ODYSSEY RE HOLDINGS CORP - 10-Q Quarterly Report

As filed with the Securities and Exchange Commission on August 1, 2003

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended: June 30, 2003		Commission File Number: 1-16535

(ODYSSEY RE LOGO)

Odyssey Re Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)


Delaware	6719	52-2301683
(State or Other Jurisdiction Of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

Odyssey Re Holdings Corp.

140 Broadway, 39th Floor, New York, New York 10005

(212) 978-4700

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Donald L. Smith, Esq.

General Counsel

Odyssey Re Holdings Corp.

140 Broadway, 39th Floor, New York, New York 10005

(212) 978-4700

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES 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 Registrant’s classes of common stock, as of the latest practicable date:


Class		Number of Shares Outstanding at July 18, 2003

Common Stock, $.01 Par Value		65,003,963

TABLE OF CONTENTS


TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
	PART 1 -- Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	PART I -- Item 3. Quantitative and Qualitative Disclosures About Market Risk
	PART I -- Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
	PART II -- Item 1. Legal Proceedings
	PART II -- Item 4. Submission of Matters to a Vote of Security Holders
	PART II -- Item 5. Other Information -- Forward Looking Statements
	PART II -- Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2

TABLE OF CONTENTS

ODYSSEY RE HOLDINGS CORP.

INDEX TO FORM 10-Q


		Page

PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002		3
	Consolidated Statements of Operations and Comprehensive Income for the six and three months ended June 30, 2003 and 2002 (unaudited)		4
	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2003 and 2002 (unaudited)		5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		30
ITEM 4.	CONTROLS AND PROCEDURES		30
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		30
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS		None
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		None
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		30
ITEM 5.	OTHER INFORMATION — FORWARD LOOKING STATEMENTS		30
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		31
	SIGNATURES		32

PART I — FINANCIAL INFORMATION

PART I — Item 1. Financial Statements

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


				June 30,			December 31,
				2003			2002

ASSETS
Investments and cash:
	Fixed income securities, at fair value (amortized cost $1,402,692 and $1,964,758, respectively)			$	1,493,345		$	1,992,574
	Redeemable preferred stock, at fair value (cost $13,398 and $13,398, respectively)				13,780			12,694
	Equity securities:
		Common stocks, at fair value (cost $147,041 and $146,028, respectively)			173,833			152,560
		Common stocks, at equity			107,557			101,021
	Short-term investments, at cost which approximates fair value				136,494			189,161
	Other invested assets				166,919			149,649
	Cash and cash equivalents				1,518,191			484,744

			Total investments and cash		3,610,119			3,082,403
Investment income due and accrued					21,365			26,358
Reinsurance balances receivable					526,226			430,491
Reinsurance recoverable on loss payments					151,826			80,473
Reinsurance recoverable on unpaid losses					907,958			1,026,979
Prepaid reinsurance premiums					83,242			92,525
Funds held by ceding insurers					132,247			112,747
Deferred acquisition costs					144,546			128,890
Deferred federal and foreign income taxes					75,875			108,314
Other assets					65,658			215,780

			Total assets	$	5,719,062		$	5,304,960

LIABILITIES
Unpaid losses and loss adjustment expenses				$	3,065,532		$	2,871,552
Unearned premiums					700,782			602,562
Debt obligations					206,121			206,340
Reinsurance balances payable					159,382			108,257
Funds held under reinsurance contracts					145,165			238,233
Current federal and foreign income taxes					33,019			1,285
Other liabilities					124,208			220,648

			Total liabilities		4,434,209			4,248,877

STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; 200,000,000 shares authorized; 0 shares issued					—			—
Common stock, $0.01 par value; 500,000,000 shares authorized; 65,142,857 shares issued					651			651
Additional paid-in capital					793,334			793,334
Treasury stock, 138,894 shares, at cost					(2,305	)		(2,305	)
Unearned compensation					(4,005	)		(4,572	)
Accumulated other comprehensive income, net of deferred income taxes					93,923			21,736
Retained earnings					403,255			247,239

			Total stockholders’ equity		1,284,853			1,056,083

			Total liabilities and stockholders’ equity	$	5,719,062		$	5,304,960

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


		Six Months			Six Months			Three Months			Three Months
		Ended			Ended			Ended			Ended
		June 30,			June 30,			June 30,			June 30,
		2003			2002			2003			2002

REVENUES
Gross premiums written		$	1,173,717		$	831,927		$	609,876		$	428,174
Ceded premiums written			141,074			98,234			67,162			57,302

	Net premiums written		1,032,643			733,693			542,714			370,872
Increase in unearned premiums			(104,172	)		(98,519	)		(61,566	)		(19,013	)

	Net premiums earned		928,471			635,174			481,148			351,859
Net investment income			59,140			58,228			26,740			30,025
Net realized investment gains			169,815			18,950			131,551			18,213

	Total revenues		1,157,426			712,352			639,439			400,097

EXPENSES
Losses and loss adjustment expenses			627,459			436,910			321,734			245,560
Acquisition costs			233,095			157,466			116,997			85,860
Other underwriting expenses			45,963			33,112			25,204			16,277
Other expense, net			3,697			1,653			730			927
Interest expense			4,929			4,396			2,883			2,214

	Total expenses		915,143			633,537			467,548			350,838

Income before income taxes and cumulative effect of a change in accounting principle			242,283			78,815			171,891			49,259

Federal and foreign income tax provision (benefit):
	Current		89,448			—			55,728			—
	Deferred		(6,431	)		26,589			3,476			16,434

	Total federal and foreign income tax provision		83,017			26,589			59,204			16,434

Income before cumulative effect of a change in accounting principle			159,266			52,226			112,687			32,825
Cumulative effect of a change in accounting principle			—			36,862			—			—

NET INCOME		$	159,266		$	89,088		$	112,687		$	32,825

BASIC
Weighted average shares outstanding			64,721,288			64,745,993			64,732,356			64,750,028

Basic earnings per share		$	2.46		$	1.38		$	1.74		$	0.51

DILUTED
Weighted average shares outstanding			65,085,416			65,134,081			65,121,690			65,127,351

Diluted earnings per share		$	2.45		$	1.37		$	1.73		$	0.50

DIVIDENDS
Dividends declared per share		$	0.05		$	0.05		$	0.025		$	0.025

COMPREHENSIVE INCOME
Net income		$	159,266		$	89,088		$	112,687		$	32,825
Other comprehensive income, net of tax			72,187			52,013			44,704			56,448

Comprehensive income		$	231,453		$	141,101		$	157,391		$	89,273

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2003			2002

COMMON STOCK
Balance, beginning and end of period	$	651		$	651

ADDITIONAL PAID-IN CAPITAL
Balance, beginning and end of period		793,334			793,334

TREASURY STOCK
Balance, beginning of period		(2,305	)		—
Purchases during period		—			(1,181	)
Reissuance during period		—			100

Balance, end of period		(2,305	)		(1,081	)

UNEARNED COMPENSATION
Balance, beginning of period		(4,572	)		(5,704	)
Amortization during the period		567			568

Balance, end of period		(4,005	)		(5,136	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF DEFERRED INCOME TAXES
Balance, beginning of period		21,736			(12,985	)
Net increase during the period		72,187			52,013

Balance, end of period		93,923			39,028

RETAINED EARNINGS
Balance, beginning of period		247,239			45,576
Net income		159,266			89,088
Dividends to stockholders		(3,250	)		(3,256	)

Balance, end of period		403,255			131,408

TOTAL STOCKHOLDERS’ EQUITY	$	1,284,853		$	958,204

COMMON SHARES (SHARES OUTSTANDING)
Balance, beginning of period		65,003,963			65,142,857
Net treasury shares acquired		—			(67,294	)

Balance, end of period		65,003,963			65,075,563

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)

(IN THOUSANDS)


			Six Months			Six Months
			Ended			Ended
			June 30,			June 30,
			2003			2002

OPERATING ACTIVITIES
Net income			$	159,266		$	89,088
	Less: cumulative effect of a change in accounting principle			—			(36,862	)

	Income before cumulative effect of a change in accounting principle			159,266			52,226
Adjustments to reconcile net income to net cash provided by operating activities:
	Reinsurance balances and funds held, net			(228,532	)		(107,142	)
	Unearned premiums			107,504			99,603
	Unpaid losses and loss adjustment expenses			313,000			1,370
	Federal and foreign income taxes			25,304			26,508
	Other assets and liabilities, net			26,361			27,554
	Deferred acquisition costs			(15,656	)		(22,845	)
	Net realized investment gains			(169,815	)		(18,950	)
	Bond discount amortization, net			(4,263	)		(802	)

		Net cash provided by operating activities		213,169			57,522

INVESTING ACTIVITIES
Maturities of fixed income securities				17,050			2,318
Sales of fixed income securities				3,766,631			388,418
Purchases of fixed income securities				(3,019,833	)		(503,625	)
Sales of equity securities				71,752			31,014
Purchases of equity securities				(67,079	)		(56,499	)
Purchases of other invested assets				(6,327	)		(3,881	)
Decrease in short-term investments				52,667			12,213

		Net cash provided by (used in) investing activities		814,861			(130,042	)

FINANCING ACTIVITIES
Dividends				(3,250	)		(3,256	)
Additional borrowings				—			107,494
Repayment of debt principal				—			(110,000	)
Sale of interest rate contract				8,667			—
Purchase of treasury stock				—			(1,181	)

		Net cash provided by (used in) financing activities		5,417			(6,943	)

Increase (decrease) in cash and cash equivalents				1,033,447			(79,463	)
Cash and cash equivalents, beginning of period				484,744			375,142

		Cash and cash equivalents, end of period	$	1,518,191		$	295,679

See accompanying notes.

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”). During the second quarter of 2003, the Company acquired an additional 41.7% interest in First Capital Insurance Ltd. (“First Capital”), a Singapore insurance company, increasing the Company’s ownership in First Capital to 97.7%. The cumulative purchase price of First Capital was $31.7 million. Fairfax Financial Holdings Limited (“Fairfax”), a Canadian financial services holding company, is OdysseyRe’s majority stockholder.

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 statement presentation of its financial position on such dates and the results of operations for those periods. The results for the six and three months ended June 30, 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 June 30, 2003.

During the first and second quarters of 2003, dividends of $.025 per common share were declared resulting in an aggregate dividend of approximate $1.6 million in each period.

2. Change in Accounting Principles

In April 2002, the Company’s stockholders approved the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan (the “2002 Plan”). An aggregate of 1.5 million shares of the Company’s common stock may be granted under the 2002 Plan. The 2002 Plan provides for the grant of non-qualified stock options to officers, key employees and directors who are employed by, or provide services to, the Company or its subsidiaries. Pursuant to the 2002 Plan, 25% of the options granted become exercisable on each annual anniversary of the grant in each of the four years following the grant and expire 10 years from the date of grant, and shall be exercisable at the grant price. Stock options granted under the 2002 Plan as of June 30, 2003 and December 31, 2002, were 769,750 and 446,750, respectively.

Prior to 2003, the Company had accounted for stock-based compensation based on the intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) 25, “Accounting for Stock Issued to Employees” and related Interpretations, as permitted under Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation.” The Company was also required to disclose the pro forma impact on net income had all stock compensation cost been charged to earnings in accordance with the fair value based method prescribed in SFAS 123.

Effective January 1, 2003, the Company adopted the expense recognition provisions of SFAS 123, on a prospective basis, in accordance with SFAS 148 “Accounting for Stock-Based Compensation — Transaction and Disclosure.” The prospective method requires the application of the fair value based method to compensation awards granted, modified, or settled on or after the date of adoption. Accordingly, net income for the six and three months ended June 30, 2003 reflects stock-based compensation expenses related to stock options granted in 2003. The impact of adopting the recognition provisions of SFAS 123 was not material to

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net income, financial condition or cash flows. Pursuant to APB 25, no stock-based compensation expenses were recognized for the six and three months ended June 30, 2002. Had compensation cost been charged to earnings in accordance with the fair value based method as prescribed in SFAS 123 for all outstanding stock-based compensation awards (occurring both before and after adoption of the recognition provisions of SFAS 123), the Company’s net income and net income per common share (on a pro forma basis) would have been as follows:


			Six Months			Six Months			Three Months			Three Months
			Ended			Ended			Ended			Ended
			June 30,			June 30,			June 30,			June 30,
			2003			2002			2003			2002

As reported
Net income:			$	159,266		$	89,088		$	112,687		$	32,825

	Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			34			—			34			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects				(226	)		(93	)		(130	)		(93	)

Pro forma net income			$	159,074		$	88,995		$	112,591		$	32,732

Net income per common share:
	As reported
		Basic	$	2.46		$	1.38		$	1.74		$	0.51
		Diluted		2.45			1.37			1.73			0.50
	Pro forma:
		Basic		2.46			1.37			1.74			0.51
		Diluted		2.44			1.37			1.73			0.50

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 six months ended June 30, 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 June 30, 2003 and December 31, 2002 has an indefinite life and is not impaired. The Company has not amortized its goodwill during the six and three months ended June 30, 2003 and 2002. There is no effect on the Company’s federal and foreign income taxes resulting from the implementation of these accounting pronouncements.

ODYSSEY RE HOLDINGS CORP.

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 six and three months ended June 30, 2003 and 2002 (in thousands):


	Six Months			Six Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2003			2002			2003			2002

Beginning balance of accumulated other comprehensive income (loss)	$	21,736		$	(12,985	)	$	49,219		$	(17,420	)

Beginning balance of foreign currency translation adjustments		(2,202	)		(9,358	)		7,524			(9,563	)
Ending balance of foreign currency translation adjustments		11,915			2,763			11,915			2,763

Current period change in foreign currency translation adjustments		14,117			12,121			4,391			12,326

Beginning balance of unrealized net gains (losses) on securities		23,938			(3,627	)		42,858			(7,857	)
Ending balance of unrealized net gains on securities		83,171			36,265			83,171			36,265

Current period change in unrealized net gains on securities		59,233			39,892			40,313			44,122

Beginning balance of minimum pension liability		—			—			(1,163	)		—

Ending balance of minimum pension liability		(1,163	)		—			(1,163	)		—

Current period change of minimum period liability		(1,163	)		—			—			—

Current period change in accumulated other comprehensive income		72,187			52,013			44,704			56,448

Ending balance of accumulated other comprehensive income	$	93,923		$	39,028		$	93,923		$	39,028

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of comprehensive income (loss) for the six and three months ended June 30, 2003 and 2002 are shown in the following table (in thousands):


	Six Months			Six Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2003			2002			2003			2002

Net income	$	159,266		$	89,088		$	112,687		$	32,825

Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		21,718			18,648			6,755			18,963
Unrealized net gains on securities		100,871			75,522			62,830			80,207
Reclassification adjustment for realized gains included in net income		(9,743	)		(14,150	)		(810	)		(12,328	)
Minimum pension liability		(1,789	)		—			—			—

Other comprehensive income, before tax		111,057			80,020			68,775			86,842

Tax (expense) benefit:
Foreign currency translation		(7,601	)		(6,527	)		(2,364	)		(6,637	)
Unrealized net gains on securities		(35,305	)		(26,433	)		(21,991	)		(28,073	)
Reclassification adjustment for realized gains included in net income		3,410			4,953			284			4,316
Minimum pension liability		626			—			—			—

Total tax expense		(38,870	)		(28,007	)		(24,071	)		(30,394	)

Other comprehensive income, net of tax		72,187			52,013			44,704			56,448

Comprehensive income	$	231,453		$	141,101		$	157,391		$	89,273

4. Earnings Per Share

Net income for the six and three months ended June 30, 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):


	Six Months		Six Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2003		2002		2003		2002

Income before cumulative effect of a change in accounting principle	$	159,266	$	52,226	$	112,687	$	32,825
Cumulative effect of a change in accounting principle		—		36,862		—		—

Net income	$	159,266	$	89,088	$	112,687	$	32,825

Weighted average common shares outstanding — basic		64,721,288		64,745,993		64,732,356		64,750,028
Effect of dilutive shares		364,128		388,088		389,334		377,323

Weighted average shares outstanding — dilutive		65,085,416		65,134,081		65,121,690		65,127,351

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


			Six Months		Six Months		Three Months		Three Months
			Ended		Ended		Ended		Ended
			June 30,		June 30,		June 30,		June 30,
			2003		2002		2003		2002

Earnings per common shares:
	Basic:
		Income before cumulative effect of a change in accounting principle	$	2.46	$	0.81	$	1.74	$	0.51
		Cumulative effect of a change in accounting principle		—		0.57		—		—

		Basic earnings per common share	$	2.46	$	1.38	$	1.74	$	0.51

	Diluted:
		Income before cumulative effect of a change in accounting principle	$	2.45	$	0.80	$	1.73	$	0.50
		Cumulative effect of a change in accounting principle		—		0.57		—		—

		Diluted earnings per common share	$	2.45	$	1.37	$	1.73	$	0.50

The 2002 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 June 30, 2002 and the 2003 and 2002 diluted earnings per share 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 June 30, 2003 and 2002.

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 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 June 30, 2003, the letter of credit was

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

valued at £69.5 million ($114.7 million) and was collateralized by $121.1 million of the Company’s investment securities at statement value. As of June 30, 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. For the six months ended June 30, 2003, Falcon has paid $0.2 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 terms of the reinsurance agreement with Odyssey America and that no further payments under the reinsurance agreement should be made.

In August 2003, Odyssey America and the retrocessionaire executed an Assignment of Rights, Limited Indemnification, and Cooperation Agreement (the “Agreement”), pursuant to which the parties agreed to withdraw their respective demands for arbitration, with prejudice. The Agreement enables the retrocessionaire, with the cooperation of Odyssey America, to assert its defenses directly against the insurer, and indemnifies Odyssey America for expenses Odyssey America incurs resulting from Odyssey America’s cooperation or the retrocessionaire’s assertion of its defenses.

Odyssey America believes the Agreement makes remote the likelihood that Odyssey America would incur any material liability for Odyssey America in connection with the reinsurance agreement or the retrocession contract.

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.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Debt Obligations

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


	As of		As of
	June 30,		December 31,
	2003		2002

Convertible Debt	$	110,000	$	110,000
Senior notes		96,121		96,340

Total	$	206,121	$	206,340

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. On June 26, 2002, OdysseyRe prepaid $10.0 million aggregate principal amount of senior notes. On May 8, 2003, the Company sold the variable interest rate instrument for a gain of $6.1 million. The gain has been capitalized and is being amortized over the remaining life of the senior notes. As of June 30, 2003, the aggregate principal amount of senior notes outstanding was $90.0 million.

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


Years	Amount

2006	$	90,000
2022		110,000

Total	$	200,000

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 June 30, 2003, the Company was in compliance with all covenants.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.	Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses for six and three months ended June 30, 2003 and 2002 follows (in thousands):


		Six Months		Six Months		Three Months		Three Months
		Ended		Ended		Ended		Ended
		June 30,		June 30,		June 30,		June 30,
		2003		2002		2003		2002

Gross unpaid losses and loss adjustment expenses, beginning of period		$	2,871,552	$	2,720,220	$	2,949,133	$	2,717,482
Less ceded unpaid losses and loss adjustment expenses, beginning of period			1,026,979		1,045,791		898,157		1,049,493

Net unpaid losses and loss adjustment expenses, beginning of period			1,844,573		1,674,429		2,050,976		1,667,989

Losses and loss adjustment expenses incurred related to:
	Current year		596,586		425,063		302,481		236,393
	Prior years		30,873		11,847		19,253		9,167

Total losses and loss adjustment expenses incurred			627,459		436,910		321,734		245,560

Paid losses and loss adjustment expenses related to:
	Current year		50,617		51,959		32,908		30,643
	Prior years		269,422		385,563		189,526		210,049

Total paid losses and loss adjustment expenses			320,039		437,522		222,434		240,692

Effects of exchange rate changes			5,581		1,981		7,298		2,941

Net unpaid losses and loss adjustment expenses, end of period			2,157,574		1,675,798		2,157,574		1,675,798
Add ceded unpaid losses and loss adjustment expenses, end of period			907,958		1,069,917		907,958		1,069,917

Gross unpaid losses and loss adjustment expenses, end of period		$	3,065,532	$	2,745,715	$	3,065,532	$	2,745,715

The prior years’ loss development for six months and three months ended June 30, 2003 is primarily related to adverse loss emergence on United States Casualty business written in the late 1990’s including discontinued auto lease residual value business. The prior years’ loss development for six months and three months ended June 30, 2002 is also principally related to poor loss emergence on United States Casualty business written in the late 1990’s.


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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 six and three months ended June 30, 2003 and 2002 is set forth in the table below (in thousands):


	Six Months		Six Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2003		2002		2003		2002

ASBESTOS
Gross unpaid losses and loss adjustment expenses, beginning of period	$	189,720	$	193,753	$	195,742	$	192,239
Less ceded unpaid losses and loss adjustment expenses, beginning of period		160,236		164,269		166,258		162,755

Net unpaid losses and loss adjustment expenses, beginning of period		29,484		29,484		29,484		29,484
Net losses and loss adjustment expenses incurred		—		—		—		—
Net paid losses and loss adjustment expenses		—		—		—		—

Net unpaid losses and loss adjustment expenses, end of period		29,484		29,484		29,484		29,484
Add ceded unpaid losses and loss adjustment expenses, end of period		167,070		163,810		167,070		163,810

Gross unpaid losses and loss adjustment expenses, end of period	$	196,554	$	193,294	$	196,554	$	193,294

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Six Months		Six Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2003		2002		2003		2002

ENVIRONMENTAL
Gross unpaid losses and loss adjustment expenses, beginning of period	$	45,712	$	55,529	$	50,911	$	56,931
Less ceded unpaid losses and loss adjustment expenses, beginning of period		13,575		23,392		18,774		24,794

Net unpaid losses and loss adjustment expenses, beginning of period		32,137		32,137		32,137		32,137
Net losses and loss adjustment expenses incurred		—		—		—		—
Net paid losses and loss adjustment expenses		—		—		—		—

Net unpaid losses and loss adjustment expenses, end of period		32,137		32,137		32,137		32,137
Add ceded unpaid losses and loss adjustment expenses, end of period		9,479		22,674		9,479		22,674

Gross unpaid losses and loss adjustment expenses, end of period	$	41,616	$	54,811	$	41,616	$	54,811

Our survival ratio for environmental and asbestos related liabilities as of June 30, 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 twelve years. The survival ratio represents the environmental impairment and asbestos related illness reserves, net of reinsurance, on June 30, 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 June 30, 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, medical malpractice and hospital professional liability business (“Healthcare”) underwritten by an affiliate corporation and 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 six and three months ended June 30, 2003 and 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, as well as First Capital. The EuroAsia division writes primarily treaty and facultative property business. The Company’s

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 reflected in the consolidated statements of operations.

The financial results of these divisions for the six and three months ended June 30, 2003 and 2002 are as follows (in thousands):


								London			U.S.
Six months ended June 30, 2003		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	682,135		$	182,169		$	190,345		$	137,871		$	1,173,717

Net premiums written		$	633,339		$	172,745		$	165,344		$	61,215		$	1,032,643

Net premiums earned		$	584,762		$	164,508		$	146,272		$	32,929		$	928,471

Losses and loss adjustment expenses			397,864			112,788			93,362			23,445			627,459
Acquisition costs and other underwriting expenses			189,471			39,383			42,748			7,456			279,058

Total underwriting deductions			587,335			152,171			136,110			30,901			906,517

	Underwriting (loss) income	$	(2,573	)	$	12,337		$	10,162		$	2,028			21,954

Net investment income															59,140
Net realized investment gains															169,815
Other expense, net															(3,697	)
Interest expense															(4,929	)

	Income from operations before income taxes													$	242,283

Underwriting ratios:
	Losses and loss adjustment expenses		68.0	%		68.6	%		63.8	%		71.2	%		67.6	%
	Acquisition costs and other underwriting expenses		32.4			23.9			29.2			22.6			30.0

	Combined ratio		100.4	%		92.5	%		93.0	%		93.8	%		97.6	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


								London			U.S.
Six months ended June 30, 2002		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	565,421		$	104,776		$	131,054		$	46,739		$	831,927

Net premiums written		$	521,051		$	100,696		$	100,695		$	11,251		$	733,693

Net premiums earned		$	462,321		$	89,461		$	75,771		$	7,621		$	635,174

Losses and loss adjustment expenses			313,871			64,454			52,276			6,309			436,910
Acquisition costs and other underwriting expenses			145,966			24,389			19,398			825			190,578

Total underwriting deductions			459,837			88,843			71,674			7,134			627,488

	Underwriting income	$	2,484		$	618		$	4,097		$	487			7,686

Net investment income															58,228
Net realized investment gains															18,950
Other expense, net															(1,653	)
Interest expense															(4,396	)

	Income from operations before income taxes													$	78,815

Underwriting ratios:
	Losses and loss adjustment expenses		67.9	%		72.0	%		69.0	%		82.8	%		68.8	%
	Acquisition costs and other underwriting expenses		31.6			27.3			25.6			10.8			30.0

	Combined ratio		99.5	%		99.3	%		94.6	%		93.6	%		98.8	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


								London			U.S.
Three months ended June 30, 2003		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	340,747		$	99,274		$	117,275		$	57,272		$	609,876

Net premiums written		$	314,720		$	92,668		$	106,836		$	28,490		$	542,714

Net premiums earned		$	293,483		$	86,925		$	82,305		$	18,435		$	481,148

Losses and loss adjustment expenses			194,953			61,161			53,340			12,280			321,734
Acquisition costs and other underwriting expenses			92,022			21,459			23,563			5,157			142,201

Total underwriting deductions			286,975			82,620			76,903			17,437			463,935

	Underwriting income	$	6,508		$	4,305		$	5,402		$	998			17,213

Net investment income															26,740
Net realized investment gains															131,551
Other expense, net															(730	)
Interest expense															(2,883	)

	Income from operations before income taxes													$	171,891

Underwriting ratios:
	Losses and loss adjustment expenses		66.4	%		70.4	%		64.8	%		66.6	%		66.9	%
	Acquisition costs and other underwriting expenses		31.4			24.7			28.6			28.0			29.5

	Combined ratio		97.8	%		95.1	%		93.4	%		94.6	%		96.4	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


								London			U.S.
Three months ended June 30, 2002		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	278,476		$	60,342		$	67,447		$	27,835		$	428,174

Net premiums written		$	254,435		$	59,203		$	49,692		$	7,542		$	370,872

Net premiums earned		$	253,576		$	54,696		$	38,843		$	4,744		$	351,859

Losses and loss adjustment expenses			174,423			40,281			27,144			3,712			245,560
Acquisition costs and other underwriting expenses			78,857			13,855			9,296			129			102,137

Total underwriting deductions			253,280			54,136			36,440			3,841			347,697

	Underwriting income	$	296		$	560		$	2,403		$	903			4,162

Net investment income															30,025
Net realized investment gains															18,213
Other expense, net															(927	)
Interest expense															(2,214	)

	Income from operations before income taxes													$	49,259

Underwriting ratios:
	Losses and loss adjustment expenses		68.8	%		73.6	%		69.9	%		78.3	%		69.8	%
	Acquisition costs and other underwriting expenses		31.1			25.3			23.9			2.7			29.0

	Combined ratio		99.9	%		98.9	%		93.8	%		81.0	%		98.8	%

PART 1 — Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Overview

Odyssey Re Holdings Corp. is a Delaware domiciled company which was incorporated on March 21, 2001 to serve as the holding company for Odyssey America and its subsidiaries, ORC, Hudson, UK Holdings and Newline. During the second quarter of 2003, we acquired an additional 41.7% interest in First Capital, a Singapore insurance company, increasing the Company’s ownership in First Capital to 97.7%. Fairfax Financial Holdings Limited (“Fairfax”), a Canadian financial services holding company, is our majority stockholder.

Through our operating subsidiaries, principally Odyssey America, we are a leading United States based underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer a broad range of both treaty and facultative reinsurance to property and casualty insurers and reinsurers. Treaty reinsurance involves the reinsurance of a specific line or class of business for an insurance company pursuant to an agreement or treaty. Facultative reinsurance involves the reinsurance of a specific policy as opposed to a line or class of business. We also write specialty and non-traditional lines of reinsurance, including professional liability, marine and aerospace. Effective January 1, 2003, we commenced, on a new and renewal basis, underwriting medical malpractice and hospital professional liability insurance through a Healthcare division located in Napa, California. We currently reinsure this business through a 100% quota share agreement with an affiliate; however, we are in the process of acquiring an excess and surplus lines insurance company which will underwrite this business on a direct basis. The Healthcare business is included in our U.S. Insurance division. OdysseyRe also underwrites insurance business through Newline and Hudson.

Throughout 2002 and continuing into 2003, we experienced growth opportunities in a number of areas, evidenced by our increase in gross premiums written of $341.8 million, or 41.1%, to $1,173.7 million for the six months ended June 30, 2003 from $831.9 million for the six months ended June 30, 2002. As a result of improved market conditions, including improved pricing and industry consolidation, and a series of catastrophic events, both in the United States and globally, conditions for us have been improving and we have opportunistically expanded in certain classes of business and in each of our geographic business segments. Our non-United States operations accounted for 40.5% of our premium volume for the six months ended June 30, 2003. For the six months ended June 30, 2003 and 2002, our net premiums written were $1,032.6 million and $733.7 million, respectively, and our net income was $159.3 million and $89.1 million (which included a cumulative effect of a change in accounting principle of $36.9 million for 2002), respectively. As of June 30, 2003, we had total assets of $5.7 billion and total stockholders’ equity of $1.3 billion.

The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The GAAP combined ratio is the sum of losses and loss adjustment expenses incurred as a percentage of net premiums earned plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percentage of net premiums earned. The combined ratio reflects only underwriting results, and does not include income from investments. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions, foreign currency fluctuations and other factors. Due to the improved pricing environment and our continued focus on underwriting discipline, our 2003 underwriting results have improved from our strong underwriting results of 2002. Our combined ratio was 97.6% for the six months ended June 30, 2003, a decrease of 1.2 percentage points from the 98.8% combined ratio for the six months ended June 30, 2002. This continued underwriting profitability is a direct result of our underwriting actions, including improvements in pricing as well as terms and conditions, and our opportunistic expansion into better performing lines of business.

We operate our business through four divisions, the Americas, EuroAsia, London Market and U.S. Insurance, which are based principally on geographic regions.

The Americas division is our largest division and writes casualty, surety and property treaty, and facultative casualty reinsurance in the United States and Canada, and treaty and facultative property reinsurance in Central and South America. The Americas division is comprised of three units, the United

States, Canada, and Latin America, with offices, located in Stamford, two offices in New York City, Mexico City, Miami, Santiago and Toronto.

The EuroAsia division was formed in 2000 as part of the realignment of our business across geographic regions. EuroAsia operates out of four offices, with principal offices in Paris and Singapore. The EuroAsia business consists of international reinsurance business which is geographically dispersed, mainly throughout the European Union, followed by Japan, Eastern Europe, the Pacific Rim, and the Middle East. The EuroAsia division has been successful in taking advantage of the rate increases throughout its international scope of operations and in creating new market opportunities by leveraging its long-term ceding company and broker relationships. The business underwritten by First Capital is also included in the EuroAsia division.

The London Market division is comprised of our Lloyd’s of London business, in which we participate through our 100% ownership of Newline which in turn owns and manages Syndicate 1218, and our London branch office. Our Lloyd’s membership provides strong brand recognition, extensive broker and direct distribution channels and worldwide licensing, including the ability to write primary business on an excess and surplus basis in the United States. The London Market division in general, and Newline in particular, has experienced a resurgence of opportunities from domestic and international business. The London Market writes insurance and reinsurance business worldwide principally through brokers.

The U.S. Insurance division is comprised of specialty program insurance business underwritten by Hudson, and medical malpractice and hospital professional liability business.

Revenues

We derive our revenues from two principal sources: premiums from insurance and reinsurance assumed, net of premiums ceded (net premiums written); and income from investments. Net premiums written are earned (net premiums earned) as they are credited to revenue over the terms of the underlying contracts or certificates in force. The relationship between net premiums written and net premiums earned will, therefore, vary depending generally on the volume and inception dates of the business assumed and ceded and the mix of such business between proportional and excess of loss reinsurance.

Consistent with our significant accounting policies, we utilize estimates in establishing premiums written, the corresponding acquisition expenses and unearned premium reserves. These estimates are required to reflect differences in the timing of the receipt of accounts from the ceding company and the actual due dates of the accounts at the close of each accounting period.

Premium estimates, the corresponding acquisition expenses and unearned premium reserves are established on a contract level for any significant accounts due but not rendered by the ceding company at the end of each accounting period. The estimated ultimate premium for the contract, actual accounts rendered by the ceding company, and our own experience on the contract are considered in establishing the estimate at the end of each accounting period.

The change in these estimates is reflected in the revenue account at the end of each accounting period.

Expenses

We determine our reserve for unpaid losses and loss adjustment expenses based on reports and individual case estimates received from ceding companies. We use generally accepted actuarial methodologies to determine a reserve for losses incurred but not reported (“IBNR”) on the basis of our historical experience and other estimates. We review the reserves continually and changes in estimates are reflected in the operating results of the period in which they become known. Accordingly, losses and loss adjustment expenses are charged to income in the calendar year they are incurred.

Our reserves for losses and loss adjustment expenses are estimates of amounts required to pay reported and unreported claims and related loss adjustment expenses. We believe the estimate of these reserves is a “critical accounting estimate” because changes in these reserves can materially affect net income. The estimates are based on assumptions related to the ultimate cost to settle these claims. Our reserves for losses

and loss adjustment expenses are determined in accordance with sound actuarial practices. However, the inherent uncertainties of estimating reserves are greater for reinsurers than for primary insurers, due to the diversity of development patterns among different types of reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. As a result, we cannot be sure that our ultimate liability will not exceed amounts we have reserved. As of June 30, 2003, our estimate of these liabilities net of reinsurance recoverables was $2,157.6 million, and as of December 31, 2002 was $1,844.6 million.

Acquisition costs consist principally of commissions and brokerage expenses incurred on business written under reinsurance contracts or certificates and insurance policies. These costs are deferred and amortized over the period in which the related premiums are earned. Commission adjustments are accrued based on the underwriting profitability of the business produced. Deferred acquisition costs are limited to their estimated realizable value, which considers anticipated losses and loss adjustment expenses and estimated remaining costs of servicing the contracts or certificates, all based on our historical experience.

Other underwriting expenses consist of cost of operations associated with our underwriting activities. These expenses include compensation, rent, and all other general expenses allocated to our underwriting activity and exclude any investment or claims related expenses.

Results of Operations

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Gross Premiums Written. Gross premiums written for the three months ended June 30, 2003 increased by $181.7 million, or 42.4%, to $609.9 million from $428.2 million for the three months ended June 30, 2002. Insurance and reinsurance market conditions continued to improve on a global basis, providing the key factor for growth. The increase in premium volume is attributable to increases in the Americas division of $62.2 million, or 22.3%, the EuroAsia division of $39.0 million, or 64.7%, the London Market division of $49.9 million, or 74.0%, and the U.S. Insurance division of $29.5 million, or 106.1%.

The Americas accounted for $340.7 million, or 55.4%, of our gross premiums written for the three months ended June 30, 2003, an increase of $62.2 million, or 22.3%, compared to $278.5 million, or 64.2%, of our gross premiums written for the three months ended June 30, 2002. Gross premiums written by the United States unit for the three months ended June 30, 2003 were $271.1 million, an increase of $35.5 million, or 15.1%, compared to $235.6 million for the three months ended June 30, 2002. Gross premiums written by the Latin American unit for the three months ended June 30, 2003 were $48.1 million, an increase of $18.9 million, or 64.7%, compared to $29.2 million for the three months ended June 30, 2002. The Canadian unit had gross premiums written of $19.8 million for the three months ended June 30, 2003, an increase of $9.6 million, or 94.1%, compared to $10.2 million for the three months ended June 30, 2002. The increases are due mainly to increased pricing both at the insurance and reinsurance levels.

For the three months ended June 30, 2003, the EuroAsia division had gross premiums written of $99.3 million, or 16.2% of our gross premiums written, an increase of $39.0 million, or 64.7%, compared to $60.3 million, or 13.9%, of our gross premiums written for the three months ended June 30, 2002. Opportunities in our EuroAsia division have increased due to catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. For the three months ended June 30, 2003 and 2002, our Paris office had gross premiums written of $70.5 million and $45.5 million, respectively, an increase of $25.0 million, or 54.9%. For the three months ended June 30, 2003 and 2002, our Singapore office had gross premiums written of $23.2 million and $14.8 million, respectively, an increase of $8.4 million, or 56.8%. For the three months ended June 30, 2003, First Capital had $5.6 million of direct premiums written.

The London Market generated $117.3 million, or 19.1%, of our gross premiums written for the three months ended June 30, 2003, an increase of $49.9 million, or 74.0% compared to $67.4 million, or 15.5%, of our gross premiums written for the three months ended June 30, 2002. Gross premiums written by the London branch for the three months ended June 30, 2003 were $43.3 million, an increase of $16.4 million, or 61.0%, compared to $26.9 million for the three months ended June 30, 2002. Our Lloyds syndicate had gross

premiums written of $74.0 million for the three months ended June 30, 2003, an increase of $33.5 million, or 82.7%, compared to $40.5 million for the three months ended June 30, 2002.

The U.S. Insurance division accounted for $57.3 million, or 9.3% of our gross premiums written for the three months ended June 30, 2003, an increase of $29.5 million or 106.1%, compared to $27.8 million or 6.4% of our gross premiums written for the three months ended June 30, 2002. Hudson had gross premiums written of $45.1 million for the three months ended June 30, 2003, an increase of $17.3 million, or 62.2%, compared to $27.8 million for the three months ended June 30, 2002. The Healthcare business contributed $12.2 million of premiums written for the three months ended June 30, 2003.

Ceded Premiums Written. Ceded premiums written for the three months ended June 30, 2003 increased by $9.9 million, or 17.3%, to $67.2 million from $57.3 million for the three months ended June 30, 2002. The increase in ceded premiums written is primarily attributable to the increase in gross premium volume and increased cessions related to our U.S. Insurance business.

Net Premiums Written. Net premiums written for the three months ended June 30, 2003 increased by $171.8 million, or 46.3%, to $542.7 million from $370.9 million for the three months ended June 30, 2002, reflecting our underwriting initiatives in the various divisions. Net premiums written represents gross premiums written less ceded premiums written.

Net Premiums Earned. Net premiums earned for the three months ended June 30, 2003 increased by $129.2 million, or 36.7%, to $481.1 million from $351.9 million for the three months ended June 30, 2002.

Net Investment Income. Net investment income for the three months ended June 30, 2003 decreased by $3.3 million, or 11.0%, to $26.7 million from $30.0 million for the three months ended June 30, 2002. The decrease is attributable to the significant realized capital gains which have been substantially reinvested in cash and cash equivalents at lower interest rates.

Net Realized Investment Gains. Net realized investment gains for the three months ended June 30, 2003 increased by $113.4 million, to $131.6 million from $18.2 million for the three months ended June 30, 2002. The increase in net realized gains in the second quarter of 2003 was primarily related to the sale of mid-maturity fixed income securities, which generated gains as we realized the benefits of the appreciation in the portfolio due to interest rates remaining at low levels.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the three months ended June 30, 2003 increased by $76.1 million, or 31.0%, to $321.7 million from $245.6 million for the three months ended June 30, 2002. The increase in losses and loss adjustment expenses is a direct result of the increase in net premiums earned. The losses and loss adjustment expense ratio for the three months ended June 30, 2003 was 66.9% compared to 69.8% for the three months ended June 30, 2002.

Acquisition Costs. Acquisition costs for the three months ended June 30, 2003 were $117.0 million compared to $85.9 million for the three months ended June 30, 2002 with the increase due to the premium growth. The resulting acquisition cost ratio, i.e., acquisition expenses expressed as a percent of earned premium, was 24.3% for the three months ended June 30, 2003 compared to 24.4% for the three months ended June 30, 2002.

Other Underwriting Expenses. Other underwriting expenses for the three months ended June 30, 2003 were $25.2 million compared to $16.3 million for the three months ended June 30, 2002. The increase is principally attributable to increased headcount, increased premium taxes resulting from an increase in insurance premiums written and expenses associated with our Healthcare business and First Capital. The other underwriting expense ratio, expressed as a percent of premiums earned, was 5.2% for the three months ended June 30, 2003, compared to 4.6% for the three months ended June 30, 2002.

Other Expenses, Net. Other expenses, net for the three months ended June 30, 2003 were $0.7 million compared to $0.9 million of net expense for the three months ended June 30, 2002. The other expense is primarily comprised of the operating expenses of our holding company.

Interest Expense. We incurred interest expense related to debt obligations of $2.9 million for the three months ended June 30, 2003, compared to $2.2 million for the three months ended June 30, 2002.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the three months ended June 30, 2003 increased by $42.8 million to $59.2 million as compared to $16.4 million for the three months ended June 30, 2002, as a result of the increase in pre-tax income.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Gross Premiums Written. Gross premiums written for the six months ended June 30, 2003 increased by $341.8 million, or 41.1%, to $1,173.7 million from $831.9 million for the six months ended June 30, 2002. Insurance and reinsurance market conditions continued to improve on a global basis, providing the key factor for growth. The increase in premium volume is attributable to increases in the Americas division of $116.7 million, or 20.6%, the EuroAsia division of $77.4 million, or 73.9%, the London Market division of $59.3 million, or 45.2%, and the U.S. Insurance division of $91.2 million, or 195.3%.

The Americas accounted for $682.1 million, or 57.2%, of our gross premiums written for the six months ended June 30, 2003, an increase of $116.7 million, or 20.6%, compared to $565.4 million, or 66.7%, of our gross premiums written for the six months ended June 30, 2002. Gross premiums written by the United States unit for the six months ended June 30, 2003 were $571.7 million, an increase of $76.3 million, or 15.4%, compared to $495.4 million for the six months ended June 30, 2002. Gross premiums written by the Latin American unit for the six months ended June 30, 2003 were $71.4 million, an increase of $24.6 million, or 52.6%, compared to $46.8 million for the six months ended June 30, 2002. The Canadian unit had gross premiums written of $36.7 million for the six months ended June 30, 2003, an increase of $18.7 million, or 103.9%, compared to $18.0 million for the six months ended June 30, 2002. The increases are due mainly to increased pricing both at the insurance and reinsurance levels.

For the six months ended June 30, 2003, the EuroAsia division had gross premiums written of $182.2 million, or 15.3% of our gross premiums written, an increase of $77.4 million, or 73.9%, compared to $104.8 million, or 12.3%, of our gross premiums written for the six months ended June 30, 2002. Opportunities in our EuroAsia division have increased due to catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. For the six months ended June 30, 2003 and 2002, our Paris office had gross premiums written of $131.9 million and $78.7 million, respectively, an increase of $53.2 million, or 67.6%. For the six months ended June 30, 2003 and 2002, our Singapore office had gross premiums written of $41.6 million and $26.0 million, respectively, an increase of $15.6 million, or 60.0%. For the six months ended June 30, 2003, First Capital had $8.7 million of direct premiums written.

The London Market generated $190.3 million, or 16.0%, of our gross premiums written for the six months ended June 30, 2003 as compared to $131.1 million, or 15.5%, of our gross premiums written for the six months ended June 30, 2002. Gross premiums written by the London branch for the six months ended June 30, 2003 were $75.6 million, an increase of $22.1 million, or 41.3%, compared to $53.5 million for the six months ended June 30, 2002. Our Lloyds syndicate had gross premiums written of $114.7 million for the six months ended June 30, 2003, an increase of $37.1 million or 47.8%, compared to $77.6 million for the six months ended June 30, 2002.

The U.S. Insurance division accounted for $137.9 million, or 11.6% of our gross premiums written for the six months ended June 30, 2003, an increase of $91.2 million, compared to $46.7 million or 5.5% of our gross premiums written for the six months ended June 30, 2002. Hudson for the six months ended June 30, 2003 had gross premiums written of $92.0 million, an increase of $45.3 million, or 97.0%, compared to $46.7 million for the six months ended June 30, 2002. Healthcare contributed $45.9 million of premiums written for the six months ended June 30, 2003.

Ceded Premiums Written. Ceded premiums written for the six months ended June 30, 2003 increased by $42.9 million, or 43.7%, to $141.1 million from $98.2 million for the six months ended June 30, 2002. The increase in ceded premiums written is primarily attributable to the increase in gross premium volume and increased cessions related to our Hudson and Healthcare business.

Net Premiums Written. Net premiums written for the six months ended June 30, 2003 increased by $298.9 million, or 40.7%, to $1,032.6 million from $733.7 million for the six months ended June 30, 2002, reflecting our underwriting initiatives in the various divisions. Net premiums written represents gross premiums written less ceded premiums written.

Net Premiums Earned. Net premiums earned for the six months ended June 30, 2003 increased by $293.3 million, or 46.2%, to $928.5 million from $635.2 million for the six months ended June 30, 2002. The change in earned premiums is greater than the increase in premiums written, due to net earned premiums now reflecting growth in written premiums of 40% and 66% in 2001 and 2002, respectively.

Net Investment Income. Net investment income for the six months ended June 30, 2003 increased by $0.9 million, or 1.5%, to $59.1 million from $58.2 million for the six months ended June 30, 2002. Net investment yield for the six months ended June 30, 2003 was 3.6% on annualized basis, compared to 4.3% for the comparable period in 2002. The decrease in net investment income and net investment yield is attributable to the significant realized capital gains which have been substantially reinvested in cash and cash equivalents at lower interest rates.

Net Realized Investment Gains. Net realized investment gains for the six months ended June 30, 2003 increased by $150.8 million, to $169.8 million from a gain of $19.0 million for the six months ended June 30, 2002. The increase in net realized gains for the six months ended June 30, 2003 was primarily related to the sale of mid-maturity fixed income securities, which generated gains as we realized the benefits of the appreciation in the portfolio due to interest rates remaining at low levels.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the six months ended June 30, 2003 increased by $190.6 million, or 43.6%, to $627.5 million from $436.9 million for the six months ended June 30, 2002. The increase in losses is a direct result of the increase in net premiums earned. The losses and loss adjustment expense ratio for the six months ended June 30, 2003 was 67.6% compared to 68.8% for the six months ended June 30, 2002.

Acquisition Costs. Acquisition costs for the six months ended June 30, 2003 were $233.1 million compared to $157.5 million for the six months ended June 30, 2002 with the increase due to the premium growth. The resulting acquisition cost ratio, i.e., acquisition expenses expressed as a percent of earned premium, was 25.1% for the six months ended June 30, 2003 compared to 24.8% for the six months ended June 30, 2002.

Other Underwriting Expenses. Other underwriting expenses for the six months ended June 30, 2003 were $46.0 million compared to $33.1 million for the six months ended June 30, 2002. The increase is principally attributable to increased headcount, increased premium taxes resulting from an increase in insurance premiums written and expenses associated with our Healthcare business and First Capital. The other underwriting expense ratio, expressed as a percent of premiums earned, was 4.9% for the six months ended June 30, 2003, compared to 5.2% for the six months ended June 30, 2002.

Other Expenses, Net. Other expenses, net, for the six months ended June 30, 2003 were $3.7 million compared to $1.7 million for the six months ended June 30, 2002. The other expense is primarily comprised of the operating expenses of the holding company.

Interest Expense. We incurred interest expense related to debt obligations of $4.9 million for the six months ended June 30, 2003, compared to $4.4 million for the six months ended June 30, 2002.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the six months ended June 30, 2003 increased by $56.4 million to $83.0 million compared to $26.6 million for the six months ended June 30, 2002, as a result of the increase in operating income.

Liquidity and Capital Resources

Our stockholders’ equity increased by $228.8 million, or 21.7%, to $1,284.9 million as of June 30, 2003 from $1,056.1 million as of December 31, 2002. The increase was attributable to net income of $159.3 million, an increase in accumulated other comprehensive income, net of deferred taxes of $72.2 million, an increase in

stockholders’ equity resulting from the amortization of unearned compensation of $0.6 million and a decrease due to dividends paid to stockholders of $3.3 million for the six months ended June 30, 2003. We have flexibility with respect to capitalization as the result of our access to the debt and equity markets. During August 2002, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which was declared effective by the Commission on December 2, 2002. The registration statement provides for the offer and sale by OdysseyRe of securities, including equity and debt securities, having a total offering price of up to $290.0 million.

Our liquidity requirements are principally met on a short-term and long-term basis by cash flows from operating activities, which principally result from premiums, collections on losses recoverable and investment income, net of paid losses, acquisition costs and underwriting and investment expenses. Cash provided by operations was $213.2 million for the six months ended June 30, 2003, compared to $57.5 million for the six months ended June 30, 2002. The increase in premium collections is directly attributable to the increase in premium volume and profitability realized since the latter part of calendar year 2001, resulting from improved market conditions. Each of our business segments contributed to the improvement in our operating cash flow.

Total cash provided by investing activities for the six months ended June 30, 2003 was $814.9 million compared to $130.0 million of cash used in investing activities for the six months ended June 30, 2002. The increase in cash proceeds from investing activities is mainly due to a change in the mix of short-term investments and cash and cash equivalents. Cash and cash equivalents were $1,518.2 million and $484.7 million, as of June 30, 2003 and December 31, 2002, respectively. The increase in cash and cash equivalents resulted from us selling longer term securities to realize capital gains during 2003. A significant portion of the proceeds from these sales have been invested in shorter term securities. It is anticipated that our cash and cash equivalents will remain at high levels over the near term, pending re-investment on a basis consistent with our long-term value oriented investment philosophy. Cash and short-term investments are maintained for liquidity purposes and represented 45.8% and 21.9% as of June 30, 2003 and December 31, 2002, respectively, of total financial statement investments and cash on such dates. Total fixed income securities were $1.5 billion and $2.0 billion as of June 30, 2003 and December 31, 2002, respectively. Total investments and cash amounted to $3.6 billion as of June 30, 2003, an increase of $527.7 million compared to December 31, 2002. The fixed income securities portfolio has a weighted average of AA security rating as measured by S&P.

An additional source of funds for OdysseyRe is the dividend capacity of its subsidiary, Odyssey America. During 2003, Odyssey America can pay dividends to us of $134.6 million, without prior regulatory approval.

In June 2002, we issued $110.0 million aggregate principal amount of 4.375% convertible senior debentures (“Convertible Debt”) due 2022. The Convertible Debt is redeemable at our option beginning on June 22, 2005. Each holder of Convertible Debt may, at its option, require us 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, to 46.9925 shares of our common stock for every $1,000 principal amount of the Convertible Debt. The Convertible Debt is reflected on our balance sheet at a value of $110.0 million, the aggregate principal amount of Convertible Debt outstanding.

In December 2001, we 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 our option. Immediately following the issuance of the senior notes, we 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. On June 26, 2002, we prepaid $10.0 million aggregate principal amount of senior notes. On May 8, 2003 we sold the variable interest rate instrument for a gain of $6.1 million. The gain has been capitalized and is being amortized over the remaining life of the senior notes. As of June 30, 2003, the aggregate principal amount of senior notes outstanding was $90.0 million.

In connection with the business of Newline, we executed a secured letter of credit and a trust account in favor of Lloyd’s, as is customary for operations in the Lloyd’s market. As of June 30, 2003, the letter of credit

was valued at £69.5 million, or $114.7 million, and was secured by a pledge of $121.1 million of our investment securities. As of June 30, 2003, the trust account was valued at £31.2 million, or $49.3 million.

On May 20, 2003, our Board of Directors declared a quarterly cash dividend of $0.025 per share payable on June 30, 2003 to all stockholders of record as of June 16, 2003. Approximately $1.6 million in dividends was paid during the first and second quarters of 2003.

Credit Ratings

Rating agencies assess the claims-paying ability of reinsurers and their ratings represent independent opinions of financial strength and ability to meet policyholder obligations. These ratings are used by insurers and reinsurance and insurance intermediaries as an important means of assessing the financial strength and quality of reinsurers. In addition, the rating of a company purchasing reinsurance may be adversely affected by an unfavorable rating of its reinsurer. A reduction in our financial strength ratings could limit or prevent us from writing new reinsurance or insurance policies. Our financial strength ratings as of June 30, 2003 were: A.M. Best Company: A (Excellent); and Standard & Poor’s rating services: A- (Strong).

Market Sensitive Instruments

The term market risk refers to the risk of loss arising from adverse changes in market rates and prices.

We believe that we are principally exposed to four types of market risk related to our investment operations. These risks are interest rate risk, credit risk, equity price risk and foreign currency risk.

All market sensitive instruments discussed here relate to our investment assets which are classified as available for sale. As of June 30, 2003, our $3.6 billion investment portfolio is comprised of $1.5 billion of fixed income securities that are subject primarily to interest rate risk and credit risk.

Interest Rate Risk

The table below displays the potential impact of market value fluctuations on the fixed income securities portfolio as of June 30, 2003 and December 31, 2002, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. This analysis was performed on each security individually.



	As of June 30, 2003								As of December 31, 2002

	Fair Value of								Fair Value of
	Fixed Income		Hypothetical			Hypothetical			Fixed Income		Hypothetical			Hypothetical
Percent Change in Interest Rates	Portfolio		$ Change			% Change			Portfolio		$ Change			% Change


	(dollars in millions)
200 basis point rise	$	1,294.5	$	(198.8	)		(13.3	)%	$	1,681.2	$	(311.4	)		(15.6	)%
100 basis point rise		1,390.8		(102.5	)		(6.9	)		1,819.5		(173.1	)		(8.7	)
Base Scenario		1,493.3		—			—			1,992.6		—			—
100 basis point decline		1,624.1		130.8			8.8			2,236.7		244.1			12.3
200 basis point decline		1,770.2		276.9			18.5			2,509.9		517.3			26.0

The preceding table indicates an asymmetric market value response to equivalent basis point shifts, up and down in interest rates. This partly reflects exposure to fixed income securities containing a put feature. In total these securities represent approximately 7% and 23% of the fair market value of the total fixed income portfolio as of June 30, 2003 and December 31, 2002, respectively. The asymmetric market value response reflects our ability to put these bonds back to the issuer for early maturity in a rising interest rate environment (thereby limiting market value loss) but to hold these bonds to their much longer full maturity dates in a falling interest rate environment (thereby maximizing the full benefit of higher market values in that environment).

As of June 30, 2003, excluding other invested assets and affiliated investments, we had gross unrealized appreciation of $138.8 million, which was offset by gross unrealized depreciation of $21.0 million, resulting principally from the current interest rate environment.

Disclosure about Limitations of Interest Rate Sensitivity Analysis

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative of future results.

Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and a change in individual issuer credit spreads.

Credit Risk

We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade credit quality in the fixed income securities we purchase.

As of June 30, 2003 and December 31, 2002, 81.9% and 88.6%, respectively, of our fixed income securities portfolio consisted of securities rated investment grade, with 18.1% and 11.4%, respectively, rated below investment grade. The percentage of below investment grade fixed income securities has increased principally as a result of the decrease in the total fixed income securities from December 31, 2002 to June 30, 2003, resulting from the significant realized gains recognized in 2003.

We believe that this concentration in investment grade securities reduces our exposure to credit risk on these fixed income investments to an acceptable level.

Equity Price Risk

As of June 30, 2003 and December 31, 2002, 7.8% and 8.2%, respectively, of our investment portfolio, including cash and cash equivalents, was in common stocks (unaffiliated and affiliated). Marketable equity securities, which represented approximately 6.4% and 7.2% on June 30, 2003 and December 31, 2002, respectively, of our investment portfolio, including cash and cash equivalents, are exposed to equity price risk, defined as the potential for loss in market value owing to a decline in equity prices. A 10% decline in the price of each of these marketable equity securities would result in a decline of $23.0 million and $22.2 million as of June 30, 2003 and December 31, 2002, respectively in the fair value of the total investment portfolio.


	*Foreign Currency Risk*

Through investment in securities denominated in foreign currencies, we are exposed to foreign (non-U.S.) currency risk. Foreign currency exchange rate risk is the potential for loss in market value owing to a decline in the U.S. dollar value of these investments due to a decline in the exchange rate of the foreign currency in which these assets are denominated. As of June 30, 2003 and December 31, 2002, our total exposure to foreign denominated securities in U.S. dollar terms was approximately $457.1 million and $541.5 million, respectively, or 12.7% and 17.6%, respectively, of our investment portfolio, including cash and cash equivalents. The primary foreign currency exposure was in Canadian dollar denominated securities, which represented 6.3% and 7.6% as of June 30, 2003 and December 31, 2002, respectively, of our investment portfolio, including cash and cash equivalents. As of June 30, 2003, the potential impact of a 10% decline in each of the foreign exchange rates on the valuation of investment assets denominated in those respective foreign currencies would result in a total $45.7 million dollar decline in the fair value of the total investment portfolio.

Accounting Pronouncements

Financial accounting standards and the related pronouncements that have been issued but are not yet effective will not have a material impact on our financial position, operations or cash flows.

PART I — Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

PART I — Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal control over financial reporting. As of the end of the period covered by this report there was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

PART II — Item 1. Legal Proceedings

OdysseyRe and its subsidiaries are involved from time to time in ordinary routine litigation and arbitration proceedings incidental to their business. OdysseyRe does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject.

PART II — Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of our stockholders was held on April 23, 2003. Proxies for the meeting had previously been solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended.

Our directors were elected in an uncontested election. There were no abstentions or broker non-votes. The following are the votes cast for or withheld from the election of directors.


Directors	For		Withheld

V. Prem Watsa		57,239,932		301,174
James F. Dowd		53,365,208		4,175,898
Andrew A. Barnard		52,832,808		4,708,298
Frank B. Bennett		57,226,932		314,174
Anthony F. Griffiths		57,219,843		321,263
Robbert Hartog		57,215,743		325,363
Brandon W. Sweitzer		57,220,810		320,296

The appointment of PricewaterhouseCoopers as our independent accountants for the year ending December 31, 2003 was approved. The holders of 57,311,155 shares of our common stock voted in favor of the appointment, the holders of 225,031 shares of our common stock voted against the appointment and the holders of 4,920 shares of our common stock abstained. There were no broker non-votes.

PART II — Item 5. Other Information — Forward Looking Statements

We have included in this Form 10-Q filing, and from time to time our management may make, written or oral statements that may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements relate to, among other things, our plans and objectives for future operations. These forward-looking statements are subject to uncertainties and

other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to:

• the occurrence of catastrophic events with a frequency or severity exceeding our estimates;

• a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry;

• the lowering or loss of one of our financial or claims-paying ratings, including those of our subsidiaries;

• risks associated with implementing our business strategies;

• uncertainties in our reserving process;

• failure of our reinsurers to honor their obligations;

• actions of our competitors, including industry consolidation;

• increased competition from alternative sources of risk management products, such as the capital markets;

• loss of services of any of our key employees;

• the passage of federal or state legislation subjecting our business to additional supervision or regulation, including additional tax regulation, in the United States or other jurisdictions in which we operate; and

• changes in economic conditions, including interest rate conditions which could affect our investment portfolio.

The words “believe,” “anticipate,” “project,” “expect,” “intend,” “will likely result,” “will seek to” or “will continue” and similar expressions identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. Additional information regarding these factors and others that could cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2003. The information appearing under “Risk Factors” in such Annual Report on Form 10-K is incorporated by reference into and made a part of this Form 10-Q. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART II — Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14 or 15d-14, as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14 or 15d-14, as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1 Risk Factors (incorporated into Part II of this Form 10-Q by reference to the section entitled “Risk Factors” in the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2003)

(b) Reports on Form 8-K

OdysseyRe furnished a Form 8-K to the Securities and Exchange Commission on May 5, 2003, in connection with the issuance of its press release announcing its results for the quarter ended March 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ODYSSEY RE HOLDINGS CORP.

Date: August 1, 2003

By /s/ ANDREW A. BARNARD

Andrew A. Barnard

President and Chief Executive Officer

Date: August 1, 2003

By /s/ CHARLES D. TROIANO

Charles D. Troiano

Executive Vice President and

Chief Financial Officer

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	•	the occurrence of catastrophic events with a frequency or severity exceeding our estimates;

	•	a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry;

	•	the lowering or loss of one of our financial or claims-paying ratings, including those of our subsidiaries;

	•	risks associated with implementing our business strategies;

	•	uncertainties in our reserving process;

	•	failure of our reinsurers to honor their obligations;

	•	actions of our competitors, including industry consolidation;

	•	increased competition from alternative sources of risk management products, such as the capital markets;

	•	loss of services of any of our key employees;

	•	the passage of federal or state legislation subjecting our business to additional supervision or regulation, including additional tax regulation, in the United States or other jurisdictions in which we operate; and

	•	changes in economic conditions, including interest rate conditions which could affect our investment portfolio.


	31.1	Certification of President and Chief Executive Officer pursuant to Rule 13a-14 or 15d-14, as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14 or 15d-14, as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2	Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	99.1	Risk Factors (incorporated into Part II of this Form 10-Q by reference to the section entitled “Risk Factors” in the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2003)


	By /s/ ANDREW A. BARNARD

	Andrew A. Barnard
	President and Chief Executive Officer


	By /s/ CHARLES D. TROIANO

	Charles D. Troiano
	Executive Vice President and
	Chief Financial Officer