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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

For the fiscal year ended: December 31, 2003

Odyssey Re Holdings Corp.

Odyssey Re Holdings Corp.

Donald L. Smith, Esq.

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

         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 such filing requirements for the past 90 days.    YES þ         NO o

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

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

         The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on June 30, 2003 was approximately $259.3 million computed upon the basis of the closing sales price of the Common Stock on that date. For purposes of this computation, shares held by directors (and shares held by entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

         As of February 17, 2004, there were 64,996,791 outstanding shares of Common Stock, par value $0.01 per share, of the registrant.

Documents Incorporated by Reference

         Portions of the registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors at the annual meeting of the stockholders of the registrant scheduled to be held on or about April 21, 2004 are incorporated by reference in Part III of this Form 10-K.

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ODYSSEY RE HOLDINGS CORP.

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References in this Annual Report on Form 10-K to “OdysseyRe,” the “Company,” “we,” “us” and “our” refer to Odyssey Re Holdings Corp. and, unless the context otherwise requires or otherwise as expressly stated, its subsidiaries, including Odyssey America, Clearwater, Newline, Hudson, Hudson Specialty and First Capital.

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FORWARD-LOOKING STATEMENTS

      We have included in this Annual Report on Form 10-K 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, which we describe in more detail elsewhere in this Annual Report on Form 10-K, 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. We have described some important factors that could cause our actual results to differ materially from our expectations in this Annual Report on Form 10-K, including factors discussed below in the section titled “Risk Factors.” 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.

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PART I

The Company

      Odyssey Re Holdings Corp. was incorporated on March 21, 2001 in the state of Delaware to serve as the holding company for the reinsurance related subsidiaries of Fairfax Financial Holdings Limited (“Fairfax”), a publicly traded Canadian financial services company. Our business was formed through the combination of Odyssey Reinsurance Corporation (“ORC”), acquired by Fairfax in May 1996, and Odyssey America Reinsurance Corporation (“Odyssey America”), acquired by Fairfax in April 1999. ORC became a wholly-owned subsidiary of Odyssey America in 1999 and as a result of this corporate reorganization, ORC substantially ceased writing new business but continued to maintain active licenses in 50 states. On December 4, 2003, ORC’s name was changed to Clearwater Insurance Company (“Clearwater”). Clearwater will become an integral part of our U.S. insurance business, supplementing the activities of Hudson Insurance Company and Hudson Specialty Insurance Company. Odyssey UK Holdings Corp. (“UK Holdings”), a subsidiary of Odyssey America, formed in 1997, is a holding company with several wholly-owned operating subsidiaries, including Newline Underwriting Management Ltd., through which it owns and manages a syndicate at Lloyd’s, Newline Syndicate 1218 (collectively, “Newline”). Hudson Insurance Company (“Hudson”), acquired by Fairfax in May 1996 as part of the acquisition of Clearwater, is a wholly-owned subsidiary of Clearwater and is principally engaged in the business of primary property and casualty insurance. On September 10, 2002, we purchased 56.0% of the common stock of First Capital Insurance Ltd. (“First Capital”), and subsequently contributed First Capital to Odyssey America. During the second quarter of 2003, Odyssey America increased its ownership of First Capital to 97.7%. First Capital is a public limited liability company incorporated under the laws of Singapore. Its principal activity is conducting general insurance business. On January 1, 2004, Odyssey America contributed all of its shares of First Capital to Fairfax Asia (2003) Limited (“Fairfax Asia”) in exchange for Class B non-voting shares representing an approximate 45% ownership interest in Fairfax Asia. Fairfax owns the controlling interest in Fairfax Asia. On October 28, 2003, Odyssey America purchased General Security Indemnity Company (“General Security”), a shell company domiciled in New York. General Security’s name was changed to Hudson Specialty Insurance Company (“Hudson Specialty”). Odyssey America contributed Hudson Specialty to Clearwater in December 2003. Hudson Specialty is an eligible surplus lines insurer in 43 states and will serve as the main platform for our Healthcare business.

      On June 19, 2001, we issued 17,142,857 shares of our common stock (approximately 26% of our issued and outstanding common stock), in an initial public offering. After the offering, subsidiaries of Fairfax held 48 million shares of our common stock (approximately 74% of our issued and outstanding common stock). On March 4, 2003, Fairfax announced it had purchased, through a subsidiary, 4.3 million outstanding shares of our common stock in a private transaction, increasing its interest in us to approximately 80.6%.

      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. 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 unit located in Napa, California. We currently reinsure this business through a 100% quota share agreement with an affiliate. In 2004, Hudson Specialty will serve as the main platform for the Healthcare business. OdysseyRe also underwrites insurance business through Newline and Hudson. Our global presence is established through 17 offices, with principal locations in the United States, London, Paris, Singapore, and Latin America.

      Our operations are managed through four distinct divisions, Americas, EuroAsia, London Market and U.S. Insurance, which are principally based on geographic regions. The Americas division is comprised of our United States reinsurance operations and our Canadian and Latin America branch offices. The United States operations write treaty property, general casualty, specialty casualty, surety, and facultative casualty reinsur-

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      Our operating subsidiaries presently hold an “A” (Excellent) rating from A.M. Best Company, Inc. (“A.M. Best”) and an “A-” (Strong) counterparty credit and financial strength rating from Standard & Poor’s Insurance Rating Services (“Standard & Poor’s”). Ratings are used by insurers, reinsurers and reinsurance and insurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers. These ratings represent independent opinions of financial strength and ability to meet policyholder obligations. “A” rated reinsurance or insurance companies are considered by A.M. Best to have a strong ability to meet their obligations to policyholders. “A” is the third highest designation of A.M. Best’s fifteen rating levels. A reinsurer or insurer rated “A-” by Standard & Poor’s is believed to have “strong” financial security characteristics, but is more likely to be affected by adverse business conditions than are insurers with higher ratings. “A-” is the third highest rating category of Standard & Poor’s ten categories.

      We had gross premiums written in 2003 of $2.6 billion and stockholders’ equity as of December 31, 2003 of $1.4 billion.

The Reinsurance Business

      Reinsurance is an arrangement in which the reinsurer agrees to indemnify an insurance or reinsurance company, the ceding company, against all or a portion of the risks underwritten by the ceding company under one or more insurance or reinsurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks, catastrophe protection from large or multiple losses and/or assistance in maintaining acceptable financial ratios. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business without a concurrent increase in capital and surplus. Reinsurance, however, does not discharge the ceding company from its liability to policyholders. Rather, reinsurance serves to indemnify a ceding company for losses payable by the ceding company to its policyholders.

      There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In treaty reinsurance, the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties and are largely dependent on the individual underwriting decisions made by the ceding company. Accordingly, reinsurers will carefully evaluate the ceding company’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty.

      In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract. Facultative reinsurance is negotiated separately for each insurance or reinsurance contract that is reinsured. Facultative reinsurance normally is purchased by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the dollar limits of their reinsurance treaties or for unusual risks. Underwriting expenses and, in particular, personnel costs, are higher on facultative business because each risk is individually underwritten and administered. The ability to separately evaluate each risk reinsured, however, increases the probability that the reinsurer can price the contract to more accurately reflect the risks involved.

      An additional form of facultative reinsurance is known as “automatic facultative” reinsurance, or “program facultative” reinsurance, which has elements of both treaty reinsurance and facultative reinsurance. In these automatic facilities, risks within a class of business are stratified into groups based on similar risk

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      Both treaty and facultative reinsurance can be written on either a proportional, also known as pro rata, basis or on an excess of loss basis. With respect to proportional reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. In the case of reinsurance written on an excess of loss basis, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company’s retention or reinsurer’s attachment point.

      Excess of loss reinsurance is often written in layers. A reinsurer accepts the risk just above the ceding company’s retention up to a specified amount, at which point that reinsurer or another reinsurer accepts the excess liability up to an additional specified amount or such liability reverts to the ceding company. The reinsurer taking on the risk just above the ceding company’s retention layer is said to write working layer or low layer excess of loss reinsurance. A loss that reaches just beyond the ceding company’s retention will create a loss for the lower layer reinsurer, but not for the reinsurers on the higher layers. Loss activity in lower layer reinsurance tends to be more predictable than in higher layers.

      Premiums payable by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportionate risk. In contrast, premiums that the ceding company pays to the reinsurer for proportional reinsurance are proportional to the premiums that the ceding company receives, consistent with the proportional sharing of risk. In addition, in proportional reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense) and also may include a profit factor for producing the business.

      Reinsurance may be written for insurance or reinsurance contracts covering casualty risks or property risks. In general, casualty insurance protects against financial loss arising out of an insured’s obligation for loss or damage to a third party’s property or person. Property insurance protects an insured against a financial loss arising out of the loss of property or its use caused by an insured peril or event. Property catastrophe coverage is generally “all risk” in nature and written on an excess of loss basis, with exposure to losses from earthquake, hurricanes and other natural or man made catastrophes such as storms, floods, fire or tornados. There tends to be a greater delay in the reporting and settlement of casualty reinsurance claims as compared to property claims due to the nature of the underlying coverage and the greater potential for litigation involving casualty risks.

      Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’s business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance: to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.

      Reinsurance can be written through professional reinsurance brokers or directly with ceding companies.

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Lines of Business

      The following table sets forth our gross premiums written by type of business for each of the three years in the period ended December 31, 2003.

(1)

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 total gross premiums written as shown in the table above does not agree to the gross premiums written of $2,558.2 million, $1,894.5 million and $1,153.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, reflected in the consolidated statements of operations.

      We write property catastrophe excess of loss reinsurance, covering loss or damage from unpredictable events such as hurricanes, windstorms, hailstorms, freezes or floods, which provides aggregate exposure limits and requires cedants to incur losses in specified amounts before our obligation to pay is triggered. Approximately $220.5 million, or 8.5%, of gross premiums written for the year ended December 31, 2003 was derived from property catastrophe excess of loss reinsurance. We also write property business which has exposure to catastrophes on a proportional basis in North America and Latin America. In addition, the EuroAsia division writes largely property business, with exposure to catastrophes, primarily in Europe, Japan, the Pacific Rim and the Middle East.

      Treaty casualty business accounted for $920.1 million, or 35.3%, of gross premiums written for the year ended December 31, 2003, of which 66.9% was written on a proportional basis and 33.1% was written on an excess of loss basis. Our treaty casualty portfolio principally consists of specialty casualty products, including professional liability, directors’ and officers’ liability, excess and surplus lines, workers’ compensation and accident and health, as well as general casualty products, including general liability and auto liability. Treaty property business represented $683.6 million, or 26.3%, of gross premiums written for the year ended December 31, 2003, primarily consisting of commercial property and homeowners’ coverage, of which 61.3% was written on a proportional basis and 38.7% was written on an excess of loss basis. Treaty marine and aerospace business accounted for approximately $108.2 million, or 4.2%, of gross premiums written for the

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      Facultative reinsurance accounted for $153.6 million, or 5.9%, of gross premiums written for the year ended December 31, 2003, with 94.4% derived from the Americas division and 5.6% from the EuroAsia division. With respect to facultative business in the United States, we write only casualty reinsurance, including general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial auto lines; with respect to facultative business in Latin America and EuroAsia, we write only property reinsurance.

      We operate at Lloyd’s of London through our wholly owned syndicate, Newline Syndicate 1218. The business focus of Newline is casualty insurance. Our Lloyd’s membership provides strong brand recognition, extensive broker and distribution channels and worldwide licensing, including the ability to write insurance business on an excess and surplus lines basis in the United States.

      In addition to reinsurance, we provide insurance products through our U.S. Insurance division. This business is comprised of specialty program insurance business underwritten on both an admitted and non-admitted basis by Hudson, and medical malpractice and hospital professional liability business underwritten by our Healthcare unit in 2003. Some of the policies that comprise the Hudson portfolio are generated through national and regional agencies and brokerages, as well as through program administrators. Each program administrator has strictly defined limitations on lines of business, states, premium capacity and policy limits. All program administrators have limited geographic scope and are also limited in type of business they may accept. Our Healthcare unit underwrites medical malpractice and hospital professional liability insurance primarily on a non-admitted basis. Coverage is written on a claims-made basis, providing a wide range of limits and retentions.

      As a general matter, we target specific classes of business depending on the market conditions prevailing at any given point in time. We actively seek to grow our participation in classes experiencing improvements, and lessen participation in those classes suffering from intense competition or poor fundamentals. Consequently, the classes of business for which we provide reinsurance are diverse in nature and the product mix within the reinsurance and insurance portfolio may change over time. From time to time, we may consider opportunistic expansion or entry into new classes of business or ventures, either through organic growth or the acquisition of other companies or books of business.

      We are not materially dependent on any single customer, line of business or geographical area. We do not believe that the reduction of business assumed from any one customer or small group of customers would have a meaningful impact on future financial results due to our competitive position in the marketplace and the availability of other sources of business.

Divisions

      Our business is organized across four operating divisions: the Americas, EuroAsia, London Market, and U.S. Insurance divisions. The table below illustrates gross premiums written by division for each of the three years in the period ended December 31, 2003. During the first quarter of 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 and assumed by Odyssey America, have been combined into a new division, the U.S. Insurance division. As a result, we have restated the segment information for each of the 2002 and 2001 periods to afford a better comparison and analysis of our current divisional structure.

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(1)

A portion of the gross premiums written by the U.S. Insurance division have been ceded to, and are also included in, the Americas division’s gross premiums written. Accordingly, the total gross premiums written as shown in the table above does not agree to the gross premiums written of $2,558.2 million, $1,894.5 million and $1,153.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, reflected in the consolidated statements of operations.

     Americas Division

      The Americas is our largest division, accounting for $1.4 billion, or 54.7%, of gross premiums written for the year ended December 31, 2003. The Americas division writes treaty, both casualty and property, and facultative casualty reinsurance in the United States and Canada, and treaty property and other short-tail lines and facultative property reinsurance in Latin America. The Americas division operates through seven offices, located in Stamford, two offices in New York City, Mexico City, Miami, Santiago and Toronto, and currently has 298 employees. The reinsurance operations of the Americas division seek to target small to medium sized regional and specialty ceding companies, as well as various specialized departments of major insurance companies.

      The Americas division is organized into three major units: the United States, Latin America and Canada. The London branch is also included in the Americas for business incepting prior to 2001.

      The following table displays gross premiums written by each of the units within the Americas division for each of the three years in the period ended December 31, 2003.

(1)	As part of the realignment of our business across geographic regions, gross premiums previously written by the London branch unit are being written through the London Market for business incepting in 2001 and subsequent.

      The United States unit provides treaty business of virtually all classes of non-life insurance. In addition to the specialty casualty and general casualty reinsurance lines, the unit also writes commercial and personal property as well as marine and aerospace, accident and health, and surety lines. Facultative casualty is also written in the United States unit, mainly for general liability, umbrella liability, directors’ and officers’ liability,

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      Gross premiums written by type of business for the Americas division are displayed in the following table for each of the three years in the period ended December 31, 2003.

     EuroAsia Division

      EuroAsia operates out of four offices, with principal offices in Paris and Singapore and satellite offices in Stockholm and Tokyo. The EuroAsia division currently has 77 employees. On September 10, 2002, we purchased 56% of First Capital, which is located in Singapore. During the second quarter of 2003 we increased our ownership of First Capital to 97.7%. On January 1, 2004, Odyssey America contributed all of its shares of First Capital to Fairfax Asia in exchange for Class B non-voting shares representing an approximate 45% ownership in Fairfax Asia.

      The EuroAsia division continued to expand its presence in 2003 in Europe, Asia, the Middle East and Africa, taking advantage of the rapidly changing international market place. The Paris branch office is the headquarters of the EuroAsia division and the underwriting center in charge of Europe, the Middle East, and Africa, with an office in Stockholm, Sweden, covering the Nordic countries. The Asia Pacific Rim unit is headquartered in Singapore, with an office in Tokyo, Japan, and writes property and casualty reinsurance on both a treaty and facultative basis.

      The EuroAsia division wrote $408.1, $258.6 and $146.5 million, or 15.7% and 13.4% and 12.2%, of our gross premiums written for the years ended December 31, 2003, 2002 and 2001, respectively.

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      The following table illustrates gross premiums written by type of business for the EuroAsia division for each of the three years in the period ended December 31, 2003.

     London Market Division

      The London Market division operates through two platforms, with offices in London and Bristol: Odyssey America’s syndicate at Lloyd’s (Newline) and the London branch. Newline’s business focus is liability insurance, while the London branch writes a treaty reinsurance account. These two underwriting platforms are run by an integrated management team with a common business approach. The London Market division currently has 73 employees and generated $437.9 million, or 16.8%, of our gross written premiums for the year ended December 31, 2003, compared to $315.3 million, or 16.3%, for the year ended December 31, 2002.

      The following table displays gross premiums written by business unit for the London Market division for each of the three years in the period ended December 31, 2003.

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      Odyssey America’s London branch writes worldwide treaty reinsurance through three units: property, marine and aerospace, and international casualty. For the year ended December 31, 2003, the London branch had gross written premiums of $154.4 million, or 35.3% of the total London Market division, compared to $117.5 million, or 37.3%, for the year ended December 31, 2002. Gross premiums written growth in the London branch in 2003 is attributable to increases in all lines of business written by the branch.

      Newline’s core business is liability insurance, which represented $264.1 million, or 60.3%, of the 2003 gross premiums written by the London Market, compared to $163.7 million, or 51.9%, in 2002. The liability insurance account is written in four business units: financial institutions, directors’ and officers’ liability, professional indemnity, and liability.

     U.S. Insurance Division

      The U.S. Insurance division operates through two units, with offices in New York, Stamford, Chicago, Minneapolis, Lansing and Napa. Hudson Insurance Company provides specialty program insurance products through national and regional agencies and brokerages, as well as through program administrators. Effective January 1, 2003, we commenced, on a new and renewal basis, underwriting medical malpractice and hospital professional liability insurance through a Healthcare unit headquartered in Napa, California. On October 28, 2003 we acquired an excess and surplus lines insurance company which will serve as the main platform for the Healthcare business in 2004. The U.S. Insurance division currently has 67 employees and generated $333.8 million, or 12.8% of our gross written premiums for the year ended December 31, 2003 compared to $168.6 million or 8.7% for the year ended December 31, 2002.

      The following table displays gross premiums written by the U.S. Insurance division for each of the three years in the period ended December 31, 2003.

Retention Levels and Retrocession Arrangements

      Under our current underwriting guidelines for treaties, we impose maximum retentions on a per risk basis. We believe that the levels of gross capacity per property risk that are in place are sufficient to achieve our objective of attracting business in the international markets. The following table illustrates the current gross capacity, maximum retrocession and maximum net retention generally applicable under our underwrit-

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      We are subject to accumulation risk with respect to catastrophic events involving multiple treaties or facultative certificates. To protect against this, we buy catastrophe excess of loss retrocessional protection, which varies from year to year. In addition, our retention varies from zone to zone, but the maximum recovery from a major United States catastrophic event in 2003 would be $126 million. Specific retrocessions are also placed to protect selected portions of our portfolio. In 2003, we purchased a Whole Account Aggregate Excess of Loss cover, of which a portion was available for additional catastrophe protection. Our newly acquired healthcare facility is protected by a reinsurance program that reduced exposure by 88%.

Marketing

      We provide reinsurance capacity in the United States market primarily through brokers, and in international markets through brokers and directly to insurers and reinsurers.

      We believe the willingness of a primary insurer or reinsurer to use a specific reinsurer is not based solely on pricing. Other factors include: perception of the financial security of the reinsurer, claims paying ability rating, ability to design customized products, the quality of a reinsurer’s service and its commitment to provide reinsurance capacity. We believe we have developed a reputation with our clients for prompt responses on underwriting submissions and timely claims payments. Additionally, we believe our level of capital and surplus demonstrates our strong financial position and intent to continue providing reinsurance capacity.

      The reinsurance broker market consists of several significant national and international brokers and a number of smaller specialized brokers. Brokers do not have the authority to bind us with respect to reinsurance agreements, nor do we commit in advance to accept any portion of the business that brokers submit. Brokerage fees generally are paid by reinsurers and are included as an underwriting expense in the financial statements. Our five largest reinsurance brokers accounted for an aggregate of 60% of reinsurance gross premiums written in 2003.

      Direct distribution is an important channel for us in the overseas markets served by the Latin America unit of the Americas division and the EuroAsia division. Direct placement of reinsurance enables us to access clients who prefer to place their reinsurance directly with their reinsurers based upon the reinsurer’s in-depth understanding of the ceding company’s needs. Our primary insurance business generated through the U.S. Insurance division is written principally through national and regional agencies and brokerages, as well as through general agency relationships. Newline’s primary market business is written through agency and direct distribution channels.

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Claims

      Claims are managed by our professional claims staff, whose responsibilities include the review of initial loss reports, creation of claim files, determination of whether further investigation is required, establishment and adjustment of case reserves, and payment of claims. Claims staff recognize that fair interpretation of our reinsurance agreements and timely payment of covered claims is a valuable service to clients and enhances our reputation. In addition to claims assessment, processing and payment, our claims staff conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected ceding companies, which we believe benefits all parties to the reinsurance arrangement. Claims audits are conducted in the ordinary course of business. In certain instances, a claims audit may be performed prior to assuming reinsurance business. Insurance claims for our Hudson specialty program business are generally handled by third party administrators who have limited authority and are subject to review by our internal professional claims staff. For the medical malpractice and hospital liability business, we employ a professional claims staff to review and establish claims reserves.

Reserves for Unpaid Losses and Loss Adjustment Expenses

      Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss by the insured to the ceding company, the reporting of the loss by the ceding company to the reinsurer, the ceding company’s payment of that loss and subsequent payments to the ceding company by the reinsurer. To recognize liabilities for unpaid losses and loss adjustment expenses, insurers and reinsurers establish reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred on or before the balance sheet date, including events which have not been reported to the ceding company.

      Upon receipt of a notice of claim from the ceding company, we establish our own case reserve for the estimated amount of the ultimate settlement, if any. Case reserves usually are based upon the amount of reserves recommended by the ceding company and may be supplemented by additional amounts as deemed necessary by our claims staff. In certain instances, we establish case reserves even when the ceding company does not report any liability to the reinsurer.

      We also establish reserves to provide for incurred but unreported claims and the estimated expenses of settling claims, including legal and other fees, and the general expenses of administering the claims adjustment process, known as loss adjustment expenses. We calculate incurred but not reported loss and loss adjustment expense reserves by using generally accepted actuarial reserving techniques to project the ultimate liability for losses and loss adjustment expenses. We periodically revise such reserves to adjust for changes in the expected loss development pattern over time.

      Losses and loss adjustment expenses, net of related reinsurance recoverables, are charged to income as incurred. Unpaid losses and loss adjustment expenses comprise the accumulation of case reserves and incurred but not reported reserves. Provisions for inflation and “social inflation” (e.g., awards by judges and juries which progressively increase in size at a rate exceeding that of general inflation) are implicitly considered in the overall reserve setting process as an element of the numerous judgments which are made as to expected trends in average claim severity. Legislative changes may also affect our liabilities, and evaluation of the impact of such changes is made in the reserve setting process.

      The methods of determining estimates for reported and unreported losses and establishing resulting reserves and related reinsurance recoverables are continually reviewed and updated, and adjustments resulting from this review are reflected in income currently. The process relies upon the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. However, estimation of loss reserves is a complex process, especially in view of changes in the legal environment which impact the development of loss reserves and therefore quantitative techniques frequently have to be supplemented by subjective considerations and managerial judgment. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development to the same degree in the future.

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      While the reserving process is complex and subjective for the ceding companies, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to the longer-term nature of most reinsurance business, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. As a result, actual losses and loss adjustment expenses may deviate, perhaps substantially, from estimates of reserves reflected in our consolidated financial statements.

      During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends usually become known. As these become apparent, it usually becomes necessary to refine and adjust the reserves upward or downward and even then the ultimate net liability may be less than or greater than the revised estimates. We use tabular reserving for workers’ compensation liabilities that are considered fixed and determinable and discount such reserves using an interest rate of 3.5% and standard mortality assumptions. The amount of loss reserve discount as of December 31, 2003 is $66.7 million.

      Included in our reserves are amounts related to environmental impairment and asbestos-related illnesses, which, net of related reinsurance recoverable, totaled approximately $62 million as of December 31, 2003 and 2002. The majority of our environmental and asbestos-related liabilities arise from contracts entered into before 1985 and underwritten as standard general liability coverages where the environmental or asbestos-related liabilities were neither clearly defined nor specifically excluded. Significant uncertainty exists as to the ultimate settlement of these liabilities since, among other things, there are inconsistent court resolutions with respect to underlying policy intent and coverage, and uncertainties as to the allocation of responsibility for resultant damages.

      A dedicated claims unit manages the environmental impairment and asbestos related illness liabilities, due to the significantly greater uncertainty involving this exposure. This unit performs audits of policyholders with significant asbestos and environmental exposure to assess our potential liabilities. This unit also monitors developments within the insurance industry having a potential impact on our reserves. Through these processes, we believe that we have established an adequate provision for environmental impairment and asbestos related illness liabilities. Recent developments, which may have an impact on our liabilities, include (a) the significance of increased bankruptcy filings as a result of asbestos claims, (b) growth in the filing of claims against peripheral defendants and (c) recent claim settlement activity by companies with significant asbestos exposure.

      Our survival ratio for environmental and asbestos related liabilities as of December 31, 2003 is eleven years, reflecting full utilization of remaining indemnifications. Our underlying survival ratio for environmental related liabilities is five years and for asbestos related liabilities is fourteen years. The survival ratio represents the environmental impairment and asbestos related illness reserves, net of reinsurance, on December 31, 2003 plus indemnifications, divided by the average paid environmental and asbestos claims, net of reinsurance, for the last three years. Our survival ratio is nine years, prior to the reflection of indemnifications. Refer to note 16 of our consolidated financial statements included in this Form 10-K. 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 6, 2003.

      The “Ten Year Analysis of Consolidated Net Losses and Loss Adjustment Expense Reserve Development” that follows presents the development of balance sheet loss and loss adjustment expense reserves for calendar years 1993 through 2003. The upper half of the table shows the cumulative amounts paid during successive years related to the opening reserve. For example, with respect to the net loss and loss adjustment expense reserve of $1,844 million as of December 31, 1993, by the end of 2003, $1,439 million had actually been paid in settlement of those reserves. In addition, as reflected in the lower section of the table, the original reserve of $1,844 million was re-estimated to be $1,740 million as of December 31, 2003. This change from the original estimate would normally result from a combination of a number of factors, including losses being settled for different amounts than originally estimated. The original estimates will also be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity patterns. The net deficiency or redundancy depicted in the table, for any particular calendar year,

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      Each amount other than the original reserves in the table below includes the effects of all changes in amounts for prior periods. For example, if a loss settled in 1996 for $150,000 was first reserved in 1993 at $100,000 and remained unchanged until settlement, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative net deficiency in each of the years in the period 1993 through 1996 shown in the following table. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future development based on this table.

      The Cumulative redundancy/(deficiency) values for 1996 and 1998 through 2002 are impacted by significant loss reserve adjustments for Odyssey America and Clearwater. A reserve adjustment in calendar year 1997 on 1996 and prior outstanding losses, recognizing reserve inadequacies in Odyssey America prior to its purchase by Fairfax, accounts for approximately $69 million of the approximate $76 million cumulative deficiency reported for 1996. A reserve adjustment in calendar year 2002 on 2001 and prior outstanding losses, recognizing reserve inadequacies in Odyssey America’s United States casualty business written in the 1997-2000 period, accounts for approximately $41 million, $69 million, $78 million, and $66 million of the approximate $228 million, $282 million, $321 million, and $230 million cumulative deficiencies reported for years 1998 through 2001, respectively. A reserve adjustment in calendar year 2003 on 2002 and prior outstanding losses, recognizing reserve inadequacies in Odyssey America’s and Clearwater’s United States casualty business written in the 1997-2000 period, accounts for approximately $135 million, $216 million, $230 million, $136 million, and $117 million of the approximate $228 million, $282 million, $321 million, $230 million, and $117 million cumulative deficiencies reported for years 1998 through 2002, respectively.

      As discussed in note 5 to our consolidated financial statements included in this Form 10-K, the Cumulative redundancy/(deficiency) values for 1995 through 2002 are also impacted by a stop loss agreement involving Clearwater loss reserves as of December 31, 1995. Without this stop loss agreement, the Cumulative deficiency amounts for 1995 through 2002 would have been $90 million, $200 million, $182 million, $316 million, $352 million, $375 million, $265 million and $134 million, respectively. Under the stop loss agreement, Clearwater retroceded, and nSpire Re Limited, a Fairfax subsidiary, agreed to reinsure, 100 percent of Clearwater’s net incurred losses plus cumulative net incurred uncollectable reinsurance recoverables, for accident years 1995 and prior, in excess of approximately $929 million, subject to a cumulative aggregate limit of $175 million.

      The Gross cumulative deficiency for 1996 through 2002 was impacted by significant loss reserve adjustments for Odyssey America and Clearwater. A reserve adjustment in calendar year 1997 on 1996 and prior gross outstanding losses, recognizing reserve inadequacies in Odyssey America prior to its purchase by Fairfax, accounts for approximately $140 million of the approximate $294 million gross cumulative deficiency reported for 1996. A reserve adjustment in calendar year 2002 on 2001 and prior gross outstanding losses, recognizing reserve inadequacies in Odyssey America’s United States casualty business written in the 1997-2000 period, accounts for approximately $47 million, $60 million, $128 million, and $146 million of the approximate $535 million, $680 million, $687 million, and $543 million Gross cumulative deficiencies reported for years 1998 through 2001, respectively. A reserve adjustment in calendar year 2003 on 2002 and prior gross outstanding losses, recognizing reserve inadequacies in Odyssey America’s and Clearwater’s United States casualty business written in the 1997-2000 period, accounts for approximately $133 million, $233 million, $303 million, $278 million, and $261 million of the approximate $535 million, $680 million, $687 million, $543 million, and $340 million Gross cumulative deficiencies reported for years 1998 through 2002, respectively. Most of this gross loss emergence has been ceded to retrocessional protections. Additionally, environmental and asbestos loss emergence accounts for a substantial portion of the remaining gross cumulative deficiencies for the years 1996 through 2002. All of this environmental and asbestos emergence has been ceded to retrocessional and indemnification protections.

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      In summary, the cumulative deficiencies recognized in calender years 2003 and 2002 are $117 million and $66 million, respectively. Higher loss estimates on United States casualty business for accident years 1997 through 2000 are principally causing the increase on prior years’ loss estimates in these calendar years. The classes of business contributing most to the changes in loss estimates include directors and officers, errors and omissions and medical malpractice liability. The casualty insurance loss development patterns for these accident years were not consistent with prior periods due to the extremely competitive environment impacting coverage terms and conditions. This led to the cumulative deficiencies noted.

      A table presenting a reconciliation of beginning and ending reserve balances for calendar years 2003, 2002 and 2001 is provided in note 15 to our consolidated financial statements included in this Form 10-K.

Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table