ODYSSEY RE HOLDINGS CORP - 10-Q Quarterly Report

As filed with the Securities and Exchange Commission on November 3, 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: September 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 October 20, 2003

Common Stock, $.01 Par Value		65,007,103

TABLE OF CONTENTS


TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
	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 5. Other Information -- Forward Looking Statements
	PART II -- Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-4.1
EX-4.2
EX-10.1
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 September 30, 2003 (unaudited) and December 31, 2002		3
	Consolidated Statements of Operations and Comprehensive Income for the nine months and three months ended September 30, 2003 and 2002 (unaudited)		4
	Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2003 and 2002 (unaudited)		5
	Consolidated Statements of Cash Flows for the nine months ended September 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		22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		31
ITEM 4.	CONTROLS AND PROCEDURES		31
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		32
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		None
ITEM 5.	OTHER INFORMATION — FORWARD LOOKING STATEMENTS		32
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		32
	SIGNATURES		34

PART I — FINANCIAL INFORMATION

PART I — Item 1. Financial Statements

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

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

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


				September 30,			December 31,
				2003			2002

ASSETS
Investments and cash:
	Fixed income securities, at fair value (amortized cost $1,442,642 and $1,964,758, respectively)			$	1,479,036		$	1,992,574
	Redeemable preferred stock, at fair value (cost $13,398)				—			12,694
	Equity securities:
		Common stocks, at fair value (cost $161,334 and $146,028, respectively)			209,047			152,560
		Common stocks, at equity			111,786			101,021
	Short-term investments, at cost which approximates fair value				125,847			189,161
	Other invested assets				217,061			149,649
	Cash and cash equivalents				1,672,273			484,744

			Total investments and cash		3,815,050			3,082,403
Investment income due and accrued					14,455			26,358
Reinsurance balances receivable					521,624			430,491
Reinsurance recoverable on loss payments					145,795			80,473
Reinsurance recoverable on unpaid losses					934,725			1,026,979
Prepaid reinsurance premiums					117,712			92,525
Funds held by ceding insurers					129,919			112,747
Deferred acquisition costs					158,999			128,890
Federal and foreign income taxes					73,657			107,029
Other assets					63,708			215,780

			Total assets	$	5,975,644		$	5,303,675

LIABILITIES
Unpaid losses and loss adjustment expenses				$	3,207,002		$	2,871,552
Unearned premiums					804,385			602,562
Debt obligations					205,673			206,340
Reinsurance balances payable					159,062			108,257
Funds held under reinsurance contracts					142,331			238,233
Other liabilities					126,890			220,648

			Total liabilities		4,645,343			4,247,592

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					793,282			793,334
Treasury stock, 135,754 and 138,894 shares, respectively, at cost					(2,253	)		(2,305	)
Unearned compensation					(3,722	)		(4,572	)
Accumulated other comprehensive income, net of deferred income taxes					98,385			21,736
Retained earnings					443,958			247,239

			Total stockholders’ equity		1,330,301			1,056,083

			Total liabilities and stockholders’ equity	$	5,975,644		$	5,303,675

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


		Nine Months			Nine Months			Three Months			Three Months
		Ended			Ended			Ended			Ended
		September 30,			September 30,			September 30,			September 30,
		2003			2002			2003			2002

REVENUES
Gross premiums written		$	1,876,670		$	1,331,648		$	702,953		$	499,721
Ceded premiums written			261,870			177,921			120,796			79,687

	Net premiums written		1,614,800			1,153,727			582,157			420,034
Increase in unearned premiums			(172,487	)		(158,015	)		(68,315	)		(59,496	)

	Net premiums earned		1,442,313			995,712			513,842			360,538
Net investment income			90,979			90,486			31,839			32,258
Net realized investment gains			187,078			123,512			17,263			104,562

	Total revenues		1,720,370			1,209,710			562,944			497,358

EXPENSES
Losses and loss adjustment expenses			982,438			683,698			354,979			246,788
Acquisition costs			346,760			252,188			113,665			94,722
Other underwriting expenses			72,313			51,668			26,350			18,556
Other expense, net			5,255			2,675			1,558			1,022
Interest expense			7,641			6,580			2,712			2,184

	Total expenses		1,414,407			996,809			499,264			363,272

Income before income taxes and cumulative effect of a change in accounting principle			305,963			212,901			63,680			134,086

Federal and foreign income tax provision:
	Current		102,548			—			13,100			—
	Deferred		1,821			72,905			8,252			46,316

	Total federal and foreign income tax provision		104,369			72,905			21,352			46,316

Income before cumulative effect of a change in accounting principle			201,594			139,996			42,328			87,770
Cumulative effect of a change in accounting principle			—			36,862			—			—

NET INCOME		$	201,594		$	176,858		$	42,328		$	87,770

BASIC
Weighted average shares outstanding			64,731,801			64,741,992			64,746,415			64,734,119

Basic earnings per share		$	3.11		$	2.73		$	0.65		$	1.36

DILUTED
Weighted average shares outstanding			65,095,465			65,132,841			65,125,348			65,131,409

Diluted earnings per share		$	3.10		$	2.72		$	0.65		$	1.35

DIVIDENDS
Dividends declared per share		$	0.075		$	0.075		$	0.025		$	0.025

COMPREHENSIVE INCOME
Net income		$	201,594		$	176,858		$	42,328		$	87,770
Other comprehensive income (loss), net of tax			76,649			29,476			4,462			(22,537	)

Comprehensive income		$	278,243		$	206,334		$	46,790		$	65,233

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2003			2002

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

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period		793,334			793,334
Net decrease during period		(52	)		—

Balance, end of period		793,282			793,334

TREASURY STOCK
Balance, beginning of period		(2,305	)		—
Purchases during period		—			(1,345	)
Reissuance during period		52			100

Balance, end of period		(2,253	)		(1,245	)

UNEARNED COMPENSATION
Balance, beginning of period		(4,572	)		(5,704	)
Amortization during the period		850			850

Balance, end of period		(3,722	)		(4,854	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF DEFERRED INCOME TAXES
Balance, beginning of period		21,736			(12,985	)
Net increase during the period		76,649			29,476

Balance, end of period		98,385			16,491

RETAINED EARNINGS
Balance, beginning of period		247,239			45,576
Net income		201,594			176,858
Dividends to stockholders		(4,875	)		(4,886	)

Balance, end of period		443,958			217,548

TOTAL STOCKHOLDERS’ EQUITY	$	1,330,301		$	1,021,925

COMMON SHARES (SHARES OUTSTANDING)
Balance, beginning of period		65,003,963			65,142,857
Net treasury shares reissued (acquired)		3,140			(77,794	)

Balance, end of period		65,007,103			65,065,063

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

(IN THOUSANDS)


			Nine Months			Nine Months
			Ended			Ended
			September 30,			September 30,
			2003			2002

OPERATING ACTIVITIES
Net income			$	201,594		$	176,858
	Less: cumulative effect of a change in accounting principle			—			(36,862	)

	Income before cumulative effect of a change in accounting principle			201,594			139,996
Adjustments to reconcile net income to net cash provided by operating activities:
	Reinsurance balances and funds held, net			(218,724	)		(189,085	)
	Unearned premiums			176,636			160,224
	Unpaid losses and loss adjustment expenses			427,704			59,949
	Federal and foreign income taxes			(5,861	)		72,670
	Other assets and liabilities, net			38,452			37,377
	Deferred acquisition costs			(30,109	)		(37,052	)
	Net realized investment gains			(187,078	)		(123,512	)
	Bond discount amortization, net			(7,407	)		(1,265	)

		Net cash provided by operating activities		395,207			119,302

INVESTING ACTIVITIES
Maturities of fixed income securities				17,279			5,795
Sales of fixed income securities				4,196,886			1,803,223
Purchases of fixed income securities				(3,456,595	)		(1,496,778	)
Sales of equity securities				77,639			39,514
Purchases of equity securities				(81,821	)		(149,861	)
Purchases of other invested assets				(28,172	)		(26,173	)
Decrease (increase) in short-term investments				63,314			(306,454	)
Cash and cash equivalents acquired				—			29,890

		Net cash provided by (used in) investing activities		788,530			(100,844	)

FINANCING ACTIVITIES
Dividends				(4,875	)		(4,886	)
Additional borrowings				—			107,494
Repayment of debt principal				—			(110,000	)
Sale of interest rate contract				8,667			—
Purchase of treasury stock				—			(1,345	)

		Net cash provided by (used in) financing activities		3,792			(8,737	)

Increase in cash and cash equivalents				1,187,529			9,721
Cash and cash equivalents, beginning of period				484,744			375,142

		Cash and cash equivalents, end of period	$	1,672,273		$	384,863

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 of its financial position on such dates and the results of operations for those periods. The results for the nine and three months ended September 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 September 30, 2003.

During each of the first three 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 September 30, 2003 and December 31, 2002, were 778,375 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 nine and three months ended September 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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

material to net income, financial condition or cash flows. Pursuant to APB 25, no stock-based compensation expenses were recognized for the nine and three months ended September 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 (in thousands, except per share amounts):


			Nine Months			Nine Months			Three Months			Three Months
			Ended			Ended			Ended			Ended
			September 30,			September 30,			September 30,			September 30,
			2003			2002			2003			2002

As reported
Net income:			$	201,594		$	176,858		$	42,328		$	87,770
	Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			109			—			75			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects				(397	)		(187	)		(171	)		(94	)

Pro forma net income			$	201,306		$	176,671		$	42,232		$	87,676

Net income per common share:
	As reported
		Basic	$	3.11		$	2.73		$	0.65		$	1.36
		Diluted		3.10			2.72			0.65			1.35
	Pro forma:
		Basic	$	3.11		$	2.73		$	0.65		$	1.35
		Diluted		3.09			2.71			0.65			1.35

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 nine months ended September 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 $19.3 million and $19.1 million, respectively, reflected in other assets as of September 30, 2003 and December 31, 2002 was not impaired. The Company has not amortized its goodwill during the nine and three months ended September 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 nine and three months ended September 30, 2003 and 2002 (in thousands):


	Nine Months			Nine Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2003			2002			2003			2002

Beginning balance of accumulated other comprehensive income (loss)	$	21,736		$	(12,985	)	$	93,923		$	39,028

Beginning balance of foreign currency translation adjustments		(2,202	)		(9,358	)		11,915			2,763
Ending balance of foreign currency translation adjustments		22,171			(4,639	)		22,171			(4,639	)

Current period change in foreign currency translation adjustments		24,373			4,719			10,256			(7,402	)

Beginning balance of unrealized net gains (losses) on securities		23,938			(3,627	)		83,171			36,265
Ending balance of unrealized net gains on securities		77,377			21,130			77,377			21,130

Current period change in unrealized net gains (losses) on securities		53,439			24,757			(5,794	)		(15,135	)

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

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

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

Current period change in accumulated other comprehensive income (loss)		76,649			29,476			4,462			(22,537	)

Ending balance of accumulated other comprehensive income	$	98,385		$	16,491		$	98,385		$	16,491

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Nine Months			Nine Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2003			2002			2003			2002

Net income	$	201,594		$	176,858		$	42,328		$	87,770

Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		37,497			7,260			15,779			(11,388	)
Unrealized net gains on securities		100,839			61,669			(32	)		(13,853	)
Reclassification adjustment for realized gains included in net income		(18,625	)		(23,581	)		(8,882	)		(9,431	)
Minimum pension liability		(1,789	)		—			—			—

Other comprehensive income (loss), before tax		117,922			45,348			6,865			(34,672	)

Tax (expense) benefit:
Foreign currency translation adjustments		(13,124	)		(2,541	)		(5,523	)		3,986
Unrealized net gains on securities		(35,294	)		(21,584	)		11			4,849
Reclassification adjustment for realized gains included in net income		6,519			8,253			3,109			3,300
Minimum pension liability		626			—			—			—

Total tax (expense) benefit		(41,273	)		(15,872	)		(2,403	)		12,135

Other comprehensive income (loss), net of tax		76,649			29,476			4,462			(22,537	)

Comprehensive income	$	278,243		$	206,334		$	46,790		$	65,233

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Earnings Per Share

Net income for the nine and three months ended September 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):


			Nine Months		Nine Months		Three Months		Three Months
			Ended		Ended		Ended		Ended
			September 30,		September 30,		September 30,		September 30,
			2003		2002		2003		2002

Income before cumulative effect of a change in accounting principle			$	201,594	$	139,996	$	42,328	$	87,770
Cumulative effect of a change in accounting principle				—		36,862		—		—

Net income			$	201,594	$	176,858	$	42,328	$	87,770

Weighted average common shares outstanding — basic				64,731,801		64,741,992		64,746,415		64,734,119
Effect of dilutive shares				363,664		390,849		378,933		397,290

Weighted average shares outstanding — dilutive				65,095,465		65,132,841		65,125,348		65,131,409

Earnings per common shares:
	Basic:
		Income before cumulative effect of a change in accounting principle	$	3.11	$	2.16	$	0.65	$	1.36
		Cumulative effect of a change in accounting principle		—		0.57		—		—

		Basic earnings per common share	$	3.11	$	2.73	$	0.65	$	1.36

	Diluted:
		Income before cumulative effect of a change in accounting principle	$	3.10	$	2.15	$	0.65	$	1.35
		Cumulative effect of a change in accounting principle		—		0.57		—		—

		Diluted earnings per common share	$	3.10	$	2.72	$	0.65	$	1.35

The 2002 diluted earnings per common share assumes that the Company’s stock options, granted in April 2002 and subsequent, under the 2002 Plan would not be exercised as of September 30, 2002, and the 2003 and 2002 diluted earnings per common 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 September 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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

As of July 14, 2000, Odyssey America agreed 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 September 30, 2003, the letter of credit was valued at £69.5 million ($115.5 million) and was collateralized by $121.0 million of the Company’s investment securities at statement value. As of September 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 nine months ended September 30, 2003, Falcon has paid $0.3 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.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

OdysseyRe believes the Agreement makes remote the likelihood that Odyssey America would incur any material liability 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.

6. Debt Obligations

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


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

Convertible Debt	$	110,000	$	110,000
Senior notes		95,673		96,340

Total	$	205,673	$	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 $6.4 million. The gain has been capitalized and is being amortized over the remaining life of the senior notes. As of September 30, 2003, the aggregate principal amount of senior notes outstanding was $90.0 million.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


7.	Unpaid Losses and Loss Adjustment Expenses

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


		Nine Months		Nine Months		Three Months			Three Months
		Ended		Ended		Ended			Ended
		September 30,		September 30,		September 30,			September 30,
		2003		2002		2003			2002

Gross unpaid losses and loss adjustment expenses, beginning of period		$	2,871,552	$	2,720,220	$	3,065,532		$	2,745,715
Less ceded unpaid losses and loss adjustment expenses, beginning of period			1,026,979		1,045,791		907,958			1,069,917

Net unpaid losses and loss adjustment expenses, beginning of period			1,844,573		1,674,429		2,157,574			1,675,798

Acquisition of net unpaid losses and loss adjustment expenses			—		9,748		—			9,748

Losses and loss adjustment expenses incurred related to:
	Current year		928,072		651,110		331,486			226,047
	Prior years		54,366		32,588		23,493			20,741

Total losses and loss adjustment expenses incurred			982,438		683,698		354,979			246,788

Paid losses and loss adjustment expenses related to:
	Current year		106,752		96,059		56,135			44,100
	Prior years		451,290		531,992		181,868			146,429

Total paid losses and loss adjustment expenses			558,042		628,051		238,003			190,529

Effects of exchange rate changes			3,308		4,300		(2,273	)		2,319

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Nine Months		Nine Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2003		2002		2003		2002

Net unpaid losses and loss adjustment expenses, end of period		2,272,277		1,744,124		2,272,277		1,744,124
Add ceded unpaid losses and loss adjustment expenses, end of period		934,725		1,063,243		934,725		1,063,243

Gross unpaid losses and loss adjustment expenses, end of period	$	3,207,002	$	2,807,367	$	3,207,002	$	2,807,367

The prior years’ loss development for nine months and three months ended September 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 nine months and three months ended September 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 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 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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net of reinsurance, for the nine and three months ended September 30, 2003 and 2002 is set forth in the table below (in thousands):


	Nine Months		Nine Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2003		2002		2003		2002

ASBESTOS
Gross unpaid losses and loss adjustment expenses, beginning of period	$	189,720	$	193,753	$	196,554	$	193,294
Less ceded unpaid losses and loss adjustment expenses, beginning of period		160,236		164,269		167,070		163,810

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		176,542		158,482		176,542		158,482

Gross unpaid losses and loss adjustment expenses, end of period	$	206,026	$	187,966	$	206,026	$	187,966

ENVIRONMENTAL
Gross unpaid losses and loss adjustment expenses, beginning of period	$	45,712	$	55,529	$	41,616	$	54,811
Less ceded unpaid losses and loss adjustment expenses, beginning of period		13,575		23,392		9,479		22,674

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		7,763		22,802		7,763		22,802

Gross unpaid losses and loss adjustment expenses, end of period	$	39,900	$	54,939	$	39,900	$	54,939

Our survival ratio for environmental and asbestos related liabilities as of September 30, 2003 is eleven years, reflecting full utilization of remaining indemnifications. Our underlying survival ratio for environmental related liabilities is eight years and for asbestos related liabilities is twelve years. The survival ratio represents

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the environmental impairment and asbestos related illness reserves, net of reinsurance, on September 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 September 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 (see note 10), have been combined into a new division, the U.S. Insurance division. For comparative purposes, the segment information presented below for the nine and three months ended September 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 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 has been ceded to, and is 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.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


								London			U.S.
Nine months ended September 30, 2003		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	1,042,992		$	298,608		$	313,223		$	254,485		$	1,876,670

Net premiums written		$	955,715		$	285,765		$	263,276		$	110,044		$	1,614,800

Net premiums earned		$	884,873		$	260,565		$	234,982		$	61,893		$	1,442,313

Losses and loss adjustment expenses			601,792			184,960			150,970			44,716			982,438
Acquisition costs and other underwriting expenses			281,669			62,169			65,464			9,771			419,073

Total underwriting deductions			883,461			247,129			216,434			54,487			1,401,511

	Underwriting income	$	1,412		$	13,436		$	18,548		$	7,406			40,802

Net investment income															90,979
Net realized investment gains															187,078
Other expense, net															(5,255	)
Interest expense															(7,641	)

	Income from operations before income taxes													$	305,963

Underwriting ratios:
	Losses and loss adjustment expenses		68.0	%		71.0	%		64.2	%		72.2	%		68.1	%
	Acquisition costs and other underwriting expenses		31.8			23.9			27.9			15.8			29.1

	Combined ratio		99.8	%		94.9	%		92.1	%		88.0	%		97.2	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


								London			U.S.
Nine months ended September 30, 2002		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written		$	864,022		$	178,293		$	212,744		$	98,240		$	1,331,648

Net premiums written		$	798,949		$	171,109		$	161,629		$	22,040		$	1,153,727

Net premiums earned		$	705,760		$	151,279		$	125,053		$	13,620		$	995,712

Losses and loss adjustment expenses			475,414			117,548			79,852			10,884			683,698
Acquisition costs and other underwriting expenses			223,223			40,299			37,555			2,779			303,856

Total underwriting deductions			698,637			157,847			117,407			13,663			987,554

	Underwriting income (loss)	$	7,123		$	(6,568	)	$	7,646		$	(43	)		8,158

Net investment income															90,486
Net realized investment gains															123,512
Other expense, net															(2,675	)
Interest expense															(6,580	)

	Income from operations before income taxes													$	212,901

Underwriting ratios:
	Losses and loss adjustment expenses		67.4	%		77.7	%		63.9	%		79.9	%		68.7	%
	Acquisition costs and other underwriting expenses		31.6			26.6			30.0			20.4			30.5

	Combined ratio		99.0	%		104.3	%		93.9	%		100.3	%		99.2	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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

Gross premiums written		$	360,857		$	116,439		$	122,878		$	116,614		$	702,953

Net premiums written		$	322,376		$	113,020		$	97,932		$	48,829		$	582,157

Net premiums earned		$	300,111		$	96,057		$	88,710		$	28,964		$	513,842

Losses and loss adjustment expenses			203,928			72,172			57,608			21,271			354,979
Acquisition costs and other underwriting expenses			92,198			22,786			22,716			2,315			140,015

Total underwriting deductions			296,126			94,958			80,324			23,586			494,994

	Underwriting income	$	3,985		$	1,099		$	8,386		$	5,378			18,848

Net investment income															31,839
Net realized investment gains															17,263
Other expense, net															(1,558	)
Interest expense															(2,712	)

	Income from operations before income taxes													$	63,680

Underwriting ratios:
	Losses and loss adjustment expenses		68.0	%		75.1	%		64.9	%		73.4	%		69.1	%
	Acquisition costs and other underwriting expenses		30.7			23.7			25.6			8.0			27.2

	Combined ratio		98.7	%		98.8	%		90.5	%		81.4	%		96.3	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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

Gross premiums written		$	298,600		$	73,517		$	81,690		$	51,501		$	499,721

Net premiums written		$	277,898		$	70,413		$	60,934		$	10,789		$	420,034

Net premiums earned		$	243,439		$	61,818		$	49,282		$	5,999		$	360,538

Losses and loss adjustment expenses			161,543			53,094			27,576			4,575			246,788
Acquisition costs and other underwriting expenses			77,257			15,910			18,157			1,954			113,278

Total underwriting deductions			238,800			69,004			45,733			6,529			360,066

	Underwriting income (loss)	$	4,639		$	(7,186	)	$	3,549		$	(530	)		472

Net investment income															32,258
Net realized investment gains															104,562
Other expense, net															(1,022	)
Interest expense															(2,184	)

	Income from operations before income taxes													$	134,086

Underwriting ratios:
	Losses and loss adjustment expenses		66.4	%		85.9	%		56.0	%		76.2	%		68.5	%
	Acquisition costs and other underwriting expenses		31.7			25.7			36.8			32.6			31.4

	Combined ratio		98.1	%		111.6	%		92.8	%		108.8	%		99.9	%

10. Subsequent Events

On October 31, 2003, OdysseyRe issued $150.0 million aggregate principal amount of senior notes due November 1, 2013. Interest accrues on the senior notes at the rate of 7.65%, which is due semi-annually on May 1 and November 1. The senior notes are redeemable prior to maturity at the discretion of OdysseyRe. The Company intends to use the proceeds from this offering to contribute capital to its operating subsidiaries and for general corporate purposes.

On October 28, 2003, OdysseyRe, through its wholly owned subsidiary, Odyssey America, completed the acquisition of a shell company, General Security Indemnity Company. The acquired company will be re-named Hudson Specialty Insurance Company and will serve as the main platform for the new Healthcare unit and will also provide the Hudson specialty programs unit with a surplus lines vehicle.


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. On October 28, 2003, we acquired an excess and surplus lines insurance company which will serve as the main platform for the Healthcare business. 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 $545.1 million, or 40.9%, to $1,876.7 million for the nine months ended September 30, 2003 from $1,331.6 million for the nine months ended September 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 41.9% of our premium volume for the nine months ended September 30, 2003. For the nine months ended September 30, 2003 and 2002, our net premiums written were $1,614.8 million and $1,153.7 million, respectively, and our net income was $201.6 million and $176.9 million (which included a cumulative effect of a change in accounting principle of $36.9 million for 2002), respectively. As of September 30, 2003, we had total assets of $6.0 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 97.2% for the nine months ended September 30, 2003, a decrease of 2.0 percentage points from the 99.2% combined ratio for the nine months ended September 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 two offices in New York City, and offices located in Stamford, 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 September 30, 2003, our estimate of these liabilities net of reinsurance recoverables was $2,272.3 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 September 30, 2003 Compared to Three Months Ended September 30, 2002

Gross Premiums Written. Gross premiums written for the three months ended September 30, 2003 increased by $203.3 million, or 40.7%, to $703.0 million from $499.7 million for the three months ended September 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 $62.3 million, or 20.9%, the EuroAsia division of $42.9 million, or 58.4%, the London Market division of $41.2 million, or 50.4%, and the U.S. Insurance division of $65.1 million, or 126.4%.

The Americas accounted for $360.9 million, or 50.3%, of our gross premiums written for the three months ended September 30, 2003, an increase of $62.3 million, or 20.9%, compared to $298.6 million, or 59.1%, of our gross premiums written for the three months ended September 30, 2002. Gross premiums written by the United States unit for the three months ended September 30, 2003 were $296.6 million, an increase of $40.5 million, or 15.8%, compared to $256.1 million for the three months ended September 30, 2002. Gross premiums written by the Latin American unit for the three months ended September 30, 2003 were $44.0 million, an increase of $13.3 million, or 43.3%, compared to $30.7 million for the three months ended September 30, 2002. The Canadian unit had gross premiums written of $19.4 million for the three months ended September 30, 2003, an increase of $9.0 million, or 86.5%, compared to $10.4 million for the three months ended September 30, 2002.

For the three months ended September 30, 2003, the EuroAsia division had gross premiums written of $116.4 million, or 16.2% of our gross premiums written, an increase of $42.9 million, or 58.4%, compared to $73.5 million, or 14.5%, of our gross premiums written for the three months ended September 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 September 30, 2003 and 2002, our Paris office had gross premiums written of $86.6 million and $53.4 million, respectively, an increase of $33.2 million, or 62.2%. For the three months ended September 30, 2003 and 2002, our Singapore office had gross premiums written of $25.2 million and $20.1 million, respectively, an increase of $5.1 million, or 25.4%. For the three months ended September 30, 2003, First Capital had $4.6 million of direct premiums written.

The London Market generated $122.9 million, or 17.1%, of our gross premiums written for the three months ended September 30, 2003, an increase of $41.2 million, or 50.4% compared to $81.7 million, or

16.2%, of our gross premiums written for the three months ended September 30, 2002. Gross premiums written by the London branch for the three months ended September 30, 2003 were $41.6 million, an increase of $8.2 million, or 24.6%, compared to $33.4 million for the three months ended September 30, 2002. Our Lloyds syndicate had gross premiums written of $81.3 million for the three months ended September 30, 2003, an increase of $33.0 million, or 68.3%, compared to $48.3 million for the three months ended September 30, 2002.

The U.S. Insurance division accounted for $116.6 million, or 16.3%, of our gross premiums written for the three months ended September 30, 2003, an increase of $65.1 million or 126.4%, compared to $51.5 million or 10.2% of our gross premiums written for the three months ended September 30, 2002. Hudson had gross premiums written of $69.1 million for the three months ended September 30, 2003, an increase of $17.6 million, or 34.2%, compared to $51.5 million for the three months ended September 30, 2002. The Healthcare business contributed $47.5 million of premiums written for the three months ended September 30, 2003.

Ceded Premiums Written. Ceded premiums written for the three months ended September 30, 2003 increased by $41.1 million, or 51.6%, to $120.8 million from $79.7 million for the three months ended September 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 September 30, 2003 increased by $162.2 million, or 38.6%, to $582.2 million from $420.0 million for the three months ended September 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 September 30, 2003 increased by $153.3 million, or 42.5%, to $513.8 million from $360.5 million for the three months ended September 30, 2002.

Net Investment Income. Net investment income for the three months ended September 30, 2003 decreased by $0.5 million, or 1.5%, to $31.8 million from $32.3 million for the three months ended September 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 September 30, 2003 decreased by $87.3 million, to $17.3 million from $104.6 million for the three months ended September 30, 2002. The decrease in net realized gains in the third quarter of 2003 was primarily related to the timing of the recognition of realized investment gains.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the three months ended September 30, 2003 increased by $108.2 million, or 43.8%, to $355.0 million from $246.8 million for the three months ended September 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 September 30, 2003 was 69.1% compared to 68.5% for the three months ended September 30, 2002.

Acquisition Costs. Acquisition costs for the three months ended September 30, 2003 were $113.7 million compared to $94.7 million for the three months ended September 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 22.1% for the three months ended September 30, 2003 compared to 26.3% for the three months ended September 30, 2002.

Other Underwriting Expenses. Other underwriting expenses for the three months ended September 30, 2003 were $26.4 million compared to $18.6 million for the three months ended September 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 5.1% for the three months ended September 30, 2003 and 2002.

Other Expenses, Net. Other expenses, net for the three months ended September 30, 2003, were $1.6 million compared to $1.0 million for the three months ended September 30, 2002. Other expenses, net is primarily comprised of the operating expenses of our holding company.

Interest Expense. We incurred interest expense related to debt obligations of $2.7 million for the three months ended September 30, 2003, compared to $2.2 million for the three months ended September 30, 2002.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the three months ended September 30, 2003 decreased by $24.9 million to $21.4 million as compared to $46.3 million for the three months ended September 30, 2002, as a result of the decrease in pre-tax income.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Gross Premiums Written. Gross premiums written for the nine months ended September 30, 2003 increased by $545.1 million, or 40.9%, to $1,876.7 million from $1,331.6 million for the nine months ended September 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 $179.0 million, or 20.7%, the EuroAsia division of $120.3 million, or 67.5%, the London Market division of $100.5 million, or 47.2%, and the U.S. Insurance division of $156.3 million, or 159.2%.

The Americas accounted for $1,043.0 million, or 54.6%, of our gross premiums written for the nine months ended September 30, 2003, an increase of $179.0 million, or 20.7%, compared to $864.0 million, or 63.8%, of our gross premiums written for the nine months ended September 30, 2002. Gross premiums written by the United States unit for the nine months ended September 30, 2003 were $868.3 million, an increase of $116.8 million, or 15.5%, compared to $751.5 million for the nine months ended September 30, 2002. Gross premiums written by the Latin American unit for the nine months ended September 30, 2003 were $115.4 million, an increase of $37.9 million, or 48.9%, compared to $77.5 million for the nine months ended September 30, 2002. The Canadian unit had gross premiums written of $56.2 million for the nine months ended September 30, 2003, an increase of $27.8 million, or 97.9%, compared to $28.4 million for the nine months ended September 30, 2002.

For the nine months ended September 30, 2003, the EuroAsia division had gross premiums written of $298.6 million, or 15.6%, of our gross premiums written, an increase of $120.3 million, or 67.5%, compared to $178.3 million, or 13.2%, of our gross premiums written for the nine months ended September 30, 2002. Opportunities in our EuroAsia division have increased due to catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. For the nine months ended September 30, 2003 and 2002, our Paris office had gross premiums written of $218.4 million and $132.1 million, respectively, an increase of $86.3 million, or 65.3%. For the nine months ended September 30, 2003 and 2002, our Singapore office had gross premiums written of $66.8 million and $46.2 million, respectively, an increase of $20.6 million, or 44.6%. For the nine months ended September 30, 2003, First Capital had $13.4 million of direct premiums written.

The London Market generated $313.2 million, or 16.4%, of our gross premiums written for the nine months ended September 30, 2003 as compared to $212.7 million, or 15.7%, of our gross premiums written for the nine months ended September 30, 2002. Gross premiums written by the London branch for the nine months ended September 30, 2003 were $117.2 million, an increase of $30.3 million, or 34.9%, compared to $86.9 million for the nine months ended September 30, 2002. Our Lloyds syndicate had gross premiums written of $196.0 million for the nine months ended September 30, 2003, an increase of $70.2 million or 55.8%, compared to $125.8 million for the nine months ended September 30, 2002.

The U.S. Insurance division accounted for $254.5 million, or 13.3%, of our gross premiums written for the nine months ended September 30, 2003, an increase of $156.3 million, compared to $98.2 million, or 7.3%, of our gross premiums written for the nine months ended September 30, 2002. Hudson for the nine months ended September 30, 2003 had gross premiums written of $161.1 million, an increase of $62.9 million, or 64.1%, compared to $98.2 million for the nine months ended September 30, 2002. Healthcare contributed $93.4 million of premiums written for the nine months ended September 30, 2003.

Ceded Premiums Written. Ceded premiums written for the nine months ended September 30, 2003 increased by $84.0 million, or 47.2%, to $261.9 million from $177.9 million for the nine months ended September 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 nine months ended September 30, 2003 increased by $461.1 million, or 40.0%, to $1,614.8 million from $1,153.7 million for the nine months ended September 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 nine months ended September 30, 2003 increased by $446.6 million, or 44.9%, to $1,442.3 million from $995.7 million for the nine months ended September 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 nine months ended September 30, 2003 increased by $0.5 million, or 0.6%, to $91.0 million from $90.5 million for the nine months ended September 30, 2002. Net investment yield for the nine months ended September 30, 2003 was 3.8% on annualized basis, compared to 4.4% 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 nine months ended September 30, 2003 increased by $63.6 million, to $187.1 million from a gain of $123.5 million for the nine months ended September 30, 2002. The increase in net realized investment gains for the nine months ended September 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 nine months ended September 30, 2003 increased by $298.7 million, or 43.7%, to $982.4 million from $683.7 million for the nine months ended September 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 nine months ended September 30, 2003 was 68.1% compared to 68.7% for the nine months ended September 30, 2002.

Acquisition Costs. Acquisition costs for the nine months ended September 30, 2003 were $346.8 million compared to $252.2 million for the nine months ended September 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 24.0% for the nine months ended September 30, 2003 compared to 25.3% for the nine months ended September 30, 2002.

Other Underwriting Expenses. Other underwriting expenses for the nine months ended September 30, 2003 were $72.3 million compared to $51.7 million for the nine months ended September 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 5.0% for the nine months ended September 30, 2003, compared to 5.2% for the nine months ended September 30, 2002.

Other Expenses, Net. Other expenses, net for the nine months ended September 30, 2003, were $5.3 million compared to $2.7 million for the nine months ended September 30, 2002. Other expenses, net is primarily comprised of the operating expenses of the holding company.

Interest Expense. We incurred interest expense related to debt obligations of $7.6 million for the nine months ended September 30, 2003, compared to $6.6 million for the nine months ended September 30, 2002.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the nine months ended September 30, 2003 increased by $31.5 million to $104.4 million compared to $72.9 million for the nine months ended September 30, 2002, as a result of the increase in operating income.

Liquidity and Capital Resources

Our stockholders’ equity increased by $274.2 million, or 26.0%, to $1,330.3 million as of September 30, 2003 from $1,056.1 million as of December 31, 2002. The increase was attributable to net income of $201.6 million, an increase in accumulated other comprehensive income, net of deferred taxes of $76.6 million, an increase in stockholders’ equity resulting from the amortization of unearned compensation of $0.9 million and a decrease due to dividends paid to stockholders of $4.9 million for the nine months ended September 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. On October 31, 2003, OdysseyRe utilized the shelf registration and issued $150.0 million aggregate principal amount of senior notes due November 1, 2013.

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 $395.2 million for the nine months ended September 30, 2003, compared to $119.3 million for the nine months ended September 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 nine months ended September 30, 2003 was $788.5 million compared to $100.8 million of cash used in investing activities for the nine months ended September 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 $1,672.3 million and $484.7 million, as of September 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 and the second half of 2002. 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 47.1% and 21.9% as of September 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 September 30, 2003 and December 31, 2002, respectively. Total investments and cash amounted to $3.8 billion as of September 30, 2003, an increase of $732.6 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 $6.4 million. The gain has been capitalized and is being amortized over the remaining life of the senior notes. As of September 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 September 30, 2003, the letter of credit was valued at £69.5 million, or $115.5 million, and was secured by a pledge of $121.0 million of our investment securities. As of September 30, 2003, the trust account was valued at £31.2 million, or $49.3 million.

On September 4, 2003, our Board of Directors declared a quarterly cash dividend of $0.025 per share payable on September 30, 2003 to all stockholders of record as of September 16, 2003. Approximately $1.6 million in dividends was paid during each of the first three 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 September 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 September 30, 2003, our $3.8 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 September 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 September 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	$	1,289.1	$	(189.1	)		(12.8	)%	$	1,681.2	$	(311.4	)		(15.6	)%
100 basis point rise		1,377.2		(101.8	)		(6.9	)		1,819.5		(173.1	)		(8.7	)
Base Scenario		1,479.0		—			—			1,992.6		—			—
100 basis point decline		1,607.4		128.4			8.7			2,236.7		244.1			12.3
200 basis point decline		1,752.1		273.1			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 September 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 September 30, 2003, we had gross unrealized appreciation of $159.6 million, which was offset by gross unrealized depreciation of $40.6 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 September 30, 2003 and December 31, 2002, 82.5% and 88.6%, respectively, of our fixed income securities portfolio consisted of securities rated investment grade, with 17.5% 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 September 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 September 30, 2003 and December 31, 2002, 8.4% 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 7.1% and 7.2% on September 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 $27.1 million and $22.2 million as of September 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 September 30, 2003 and December 31, 2002, our total exposure to foreign denominated securities in U.S. dollar terms was approximately $556.0 million and $541.5 million, respectively, or 14.6% 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 6.7% and 7.6% as of September 30, 2003 and December 31, 2002, respectively, of our investment portfolio, including cash and cash equivalents. As of September 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 $55.6 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 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

4.1 Senior Debt Securities Indenture dated as of October 31, 2003 between OdysseyRe Holdings Corp. and The Bank of New York

4.2 Global Security dated October 31, 2003 representing $150,000,000 aggregate principal amount of 7.65% Senior Notes due 2013

10.1 Underwriting Agreement dated October 28, 2003 with respect to the 7.65% Senior Notes due 2013

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 July 31, 2003, in connection with the issuance of its press release announcing its results for the quarter ended June 30, 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: November 3, 2003

By /s/ ANDREW A. BARNARD

Andrew A. Barnard

President and Chief Executive Officer

Date: November 3, 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.


	4.1	Senior Debt Securities Indenture dated as of October 31, 2003 between OdysseyRe Holdings Corp. and The Bank of New York


	4.2	Global Security dated October 31, 2003 representing $150,000,000 aggregate principal amount of 7.65% Senior Notes due 2013


	10.1	Underwriting Agreement dated October 28, 2003 with respect to the 7.65% Senior Notes due 2013

	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