~~Fund~~estimated ~~(“HWIC”),~~fair invalue ~~which~~was itless than cost ~~holds~~or aamortized ~~31.7%~~cost ~~interest~~at ~~as of June~~September 30, 2009. ~~HWIC~~and isbased thereon, ~~accounted~~recorded ~~for~~other inthan ~~accordance~~temporary ~~with~~impairment charges of $26 and $105,980 in the ~~equity~~three ~~method~~and ofnine months ended September 30, ~~accounting~~2009, respectively. For the ~~three~~nine months ended ~~June~~September 30, 2009, ~~HWIC~~of the $105,980 of other than temporary impairments, $3,507 was ain ~~significant~~respect ~~subsidiary~~of asfixed ~~defined~~income insecurities, all of which was credit related, and the ~~SEC’s~~remaining $102,473 was due to write ~~Regulation S-X~~downs of equity securities. There were no credit related losses ~~The~~for ~~Company’s~~which ~~aggregate~~a ~~share~~portion of ~~HWIC’s~~the ~~statement~~other ofthan temporary impairment has ~~income~~been ~~reported~~recognized in ~~the~~accumulated ~~Company’s~~other ~~results~~comprehensive ~~(in~~income. ~~investment~~For ~~income) for~~ the three and nine months ended ~~June~~September 30, ~~2009~~2008, isthe ~~summarized~~Company asrecorded ~~follows:~~other than temporary impairment charges of $34,698 and $75,776, respectively, primarily related to write downs of equity securities.

	Three Months Ended
	June 30, 2009
Total revenues	$	23,475
Total expenses	$	1,050
Income from continuing operations	$	22,425
Net income	$	22,424

Fixed Income Securities Designated as Held-for-Trading

Fixed income securities classified as 13held-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 ~~NOTES TO~~held-for-trading ~~CONSOLIDATED~~securities ~~FINANCIAL~~are ~~STATEMENTS~~two convertible securities issued by Level 3 ~~(Unaudited~~Communications, ~~dollars~~Inc. with a combined value of $142,333, which together with an investment in ~~thousands~~Level 3 Communications, Inc. common stock of $33,657, represented 11.2% of shareholder’s equity at September 30, 2009 (12.8% at December 31, 2008).

~~Derivatives~~ ~~and Other Invested Assets~~12

Derivative Securities Table of Contents

~~The Company utilizes derivative securities to mitigate financial~~ ~~risks arising principally from its investment holdings and receivables. Effective January~~NOTES ~~1, 2009, the Company adopted~~TO ~~SFAS~~CONSOLIDATED ~~161,~~FINANCIAL ~~which requires enhanced disclosures about derivatives~~STATEMENTS ~~and hedging activities. The Company’s derivative securities are principally comprised of credit default swaps~~(Unaudited, ~~none~~dollars ~~of which is designated as a hedge, and are included~~ in ~~derivatives and~~thousands) other invested assets on the consolidated balance sheets at fair value. The Company had no derivative liabilities at June 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 operations in the period in which they occur.

~~The following table summarizes the Company’s derivative~~Investments ~~securities~~ at ~~June 30, 2009 and December 31, 2008.~~Equity

	June 30, 2009						December 31, 2008
	Notional				Fair Value		Notional				Fair Value
	Amount		Cost		Asset		Amount		Cost		Asset
Credit default swaps	$	1,538,616	$	21,624	$	42,620	$	3,044,313	$	42,477	$	138,830
Eurodollar futures contracts		—		—		—		1,013,000		—		—	1
Warrants		101,201		10,225		2		101,201		10,225		—

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.

~~1 Eurodollar futures contracts are settled daily~~ Derivatives and ~~therefore~~Other ~~had~~Invested ~~no fair value at December 31, 2008.~~Assets

~~Credit~~Derivative ~~Default Swaps~~Securities

The Company ~~has~~utilizes ~~purchased~~derivative ~~credit~~securities ~~default swaps, referenced~~ to ~~various~~ ~~issuers~~mitigate ~~in the banking, mortgage and insurance sectors of the~~ financial ~~services industry which serve as economic~~ ~~hedges~~risks ~~against~~arising ~~declines~~principally infrom ~~the~~its ~~fair~~investment ~~value~~holdings ~~of the Company’s~~and ~~financial assets~~receivables. ~~Under~~Effective aJanuary 1, ~~credit default swap~~2009, as the ~~buyer,~~Company ~~the~~adopted ~~Company~~FASB ~~agrees to pay to a specific counterparty~~ASC 815-10, ~~fixed premium~~ ~~amounts~~Derivatives ~~based~~and onHedging, anwhich ~~agreed~~requires ~~notional principal amount in exchange~~enhanced ~~for~~disclosures ~~protection~~about ~~against~~derivatives ~~default~~and byhedging ~~the~~activities. ~~issuers of specified~~The ~~referenced~~Company’s ~~debt~~derivative securities. ~~The~~are ~~credit~~principally ~~events, as defined by the~~comprised ~~respective~~of credit default ~~swap~~swaps ~~contracts~~and ~~establishing~~total ~~the~~return ~~rights to recover amounts from the counterparties~~swaps, ~~include~~none ~~events~~of ~~such~~which asare ~~bankruptcy,~~designated ~~obligation~~as ~~acceleration~~hedges, ~~obligation~~and ~~default, failure~~are toincluded ~~pay,~~in ~~repudiation/moratorium~~derivatives and ~~restructuring. As of~~ ~~June 30,~~other ~~2009,~~invested ~~all~~assets ~~credit~~on ~~default swap contracts held by~~ the ~~Company~~consolidated ~~have~~balance ~~been~~sheets ~~purchased~~at ~~from and entered into with~~fair ~~either Citibank, N~~value.~~A.,~~ ~~Deutsche~~The ~~Bank~~Company AGhad orno ~~Barclays~~derivative ~~Bank~~liabilities ~~PLC as~~at ~~the counterparty~~September 30, ~~with~~2009 ~~positions~~or onDecember 31, ~~certain~~2008. ~~covered~~Changes ~~risks with~~in ~~more~~fair ~~than~~value ~~one~~ of ~~these~~derivative ~~counterparties.~~securities ~~These~~are ~~credit~~included ~~default~~in realized ~~swaps~~investment ~~were~~gains ~~acquired by Fairfax~~ and ~~assigned~~losses toon the ~~Company~~consolidated tostatements of ~~facilitate~~income ~~administration~~in ofthe ~~counterparty~~period ~~credit~~in ~~risk~~which ~~and collateral~~they ~~maintenance~~occur.

The ~~credit~~following ~~default~~table ~~swaps~~summarizes ~~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’s ~~obtains~~derivative ~~market-derived~~securities ~~fair~~at ~~values for its credit default swaps from third-party providers~~September 30, ~~principally~~2009 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 issuersDecember 31, ~~movements in credit spreads~~2008: 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.


	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		—

~~NOTES TO CONSOLIDATED~~1 ~~FINANCIAL~~At ~~STATEMENTS (Unaudited~~September 30, ~~dollars~~2009, inother ~~thousands)~~ 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.

~~Counterparties to the credit default swaps expose the Company to~~ ~~credit risk in the event of non-performance, which Fairfax and~~Credit ~~the~~Default ~~Company endeavor to limit through the terms of agreements~~Swaps 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 Company’s balance sheet, is held by an independent custodian in the name of Fairfax on behalf of the Company, or directly in the name of the Company, and amounted to $13,704 at June 30, 2009. The Company has the right to sell or repledge $10,511 of 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 ($28,916 at June 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.

AtThe ~~June 30~~Company has purchased credit default swaps, ~~2009~~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 Company’s financial assets. Under a credit default swap, ~~portfolio~~as ~~had~~the anbuyer, the ~~average~~Company ~~term~~agrees to ~~expiry~~pay ofto ~~2.8 years.~~a Aspecific ~~maturity~~counterparty, ~~analysis~~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 ~~swaps~~swap atcontracts ~~June~~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, isall ~~summarized~~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 ~~follows:~~the counterparty, with positions on certain covered risks with more than one of these counterparties.

	Notional
	Amount		Fair Value
Expiring in one year or less	$	597,938	$	6,804
Expiring after 1 year through 5 years		940,678		35,816
	$	1,538,616	$	42,620

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.

~~The following table summarizes the changes in fair value of the~~ ~~Company’s derivative securities and short positions~~13 ~~included in net realized investment gains and losses in the consolidated statements of operations for the three and six months ended June 30, 2009 and 2008.~~

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Credit default swaps	$	(18,746	)	$	2,672		$	13,450		$	156,645
SPDRs short-sales		—			(4,009	)		—			65,506
Total return swaps		—			11,797			—			11,797
Common stock short-sales		—			(112	)		—			4,749
S&P Index call options		—			(33	)		—			(453	)
Other1		1			(2,240	)		(341	)		(3,470	)
Total net realized investment (losses) gains	$	(18,745	)	$	8,075		$	13,109		$	234,774

1 NOTES TO CONSOLIDATED ~~Other~~FINANCIAL ~~includes~~STATEMENTS (Unaudited, ~~warrants~~dollars ~~and~~in ~~Eurodollar futures contracts.~~thousands)

Counterparties to the credit default swaps expose the Company to 15credit 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 Company’s 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:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, dollars in thousands)


	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

~~Further~~The ~~analysis~~Company’s ofcredit ~~the~~default ~~realized~~swaps ~~gains~~have ~~for~~declined significantly ~~the~~in ~~three~~2009 ~~and~~relative ~~six~~to prior years, largely as a ~~months~~result ~~ended~~of ~~June 30,~~significant ~~2009~~sales ~~and~~in 2008. isIn ~~set~~the ~~forth~~latter inpart of 2008, the Company reviewed the financial objectives of its economic ~~tables~~hedging ~~below.~~program ~~The~~and ~~realized~~decided ~~gains~~not orto ~~losses~~replace closed credit default swaps based on: ~~disposal~~(i) the ~~represent~~Company’s judgment that its ~~inception~~exposure to ~~date~~elevated ~~gains~~levels orof ~~losses~~credit onrisk ~~positions~~had ~~closed~~moderated and that its historical approaches to managing credit risk were satisfactory in mitigating the Company’s exposure to credit ~~periods.~~risk ~~The~~arising ~~reversal~~from ofits financial assets; (ii) the ~~mark-to-market~~significant increase in the cost of purchasing credit ~~gains~~protection; orand ~~losses~~(iii) the ~~represents~~fact ~~changes~~that inthe ~~fair~~Company’s capital ~~value~~and ~~recognized~~liquidity had benefited from approximately $450 million in realized gains from credit default swaps ~~prior~~since ~~periods~~inception onof ~~securities~~the ~~sold~~hedge ~~and~~program. As a result, the effects ~~mark-to-market~~that credit default swaps as hedging instruments may be expected ~~gains~~to have on ~~losses~~the inCompany’s ~~the~~future ~~current~~financial ~~period~~position, liquidity ~~represents~~and ~~changes~~results of operations may be expected to diminish significantly relative to the effects in ~~fair~~recent years. The ~~value~~Company onmay initiate new credit default ~~swaps~~swap ~~still~~contracts ~~outstanding~~as an effective hedging mechanism in the future, but there can be no assurance that it will do so.

	Three Months Ended June 30, 2009
	Credit Default
	Swaps1			Other Derivatives		Total
Realized gains on disposal	$	—		$	—	$	—
Reversal of mark-to-market gains recognized in prior periods		—			—		—
Mark-to-market (losses) gains recognized in period		(18,746	)		1		(18,745	)
Net realized investment (losses) gains	$	(18,746	)	$	1	$	(18,745	)

1Table During the three months ended June 30, 2009, the Company had no sales of credit default swaps.Contents

	Three Months Ended June 30, 2008
										Common			S&P
	Credit			SPDRs			Total			Stock			Index
	Default			Short-			Return			Short-			Call			Other
	Swaps1			Sales			Swaps			Sales			Options			Derivatives			Total
Realized gains (losses) on disposal	$	25,982		$	(22,523	)	$	(2,617	)	$	2,053		$	(228	)	$	—		$	2,667
Reversal of previously recognized mark-to-market (gains) losses on current period disposals		(21,911	)		18,514			—			(2,165	)		228			—			(5,334	)
Mark-to-market (losses) gains recognized in period		(1,399	)		—			14,414			—			(33	)		(2,240	)		10,742
Net realized investment gains (losses)	$	2,672		$	(4,009	)	$	11,797		$	(112	)	$	(33	)	$	(2,240	)	$	8,075

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)

1 The ~~During~~following ~~the~~tables ~~three~~summarize ~~months~~the ~~ended~~effect ~~June~~of ~~30, 2008,~~ the ~~Company sold~~ credit default swaps ~~with~~and arelated ~~cost~~hedged ofitems ~~$4,668~~on the Company’s financial position and ~~notional~~results ~~amount~~of operations as of ~~$145,776~~and for ~~proceeds~~the ofthree $and nine months ended September 30,~~650.~~ 2009 and 2008:

	Six Months Ended June 30, 2009
	As of and for the Three Months Ended September 30, 2009
	Credit
							Effect on Pre-tax
	Default			Other
										Net Realized
	Swaps1			Derivatives			Total
							Other			Investment
Realized gains on disposal	$	88,807		$	(343	)	$	88,464
	Exposure/			Carrying			Comprehensive			Gains
Reversal of mark-to-market gains recognized in prior periods		(60,119	)		—			(60,119	)
	Notional Value			Value			Income			(Losses)1			Net Equity
Mark-to-market (losses) gains recognized in period		(15,238	)		2			(15,236	)
Credit risk exposures:
Net realized investment gains (losses)	$	13,450		$	(341	)	$	13,109
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 ~~During~~Includes ~~the~~earnings ~~six~~charges ~~months~~for ~~ended~~premiums ~~June~~receivable ~~30, 2009, the Company sold credit default swaps with a cost of $20,853~~ and ~~notional~~reinsurance ~~amount of $1,387,500 for proceeds of $109,660~~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

~~NOTES TO CONSOLIDATED~~1 ~~FINANCIAL~~Includes ~~STATEMENTS (Unaudited,~~earnings ~~dollars~~charges infor ~~thousands)~~ premiums receivable and reinsurance recoverable.

	Six Months Ended June 30, 2008
										Common			S&P
	Credit			SPDRs			Total			Stock			Index
	Default			Short-			Return			Short-			Call			Other
	Swaps1			Sales			Swaps			Sales			Options			Derivatives			Total
Realized gains (losses) on disposal	$	149,518		$	(22,523	)	$	(2,617	)	$	5,116		$	(1,615	)	$	—		$	127,879
Reversal of previously recognized mark-to-market (gains) losses on current period disposals		(103,545	)		88,029			—			(367	)		1,555			—			(14,328	)
Mark-to-market gains (losses) recognized in period		110,672			—			14,414			—			(393	)		(3,470	)		121,223
Net gains realized investment gains (losses)	$	156,645		$	65,506		$	11,797		$	4,749		$	(453	)	$	(3,470	)	$	234,774

1Table During the six months ended June 30, 2008, the Company sold credit default swaps with a cost of $20,259 and notional amount of $778,891 for proceeds of $169,777.Contents

~~Other~~NOTES TO ~~Invested~~CONSOLIDATED ~~Assets~~FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

Other invested assets are comprised of investments for which the Company has elected the fair value option under SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). These investments, which include the Company’s investments in Odyssey Re Holdings Corp. (“Odyssey”) common and preferred stock and Advent Capital (Holdings) PLC (“Advent”), 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 June 30, 2009 and December 31, 2008, other invested assets had a fair value of $214,310 and $273,917, respectively. For the three and six months ended June 30, 2009 and 2008, the change in fair value of other invested assets resulted in a realized investment gain (loss) of $11,455 and $(59,607), and $668 and $(40,416), respectively. For the six months ended June 30, 2009, the loss was primarily attributable to the change in fair value of the Company’s investment in Odyssey common stock, which was acquired in the fourth quarter of 2008, whereas for the six months ended June 30, 2008 the loss was primarily due to the change in fair value of the Company’s investment in Northbridge Financial Corp. which was sold in the fourth quarter of 2008.


	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

~~Related Party~~1 ~~Transactions~~ Includes earnings charges for premiums receivable and reinsurance recoverable.

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.


	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

In1 ~~March~~Includes ~~2009,~~earnings ~~the~~charges ~~Company sold several municipal securities with a fair market value of $97,112 to certain Fairfax affiliates,~~ for ~~cash~~premiums ~~consideration~~receivable and areinsurance ~~pre-tax gain of $4,236~~recoverable. Also in March 2009, the Company transferred municipal securities with a fair market value of $54,008 to Fairfax Inc., as partial settlement of a tax liability, resulting in a pre-tax gain of $5,907.

1716

NOTES TO CONSOLIDATEDTable FINANCIALof STATEMENTS (Unaudited, dollars in thousands) Contents

4. NOTES TO CONSOLIDATED ~~Fair~~FINANCIAL ~~Value~~STATEMENTS (Unaudited, ~~Disclosures~~dollars in thousands)

~~Fair~~Total ~~Value~~Return ~~Hierarchy~~Swaps

InDuring ~~accordance~~much ~~with~~of ~~SFAS No. 157,~~2008 ~~“Fair~~and ~~Value Measurements”~~immediately ~~(“SFAS 157”)~~preceding years, the Company ~~has~~had ~~categorized~~been ~~its~~concerned ~~financial~~about ~~instruments~~the ~~into~~valuation ~~the~~of ~~three-level~~worldwide equity ~~fair value hierarchy~~markets, ~~based~~uncertainty onresulting ~~priority~~from ofcredit ~~inputs~~issues toin the ~~valuation technique~~U. ~~SFAS~~S. ~~157~~and ~~defines~~global ~~fair~~economic ~~value,~~conditions. As protection against ~~establishes~~ a ~~framework~~decline ~~for~~in ~~measuring~~equity ~~fair~~markets, ~~value~~the inCompany ~~accordance with~~held ~~generally~~short ~~accepted~~positions ~~accounting~~in Standard & ~~principles~~Poor’s ~~and~~Depositary ~~expands~~Receipts ~~disclosures~~(“SPDRs”) ~~about~~and ~~fair~~U.S. listed ~~value~~common ~~measurements.~~stocks ~~SFAS 157~~and ~~clarifies~~equity ~~that~~index ~~fair~~and ~~value~~equity istotal ~~the~~return ~~exit price~~swaps, ~~representing~~referred to in the ~~amount~~aggregate ~~that~~as ~~would~~equity behedges. ~~received~~The toCompany ~~sell~~also anin ~~asset~~the ~~or paid to~~past ~~transfer~~purchased aS&P ~~liability~~Index incall anoptions ~~orderly~~to ~~transaction~~limit ~~between~~the ~~market~~potential ~~participants~~loss ~~and~~on ~~establishes~~its aequity ~~fair~~index ~~value~~total ~~hierarchy~~return ~~that~~swaps and SPDRs short ~~prioritizes~~positions ~~the~~and ~~inputs~~to ~~used~~provide ingeneral ~~valuation~~protection ~~techniques.~~against ~~The~~the ~~fair~~short ~~value~~position ~~hierarchy~~in iscommon ~~designed~~stocks. toIn ~~indicate~~ the ~~relative~~latter ~~reliability~~ half of ~~fair~~2008, ~~value~~following significant ~~measurement.~~declines ~~The~~in ~~highest~~global ~~priority~~equity ismarkets, ~~given~~the toCompany ~~quoted~~reviewed ~~prices~~the infinancial ~~active~~objectives ~~markets~~of ~~and~~its ~~the~~hedging ~~lowest~~program ~~to unobservable~~and ~~data.~~determined Inthat ~~certain~~elevated ~~cases,~~risks in the ~~inputs~~global ~~used~~equity tomarkets ~~measure fair value~~had ~~may~~moderated ~~fall~~and ~~into~~subsequently ~~different~~closed ~~levels~~all of ~~the~~its ~~fair~~equity ~~value hierarchy. In~~hedge ~~such cases~~positions, ~~the~~realizing ~~level~~substantial ingains. ~~the~~During ~~hierarchy within which~~ the ~~fair~~fourth ~~value~~quarter ~~measurement~~of ~~falls~~2008, isthe ~~determined~~Company ~~based~~increased onits ~~the~~investments ~~lowest level~~in ~~significant~~equities ~~input.~~as ~~The~~a ~~hierarchy~~result isof ~~broken~~the ~~down~~opportunities ~~into~~presented ~~three~~by ~~levels~~significant ~~based~~declines onin the ~~reliability~~global ofequity ~~inputs as follows:~~markets.

~~Level 1 —~~During ~~Valuations~~the ~~based~~third onquarter ~~unadjusted~~of ~~quoted~~2009, as a result of the rapid ~~prices~~increase in ~~active~~the ~~markets~~valuation ~~for~~level ~~identical~~of ~~assets~~worldwide orequity ~~liabilities.~~markets, Athe ~~quoted~~Company ~~price~~once ~~for~~again andetermined ~~identical~~to ~~asset~~protect ora ~~liability~~portion of its equity and equity related holdings against a decline in anequity ~~active~~markets ~~market~~and ~~provides~~entered ~~the~~into ~~most~~equity ~~reliable~~index ~~fair~~total return swaps with a notional value ~~measure~~of ~~and~~$452,319. These total return swaps contain contractual ~~whenever~~reset ~~available,~~provisions ~~should~~requiring becounterparties ~~used~~to cash-settle on a monthly basis any market value movements arising since the prior settlement. Any cash paid to ~~measure~~settle ~~fair~~unfavorable market value changes and, conversely, any cash received in settlement of ~~provided~~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 ~~(1)~~ a contractual reset date of a contract does not correspond to the balance ~~market~~sheet isdate, the ~~principal~~Company (records additional net realized investment gains or ~~most~~losses on the consolidated statements of ~~advantageous)~~income ~~market~~to ~~and~~adjust ~~(2)~~ the ~~entity~~carrying ~~has~~value of the ~~ability~~derivative asset or liability associated with each total return swap contract to ~~access~~reflect ~~the~~its ~~principal~~fair ~~(or~~value ~~most~~at ~~advantageous)~~the ~~market~~balance sheet date.

~~Level 2 —~~The ~~Valuations~~Company ~~based~~is onrequired ~~information~~to ~~(other than~~post ~~quoted~~collateral ~~prices~~equivalent ~~included~~to ~~within~~6% ~~Level 1) that is~~of ~~observable~~the ~~for~~notional value of the ~~asset~~total ~~and~~return ~~liability,~~swaps ~~either~~at ~~directly~~the ortime the ~~indirectly~~swap is opened. ~~This~~These ~~includes~~assets ~~quoted~~are ~~prices~~recorded ~~for~~at ~~similar~~fair ~~assets~~value orin ~~liabilities~~assets inpledged ~~active~~for ~~markets,~~derivatives ~~quoted~~on ~~prices~~the ~~for~~consolidated ~~identical or~~balance ~~similar~~sheets. ~~assets~~At orSeptember 30, ~~liabilities~~2009, inthe ~~markets~~fair ~~that~~value ~~are~~of ~~not active and~~the ~~observable~~collateral ~~inputs~~posted, ~~other~~in ~~than~~the ~~quoted~~form ~~prices,~~of ~~such~~municipal asbonds, ~~interest rates~~was ~~and yield curves~~$29,756.

~~Level 3 —~~The ~~Valuations~~following ~~based~~tables onsummarize ~~inputs~~the ~~that~~effect ~~are~~of equity risk hedging ~~unobservable~~instruments and ~~significant~~related tohedged items on the ~~overall~~Company’s financial ~~fair~~position ~~value~~and results of operations as of and for the ~~measurement.~~three and nine months ended September 30, 2009 and 2008:

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.


	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

~~For~~1 ~~determining~~Includes ~~the~~earnings ~~fair~~from ~~value of its Level 1~~ investments ~~(approximately~~ ~~43% of total investment portfolio~~ at ~~fair value), the Company utilizes quoted market prices in active markets for identical securities. The Company’s Level 1 investments include exchange-traded~~ equity ~~securities in active markets~~.

~~The Company’s Level 2 investments (approximately 56%~~ ~~of total investment portfolio at fair value), the majority of~~17 which are in government, corporate and municipal securities, are priced using publicly traded over-the-counter prices and broker-dealer quotes. Also included in Level 2 investments are certain mortgage-backed securities, purchased at deep discounts to par, as well as credit default swaps that are priced principally using broker-dealer quotes and inactively traded convertible corporate debentures which are valued using a pricing model. All the values of the Company’s Level 2 investments are based on observable market inputs such as benchmark yields, reported trades, credit spreads, discount rates and bids. For determining the fair value of credit default swaps, the Company utilizes broker-dealer quotes which include observable credit spreads, with current market spreads being the primary observable input. 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. 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.

18 Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)

The Company’s 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.


	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

~~The~~1 ~~following~~Includes ~~tables~~earnings ~~present~~from ~~the Company’s 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 June 30, 2009 and December 31, 2008:~~ equity.

	June 30, 2009
	As of and for the Nine Months Ended September 30, 2009
	Quoted Prices in		Significant Other
					Effect on Pre-tax
	Active Markets for		Observable		Significant
							Net Realized
	Identical Assets		Inputs		Unobservable Inputs
					Other		Investment
	(Level 1)		(Level 2)		(Level 3)		Total
	Exposure/		Carrying		Comprehensive		Gains
Assets
	Notional Value		Value		Income		(Losses)1			Net Equity
Available-for-sale fixed income securities:
Equity exposures:
U.S. government and government agencies and authorities	$	—	$	92,816	$	—	$	92,816
Equity securities	$	1,383,777	$	1,383,777	$	322,728	$	(71,518	)	$	251,210
States, municipalities and political subdivisions		—		1,185,564		—		1,185,564
Investments at equity		159,370		159,370		1,776		44,579			46,355
Other corporate		—		164,885		—		164,885
Other invested assets		355,303		355,303		—		73,902			73,902
Total available-for-sale fixed income securities		—		1,443,265		—		1,443,265
Total equity exposure	$	1,898,450	$	1,898,450		324,504		46,963			371,467
Fixed income securities, held-for-trading:
Hedging instruments:
Residential mortgage-backed		—		93,580		21,913		115,493
Derivatives:
Other corporate		—		215,529		—		215,529
Total return swaps	$	452,319	$	2,611		—		2,611			2,611
Total held-for-trading fixed income securities		—		309,109		21,913		331,022
Total equity hedging instruments	$	452,319	$	2,611		—		2,611			2,611
Equity securities		1,228,306		29,454		—		1,257,760
Net equity exposure					$	324,504	$	49,574		$	374,078
Derivatives and other invested assets		204,539		52,393		—		256,932
Short-term investments		—		45,707		—		45,707
Total	$	1,432,845	$	1,879,928	$	21,913	$	3,334,686

19 1 Includes earnings from investments at equity.

~~NOTES TO~~ ~~CONSOLIDATED FINANCIAL STATEMENTS~~18 ~~(Unaudited, dollars in thousands)~~

	December 31, 2008
	Quoted Prices in		Significant Other
	Active Markets for		Observable		Significant
	Identical Assets		Inputs		Unobservable 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 June~~NOTES ~~30, 2009 and December 31, 2008, the Company~~TO ~~did~~CONSOLIDATED ~~not~~FINANCIAL ~~carry any liabilities at fair value. The fair value of~~STATEMENTS ~~the Company’s long-term debt~~(Unaudited, ~~determined~~dollars ~~from~~in ~~market~~thousands) ~~prices, was $292,875 and $244,200 at June 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 six months ended June 30, 2009 and 2008:


	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	)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Balance, beginning of period	$	29,694		$	2,661		$	66,393		$	2,500
Purchases, issuances and settlements		(11,404	)		—			(1,435	)		—
Transfers to Level 2		—			—			(47,611	)		—
Realized gains (losses) included in net income		3,623			(163	)		4,566			(2	)
Balance, end of period	$	21,913		$	2,498		$	21,913		$	2,498
Total gains (losses) for the period recognized in earnings attributable to the change in unrealized gains or losses relating to assets held at period end.	$	246		$	(163	)	$	973		$	(2	)


¹		Includes earnings from investments at equity.

Other 20Derivatives

The Company has investments in warrants, which are contracts ~~NOTES TO~~that grant the holder the right to purchase an underlying ~~CONSOLIDATED~~financial ~~FINANCIAL~~instrument ~~STATEMENTS~~at a given price and time. Warrants are ~~(Unaudited,~~recorded ~~dollars~~at fair value with changes in ~~thousands)~~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 ~~Fair~~Company’s derivative securities and short positions ~~Value~~included ~~Option~~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:

In accordance with the provisions of SFAS 159, the Company has elected the fair value option for certain investments that would have otherwise been accounted for under the equity method of accounting. SFAS 159 provides the option 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. Changes in the fair value of assets and liabilities for which the election is made are recognized in net income as they occur.


	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

In1 ~~determining~~Other ~~the~~includes ~~eligible financial instruments for which to elect the fair value option~~warrants, ~~the~~Eurodollar ~~Company~~futures ~~considered~~contracts 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~~S&P ~~accounting~~Index ~~risk~~call ~~associated with those valuations~~options. The Company has elected the fair value option for its investments in Advent, an affiliated company traded on the Alternative Investment Market of the London Stock Exchange, 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 Company’s investments in Odyssey include investments in Odyssey’s common and preferred stock.

~~At June 30, 2009 and December 31, 2008, the~~ ~~Company’s investment in Advent is recorded in derivatives~~19 and other invested assets on the consolidated balance sheets at a fair value of $9,771 and $11,607, respectively. For the three and six months ended June 30, 2009 the change in fair value of the Company’s investment in Advent was a gain (loss) of $74 and $(1,836), respectively, which was recorded through realized investment gains and losses in the consolidated statements of operations.

AtTable June 30, 2009 and December 31, 2008, the Company’s investments in Odyssey’s common and preferred stock are recorded in derivatives and other invested assets on the consolidated balance sheets at fair values of $197,953 and $6,586, and $256,570 and $5,740, respectively. For the three and six months ended June 30, 2009, the total change in fair value of the Company’s investments in Odyssey common and preferred stock was a gain (loss) of $11,381 and $(57,771), respectively, which was recorded through realized investment gains and losses in the consolidated statements of operations. Dividends of $520 and $1,054 were recorded from Odyssey for the three and six months ended June 30, 2009, respectively, and have been recorded as investment income in the consolidated statements of operations. Contents

NOTES TO 21CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

Further analysis of the realized gains for the three and nine ~~NOTES~~months ended September TO30, 2009 and 2008 is set forth in ~~CONSOLIDATED~~the ~~FINANCIAL~~tables ~~STATEMENTS~~below. The realized gains (losses) on disposal represent inception to date gains (~~Unaudited,~~losses) ~~dollars~~on positions closed in ~~thousands~~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.

5. Unpaid Losses and Loss Adjustment Expenses


	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	)

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


	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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Gross unpaid losses and LAE, beginning of period	$	2,871,026		$	3,172,873		$	2,987,803		$	3,178,506
Less ceded unpaid losses and LAE		670,237			1,139,807			684,239			1,197,496
Net unpaid losses and LAE, beginning of period		2,200,789			2,033,066			2,303,564			1,981,010
Losses and LAE incurred related to:
Current period		143,365			186,720			290,100			382,982
Prior years		(10,890	)		59,026			(21,775	)		72,374
Total losses and LAE incurred		132,475			245,746			268,325			455,356
Losses and LAE paid related to:
Current period		42,877			58,095			73,438			85,612
Prior years		146,801			(174,240	)		354,865			(44,203	)
Total losses and LAE paid		189,678			(116,145	)		428,303			41,409
Net unpaid losses and LAE, end of period		2,143,586			2,394,957			2,143,586			2,394,957
Add ceded unpaid losses and LAE		663,097			724,587			663,097			724,587
Gross unpaid losses and LAE, end of period	$	2,806,683		$	3,119,544		$	2,806,683		$	3,119,544


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.

For the three and six months ended June 30, 2009, the Company reported favorable prior years’ loss development as compared to adverse loss development in the corresponding 2008 periods. The adverse loss development in 2008 was primarily attributable to a loss on commutation of a finite reinsurance contract of $75,470 in the second quarter. In addition, for the six months ended June 30, 2008, prior year loss development was also adversely impacted by a $25,500 loss attributable to the settlement of an asbestos lawsuit. Losses and LAE paid related to prior years for the three and six months ended June 30, 2008 includes proceeds from the aforementioned commutation of $302,500.


	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	)

A1 ~~reconciliation~~During of the ~~ceded~~nine ~~unpaid~~months ~~losses~~ended ~~and~~September ~~LAE~~30, in2009, the ~~table above~~Company tosold ~~the~~credit ~~reinsurance~~default ~~recoverable~~swaps ~~reflected~~with ona ~~the consolidated~~cost ~~balance~~of ~~sheet~~$20,853 ~~follows:~~ and notional amount of $1,387,500 for proceeds of $109,660.

	June 30,
	2009
Ceded unpaid losses and LAE in the table above	$	663,097
Reconciling items:
Reinsurance receivable on paid losses and LAE		11,240
Retroactive reinsurance recoverable		257,683
Reinsurance recoverable on the consolidated balance sheet	$	932,020

22 Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)

6. Asbestos and Environmental Losses and Loss Adjustment Expenses


	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

~~The~~1 ~~Company~~During ~~has exposure to asbestos and environmental claims arising from~~ the ~~sale~~nine ofmonths ~~general~~ended ~~liability~~September 30, ~~commercial multi-peril and umbrella insurance policies~~2008, the ~~majority~~Company ~~of which~~sold ~~were~~credit ~~written~~default ~~for~~swaps ~~accident~~with ~~years~~a ~~1985~~cost ~~and prior. Estimation~~ of ~~ultimate~~$33,128 ~~liabilities~~and ~~for~~notional ~~these~~amount ~~exposures is unusually difficult due to such issues as whether or not coverage exists, definition~~ of ~~an occurrence~~$1,518,544 ~~determination~~for ofproceeds ~~ultimate damages and allocation~~ of ~~such damages to financially responsible parties~~$290,356.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Asbestos
Gross unpaid losses and allocated LAE (“ALAE”), beginning of period	$	372,456	$	434,194	$	387,224	$	428,139
Less ceded unpaid losses and ALAE		95,432		83,178		85,336		94,497
Net unpaid losses and ALAE, beginning of period		277,024		351,016		301,888		333,642
Net losses and ALAE incurred		—		—		—		25,500
Net paid losses and ALAE		10,499		11,748		35,363		19,874
Net unpaid losses and ALAE, end of period		266,525		339,268		266,525		339,268
Add ceded unpaid losses and ALAE		113,671		82,349		113,671		82,349
Gross unpaid losses and ALAE, end of period	$	380,196	$	421,617	$	380,196	$	421,617

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 Company’s 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 Company’s 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 Company’s investment in Northbridge Financial Corp. which was sold in the fourth quarter of 2008.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2009		2008		2009		2008
Environmental
Gross unpaid losses ALAE, beginning of period	$	107,517	$	114,387	$	107,948	$	117,768
Less ceded unpaid losses and ALAE		30,466		31,754		28,969		32,725
Net unpaid losses and ALAE, beginning of period		77,051		82,633		78,979		85,043
Net losses and ALAE incurred		—		—		—		—
Net paid losses and ALAE		1,754		3,780		3,682		6,190
Net unpaid losses and ALAE, end of period		75,297		78,853		75,297		78,853
Add ceded unpaid losses and ALAE		29,665		30,887		29,665		30,887
Gross unpaid losses and ALAE, end of period	$	104,962	$	109,740	$	104,962	$	109,740

For the nine months ended September 30, 2009, Odyssey was a significant subsidiary as defined in the SEC’s Regulation S-X. The Company’s aggregate share of Odyssey’s statement of operations which would have been reported in the Company’s 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:

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 $17,883 and $20,258, net of reinsurance, at June 30, 2009 and December 31, 2008, respectively.


	Three Months Ended
	September 30, 2009

Total revenues	$	52,812
Total expenses	$	38,320
Income from continuing operations	$	14,492
Net income	$	10,232

2321

NOTES TO CONSOLIDATEDTable FINANCIALof STATEMENTS (Unaudited, dollars in thousands) Contents

7. NOTES TO CONSOLIDATED ~~Reinsurance~~FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Premiums written:
Direct	$	228,956		$	274,775		$	439,855		$	552,824
Assumed from other companies, pools or associations		9,227			4,864			16,553			9,408
Ceded to other companies, pools or associations		(39,971	)		(33,358	)		(77,926	)		(71,298	)
Net premiums written	$	198,212		$	246,281		$	378,482		$	490,934
Premiums earned:
Direct	$	227,906		$	289,728		$	464,458		$	592,615
Assumed from other companies, pools or associations		9,609			5,222			17,281			10,108
Ceded to other companies, pools or associations		(37,234	)		(32,068	)		(74,028	)		(68,031	)
Premiums earned	$	200,281		$	262,882		$	407,711		$	534,692

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.

~~The~~In ~~net~~July ~~impact~~2009, ofFairfax ~~ceded~~announced ~~reinsurance~~a ~~transactions~~formal ~~for~~offer to acquire all of the ~~three~~outstanding common shares of Advent, other than those shares not already owned by Fairfax and ~~six~~its ~~months~~affiliates, ~~ended~~for ~~June 30~~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. ~~and~~As ~~June 30~~part of the acquisition, ~~2008~~the Company ispurchased ~~summarized~~additional asAdvent ~~follows:~~shares in September 2009 for cash consideration of $10,050. The Company’s ownership of Advent increased to 17.5% with the purchase of the additional shares (11.7% at December 31, 2008).

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Earned premiums ceded to reinsurers	$	(37,234	)	$	(32,068	)	$	(74,028	)	$	(68,031	)
Commissions earned on ceded reinsurance premiums		9,313			7,018			17,567			14,624
Claims incurred ceded to reinsurers		17,349			(68,359	)		40,924			(59,104	)
Provision for uncollectible reinsurance		—			(2,000	)		(2,000	)		(4,000	)
Net impact of ceded reinsurance transactions	$	(10,572	)	$	(95,409	)	$	(17,537	)	$	(116,511	)

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.

~~The~~In ~~components~~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’s ~~total~~transferred ~~reinsurance~~municipal securities with a fair market ~~recoverable~~value ~~are~~of ~~summarized~~$54,008 to Fairfax Inc., as ~~follows:~~partial settlement of its tax liability, resulting in a pre-tax gain of $5,907.

	June 30,		December 31,
	2009		2008
Reinsurance recoverable on unpaid losses and LAE	$	920,780	$	949,364
Reinsurance receivable on paid losses and LAE		11,240		18,853
Total reinsurance recoverable	$	932,020	$	968,217


4.	Fair Value Disclosures

~~The reinsurance recoverable balances above are net of reserves~~ ~~for uncollectible reinsurance of $55,467 and $55,999 at~~Fair ~~June 30,~~Value ~~2009 and December 31, 2008, respectively.~~Hierarchy Included in reinsurance recoverable is $141,030 and $142,213 at June 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.

In accordance with FASB ASC 24820-10, 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:

~~NOTES~~Level TO1 — Valuations based on unadjusted quoted ~~CONSOLIDATED~~prices ~~FINANCIAL~~in ~~STATEMENTS~~active markets for identical assets or liabilities. A ~~(Unaudited,~~quoted ~~dollars~~price for an identical asset or liability in ~~thousands~~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 ~~Corporate~~than quoted prices included within Level 1) that is ~~Aggregate~~observable ~~Reinsurance~~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.

~~The~~Level 3 — ~~Company’s~~Valuations ~~corporate~~based ~~aggregate~~on ~~reinsurance~~inputs ~~contracts~~that are ofunobservable ~~the type commonly referred to as “finite” reinsurance~~ and ~~cover~~significant 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.~~overall Atfair ~~June 30, 2009, only~~value ~~one retroactive contract with a remaining limit of $51,000 and one prospective contract with a remaining limit of $96,272 are in effect~~measurement. ~~This prospective contract had no effect on operations~~ ~~for the three months ended June 30, 2009.~~

The ~~effect~~Company is responsible for determining the fair value of ~~retroactive~~its investment ~~corporate~~portfolio ~~aggregate~~by ~~reinsurance~~utilizing onmarket driven fair value ~~components~~measurements ofobtained ~~the~~from ~~Company’s~~active ~~consolidated~~markets ~~statements~~where ofavailable, by ~~operations~~considering ~~follows~~other ~~((decrease)~~observable ~~increase~~and inunobservable ~~indicated~~inputs ~~component):~~and by employing valuation techniques which make use of current market data.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Funds held interest charged to investment income	$	(3,832	)	$	(3,798	)	$	(7,599	)	$	(9,107	)
Losses and LAE		(3,721	)		71,669			(7,442	)		68,262
Decrease in income before income taxes	$	(111	)	$	(75,467	)	$	(157	)	$	(77,369	)

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 Company’s Level 1 investments are exchange-traded equity securities in active markets.

~~An analysis of activity in deferred income related to~~ ~~retroactive corporate aggregate reinsurance contracts follows:~~22

	Three Months Ended						Six Months Ended
	June 30,						June 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		(3,721	)		(12,579	)		(7,442	)		(16,382	)
Decrease in deferred income		(3,721	)		(12,579	)		(7,442	)		(16,382	)
Deferred income on retroactive reinsurance — beginning of period		117,556			148,238			121,277			152,041
Deferred income on retroactive reinsurance — end of period	$	113,835		$	135,659		$	113,835		$	135,659

~~For the three months ended June~~NOTES ~~30, 2009, the above~~TO ~~activity~~CONSOLIDATED ~~arises~~FINANCIAL ~~from the 2001 retroactive adverse development~~STATEMENTS ~~contract for $400~~(Unaudited,~~000,~~ ~~which~~dollars ~~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 $228,441, respectively, at June 30, 2009 ($349,000 and $220,843, respectively, at December 31, 2008thousands).

~~For~~The ~~additional~~Company’s ~~information~~Level 2 oninvestments (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 Company’s ~~prospective~~Level 2 ~~and~~investments also include certain ~~retroactive~~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 ~~aggregate~~debentures ~~reinsurance~~which ~~contracts~~are valued using a pricing model, ~~refer~~the inputs toof which are derived principally from, or corroborated by, observable market data such as credit spreads and discount rates. For credit default swaps, the Company’s ~~Annual~~assesses ~~Report~~the reasonableness onof the fair values obtained from the ~~Form 10~~broker-Kdealers 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 ~~year~~three months ended ~~December~~March 31, ~~2008~~2009, the ~~filed~~Company ~~with~~transferred ~~the~~$47,611 ~~SEC~~of onLevel 3 investments to ~~February~~Level 272 investments, ~~2009~~after determining that broker-dealer quotes would be used to determine the fair value of the instruments.

8 The Company’s 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 ~~Income~~cash ~~Taxes~~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 ~~effective~~following ~~income~~tables ~~tax~~present ~~rate~~the ~~was~~Company’s ~~a tax expense of 26.6% and a~~investment ~~tax~~portfolio ~~benefit~~(excluding ofcash ~~40.8%~~and incash ~~the~~equivalents ~~three~~ and ~~six months ended~~investments ~~June 30,~~at ~~2009,~~equity) ~~respectively.~~measured ~~The~~at ~~effective~~fair ~~rate~~value ~~differs from~~on ~~the~~a ~~statutory~~recurring ~~federal~~basis, ~~income tax rate of 35% primarily~~within ~~because~~the offair ~~the~~value ~~benefit~~hierarchy, ofat ~~tax-exempt~~September 30, ~~interest~~2009 and ~~dividends~~ ~~received~~December 31, ~~deductions.~~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

~~NOTES TO CONSOLIDATED~~1 ~~FINANCIAL~~Includes ~~STATEMENTS (Unaudited,~~securities ~~dollars~~pledged infor ~~thousands)~~ derivatives at a fair value of $29,756.

~~9. Commitments and Contingencies~~ 23

OnTable September 7, 2005, Fairfax announced that it had received a subpoena from the SEC requesting documents regarding any non-traditional insurance or reinsurance transactions entered into or offered by Fairfax and the entities in its consolidated group, which includes the Company. On June 25, 2009, Fairfax announced that it had been informed by the New York Regional Office of the SEC that its investigation as to Fairfax had been completed and that it did not intend to recommend any enforcement action by the SEC. Contents

~~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.NOTES ~~District Court for the~~TO ~~District~~CONSOLIDATED ofFINANCIAL ~~New Jersey. Plaintiffs seek certification of a~~STATEMENTS ~~nationwide class consisting of all persons who between August 26~~(Unaudited, ~~1994~~dollars 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.~~thousands) 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 & Forster’s 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.


	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

10 At September 30, 2009 and December 31, 2008, the Company did not carry any liabilities at fair value. ~~Segment~~The ~~Reporting~~fair value of the Company’s long-term debt, determined from market prices, was $305,250 and $244,200 at September 30, 2009 and December 31, 2008, respectively.

The ~~Company~~following ~~operates~~table ~~primarily~~provides ina ~~the~~summary ~~commercial~~of ~~property~~changes ~~and~~in fair value ~~casualty~~of ~~insurance~~Level 3 ~~business.~~financial ~~Premiums~~assets ~~earned~~ for the ~~Company’s~~ ~~lines~~three ofand ~~business~~nine ~~are~~months ended ~~summarized~~September 30, as2009 ~~follows~~and 2008:

	Three Months Ended					~~Six~~Nine Months Ended
	June 30,					June 30,
	September 30,					September 30,
	2009			2008		2009			2008
General liability	$	36,638		$	52,532	$	76,167		$	106,564
Balance, beginning of period	$	21,913		$	2,498	$	66,393		$	2,500
Workers’ compensation		47,223			60,654		94,637			118,353
Purchases, issuances and settlements		(8,591	)		6,440		(10,026	)		6,440
Commercial automobile		33,096			48,250		68,499			101,807
Transfers to Level 2		—			—		(47,611	)		—
Property		24,310			44,920		54,870			100,910
Realized gains (losses) included in net income		3,118			186		7,684			184
Commercial multi-peril		19,240			20,208		38,720			40,774
Balance, end of period	$	16,440		$	9,124	$	16,440		$	9,124
Accident and health		33,437			29,301		62,108			52,224
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
Other1		6,337			7,017		12,710			14,060
Total premiums earned	$	200,281		$	262,882	$	407,711		$	534,692

~~1 Other includes surety, homeowners and personal automobile lines of business.~~ 24

26 Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)

~~The losses and LAE and losses and LAE ratios of the~~Fair ~~Company’s~~Value ~~lines of business are summarized as follows:~~Option

	Three Months Ended											Six Months Ended
	June 30,											June 30,
	2009						2008					2009						2008
	Amount			Ratio			Amount		Ratio			Amount			Ratio			Amount		Ratio
Accident year loss and LAE ratios:
General liability	$	27,472			75.0	%	$	37,622		71.6	%	$	54,500			71.6	%	$	77,830		73.0	%
Workers’ compensation		37,094			78.6	%		46,651		76.9	%		75,763			80.1	%		95,181		80.4	%
Commercial automobile		25,625			77.4	%		35,666		73.9	%		50,380			73.5	%		75,016		73.7	%
Property		17,413			71.6	%		31,587		70.3	%		39,956			72.8	%		67,858		67.2	%
Commercial multi-peril		10,768			56.0	%		12,438		61.5	%		22,111			57.1	%		25,216		61.8	%
Accident and health		22,737			68.0	%		20,039		68.4	%		42,469			68.4	%		35,737		68.4	%
Other		2,256			35.6	%		2,717		38.7	%		4,921			38.7	%		6,144		43.7	%
Total accident year losses and LAE		143,365			71.6	%		186,720		71.0	%		290,100			71.2	%		382,982		71.6	%
Prior years’ loss development		(10,890	)		(5.5	)		59,026		22.5			(21,775	)		(5.4	)		72,374		13.6
Calendar year losses and LAE	$	132,475			66.1	%	$	245,746		93.5	%	$	268,325			65.8	%	$	455,356		85.2	%

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 ~~does~~concluded that the election would be inappropriate for those equity method investments that do not ~~allocate~~have ~~investment~~quoted ~~results~~market orprices ~~certain~~due to the degree of judgment ~~corporate~~that ~~expenses~~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 ~~purposes~~its investments in Advent, an affiliated company formerly traded on the Alternative Investment Market of ~~evaluating~~the ~~financial~~London Stock Exchange ~~performance~~(“AIM”), and Odyssey, an affiliated company traded on the New York Stock Exchange, both of ~~each~~which ~~line~~would otherwise be subject to the equity method of ~~business~~accounting as they are subsidiaries of Fairfax. The Company’s investments in Odyssey include investments in Odyssey’s 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 27Company’s 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 Company’s 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.

~~ITEM~~At September 230, 2009 and December 31, 2008, the Company’s investments in Odyssey’s 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. ~~MANAGEMENT~~ For the three and nine months ended September 30, 2009, the total change in fair value of the Company’Ss investments in ~~DISCUSSION~~Odyssey ~~AND~~common ~~ANALYSIS~~and OFpreferred ~~FINANCIAL~~stock ~~CONDITION~~was ~~AND~~a ~~RESULTS~~gain OFof $124,405 and ~~OPERATIONS~~$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.

~~The following discussion relates to the critical accounting~~ ~~policies and estimates, the consolidated results of operations,~~25 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 & Forster’s parent company, and Fairfax Financial Holdings Limited, which holds a 100% indirect interest in Fairfax Inc.

CertainTable 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 Company’s consolidated financial statements, and notes related thereto, included in the Company’s 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. Contents

~~All~~NOTES TO CONSOLIDATED ~~dollar~~FINANCIAL ~~amounts~~STATEMENTS (Unaudited, ~~are~~dollars in thousands~~, unless otherwise indicated.~~)

~~Statements Regarding~~5. ~~Forward-Looking~~Unpaid ~~Information~~ Losses and Loss Adjustment Expenses

~~Certain~~Changes ~~statements~~in ~~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~~ Company’s ~~anticipated~~liability ~~performance.~~for ~~The~~unpaid ~~words “anticipates”,~~losses ~~“believes”,~~and ~~“expects”,~~loss ~~“intends”,~~adjustment ~~“estimates”, “projects”,~~expenses (“~~plans~~LAE”,) “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 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~~summarized ~~elsewhere in this report, include, but are not~~as ~~limited to, the following~~follows:

• Competitive conditions in the insurance market and the ability to attract and retain new business; • Adverse effect of continuing 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 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; • Changes in governmental regulations; and • Exposure to credit risks on novated policies.


	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 28three 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.

~~Although~~A ~~the~~reconciliation ~~Company~~of ~~believes that its forward-looking statements are based upon reasonable assumptions, management can give no assurance that~~ the ~~Company’s~~ceded ~~goals~~unpaid ~~will~~losses ~~be achieved.~~and ~~Given~~LAE ~~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~~table ~~otherwise~~above ~~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 ~~Company’s~~ ~~Annual~~reinsurance ~~Report~~recoverable reflected on ~~Form 10-K for~~ the ~~year ended December 31, 2008 filed with the SEC on~~ ~~February 27,~~consolidated ~~2009.~~balance ~~The~~sheet ~~information appearing under~~follows: ~~“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


	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

~~The Company’s consolidated financial statements and related~~ ~~notes thereto are prepared in accordance with GAAP. GAAP~~26 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, management’s 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.

TheTable 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 management’s estimates, the Company’s reported consolidated results of operations and financial condition could be materially affected. Contents

~~The Company’s significant accounting policies are described~~ ~~in detail in Note~~NOTES ~~2 to the Company’s consolidated~~TO ~~financial~~CONSOLIDATED ~~statements~~FINANCIAL ~~included in its Annual Report on~~STATEMENTS ~~Form 10-K for the year ended December 31~~(Unaudited, ~~2008~~dollars ~~filed~~in ~~with the SEC on~~thousands) ~~February 27, 2009.~~

~~Unpaid~~ 6. Asbestos and Environmental Losses and Loss Adjustment Expenses

The ~~most~~Company ~~significant~~has ~~accounting~~exposure ~~estimates~~to ~~relate~~asbestos toand ~~the~~environmental claims ~~Company’s~~arising ~~reserves~~from ~~for~~the ~~unpaid~~sale ~~losses~~of general liability, commercial multi-peril and ~~loss~~umbrella ~~adjustment~~insurance policies, the majority of ~~expenses~~which ~~(“LAE”).~~were ~~Unpaid~~written ~~losses~~for accident years 1985 and ~~LAE~~prior. ~~include~~Estimation ~~reserves~~of ultimate liabilities for ~~both~~these ~~reported~~exposures ~~(case~~is ~~reserves)~~unusually difficult ~~and~~due ~~unreported~~to ~~losses~~such issues as whether or not coverage exists, definition of an occurrence, determination of ultimate damages and ~~LAE~~allocation of such damages to financially responsible parties.

~~When~~Changes ~~the~~in ~~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,’s ~~the~~liability ~~scope of coverage available~~ for ~~the~~asbestos ~~reported claim under each individual policy assuming application of controlling state contract law, general reserving practices, the experience~~ and ~~knowledge of such~~ ~~personnel~~environmental ~~regarding~~exposures ~~the~~are ~~nature~~summarized ~~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~~follows: ~~sufficient information becomes available.~~

The Company’s 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 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 June 30, 2009, the Company’s actuaries concurred with the reasonableness of management’s best estimate.


	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

~~Losses~~For ~~and~~the ~~LAE~~three ~~are~~and ~~charged~~nine tomonths ~~income~~ended asSeptember 30, ~~they~~2009, ~~are incurred.~~net ~~During~~losses ~~the~~and ~~loss~~ALAE ~~settlement~~incurred ~~period,~~and ~~reserves~~paid ~~established~~reflect ina ~~prior~~recovery of $13,750 ~~years~~associated ~~are~~with ~~adjusted~~an asasbestos ~~loss~~lawsuit ~~experience~~that ~~develops~~the ~~and~~Company ~~new~~settled in ~~information~~2008 ~~becomes~~and ~~available.~~for ~~Adjustments~~which toit ~~previously estimated~~incurred ~~reserves,~~a ~~both~~charge ~~positive~~of ~~and negative~~$25,500 ~~are~~in ~~reflected~~the innine ~~the~~months ~~Company’s~~ended ~~financial~~September 30, ~~results~~2008 inas ~~the~~reflected ~~periods~~ in ~~which~~the table ~~they~~above. ~~are~~In ~~made~~addition, ~~and~~for ~~are~~the ~~referred~~nine tomonths asended ~~prior period development.~~September 30, ~~Due~~2009 toand the ~~high~~three ~~level~~and ofnine ~~uncertainty,~~months ~~revisions~~ended ~~to these~~September 30, ~~estimated~~2008, ~~reserves~~net ~~could~~paid ~~have~~losses aand ~~material~~ALAE ~~impact~~reflect ona ~~the Company’s~~payment ~~results~~ of ~~operations~~$18,333 in ~~the period recognized~~ ~~and~~each ~~actual~~period, ~~payments~~related ~~for~~to ~~claims~~the ~~and~~asbestos ~~LAE~~lawsuit ~~could ultimately be significantly different from estimates~~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 ~~has~~also ~~written~~maintains 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~~exposures ~~these~~such ~~exposures~~as ~~cannot~~those beassociated ~~estimated solely~~ with ~~the~~silica, ~~traditional loss~~lead, ~~reserving techniques~~mold, ~~which rely on historical accident year development factors. Among the uncertainties relating to asbestos~~chemical, ~~environmental and other latent reserves are a lack of~~gas ~~historical data, long reporting delays~~ and ~~complex~~vapors ~~unresolved legal issues regarding policy coverage~~ and ~~the~~welding ~~extent~~fumes ~~and timing~~ of ~~any such contractual liability. Courts have reached different~~$17,116 and ~~frequently inconsistent~~$20,258, ~~conclusions~~net ~~as to when~~of ~~losses occurred~~reinsurance, ~~what~~at ~~claims are covered~~September 30, ~~under~~2009 ~~what circumstances~~and ~~the insurer has an obligation to defend~~December 31, ~~how~~ ~~policy~~2008, ~~limits are determined and how policy exclusions are applied and interpreted~~respectively.

~~No adjustment was made to asbestos, environmental or other~~ ~~latent reserves in the three and six months ended June 30,~~27 2009. In 2008 and 2007, based on the Company’s internal actuarial reviews, the Company strengthened its asbestos, environmental and other latent reserves by $36,215 and $54,547, respectively.

Investments Table of Contents

~~The Company is responsible for determining the fair value of its~~NOTES TO ~~investment~~CONSOLIDATED ~~portfolio~~FINANCIAL ~~by utilizing market-driven fair value~~STATEMENTS ~~measurements obtained from active markets where available~~(Unaudited, ~~by considering~~dollars ~~observable~~in ~~and unobservable inputs and by employing~~thousands) ~~valuation techniques that make use of current market data.~~

~~In accordance with SFAS No~~7. ~~157,~~ “Fair Value Measurements” (“SFAS 157”), 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 Company’s Level 3 investments are comprised of mortgage-backed securities purchased at deep discounts to par (less than 1% of total investment portfolio), 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 3% of total investment portfolio), are included in Level 2 investments as they are priced using broker-dealer quotes. At June 30, 2009, the total fair value of the Company’s Level 2 and Level 3 mortgage-backed securities was $115,493. 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 operations. For the three and six months ended June 30, 2009, realized investment gains resulting from the net change in fair value of the mortgage-backed securities were $17,151 and $5,893, respectively. Reinsurance

~~Derivatives~~The ~~held~~components byof the Company’s at June 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~~premiums inwritten the period in which they occur. The Company obtains market-derived fair values for its credit default swaps from third-party providers, principally broker-dealers. 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~~premiums ~~transaction~~earned ~~prices for similar credit default swaps where available. The fair values of credit default swaps~~ are ~~subject to~~summarized 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~~follows: stock market conditions, realized values may differ from estimates reflected in the consolidated financial statements. At June 30, 2009 and December 31, 2008, the fair value of the credit default swaps was $42,620 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 operations. For the three and six months ended June 30, 2009 and 2008, realized investment (losses) gains resulting from the net change in fair value of the credit default swaps were $(18,746) and $13,450 and $2,672 and $156,645, respectively.


	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 ~~global~~net ~~financial~~impact ~~crisis has increased the volatility~~ of ~~most investments.~~ceded Asreinsurance atransactions result, the market values of these investments 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~~three ~~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~~nine ofmonths ~~the~~ended 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)September ~~for fixed income securities~~30, ~~the~~2009 Company’s 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~~2008 securities, the Company’s 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~~summarized ~~than~~as ~~temporarily impaired, an impairment loss~~follows: ~~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. Given the prolonged nature of the current financial market downturn, the duration and severity of unrealized losses 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 June 30, 2009 based on current facts and circumstances existing at that date, resulting in additional other than temporary impairments in future periods.


	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	)

~~During~~The ~~the~~components ~~three~~of ~~and six months ended June 30, 2009 and 2008,~~ the Company’s ~~recorded~~total ~~other than temporary impairment~~reinsurance ~~charges~~recoverable ofare ~~$51,553~~summarized ~~and~~as ~~$105,954, and $165 and $41,078,~~follows: ~~respectively, primarily related to write-downs of equity securities.~~

Reinsurance Recoverable


	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

~~Amounts~~The reinsurance recoverable ~~from~~balances ~~reinsurers~~above are ~~initially~~net ~~estimated~~of inreserves ~~conjunction~~for ~~with~~uncollectible ~~the~~reinsurance ~~establishment~~ of ~~reserves~~$55,499 ~~for unpaid losses~~ and ~~LAE.~~$55,999 ~~These amounts may be adjusted as actual case reserves~~at ~~are~~September 30, ~~recorded~~2009 and ~~reinsured~~December 31, ~~claims are settled. The ceding of~~2008, ~~risk~~respectively. toIncluded ~~reinsurers~~in ~~does~~reinsurance ~~not~~recoverable ~~relieve~~is ~~the insurance companies of~~$141,030 ~~their~~and ~~primary~~$142,213 ~~obligation~~at ~~to policyholders as the direct insurer. Accordingly~~September 30, ~~the~~2009 ~~Company~~and ~~is exposed to the risk that any~~December 31, ~~reinsurer may be unable~~2008, ~~or unwilling~~respectively, torepresenting ~~meet~~ the ~~obligations assumed~~present ~~under~~value ~~its~~of ~~reinsurance agreements. Management attempts to~~amounts ~~mitigate~~due ~~this~~from ~~risk~~insurance bycompanies ~~obtaining~~from ~~collateral~~which ~~and~~the byCompany ~~entering into~~has ~~reinsurance~~purchased ~~arrangements~~annuities ~~only~~to ~~with~~settle ~~reinsurers that have credit ratings and statutory surplus above~~ certain ~~levels~~claim liabilities.

~~In certain circumstances, the Company may engage in commutation~~ ~~discussions with an individual reinsurer, essentially canceling~~28 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 Company’s results of operations.

AnTable 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. Contents

NOTES TO 31CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, dollars in thousands)

~~At June 30, 2009 and December 31, 2008, reinsurance~~ ~~recoverable was $932,020 and $968,217, net of reserves for~~Corporate ~~uncollectible~~Aggregate ~~reinsurance of $55,467 and $55,999, respectively.~~Reinsurance Included in reinsurance recoverable is $141,030 and $142,213 at June 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 six month periods ended June 30, 2009 and 2008 was $0 and $2,000, and $2,000 and $4,000, 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 Company’s financial position and results of operations.

The Company’s corporate aggregate reinsurance contracts are ~~Deferred~~of the type commonly referred to as “finite” ~~Income~~reinsurance ~~Tax~~and ~~Assets~~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 ~~Company~~effect ~~recognizes~~of ~~deferred~~retroactive ~~tax~~corporate ~~assets~~aggregate ~~and~~reinsurance ~~liabilities based~~ on ~~differences between the financial statement carrying amounts~~ ~~and~~components ~~the tax bases~~ of ~~assets and liabilities. Management regularly reviews~~ the Company’s ~~deferred~~consolidated ~~tax~~statements ~~assets for recoverability based on history~~ of ~~earnings, expectations for~~ ~~future~~income ~~earnings~~follows ~~and~~((decrease) ~~expected~~increase ~~timing~~in ofindicated ~~reversals of temporary~~component): ~~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 & Forster’s 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 relate 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.


	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

At1 ~~June 30,~~For ~~2009, there are no valuation allowances against~~ the ~~Company’s~~nine ~~gross~~months ~~deferred~~ended ~~tax~~September ~~assets of $219~~30,~~626.~~ 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 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~~LAE tois ~~hold~~comprised ~~its available-for-sale securities until maturity or recovery. The Company’s current projections~~ of ~~future~~a ~~taxable~~loss ~~income are based~~ on ~~assumptions~~ commutation of ~~declining~~$4,123 ~~premium~~offset ~~volumes~~by ~~and relatively stable combined ratios~~$8,778 ~~with portfolio yields approximating current levels. Should the assumptions~~ of ~~future~~unamortized ~~profitability~~deferred ~~change significantly, however, or the taxable~~ income ofreleased ~~these~~on ~~entities fall~~commutation ~~below~~as ~~expectations,~~well aas ~~valuation allowance~~$11,297 ~~which could be significant, may have to be established if management believes any portion~~ of ~~the~~recurring deferred ~~tax~~income ~~asset will not be realized~~amortization. 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~~An ofanalysis ~~the deferred tax asset under SFAS 109 ultimately depends on the existence~~ of ~~sufficient~~activity ~~taxable income available under tax law, including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income~~ in ~~prior~~deferred ~~carryback years and tax planning strategies. Future profitability, as it relates to taxable~~ income ~~expectations~~related ~~discussed above, can be~~to ~~negatively~~retroactive ~~affected~~corporate byaggregate ~~factors~~reinsurance ~~including~~contracts ~~substantial changes in~~follows: 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


	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 ~~Overview~~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).

~~The~~For ~~Company~~additional isinformation aon ~~national~~the ~~commercial~~Company’s ~~property~~prospective and ~~casualty~~ ~~insurance~~retroactive ~~company~~corporate ~~with~~aggregate areinsurance ~~focused underwriting strategy~~contracts, ~~targeting~~ ~~specialty~~refer ~~classes of business and underserved market~~to ~~opportunities. Operating through its home office and regional branch network,~~ the Company’s ~~writes~~Annual aReport ~~broad range of commercial~~on ~~coverage, including general liability, workers’~~Form 10-K ~~compensation,~~for ~~commercial~~the ~~automobile,~~year ~~property,~~ended ~~commercial multi-peril~~December 31, ~~accident~~2008 ~~and~~filed ~~health~~with ~~and~~the ~~other~~SEC ~~lines of business. The Company generally conducts business~~ on ~~a brokerage basis~~ ~~through more than 1~~February 27,~~400~~ ~~producers located throughout the United States~~2009.

~~The Company’s objective is to expand opportunistically into~~ ~~classes of business or market segments that are consistent with~~29 its underwriting expertise and have the potential to generate an underwriting profit. Management believes the Company’s ability to identify and react to changing market conditions provides it with a competitive advantage. Based on the experience and underwriting expertise of 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.

32 Table of Contents

~~The profitability of property and casualty insurance companies~~ ~~is primarily determined by their underwriting results and~~NOTES TO ~~investment~~CONSOLIDATED ~~performance.~~FINANCIAL ~~Underwriting results are the net result~~STATEMENTS ~~of a company’s premiums earned and amounts paid~~(Unaudited, ~~or expected~~dollars ~~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~~thousands) 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 industry’s willingness to deploy capital to cover each insurable risk.

~~Premiums collected are invested until funds are required to pay settled claims~~8. ~~Insurance~~Income 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 Company’s capital. Taxes

~~Management~~The ~~monitors~~effective ~~the~~income ~~contribution~~tax torate ~~earnings~~was of31.3% ~~underwriting operations~~ and ~~investment results separately~~25.8% ~~The~~in ~~ability~~the tothree ~~achieve underwriting profitability on a consistent basis is the core competency of a property~~ and ~~casualty~~nine ~~insurance~~months ~~company, demonstrating~~ended ~~discipline~~September 30, ~~individual risk selection and pricing skills~~2009, ~~and effective risk management on a portfolio basis~~respectively. The ~~underwriting~~effective ~~functions~~rate ofdiffers from the ~~Company~~statutory ~~are~~federal ~~managed~~income ~~separately~~tax ~~from~~rate ~~the~~of ~~investment~~35% ~~operations.~~primarily ~~Accordingly,~~because inof ~~assessing~~ the ~~Company’s~~ ~~results~~benefit of ~~operations, management evaluates~~tax-exempt ~~underwriting~~interest ~~results~~and ~~separately~~dividends ~~from~~received ~~investment performance~~deductions.

~~With respect to the Company’s underwriting operations, management monitors key indicators of growth and profitability~~9. ~~Growth~~ isCommitments 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 comprises 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. Contingencies

~~Underwriting~~Crum & ~~profit~~Forster orHoldings ~~loss~~Corp. ~~expressed~~and inUS ~~dollars~~Fire, isamong numerous ~~considered~~other ainsurance company and insurance broker ~~non-GAAP~~defendants, ~~financial~~have ~~measure.~~been ~~The~~named ~~table~~as atdefendants ~~the~~in ~~beginning~~a ofclass ~~the~~action suit ~~Results~~filed ofby ~~Operations~~policyholders ~~section~~alleging, among other things, that ~~follows~~the defendants ~~presents~~used the ~~separate~~contingent commission structure to deprive ~~contribution~~policyholders of ~~underwriting~~free ~~and~~competition ~~investment~~in ~~operations~~the tomarket ~~income~~for insurance. ~~before~~The ~~income~~action ~~taxes~~was onfiled ain ~~GAAP~~the ~~basis~~U.S. District AnCourt ~~understanding~~for the District of New Jersey. Plaintiffs seek certification of a ~~property~~nationwide ~~and~~class ~~casualty~~consisting ~~insurance~~of ~~company’s~~all ~~financial~~persons who between ~~condition~~August 26, ~~results~~1994 ofand ~~operations~~the ~~and~~date ~~profit~~of ~~and~~the ~~growth~~class ~~prospects~~certification ~~begins~~engaged ~~with~~the anservices ~~assessment~~of any one of the ~~entity’s~~broker ~~ability~~defendants toand who ~~underwrite~~entered ~~effectively.~~into ~~Underwriting~~or isrenewed ~~the~~a ~~core~~contract ~~business~~of insurance with one of the ~~such~~insurer ~~companies;~~defendants. ~~investment~~The ~~operations~~trial ~~are~~court adismissed ~~separate~~the ~~function.~~federal ~~Management~~antitrust ~~monitors~~claims ~~the~~and ~~Company’s~~RICO ~~consolidated~~claims ~~results~~with onprejudice and declined to ~~this~~accept ~~basis~~supplemental ~~and~~jurisdiction ~~likewise~~over ~~reports~~plaintiffs’ ~~such~~state ~~results~~law claims. toOn ~~its~~October 24, ~~board~~2007, ofplaintiffs filed an appeal ~~directors~~with the U.S. Court ~~Rating~~of ~~agencies~~Appeals ~~and~~for ~~securities~~the ~~analysts~~Third ~~also~~Circuit. ~~focus~~The ~~separately~~briefing on ~~underwriting~~appeal ~~and~~has ~~investment~~been ~~results~~completed. InThe ~~annual~~court ~~and~~heard oral ~~quarterly~~arguments ~~statements~~on toApril 21, ~~state~~2009 ~~insurance~~in ~~regulators~~Philadelphia, ~~prepared in~~Pennsylvania. ~~accordance~~The ~~with~~court ~~Statutory~~took ~~Accounting~~the ~~Principles,~~matter ~~underwriting~~under submission. A final ruling is ~~profit~~not orexpected ~~loss~~from isthe ~~presented~~Court ~~separately~~of ~~from~~Appeals ~~investment~~before ~~results~~late 2009. ~~Underwriting~~Crum & ~~profit~~Forster orHoldings ~~loss,~~Corp. ~~together~~and ~~with~~US ~~the~~Fire ~~related~~continue ~~combined~~to ~~ratio,~~be ~~are~~named ~~widely~~as ~~followed~~defendants ~~measures~~and inintend ~~the~~to ~~property~~vigorously ~~and~~defend ~~casualty~~the ~~insurance industry~~action.

~~Investment~~In ~~results~~the ordinary course of their business, Crum & Forster’s subsidiaries receive claims asserting alleged injuries and damages from asbestos and other hazardous waste and toxic substances and are ~~generally~~subject ~~measured~~to inrelated ~~terms~~coverage litigation. The conditions surrounding the final resolution of ~~total~~these claims ~~return~~and the related litigation continue to change. Currently, it is not possible to predict judicial and legislative changes and their impact on ~~assets~~the ~~under~~future ~~management~~development ~~both~~of asbestos and environmental claims and litigation. This trend will be affected by future court decisions and interpretations, as well as changes in ~~absolute~~applicable ~~terms~~legislation and the possible ~~relative~~implementation toof ~~appropriate~~a ~~benchmarks~~proposed federal compensation scheme for asbestos-related injuries. ~~Growth~~As a result of these uncertainties, additional liabilities may arise for amounts in ~~the~~excess ~~Company’s~~of ~~cash~~current reserves for asbestos, environmental and ~~invested~~other ~~assets~~latent exposures. isThese ~~also~~additional amounts, or a ~~key~~range ~~measure~~of these additional amounts, cannot currently be reasonably estimated. As a result of ~~investment~~these claims, management continually reviews ~~performance~~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 Company’s subsidiaries are involved in various lawsuits 33and 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 Company’s 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.

~~Market~~ ~~Conditions~~30

TheTable 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 six 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. There are some hopeful signs that the market is in transition, evidenced by stable or slightly increasing rates across some lines of business such as California workers’ compensation, where the Company saw slight rate increases through June 2009. Also, some property insurers are 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 property catastrophe reinsurance costs, resulting in property rates stabilizing or even increasing in some cases. Contents

~~During the first six months of 2009, the Company’s renewal~~ retention rates, renewal pricing and new business growth all declined compared to the first six 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 and 3NOTES ~~percentage points in the~~TO ~~first~~CONSOLIDATED ~~and~~FINANCIAL ~~second quarters of 2009, respectively, as compared to~~STATEMENTS ~~declines of approximately 4 percentage points in each of the third and fourth quarters of 2008. Specifically~~(Unaudited, ~~renewal retention~~dollars ~~rates for casualty lines remained stable and renewal retention rates for property lines declined by approximately 9 percentage points~~ in ~~the first six months of 2009 as~~thousands) 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 each of the first and second quarters of 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 remain very challenging and declined by approximately 25% in the first six months of 2009, attributable to a reduction in both casualty and property business.

Although there is some evidence of deceleration in rate decreases and an expectation that prices will further stabilize, the Company expects the market to remain competitive for the remainder of 200910. ~~Under~~Segment such conditions, the Company will continue to reject underpriced new business opportunities and to shed accounts and classes of business that are unprofitable. As a consequence, it is likely that the Company’s premium volume will 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. Reporting

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

The most significant component of the Company’s ceded reinsurance program is property reinsurance which is comprised of two coverages: catastrophe and property per risk. The Company renewed its property catastrophe treaties in the second quarter of 2009 and its property per risk treaty effective July 1, 2009 and has modified coverage and retention levels as deemed necessary in the current market environment.


	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

~~Effective June~~ 1, ~~2009,~~Other ~~the~~includes ~~Company placed its property catastrophe reinsurance treaty (excluding Seneca). Both the expiring and renewal treaties exclude non-admitted fire and inland marine policies~~surety, ~~which~~homeowners ~~are covered under separate treaties,~~ and ~~the~~personal ~~expiring~~automobile ~~treaty~~lines ~~also excluded difference in condition policies, which are covered under the new treaty. The expiring treaty provided coverage~~ of ~~$85 million in excess of $65 million whereas the new treaty provides coverage of $35 million in excess of $40 million, recognizing the Company’s reduced property exposures~~business. ~~The Company is obliged to reinstate any limits used at 100% of the original premium.~~

~~Effective~~The ~~May 1,~~losses ~~2009,~~and ~~Seneca~~LAE ~~placed~~and ~~its~~losses ~~property catastrophe~~and ~~treaty~~LAE ~~providing~~ratios ~~coverage~~of ~~for~~ the ~~Company’s~~ ~~non-admitted fire and inland marine business along with Seneca~~Company’s ~~property~~lines ~~business. The expiring treaty provided coverage~~ of ~~$50 million~~business inare ~~excess~~summarized ofas ~~$10 million,~~follows: ~~whereas the renewal provides coverage of $45 million in excess of $15 million.~~

Effective July 1, 2009, the Company placed a combined property per risk program providing coverage for Crum & Forster’s standard property division and a combined division covering Seneca’s standard property division and the Company’s non-admitted fire and inland marine business. Both the expiring and renewal treaties provide $25 million in capacity.


	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 34corporate expenses for purposes of evaluating financial performance of each line of business.

~~Results~~ ~~of Operations~~31

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Gross premiums written	$	238,183		$	279,639		$	456,408		$	562,232
Net premiums written	$	198,212		$	246,281		$	378,482		$	490,934
Premiums earned	$	200,281		$	262,882		$	407,711		$	534,692
Losses and LAE		132,475			245,746			268,325			455,356
Underwriting expenses		68,806			83,318			136,243			164,375
Underwriting (loss) income		(1,000	)		(66,182	)		3,143			(85,039	)
Investment income and net realized investment gains and losses		86,684			40,954			30,883			212,063
Interest and other expense		7,734			6,522			15,470			15,684
Costs related to early retirement of debt		—			392			—			392
Income (loss) before income taxes and equity in earnings of investees		77,950			(32,142	)		18,556			110,948
Income tax expense (benefit)		20,697			(12,564	)		(7,670	)		36,662
Income (loss) before equity in earnings of investees		57,253			(19,578	)		26,226			74,286
Equity in (losses) earnings of investees, net of tax		(1	)		2			79			(461	)
Net income (loss)	$	57,252		$	(19,576	)	$	26,305		$	73,825
Loss and LAE ratio		66.1	%		93.5	%		65.8	%		85.2	%
Underwriting expense ratio		34.4			31.7			33.4			30.7
Combined ratio		100.5	%		125.2	%		99.2	%		115.9	%

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The ~~increase~~following indiscussion ~~net~~relates ~~income~~to inthe critical accounting policies and estimates, the ~~three~~consolidated ~~months~~results ~~ended~~of operations, ~~June 30~~financial condition, ~~2009~~liquidity asand ~~compared~~capital toresources of the Company ~~three~~for ~~months~~the ~~ended~~interim periods indicated. Within this ~~June 30~~discussion, ~~2008~~the ~~was~~terms ~~primarily~~“Company” ~~attributable~~or “Crum & Forster” refer to ~~improved~~Crum & ~~underwriting~~Forster ~~results~~Holdings Corp. and ~~higher~~its ~~investment~~direct ~~earnings.~~and ~~The~~indirect subsidiaries, ~~improvement~~including inUnited ~~underwriting~~States ~~income~~Fire ~~and~~Insurance ~~corresponding~~Company ~~loss and~~(“US ~~LAE~~Fire”), ~~and~~The ~~combined~~North ~~ratios~~River ~~was~~Insurance ~~principally~~Company ~~due~~(“North River”), toCrum & aForster ~~charge~~Indemnity ofCompany and ~~$75,470~~Crum ~~(28~~and Forster Insurance Company.7 ~~loss~~US ~~ratio~~Fire ~~points)~~owns in100% of the stock ~~second~~of ~~quarter~~Crum & ofForster ~~2008~~Specialty Insurance Company. ~~associated~~North ~~with~~River owns 100% of the ~~commutation~~stock of aSeneca ~~finite~~Insurance ~~reinsurance~~Company, ~~contract~~Inc. ~~The~~and ~~increase~~its insubsidiaries ~~investment~~(“Seneca”). ~~earnings~~The ~~was primarily due~~term to“Fairfax” ~~higher~~refers ~~income~~to ~~from~~Fairfax ~~investments at equity~~Inc., ~~including~~Crum & ~~partnership~~Forster’s ~~investments~~parent company, and ~~higher~~Fairfax ~~net~~Financial ~~realized investment~~Holdings ~~gains~~Limited, which holds a 100% indirect interest in Fairfax Inc.

~~The~~Certain ~~decrease~~financial ininformation ~~net~~that ~~income~~is innormally ~~the~~included ~~six months ended June 30,~~in ~~2009,~~annual asfinancial ~~compared~~statements, toincluding ~~the~~certain ~~six months ended June 30, 2008,~~financial ~~was~~statement ~~primarily attributable to lower investment earnings~~footnotes, ~~partially~~ ~~offset~~prepared byin ~~higher~~accordance ~~underwriting~~with ~~income. Investment~~generally ~~earnings~~accepted ~~were~~accounting ~~lower~~principles in the ~~six~~United ~~months~~States ~~ended~~of ~~June 30, 2009,~~America ~~primarily~~(“GAAP”), ~~due~~is tonot ~~lower~~required ~~net realized gains on derivative and short-sale securities which were $13,109~~ for ~~the~~interim ~~six months~~reporting ~~ended~~purposes ~~June 30,~~and ~~2009~~has asbeen ~~compared~~condensed toor ~~$234,774~~omitted ~~for~~herein. ~~the six~~This ~~months ended June 30~~discussion, ~~2008. 2008 net realized gains on derivative~~ and ~~short-sale~~the ~~securities primarily reflect significant gains~~ related toconsolidated ~~credit~~financial ~~default swaps and Standard~~statements, ~~and~~should ~~Poor’s~~be ~~Depositary~~read ~~Receipts~~in ~~(“SPDRs”) short-sales.~~conjunction ~~Partially~~with ~~offsetting~~ the ~~decline in realized~~Company’s ~~investment~~consolidated ~~gains~~financial ~~was~~statements, ~~higher~~and ~~income~~notes ~~from~~related ~~investments at equity~~thereto, ~~including~~included ~~partnership investments. The increase~~ in ~~underwriting income and corresponding improvement in~~ the ~~loss~~Company’s ~~and~~Annual ~~LAE~~Report ~~and~~on ~~combined ratios was principally due to the effect of one~~Form 10-~~time~~K ~~charges~~for ~~recorded in~~ the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2008, filed with the ~~including~~Securities ~~the~~and ~~aforementioned~~Exchange ~~reinsurance~~Commission ~~commutation~~ (~~14.1~~“SEC”) ~~loss~~on ~~ratio~~February 27, ~~points)~~2009. ~~and~~The aresults ~~$25,500~~of ~~charge~~operations ~~(4.8~~for ~~loss ratio points)~~interim ~~associated~~periods ~~with~~are annot ~~asbestos~~necessarily ~~lawsuit~~indicative ~~settlement~~of in the ~~first~~results to be ~~quarter~~expected offor ~~2008~~the full year.

~~The~~All ~~effective~~dollar ~~income~~amounts ~~tax~~are ~~rate~~in ~~was a tax expense of 26.6% and a tax benefit of 40.8% for the three and six months ended June 30~~thousands, ~~2009,~~unless ~~respectively,~~otherwise ~~as compared to a tax benefit of 39~~indicated.~~1% and a tax expense of 33.0% for the three and six months~~ ended June 30, 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 and dividends received deductions totaling $6,340, or 8.1%, and $13,927, or 74.6%, for the three and six months ended June 30, 2009, respectively.

Statements 35Regarding Forward-Looking Information

Certain statements contained herein may constitute ~~Underwriting~~forward-looking statements and are made pursuant to the ~~Results~~“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 Company’s 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 Company’s actual results, performance or achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other factors, which are described elsewhere in this report, include, but are not limited to, the following:

~~Gross Premiums~~• ~~Written~~ 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 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; • Changes in governmental regulations; and • Exposure to credit risks on novated policies.

~~Gross premiums written by line of business are summarized as~~ ~~follows:~~32

	Three Months Ended June 30,
					Increase/			Percent
	2009		2008		(Decrease)			Change
General liability	$	51,216	$	59,679	$	(8,463	)		(14.2)%
Workers’ compensation		51,885		52,922		(1,037	)		(2.0)%
Commercial automobile		34,339		41,674		(7,335	)		(17.6)%
Property		26,141		58,352		(32,211	)		(55.2)%
Commercial multi-peril		22,011		22,900		(889	)		(3.9)%
Accident and health		46,592		37,613		8,979			23.9 %
Other		5,999		6,499		(500	)		(7.7)%
Total gross premiums written	$	238,183	$	279,639	$	(41,456	)		(14.8)%

	Six Months Ended June 30,
					Increase/			Percent
	2009		2008		(Decrease)			Change
General liability	$	103,359	$	123,514	$	(20,155	)		(16.3)%
Workers’ compensation		101,965		107,640		(5,675	)		(5.3)%
Commercial automobile		62,049		99,908		(37,859	)		(37.9)%
Property		49,600		106,716		(57,116	)		(53.5)%
Commercial multi-peril		41,359		42,353		(994	)		(2.3)%
Accident and health		87,322		70,823		16,499			23.3%
Other1		10,754		11,278		(524	)		(4.6)%
Total gross premiums written	$	456,408	$	562,232	$	(105,824	)		(18.8)%

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. Additional information regarding these factors, that could cause actual results to differ materially from expectations, is included in the Company’s 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.

1 Critical Accounting ~~Other~~Policies ~~includes surety, homeowners~~ and ~~personal automobile lines of business.~~Estimates

~~For~~The ~~the three months ended June 30, 2009, gross premiums written associated with the~~ Company’s ~~commercial~~consolidated ~~lines~~financial ~~of business~~statements ~~(excluding accident~~ and ~~health and “other”~~related ~~lines~~notes ofthereto ~~business~~are prepared in ~~the~~accordance ~~table~~with ~~above), declined by $49,935, or 21~~GAAP.~~2%,~~ ~~as compared to the three months ended June 30, 2008,~~GAAP ~~primarily~~requires ~~due~~management to amake ~~decline~~estimates ~~in new business of approximately 4%, a decline in renewal retention rates of approximately 3 percentage points~~ and ~~price~~assumptions ~~decreases on renewal policies~~that ofaffect ~~approximately 1%. For~~ the ~~six~~reported ~~months~~amounts ~~ended June 30, 2009, gross premiums written associated with the Company’s commercial lines~~ of ~~business~~assets ~~(excluding accident~~ and ~~health~~liabilities and ~~“other”~~ ~~lines of business in~~ the ~~table above),~~ ~~declined~~disclosure byof ~~$121,799,~~material orcontingent ~~25.4%,~~assets asand ~~compared~~liabilities toat the ~~six months~~ ~~ended~~balance ~~June 30,~~sheet ~~2008,~~date ~~primarily due to a decline in new business of approximately 25%, a decline in renewal retention rates of approximately 2 percentage points~~ and ~~price decreases~~the onrevenues ~~renewal policies of approximately 1%. The year to date decline in new business is attributable to a reduction in both property~~ and ~~casualty~~expenses ~~writings.~~reported ~~Although there is some~~during ~~evidence that rate decreases have started to moderate and may further stabilize in 2009,~~ the ~~prolonged~~relevant ~~soft market conditions continue to make it very challenging to write new business at acceptable rates~~period. In ~~addition to competitive market conditions~~general, ~~the~~ ~~decline~~management’s inestimates ~~gross premiums written is also attributable to~~are ~~underwriting~~based ~~actions~~on ~~taken~~historical byexperience, ~~the~~evaluation ~~Company~~of tocurrent ~~reduce unprofitable~~trends, ~~classes~~information offrom ~~business,~~third ~~most~~party ~~notably~~professionals ~~a reduction in the property~~ and ~~commercial~~various ~~automobile lines of business. The Company~~other ~~continues~~assumptions tothat ~~maintain~~are ~~its~~believed ~~disciplined approach~~ to ~~underwriting in~~be ~~this~~reasonable ~~highly~~under ~~competitive~~the ~~market, renewing business and writing~~known ~~new~~facts ~~business only where it believes rates are acceptable~~ and ~~terms~~ ~~and conditions are appropriate for the exposure~~circumstances.

The ~~decline~~accounting inpolicies ~~gross~~and ~~premiums~~estimates ~~written~~discussed inbelow ~~the~~are ~~commercial~~those that ~~lines~~require management to make assumptions about highly ~~was~~uncertain ~~partially~~matters. ~~offset~~If bymanagement ~~growth~~were to make different assumptions about those matters, or if actual results were to differ significantly from management’s estimates, the Company’s ~~accident~~reported ~~and~~consolidated ~~health~~results of operations and ~~business~~financial condition could be materially affected.

The Company’s significant accounting policies are described 36in detail in Note 2 to the Company’s 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.

~~Casualty~~Unpaid Losses ~~Gross~~and ~~Premiums~~Loss ~~Written~~Adjustment Expenses

~~For~~The ~~the~~most ~~three~~significant ~~and~~accounting ~~six~~estimates ~~months~~relate ~~ended~~to ~~June 30, 2009, gross premiums written in casualty lines, which include~~ the ~~general~~ ~~liability, workers~~Company’s ~~compensation~~reserves ~~and~~for ~~commercial~~unpaid ~~automobile lines~~losses ~~of business, decreased by $16,835, or 10.9%,~~ and ~~$63,689,~~loss adjustment orexpenses 19(“LAE”).~~2%,~~ ~~respectively,~~Unpaid aslosses ~~compared to the three~~ and ~~six~~LAE ~~months~~include ~~ended~~reserves ~~June 30,~~for ~~2008.~~both ~~For~~reported ~~the~~(case ~~three~~reserves) ~~months ended June 30, 2009, the decrease was primarily due to a lower renewal premium base, although renewal retention rates were stable relative to prior year,~~ and ~~price~~unreported ~~reductions on renewal~~losses ~~policies of approximately 1%. For the six months ended June 30, 2009, the decrease was primarily due to a reduction in new business of approximately 25%~~ and ~~price decreases on renewal policies of approximately 1% as well as a lower renewal premium base, although renewal retention rates remained stable relative to prior year~~LAE. ~~Aside from modest~~ ~~improvement in California workers’ compensation rates, casualty business across the industry is continuing to suffer from inadequate rates with some declines in pricing.~~

~~For~~When the ~~six~~Company ~~months~~is ~~ended~~notified ~~June 30,~~of ~~2009~~insured losses, claims personnel set up case reserves for the ~~significant~~estimated amount of settlement, if ~~reduction~~any, inwhich ~~commercial~~excludes ~~auto~~estimates ~~gross~~of ~~premiums~~expenses ~~written~~to settle claims, such as ~~compared~~legal and other fees and the general expenses of toadministering the ~~prior~~claims ~~year~~adjustment ~~period~~process. isThe ~~due~~estimate reflects tothe judgment of claims personnel, or of independent claims adjusters hired by the Company, ~~more~~the ~~aggressively~~scope of coverage ~~reducing~~available ~~its~~for ~~exposure~~the toreported ~~transportation~~claim ~~accounts~~under ~~where~~each ~~loss~~individual policy ~~experience~~assuming ~~was~~application ~~unfavorable.~~of ~~The~~controlling ~~reduction~~state incontract law, general reserving ~~liability~~practices, the experience and knowledge of such ~~reflects~~personnel aregarding ~~decrease~~the innature of the ~~non-admitted~~specific ~~casualty~~claim ~~business~~and, where ~~primarily~~appropriate, ~~related~~advice toof counsel, with the ~~impact~~goal of setting the reserve ~~recession~~at on the ultimate expected loss amount as soon as ~~construction~~sufficient ~~business~~information becomes available.

~~Property~~The ~~Gross~~Company’s ~~Premiums~~internal ~~Written~~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 Company’s actuaries concurred with the reasonableness of management’s best estimate.

~~For~~Losses ~~the three~~ and ~~six~~LAE ~~months~~are ~~ended~~charged ~~June 30,~~to ~~2009,~~income ~~gross premiums~~as ~~written~~they inare ~~property lines, which include the property and commercial multi-peril lines of business, decreased by $33,100, or 40~~incurred.~~7%, and $58,110, or 39.0%, respectively, as~~ ~~compared~~During to the ~~three~~loss ~~and~~settlement ~~six months ended June 30~~period, ~~2008, primarily~~reserves ~~due~~established ~~to a reduction~~ in ~~new business and a decline in~~prior ~~renewal~~years ~~retention~~are ~~rates~~adjusted ~~whereas~~as ~~prices~~loss onexperience ~~renewal~~develops ~~policies remained relatively stable. For the three~~ and ~~six months ended~~new ~~June 30,~~information ~~3009,~~becomes ~~new~~available. ~~business~~Adjustments ~~declined~~to ~~by approximately 25%~~previously inestimated ~~each period~~reserves, ~~renewal~~both ~~retention~~positive ~~rates declined by approximately 12~~ and ~~9 percentage points~~negative, ~~respectively,~~are ~~and~~reflected in ~~prices~~the ~~increased~~Company’s byfinancial ~~approximately~~results 1% in the ~~second~~periods ~~quarter~~in ofwhich ~~2009~~they ~~and~~are ~~decreased by approximately 1% year to date through June 30~~made, ~~2009.~~and Inare ~~addition~~referred to ~~soft~~as ~~market~~prior ~~conditions~~period ~~which~~development. ~~have~~Due ~~significantly~~to ~~affected~~ the ~~Company’s~~high ~~property business,~~level ~~the~~of ~~decrease~~uncertainty, inrevisions ~~property~~to ~~gross premiums written is~~these ~~also~~estimated ~~due~~reserves tocould have a ~~continued~~material ~~reduction~~impact inon ~~habitational business,~~the ~~where~~Company’s ~~loss~~results ~~ratios~~of ~~are~~operations ~~higher~~in ~~than~~ the ~~remainder~~period ~~of the book of~~recognized ~~business,~~and asactual ~~well~~payments asfor aclaims ~~reduction~~and inLAE ~~accounts~~could ~~with~~ultimately ~~larger total~~be ~~insured~~significantly ~~values~~different from estimates.

~~Overall property rates appear to be stabilizing, or even~~ ~~increasing in a few cases, driven by reduced capacity in peak~~33 ~~catastrophe zones as a result of significant catastrophe losses sustained in 2008 from Hurricane Ike and increased property catastrophe reinsurance costs.~~

OtherTable Grossof Premiums Written Contents

~~For~~The ~~the~~Company ~~three~~has written general liability, commercial multi-peril and ~~six~~umbrella ~~months~~policies ~~ended~~under ~~June 30,~~which ~~2009,~~its ~~the~~policyholders ~~increase~~continue into present asbestos, environmental and other ~~gross~~latent claims. ~~premiums~~The ~~written~~vast majority of $8these claims,~~479,~~ orparticularly ~~19.2%,~~with respect to asbestos and 15environmental claims,~~975,~~ orare ~~19.5%,~~presented under ~~was~~policies ~~primarily~~written ~~due~~many toyears ~~significant~~ago. ~~growth~~There inare significant uncertainties in estimating the ~~Company’s~~amount ~~accident~~of ~~and~~reserves ~~health~~required ~~book~~for asbestos, ofenvironmental ~~business~~and other latent claims. Reserves for ~~Previously~~these ~~written~~exposures incannot ~~the~~be ~~“B++”~~estimated ~~rated~~solely ~~Fairmont~~with traditional loss ~~companies~~reserving techniques, ~~the~~which rely on historical accident ~~and~~year development ~~health~~factors. ~~business~~Among ~~continues~~the touncertainties ~~benefit~~relating to ~~from~~asbestos, ~~Crum &~~environmental ~~Forster’s~~and ~~“A”~~other latent reserves are a lack of ~~A.M. Best~~historical ~~rating~~data, ~~which~~long ~~has~~reporting ~~resulted~~delays inand ~~the~~complex ~~Company~~unresolved ~~acquiring~~legal ~~several~~issues ~~new~~regarding ~~programs~~policy ~~since~~coverage ~~2007~~and ~~that~~the extent and timing of any such contractual liability. Courts have ~~contributed~~reached different, and frequently inconsistent, conclusions as to ~~business~~when losses ~~growth.~~occurred, ~~The~~what ~~growth~~claims inare ~~2009~~covered, under what circumstances the insurer has ~~primarily~~an ~~come~~obligation ~~from~~to defend, how ~~the~~policy ~~employer~~limits ~~stop~~are ~~loss~~determined ~~business~~and how policy exclusions are applied and interpreted.

No adjustment was made to asbestos, environmental or other ~~Net~~latent reserves in the three and nine months ended ~~Premiums~~September 30, ~~Written~~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 Company’s internal actuarial reviews, the Company strengthened its asbestos, environmental and other latent reserves by $36,215 and $54,547, respectively.

~~For the three and six months ended June 30, 2009, net~~ ~~premiums written decreased by $48,069, or 19.5%, and $112,452,~~Investments ~~or 22.9%, compared to the three and six months ended June 30, 2008, respectively, reflective of the decline in gross premiums written in the corresponding periods.~~

The Company is responsible for determining the fair value of its ~~Premiums~~investment portfolio by utilizing market-driven fair value ~~Earned~~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.

~~Premiums~~In ~~earned~~accordance ~~reflect~~with FASB ASC 820-10, Fair Value Measurements and Disclosures, the ~~amount~~Company ofhas categorized ~~net~~its ~~premiums~~financial ~~written~~instruments, based on the priority of ~~applicable~~the inputs to the ~~portion~~valuation oftechnique, into a three-level fair value hierarchy. The fair value hierarchy gives the ~~policy~~highest priority ~~term~~to ~~that~~quoted ~~expires~~prices in aactive markets for identical assets ~~given~~or ~~period~~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 Company’s ~~generally~~Level 3 investments ~~earns~~are ~~premiums~~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 athe ~~pro~~mortgage-~~rata~~backed securities ~~basis~~through ~~over~~ the current period inand ~~which~~projects the ~~coverage~~remaining iscash ~~provided~~flows from the underlying mortgages, using a number of assumptions and inputs that are based on the security-specific collateral. ~~For~~The Company assesses the reasonableness of the fair values of these ~~three~~securities by comparing to models validated by qualified personnel, by reference to movements in credit spreads and ~~six~~by comparing ~~months~~the ~~ended~~fair ~~June~~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, ~~premiums~~the ~~earned~~total fair ~~decreased~~value byof ~~$62,601,~~the orCompany’s ~~23.8%,~~Level 2 and Level 3 mortgage-backed securities was $~~126~~106,~~981,~~284. Gains or ~~23.7%,~~losses asarising ~~compared~~from tochanges 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 ~~six~~nine months ended ~~June~~September 30, ~~2008.~~2009, realized investment gains ~~The~~resulting ~~decrease~~from ~~was~~the ~~generally~~net ~~comparable~~change toin ~~the~~fair ~~decrease~~value inof ~~net~~the ~~premiums~~mortgage-backed ~~written~~securities were $24,176 and $30,069, respectively.

Derivative securities held by the Company at September 30, 372009 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.

~~Losses~~ ~~and Loss Adjustment Expenses~~34

ForTable the three and six months ended June 30, 2009, the Company’s calendar period loss and LAE ratio improved to 66.1% and 65.8%, respectively, from 93.5% and 85.2% for the three and six months ended June 30, 2008, respectively. For the three months ended June 30, 2009, the improvement in the calendar year loss and LAE ratio was principally due to the impact of the loss on commutation of a finite reinsurance contract of $75,470 (28.7 points) in the second quarter of 2008. Excluding the effect of the commutation, the calendar year loss and LAE ratio was 66.1% in the second quarter of 2009 as compared to 64.8% in the second quarter of 2008, the slight decline due in part to the continuing effects of soft market conditions, partially offset by lower catastrophe losses. Contents

~~For~~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 ~~six~~long ~~months~~term. ~~ended~~At ~~June 30~~each reporting date, ~~2009~~and more frequently when conditions warrant, ~~the~~management ~~improvement~~evaluates all available-for-sale securities with unrealized losses to determine whether an other than temporary decline in value exists and whether losses should ~~the~~be ~~calendar~~recognized ~~year~~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 ~~LAE~~involves ~~ratio~~analyzing ~~was~~many ~~principally~~factors. ~~due~~These factors include but are not limited to (i) the length of time and extent to ~~effects~~which ofthe fair value has been less than its cost or amortized cost; (ii) the ~~aforementioned~~severity ~~commutation~~of the impairment; (~~14.1~~iii) the cause ~~points~~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 achanges ~~$25~~in credit rating,~~500~~ reduction ~~charge~~or ~~(4.8~~elimination ~~points~~of dividends or non-payment of scheduled interest payments; and (v) for ~~associated~~fixed ~~with~~income securities, the ~~settlement~~Company’s intent to sell a security or ofwhether anit ~~asbestos~~is ~~lawsuit~~more inlikely ~~the~~than ~~first~~not ~~quarter~~that ofthe ~~2008.~~Company ~~Excluding~~will be required to sell the ~~effect~~security before recovery of ~~these~~its ~~charges~~amortized cost, ~~the~~which ~~calendar~~in ~~year~~some ~~loss~~cases, may extend to maturity, and ~~LAE~~for ~~ratio~~equity insecurities, the ~~six~~Company’s ~~months~~intent ~~ended~~and ~~June 30,~~ability ~~2009~~to ~~was~~hold the ~~65.8%~~security asfor a period of time sufficient to allow for any ~~compared~~anticipated torecovery ~~66.3%~~of fair value in the ~~six~~near ~~months~~term. ~~ended~~To ~~June 30~~the extent management determines that a security is deemed to be other than temporarily impaired, ~~2008~~an impairment loss is recognized.

~~The~~There ~~accident~~are ~~year~~risks ~~loss~~ and ~~LAE~~uncertainties ~~ratio~~associated ~~was~~with ~~71.2%~~determining whether ~~for~~declines in the ~~first~~fair ~~six~~value of investments are other than ~~months~~temporary ofsuch ~~2009~~as significant subsequent changes in general economic conditions, as ~~compared~~well toas 71specific business conditions affecting particular issuers; subjective assessments of issuer-specific factors (seniority of claims, collateral value, etc.6%); ~~for~~future ~~the~~financial ~~first~~market ~~six~~effects; ~~months~~stability of foreign ~~2008~~governments and economies; future rating agency actions; and significant disclosures relating to accounting, fraud or corporate governance issues that may adversely affect certain investments. ~~The~~In ~~modest~~addition, ~~improvement~~significant assumptions and management judgment regarding these risks and uncertainties are involved in determining if a decline is ~~primarily~~other ~~attributable~~than totemporary. As a result of ~~reduction~~the volatility in ~~catastrophe~~the ~~losses~~financial markets that occurred during 2008 and that has continued into 2009, the ~~benefit~~duration ofand ~~underwriting~~severity ~~actions,~~of ~~largely~~unrealized ~~offset~~losses byon many of the ~~continuing~~Company’s ~~effects~~investments has ofexceeded ~~the~~historical ~~soft~~norms making it particularly difficult ~~market~~for management to evaluate whether impairments are other than temporary. ~~The~~Management ~~full~~will ~~year~~continue ~~accident~~to ~~year~~monitor ~~2008~~these ~~loss~~unrealized losses ~~ratio~~and ~~was~~will ~~80.4%~~assess all available facts and circumstances for each security as they become known, which may result in changes ~~inclusive~~to ofthe ~~7.2~~conclusions ~~loss~~reached ~~ratio~~at ~~points~~September 30, ~~from~~2009 ~~Hurricanes~~based ~~Gustav~~on current facts and circumstances existing at that date, resulting ~~Ike~~in additional other than temporary impairments in future periods.

During the three and nine months ended September 30, 2009 ~~Underwriting~~and 2008, the Company recorded other than temporary impairment ~~Expenses~~charges of $26 and $105,980, and $34,698 and $75,776, respectively, primarily related to write-downs of equity securities.

~~Underwriting expenses include policy acquisition costs (costs~~ ~~that vary with and are primarily related to the acquisition of~~Reinsurance ~~new and renewal policies and are comprised of commissions paid~~Recoverable to producers and premium taxes) and other operating expenses associated with the Company’s underwriting activities, such as salaries and benefits, information technology costs and rent. For the three and six months ended June 30, 2009, the Company’s underwriting expense ratio increased to 34.4% and 33.4%, respectively, from 31.7% and 30.7% for the three and six months ended June 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 of approximately 24% in both the three and six month periods ended June 30, 2009. Continued soft market conditions and a weak economy continue to adversely affect the Company’s underwriting expense ratio.

Amounts recoverable from reinsurers are initially estimated in ~~Investment~~conjunction with the establishment of reserves for unpaid losses ~~Results~~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.

~~Information~~In oncertain 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 Company’s ~~investment~~ results of operations. An estimated allowance for uncollectible reinsurance recoverable is recorded on the basis ~~summarized~~of asperiodic ~~follows:~~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.

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Average investments, including cash and cash equivalents, at book value1	$	3,579,803		$	4,391,345		$	3,736,214		$	4,421,123
Investment income	$	63,682		$	31,245		$	98,952		$	47,086
Realized investment gains (losses)		23,002			9,709			(68,069	)		164,977
Pre-tax equity in earnings (losses) of investees		(1	)		3			122			(709	)
Change in unrealized investment losses and foreign currency translation		350,741			(36,261	)		232,014			(49,664	)
Total return on investments	$	437,424		$	4,696		$	263,019		$	161,690
Annualized total return on investments		48.9	%		0.4	%		14.1	%		7.3	%

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 Company’s financial position and results of operations.

~~1 Includes cash and cash equivalents and assets pledged for derivatives.~~ 35

38 Table of Contents

~~The Company manages its investment portfolio with an emphasis on~~ ~~total return on assets under management. Total return for the~~Deferred ~~period~~Income isTax ~~the sum of investment income (including pre-tax equity~~Assets 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 Company’s 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.

~~Investment~~The ~~Income~~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 Company’s deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences.

~~The~~Although ~~components~~realization is not assured, management believes the recorded deferred tax assets are fully recoverable based on estimates of ~~investment~~the ~~income~~future ~~for~~profitability of Crum & Forster’s operating subsidiaries and current forecasts for the ~~three~~periods through which losses may be carried back and/or forward. ~~six~~The ~~months~~Company has several material deferred tax assets ~~ended~~arising ~~June 30~~from investments (a significant portion of which relates to impairments), ~~2009~~loss reserve discounting, deferred income on retroactive reinsurance and ~~2008~~unearned ~~are~~premium ~~summarized~~adjustments. asThe realizability ~~follows:~~of these reversing deferred tax assets is considered in conjunction with similar originating deferred tax assets and other taxable income.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Interest on fixed income securities	$	25,076		$	26,396		$	53,590		$	50,687
Dividends from equity securities		10,230			7,559			22,393			14,467
Earnings (losses) from other invested assets		34,817			3,827			35,621			(9,853	)
Other, primarily interest on cash and cash equivalents		607			5,918			1,104			15,871
Gross investment income		70,730			43,700			112,708			71,172
Interest on funds held under reinsurance contracts		(3,832	)		(3,797	)		(7,599	)		(9,106	)
Investment expenses		(3,216	)		(8,658	)		(6,157	)		(14,980	)
Investment income	$	63,682		$	31,245		$	98,952		$	47,086

At September 30, 2009, there are no valuation allowances against the Company’s 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 Company’s 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.

~~For~~Realization of the ~~three~~deferred ~~and~~tax ~~six~~asset ~~months~~under ~~ended~~FASB ~~June 30, 2009, the~~ASC ~~increase in investment income of $32~~740-10,~~437, or 103.8%, and~~ ~~$51,866,~~Income orTaxes ~~110~~(formerly SFAS No.2% 109, ~~as compared to the corresponding prior year~~ ~~periods,~~Accounting ~~was~~for ~~primarily~~Income ~~due to the combined effects of: (i~~Taxes) ~~higher~~ ~~earnings~~ultimately ~~from~~depends ~~the~~on ~~Company’s investments at~~the ~~equity,~~existence ~~the majority~~ of ~~which~~sufficient ~~was~~taxable ~~attributable~~income toavailable ~~higher earnings~~under ~~from~~tax ~~HWIC Asia Fund (“HWIC”)~~law, ~~an affiliated~~ ~~equity~~including ~~method~~future ~~investee,~~reversals ~~which~~of ~~realized~~existing ~~significant~~temporary ~~capital gains~~differences, infuture ~~the~~taxable ~~second~~income ~~quarter~~exclusive of ~~2009,~~reversing ~~as well as higher earnings from~~differences, ~~partnership~~taxable ~~investments;~~income ~~(ii) higher~~in ~~dividends~~prior ~~from~~carryback ~~equity securities~~years ~~due~~and totax ~~a shift in portfolio composition to equity~~planning ~~securities~~strategies. ~~since~~Future ~~the~~profitability, ~~fourth~~as ~~quarter~~it ofrelates ~~2008 and (iii) lower investment expenses due~~ to ~~lower SPDRs expense and lower~~taxable ~~incentive management fees. Offsetting these increases in investment~~ income ~~was~~expectations adiscussed ~~decline~~above, incan ~~interest~~be onnegatively ~~cash and cash~~affected ~~equivalents~~by ~~due~~factors toincluding ~~lower~~substantial ~~cash~~changes ~~collateral held~~ in ~~2009~~premium asvolume, ~~compared~~underwriting tolosses ~~2008,~~resulting ~~related~~from tosignificant ~~the~~events ~~SPDR’s~~such ~~short-sales which~~as ~~were~~severe ~~closed~~natural ~~out~~disasters inor ~~the~~large ~~fourth~~settlements ~~quarter~~for ofasbestos ~~2008 and a decline in~~or ~~year~~environmental ~~over~~claims, ~~year~~or ~~short-term~~materially ~~interest~~lower ~~rates~~investment results.

Summary 39of Operations

~~Net Realized Investment Gains and Losses~~Overview

~~Net~~The ~~realized~~Company ~~investment~~is ~~gains~~a ~~(losses)~~national incommercial ~~the~~property ~~three~~and casualty insurance company with a focused underwriting strategy, targeting specialty classes of business and ~~six~~underserved market ~~months~~opportunities. ~~ended~~Operating ~~June 30~~through its home office and regional branch network, ~~2009~~the Company writes a broad range of commercial coverage, including general liability, workers’ compensation, commercial automobile, property, commercial multi-peril, accident and ~~2008~~health ~~are~~and ~~summarized~~other aslines of business. ~~follows:~~The Company generally conducts business on a brokerage basis through more than 1,400 producers located throughout the United States.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Fixed income securities	$	73,459		$	1,118		$	73,724		$	13,255
Equity securities		7,194			—			8,678			—
Derivatives and short-sale obligations		(18,745	)		8,075			13,109			234,774
Investments at equity and other invested assets		12,647			681			(57,626	)		(41,974	)
		74,555			9,874			37,885			206,055
Other than temporary impairment charges:
Equity securities		(51,553	)		(165	)		(102,447	)		(39,813	)
Fixed income securities		—			—			(3,507	)		(1,265	)
		(51,553	)		(165	)		(105,954	)		(41,078	)
Total pre-tax net realized investment gains (losses)	$	23,002		$	9,709		$	(68,069	)	$	164,977

The Company’s objective is to expand opportunistically into classes of business or market segments that are consistent with its underwriting expertise and have the potential to generate an underwriting profit. Management believes the Company’s ability to identify and react to changing market conditions provides it with a competitive advantage. Based on the experience and underwriting expertise of 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 ~~increase~~profitability inof ~~net~~property ~~realized~~and ~~investment~~casualty ~~gains~~insurance ~~for the three~~companies ~~months~~is ~~ended June 30, 2009 of $13,293, or 136.9%,~~ primarily ~~reflects:~~ ~~(i) an~~determined ~~increase~~by intheir ~~net~~underwriting ~~gains~~results ~~on fixed income~~ and ~~equity~~investment ~~securities,~~performance. ~~which~~Underwriting ~~include~~results ~~$39,286~~are ofthe net ~~gains related to~~result ~~sales~~ of ~~fixed~~a ~~income~~company’s ~~securities~~premiums earned and ~~$34~~amounts paid,~~173~~ ~~of net~~or ~~mark-~~expected to~~-market gains~~ ~~on held-for-trading fixed~~be ~~income~~paid, ~~securities~~to insettle ~~the~~insured ~~second~~claims ~~quarter~~and ~~of 2009, largely~~policy ~~offset~~acquisition bycosts ~~higher~~and other ~~than~~underwriting ~~temporary~~expenses. ~~impairment~~The ~~charges~~insurance ~~primarily~~business ~~related~~is tounique ~~equity~~in ~~securities;~~that ~~(ii) higher~~premiums charged for insurance ~~mark-to-market gains~~coverage onare ~~other~~set ~~invested~~without ~~assets,~~certainty ~~principally~~of ~~attributable~~the toultimate aclaim costs ~~gain~~to ofbe ~~$10,009~~incurred ~~related~~on toa ~~the~~given ~~Company’s~~policy. ~~investment~~This inrequires that liabilities ~~Odyssey~~be Reestimated ~~Holdings~~and ~~Corp.~~recorded ~~(“Odyssey”),~~in anrecognition ~~affiliated company,~~of ~~for~~future ~~which~~loss ~~the~~and settlement ~~Company~~obligations. ~~has~~Due ~~elected~~to the ~~fair~~inherent ~~value~~uncertainty ~~option~~in ~~under~~estimating ~~SFAS No. 159~~these liabilities, ~~The~~there ~~Fair~~can ~~Value~~be ~~Option~~no ~~for~~assurance that ~~Financial~~actual ~~Assets~~liabilities ~~and~~will ~~Financial~~not ~~Liabilities —~~exceed ~~Including an~~recorded ~~Amendment~~amounts ofor ~~FASB Statement No. 115~~premiums ~~(“SFAS 159”);~~received. ~~(iii) lower~~The ~~net~~ultimate ~~gains~~adequacy ~~on derivatives~~of ~~securities~~premium ~~and~~rates ~~short-sale~~is ~~obligations, primarily~~affected ~~attributable~~mainly toby athe ~~decrease~~severity inand ~~net~~frequency ~~realized~~of ~~gains~~claims, onwhich ~~credit~~are ~~default~~influenced ~~swaps,~~by ~~total~~many ~~return~~factors, ~~swaps~~including natural and ~~SPDRs short~~man-~~sales. During~~made ~~the~~disasters, ~~three~~regulatory ~~months~~measures ~~ended~~and ~~June 30,~~court ~~2009,~~decisions ~~the~~that ~~Company recorded~~define ~~net~~and ~~losses~~expand ofthe ~~$18,746~~extent onof ~~its~~coverage. ~~credit~~Insurance ~~default~~premium ~~swaps~~rates ~~as compared to~~are ~~net~~also ~~gains~~influenced ofby ~~$10,460~~available oninsurance ~~credit~~capacity ~~default~~or ~~swaps, total return swaps~~the ~~and~~industry’s ~~SPDRs~~willingness ~~short~~to ~~sales~~deploy incapital ~~the~~to ~~three~~cover ~~months ended June 30,~~each ~~2008;~~insurable risk.

~~The decrease in net realized investment gains of $233,046 for~~ ~~the six months ended June 30, 2009 as compared to~~36 June 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 and SPDRs short-sales. For the six months ended June 30, 2009, net gains on derivatives and short-sale obligations include net gains of $13,450 related to credit default swaps as compared to net gains of $156,645 and $65,506 related to credit default swaps and SPDRs short-sales, respectively, in the six months ended June 30, 2008; (ii) higher net gains on fixed income and equity securities, which include $54,401 of net gains related to sales of fixed income securities and $19,323 of net mark-to-market gains on held-for-trading fixed income securities, largely offset by higher other than temporary impairment charges primarily related to equity securities.

DuringTable 2008,of the Company significantly reduced its credit default swap portfolio and closed out its total return swaps, SPDRs and equity short-sales. Contents

Premiums collected are invested until funds are required to pay ~~Interest~~settled claims. Insurance company investment portfolios generally must provide a balance among total return, capital preservation and ~~Other~~liquidity ~~Expense~~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 Company’s capital.

~~For~~Management monitors the ~~three~~contribution to earnings of underwriting operations and ~~six~~investment ~~months~~results ~~ended~~separately. ~~June 30,~~The ~~2009,~~ability ~~interest~~to ~~and~~achieve ~~other~~underwriting ~~expenses,~~profitability ~~excluding~~on ~~costs~~a ~~related~~consistent tobasis ~~early~~is ~~retirement~~the core competency of ~~debt~~a inproperty ~~2008,~~and ~~were~~casualty $7insurance company,~~734~~ demonstrating ~~and $15~~discipline,~~470,~~ ~~and~~individual ~~$6,522~~risk selection and pricing ~~$15~~skills,~~684,~~ ~~respectively.~~and ~~The~~effective ~~higher~~risk ~~expense~~management inon ~~the~~a ~~three~~portfolio ~~months~~basis. The ~~ended~~underwriting ~~June 30,~~functions ~~2009,~~of ~~was~~the ~~primarily~~Company ~~due~~are tomanaged ~~higher charitable~~separately ~~contributions,~~from ~~whereas~~the ~~for~~investment ~~the~~operations. ~~six~~Accordingly, ~~months~~in ~~ended~~assessing ~~June 30,~~the ~~2009,~~Company’s ~~interest~~results ~~and~~of ~~other~~operations, ~~expense~~management ~~was~~evaluates underwriting ~~relatively~~results ~~flat~~separately ~~compared~~from ~~to prior~~investment ~~year~~performance.

With respect to the Company’s underwriting operations, 40management 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 ~~Liquidity~~non-GAAP financial measure. The table at the beginning of the Results of Operations section that follows presents the separate contribution of underwriting and ~~Capital~~investment ~~Resources~~operations to income before income taxes on a GAAP basis. An understanding of a property and casualty insurance company’s financial condition, results of operations and profit and growth prospects begins with an assessment of the entity’s ability to underwrite effectively. Underwriting is the core business of such companies; investment operations are a separate function. Management monitors the Company’s 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 ~~Holding~~return on assets under management both in absolute terms and relative to appropriate benchmarks. Growth in the Company’s cash and invested assets is also a key measure of investment performance.

~~As a holding company with no direct operations, Crum &~~ ~~Forster Holdings Corp.’s (referred to in this section as~~Market ~~the Company) assets consist primarily of its investments in the~~Conditions 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 ~~Company’s~~property ~~ability~~and tocasualty ~~satisfy~~insurance ~~its~~business ~~corporate~~is ~~obligations~~cyclical and isinfluenced ~~primarily~~by ~~dependent~~many onfactors, ~~the~~including ~~dividend~~price ~~paying~~competition, economic ~~capacity~~conditions, ofnatural ~~its~~and man-made disasters (for example ~~subsidiaries.~~hurricanes, ~~State~~earthquakes ~~insurance~~and ~~laws~~terrorism), ~~restrict~~availability ~~the~~and ~~amount~~cost of ~~shareholder~~reinsurance, ~~dividends~~credit ~~that~~conditions ~~insurance~~and ~~companies~~interest ~~may~~rates, ~~pay without~~state ~~prior~~regulations, ~~approval~~court ofdecisions ~~regulatory~~and ~~authorities.~~changes ~~The~~in ~~ability~~the oflaw. For the ~~Company’s~~last ~~insurance~~several ~~subsidiaries~~years, tothe ~~pay~~property ~~dividends~~and ~~depends,~~casualty market has ~~among~~experienced ~~other~~challenging ~~things,~~market onconditions ~~such~~characterized ~~subsidiaries having positive~~by ~~statutory~~intense ~~earned~~competition ~~surplus.~~and ~~The~~downward ~~Company’s~~pricing ~~principal~~trends. ~~insurance~~These soft ~~subsidiaries~~market ~~are~~conditions USheightened ~~Fire~~in 2008 and ~~North~~the ~~River.~~Company ~~At June 30, 2009,~~has UScontinued ~~Fire~~to ~~reported~~see ~~statutory~~soft ~~earned~~market ~~surplus~~pricing ofthrough ~~$429,847~~all ~~and~~lines ~~North~~of ~~River~~business ~~reported~~in ~~statutory~~the ~~earned~~first ~~surplus~~nine months of ~~$178,705.~~2009 Inwith ~~March~~competitors in ~~2009,~~some ~~both~~cases USwriting ~~Fire~~accounts ~~and~~at ~~North~~levels ~~River~~below ~~received~~average ~~approval from the~~developed ~~Delaware~~losses ~~Department~~with ofmulti-year ~~Insurance~~rate ~~and~~lock ~~New~~deals ~~Jersey~~and ~~Department~~frequently ofterms and ~~Banking~~conditions ~~and~~are ~~Insurance,~~expanded ~~respectively,~~without tomuch ~~pay~~price ~~extraordinary~~consideration. ~~dividends.~~ Although ~~the~~there ~~amount~~were ofsome signs earlier in the ~~dividend~~year ~~for~~that ~~both~~the ~~companies~~market was ~~10%~~in oftransition, ~~prior~~as ~~year-end~~evidenced ~~surplus~~by ~~(the~~stable ~~amount~~or ~~of an~~slightly ~~ordinary~~increasing ~~dividend),~~rates ~~the~~across ~~extraordinary~~certain ~~dividend~~lines ~~approvals allowed acceleration~~ of ~~the~~business ~~dividend~~such ~~payments~~as California ~~from~~workers’ ~~October~~compensation, tooverall ~~March~~market ~~for~~conditions USstill ~~Fire~~remain competitive and ~~from~~have ~~May~~deteriorated toduring ~~March~~the ~~for~~third quarter ~~North~~of ~~River~~2009. OnThroughout ~~March 27~~the first half of the year, some ~~2009,~~property

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