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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

Odyssey Re Holdings Corp.

Odyssey Re Holdings Corp.

Donald L. Smith, Esq.

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

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

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

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ODYSSEY RE HOLDINGS CORP.

INDEX TO FORM 10-Q

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PART I — FINANCIAL INFORMATION

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See accompanying notes.

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ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

See accompanying notes.

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ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization and Basis of Presentation

      Odyssey Re Holdings Corp. (the “Company” or “OdysseyRe”) is a Delaware domiciled company which was incorporated on March 21, 2001 to serve as the holding company for its wholly owned subsidiary Odyssey America Reinsurance Corporation (“Odyssey America”) and Odyssey America’s subsidiaries, Odyssey Reinsurance Corporation (“ORC”), Odyssey UK Holdings Corporation (“UK Holdings”), Newline Underwriting Management Ltd., which owns and manages a syndicate at Lloyd’s, Newline Syndicate 1218 (collectively, “Newline”) and Hudson Insurance Company (“Hudson”). On September 10, 2002, OdysseyRe acquired 56% of First Capital Insurance Ltd., a Singapore insurance company. Fairfax Financial Holdings Limited (“Fairfax”), a Canadian financial services holding company, is OdysseyRe’s majority shareholder.

      The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions, which could differ from actual results, that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been omitted since it is not required for interim reporting purposes. The Company’s unaudited interim consolidated financial statements include all adjustments which in management’s opinion are normal recurring adjustments for a fair presentation of its financial position on such dates and the results of operations for those periods. The results for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results for a full year. As of December 31, 2002, certain amounts have been reclassified to conform to the balance sheet presentation as of March 31, 2003.

      During the three months ended March 31, 2003 and 2002, dividends of $0.025 per common share were declared resulting in an aggregate dividend of approximate $1.6 million in each period.

2.     Change in Accounting Principle

      Effective January 1, 2003, the Company adopted the expense recognition provisions, on a prospective basis, of Statement of Financial Accounting Standard (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. The adoption of these provisions has no effect on the consolidated statement of operations for the three months ended March 31, 2003, as the Company did not grant any stock options during the first quarter.

      On January 1, 2002, the Company, in accordance with the provisions of SFAS 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets”, fully amortized its negative goodwill of $36.9 million and reflected the amortization as a cumulative effect of a change in accounting principle in its statement of operations for the three months ended March 31, 2002. SFAS 142 requires that an entity determine if the goodwill or other intangible assets has an indefinite or a finite useful life. Goodwill and intangible assets with indefinite useful lives will not be subject to amortization and must be tested at least annually for impairment. Management has determined that the goodwill of $19.1 million reflected in other assets as of March 31, 2003 and December 31, 2002 has an indefinite life and is not impaired. The Company has not amortized its goodwill during the three months ended March 31, 2003 and 2002. There is no effect on the Company’s federal and foreign income taxes resulting from the implementation of these accounting pronouncements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.     Accumulated Other Comprehensive Income

      The following table shows the components of the change in accumulated other comprehensive income (loss) for the three months ended March 31, 2003 and 2002 (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The components of comprehensive income (loss) for the three months ended March 31, 2003 and 2002 are shown in the following table (in thousands):

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4.   Earnings Per Share

      Net income for the three months ended March 31, 2003 and 2002 per common share has been computed in the following table based upon weighted average common shares outstanding (in thousands, except share amounts):

      The 2003 diluted earnings per common share assumes that the Company’s stock options, granted in April 2002 and subsequent, under the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan would not be exercised as of March 31, 2003 and does not reflect the conversion of the Company’s convertible debentures into shares of common stock of the Company because, under the terms of the indenture under which the convertible debentures were issued in June 2002, the convertible debentures were not convertible as of March 31, 2003.

5.     Contingencies

      ORC agreed to allow Ranger Insurance Company (“Ranger”), a subsidiary of Fairfax, to attach an assumption of liability endorsement to its policies where required. The agreement applies to endorsements issued from July 1, 1999 to December 31, 2003. The agreement may also terminate earlier upon Ranger receiving an A.M. Best rating of A- or better, Ranger ceasing to be under the control of Fairfax, or either party giving the other party 30 days notice. Following termination of the agreement, ORC will remain liable for any losses occurring prior to the effective date of the termination, pursuant to the terms of the endorsements. While ORC’s potential exposure in connection with these endorsements is not reasonably quantifiable at this time, we deem it to be immaterial, as Fairfax has agreed to indemnify ORC for any obligation under this agreement. The Company anticipates that Ranger will meet all of its obligations in the

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normal course of business, and ORC does not anticipate making any payments under this guarantee that would require ORC to utilize the indemnification from Fairfax.

      Odyssey America agreed, as of July 14, 2000, to guarantee the performance of all of the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), an affiliate, in the event CTR becomes insolvent and CTR is not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. This guarantee was entered into as part of the redeployment of CTR’s business to Odyssey America. While Odyssey America’s potential exposure in connection with this guarantee is not reasonably quantifiable at this time, we deem it to be immaterial, as Fairfax has agreed to indemnify Odyssey America for all obligations under this guarantee.

      Through UK Holdings, Odyssey America became a limited liability participant in the Lloyd’s market in 1997. In order to continue underwriting at Lloyd’s, Newline has established a clean irrevocable letter of credit and a trust account in favor of the Society and Council of Lloyd’s. As of March 31, 2003, the letter of credit was valued at £69.5 million ($109.9 million) and was collateralized by $137.3 million of the Company’s investment securities at statement value. As of March 31, 2003, the trust account was valued at £31.2 million ($49.3 million). The letter of credit and the trust account effectively secure the future contingent obligations of UK Holdings should Newline, the Lloyd’s underwriting syndicate in which the Company participates, incur net losses. The Company’s contingent liability to the Society and Council of Lloyd’s is limited to the amount of the letter of credit and the trust account.

      Odyssey America agreed, as of April 1, 2002, to guarantee the prompt payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agreement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), an affiliate, in the event Falcon becomes insolvent. While Odyssey America’s potential exposure in connection with this agreement is not reasonably quantifiable at this time, we deem it to be immaterial, as Fairfax has agreed to indemnify Odyssey America for any obligation under this agreement. Falcon has agreed to pay Odyssey America one percent of all gross earned premium associated with the subject business on a quarterly basis. During the first quarter of 2003, Falcon has paid $0.1 million to Odyssey America related to this agreement. Odyssey America anticipates that Falcon will meet all of its obligations in the normal course of business and does not anticipate making any payments under this guarantee that will require Odyssey America to utilize the indemnification from Fairfax.

      In addition, in connection with the guarantee, Falcon has granted Odyssey America the option (the “Option”) to assume a ten percent quota share reinsurance participation for a period of up to three years of all of Falcon’s liabilities under the Subject Contracts entered into by Falcon on or after the date of the exercise of the Option by Odyssey America. If the Option is exercised, the one percent fee will be cancelled during the term of the quota share reinsurance agreement.

      In December 2002, Odyssey America and a retrocessionaire each demanded arbitration to resolve a dispute arising from an excess of loss retrocessional contract, effective January 1, 1998, pursuant to which the retrocessionaire reinsured Odyssey America for 50% of certain accident and health exposures assumed by Odyssey America from a third-party insurer. The dispute arose in October 2002 when the retrocessionaire asserted that the third-party insurer violated the reinsurance agreement with Odyssey America such that no further payments under the agreement should be made. Odyssey America is continuing to make payments to the third-party insurer on submitted claims pursuant to the reinsurance agreement, subject to a full reservation of rights.

      At arbitration, Odyssey America is seeking enforcement of the retrocessional contract and the retrocessionaire is seeking rescission of the same contract, alleging that Odyssey America’s refusal to assert defenses under the reinsurance agreement with the third-party insurer constitutes a breach of the duty of good faith to the retrocessionaire. In accordance with the retrocessional contract’s arbitration provisions, as of this date, the

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parties have appointed arbitrators, but no umpire has been appointed and, therefore, the arbitration panel has not yet been duly constituted.

      Odyssey America intends to vigorously pursue the arbitration, and, to that end, has engaged the services of outside counsel. Odyssey America believes that it has a strong case against the retrocessionaire for full reinsurance coverage in accordance with the retrocessional contract. Nevertheless, at this early stage of the proceedings it is not possible to make any determination regarding the potential arbitration outcome, or the magnitude of any possible liability in the event of a determination adverse to Odyssey America.

      OdysseyRe and its subsidiaries are involved from time to time in ordinary routine litigation and arbitration proceedings incidental to their business. In management’s opinion, the outcome of these suits, individually or collectively, is not likely to result in judgments which would be material to the financial condition or results of operations or cash flow of the Company.

6.     Debt Obligations

      The components of debt obligations are as follows (in thousands):

      In June 2002, OdysseyRe issued $110.0 million aggregate principal amount of 4.375% convertible senior debentures (“Convertible Debt”) due 2022. The Convertible Debt is redeemable at the Company’s option beginning on June 22, 2005. Each holder of Convertible Debt may, at its option, require OdysseyRe to repurchase all or a portion of its Convertible Debt on June 22, 2005, 2007, 2009, 2012 and 2017. Under certain circumstances, each Convertible Debt holder can convert its Convertible Debt, in accordance with the terms of the indenture under which the Convertible Debt was issued, into 46.9925 shares of OdysseyRe common stock for every $1,000 principal amount of the Convertible Debt. The Convertible Debt is reflected on OdysseyRe’s balance sheet at a value of $110.0 million, the aggregate principal amount of Convertible Debt outstanding.

      In December 2001, OdysseyRe issued $100.0 million aggregate principal amount of senior notes, pursuant to a private placement, due November 30, 2006. Interest accrues on the senior notes at a fixed interest rate of 7.49%, which is due semi-annually on May 31st and November 30th. The senior notes are redeemable prior to maturity at OdysseyRe’s option. Immediately following the issuance of the senior notes, OdysseyRe entered into an interest rate swap agreement, with Bank of America N.A., that effectively converted the fixed 7.49% interest rate into a variable interest rate of London Interbank Offered Rate (“LIBOR”) plus 263 basis points, which was 3.9% as of March 31, 2003. The proceeds from the sale of the senior notes was used to prepay part of the principal amount outstanding under the $200.0 million term note. On June 26, 2002, OdysseyRe prepaid $10.0 million aggregate principal amount of senior notes. As of March 31, 2003, the aggregate principal amount of senior notes outstanding was $90.0 million and the senior notes have been reflected on the Company’s balance sheet at fair value of $98.1 million. The offsetting fair value adjustment to the swap transaction of $8.1 million has been reflected in other liabilities.

      In December 2001, OdysseyRe entered into a credit agreement with Bank of America N.A. and J.P. Morgan Chase Bank. The amount of borrowing available under the credit agreement was $50.0 million, payable on January 31, 2002, plus accrued interest. The credit agreement was a thirty day agreement. In accordance with the agreement terms, on January 31, 2002, it was converted to a three year obligation with the

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principal due in 2005 and interest payable at a rate based upon either the rate designated by Bank of America N.A. as its prime rate or a rate of 250 basis points over the applicable LIBOR. On June 18, 2002, this obligation was fully extinguished by proceeds from the issuance of the Convertible Debt.

      In connection with the acquisition of Odyssey America and its subsidiaries, OdysseyRe issued a $200.0 million term note to a subsidiary of Fairfax, which was due between 2002 and 2004. The term note accrued interest using the three-month LIBOR plus 225 basis points, payable quarterly. This debt has been fully extinguished by the proceeds from the senior notes, credit agreement and Convertible Debt described herein.

      Aggregate maturities of the Company’s debt obligations, at face value are as follows (in thousands):

      OdysseyRe’s senior notes are subject to certain covenants, none of which significantly restricts the Company’s operating activities or dividend-paying ability. As of March 31, 2003, the Company was in compliance with all covenants.

7.     Unpaid Losses and Loss Adjustment Expenses

      Activity in the liability for unpaid losses and loss adjustment expenses for the three months ended March 31, 2003, and 2002 are as follows (in thousands):

      The prior years’ loss development for the three months ended March 31, 2003 is primarily related to terminated auto lease residual value business in the Americas business segment.

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8.     Asbestos and Environmental Losses and Loss Adjustment Expenses

      The Company has exposure to asbestos and environmental pollution claims. Exposure arises from reinsurance contracts under which the Company has assumed liabilities, on an indemnity or assumption basis, from ceding companies primarily in connection with general liability insurance policies issued by such cedants. The Company’s estimate of its ultimate liability for such exposures includes case basis reserves and a provision for liabilities incurred but not reported. Case basis reserves are a combination of reserves reported to the Company by ceding companies and additional case reserves determined by the Company’s dedicated asbestos and environmental claims unit based on claims audits of cedants. The provision for liabilities incurred but not reported is established based on various methods such as loss development, market share and frequency and severity.

      Estimation of ultimate liabilities for these exposures is unusually difficult due to outstanding issues such as whether coverage exists, definition of an occurrence, determination of ultimate damages and allocation of such damages to financially responsible parties. The determination of ultimate liabilities for waste site pollution exposure is especially uncertain due to the potential for an amendment to the Superfund Law proposed by various business groups, environmental groups and government agencies.

      The Company’s reserves for asbestos and environmental related liabilities displayed below are from business written for accident years 1985 and prior. There is minimal exposure and no specific reported reserves in the more recent accident years. The Company’s asbestos and environmental reserve development, gross and net of reinsurance, for the three months ended March 31, 2003 and 2002 is set forth in the table below (in thousands):

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      Our survival ratio for environmental and asbestos related liabilities as of March 31, 2003 is eleven years, reflecting full utilization of remaining indemnifications. Our underlying survival ratio for environmental related liabilities is ten years and for asbestos related liabilities is eleven years. The survival ratio represents the environmental impairment and asbestos related illness reserves, net of reinsurance, on March 31, 2003, plus indemnifications, divided by the average paid environmental and asbestos claims, net of reinsurance, for the last four years. Our survival ratio is nine years for environmental and asbestos related liabilities as of March 31, 2003, prior to the reflection of indemnifications. Our survival ratio compares favorably with the United States Property and Casualty Industry average survival ratio of nine years as published by A.M. Best in its special report on Asbestos and Environmental claims dated October 28, 2002.

9.     Segment Reporting

      The Company’s operations are managed through four distinct divisions, Americas, EuroAsia, London Market and U.S. Insurance which are established principally based on geographic regions. The Americas division is comprised of the Company’s United States reinsurance operations and its Canadian and Latin America branch offices. The United States operations write treaty property, general casualty, specialty casualty, surety, and facultative casualty reinsurance business primarily through professional reinsurance brokers. Treaty property business is written through its Canadian Branch while the Latin American branch writes both treaty and facultative property business. Effective January 1, 2003, insurance business underwritten by Hudson, which was previously included with the Americas division, and the 2003, new and renewal, Healthcare business assumed by Odyssey America, have been combined into a new division, the U.S. Insurance division. For comparative purposes, the segment information presented below for the three months ended March 31, 2002 has been restated to reflect the Hudson business in the U.S. Insurance division. The EuroAsia division is comprised of offices in Paris, Stockholm, Singapore and Tokyo. The EuroAsia division writes primarily treaty and facultative property business. The Company’s London Market division operates through two distribution channels, Newline at Lloyd’s where the business focus is casualty insurance, and our London Branch, where the business focus is worldwide property and casualty reinsurance.

      A portion of the gross premiums written by the U.S. Insurance division have been ceded to, and are also included in the Americas division’s gross premiums written. Accordingly, the sum of the gross premiums written for each division does not agree to the total gross premiums written as shown in the tables below and as

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reflected in the consolidated statements of operations. The financial results of these divisions for the three months ended March 31, 2003 and 2002 are as follows (in thousands):