ODYSSEY RE HOLDINGS CORP - 10-Q Quarterly Report

As filed with the Securities and Exchange Commission on August 3, 2004

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended: June 30, 2004		Commission File Number: 1-16535

(ODYSSEY RE LOGO)

Odyssey Re Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)


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

Odyssey Re Holdings Corp.

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

(212) 978-4700

(Address, including zip code, and telephone number,

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

Donald L. Smith, Esq.

General Counsel

Odyssey Re Holdings Corp.

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

(212) 978-4700

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

including area code, of agent for service)

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

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

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


Class		Number of Shares Outstanding at July 20, 2004

Common Stock, $.01 Par Value		64,782,795

TABLE OF CONTENTS

ODYSSEY RE HOLDINGS CORP.

INDEX TO FORM 10-Q


		Page

PART I
FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003		3
	Consolidated Statements of Operations and Comprehensive Income for the six and three months ended June 30, 2004 and 2003 (unaudited)		4
	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2004 and 2003 (unaudited)		5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		31
ITEM 4.	CONTROLS AND PROCEDURES		33
PART II
OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		34
ITEM 2.	CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES		34
ITEM 3.	DEFAULTS ON SENIOR SECURITIES		34
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		34
ITEM 5.	OTHER INFORMATION — FORWARD LOOKING STATEMENTS		35
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		35
	SIGNATURES		37
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

PART I — Item 1. Financial Statements

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


				June 30,			December 31,
				2004			2003

ASSETS
Investments and cash:
	Fixed income securities, at fair value (amortized cost $2,571,422 and $1,605,378, respectively)			$	2,471,091		$	1,597,688
	Equity securities:
		Common stocks, at fair value (cost $394,252 and $376,215, respectively)			440,311			447,700
		Common stocks, at equity			120,598			117,489
	Short-term investments, at cost which approximates fair value				204,458			218,208
	Other invested assets				406,692			267,504
	Cash and cash equivalents				696,016			1,588,659

			Total investments and cash		4,339,166			4,237,248
Investment income due and accrued					38,841			21,668
Reinsurance balances receivable					511,138			499,680
Reinsurance recoverables on loss payments					117,906			83,448
Reinsurance recoverables on unpaid losses					1,069,798			1,058,623
Prepaid reinsurance premiums					96,101			110,881
Funds held by ceding insurers					133,865			124,464
Deferred acquisition costs					167,279			168,289
Federal and foreign income taxes					120,889			71,183
Other assets					105,715			84,572

			Total assets	$	6,700,698		$	6,460,056

LIABILITIES
Unpaid losses and loss adjustment expenses				$	3,684,731		$	3,400,277
Unearned premiums					786,284			819,840
Debt obligations					376,516			376,892
Reinsurance balances payable					144,491			121,457
Funds held under reinsurance contracts					202,223			199,763
Other liabilities					114,223			151,592

			Total liabilities		5,308,468			5,069,821

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					794,063			793,586
Treasury stock, at cost (359,031 and 146,691 shares, respectively)					(8,662	)		(2,549	)
Unearned compensation					(6,908	)		(3,439	)
Accumulated other comprehensive income, net of deferred income taxes					9,582			112,430
Retained earnings					603,504			489,556

			Total stockholders’ equity		1,392,230			1,390,235

			Total liabilities and stockholders’ equity	$	6,700,698		$	6,460,056

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

SIX AND THREE MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


		Six Months			Six Months			Three Months			Three Months
		Ended			Ended			Ended			Ended
		June 30,			June 30,			June 30,			June 30,
		2004			2003			2004			2003

REVENUES
Gross premiums written		$	1,241,459		$	1,173,717		$	611,976		$	609,876
Ceded premiums written			138,209			141,074			61,965			67,162

	Net premiums written		1,103,250			1,032,643			550,011			542,714
Decrease (increase) in unearned premiums			23,125			(104,172	)		30,103			(61,566	)

	Net premiums earned		1,126,375			928,471			580,114			481,148
Net investment income			70,567			59,140			35,105			26,740
Net realized investment gains			67,256			169,815			32,417			131,551

	Total revenues		1,264,198			1,157,426			647,636			639,439

EXPENSES
Losses and loss adjustment expenses			747,318			627,459			383,761			321,734
Acquisition costs			257,489			233,095			132,008			116,997
Other underwriting expenses			63,880			45,963			33,971			25,204
Other expense, net			4,956			3,697			2,596			730
Interest expense			12,799			4,929			6,405			2,883

	Total expenses		1,086,442			915,143			558,741			467,548

Income before income taxes			177,756			242,283			88,895			171,891

Federal and foreign income tax provision (benefit):
	Current		61,013			89,448			35,903			55,728
	Deferred		(1,263	)		(6,431	)		(6,059	)		3,476

	Total federal and foreign income tax provision		59,750			83,017			29,844			59,204

NET INCOME		$	118,006		$	159,266		$	59,051		$	112,687

BASIC
Weighted average shares outstanding			64,385,021			64,721,288			64,311,432			64,732,356

Basic earnings per share		$	1.83		$	2.46		$	0.92		$	1.74

DILUTED
Weighted average shares outstanding			65,215,627			65,085,416			65,161,596			65,121,690

Diluted earnings per share		$	1.81		$	2.45		$	0.91		$	1.73

DIVIDENDS
Dividends declared per share		$	0.0625		$	0.05		$	0.03125		$	0.025

COMPREHENSIVE INCOME
Net income		$	118,006		$	159,266		$	59,051		$	112,687
Other comprehensive (loss) income, net of tax			(102,848	)		72,187			(97,617	)		44,704

Comprehensive income (loss)		$	15,158		$	231,453		$	(38,566	)	$	157,391

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2004			2003

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

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period		793,586			793,334
Net increase during the period		477			—

Balance, end of period		794,063			793,334

TREASURY STOCK
Balance, beginning of period		(2,549	)		(2,305	)
Purchases during the period		(10,091	)		—
Reissuance during the period		3,978			—

Balance, end of period		(8,662	)		(2,305	)

UNEARNED COMPENSATION
Balance, beginning of period		(3,439	)		(4,572	)
Issuance of restricted stock during the period		(4,328	)		—
Amortization during the period		859			567

Balance, end of period		(6,908	)		(4,005	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF DEFERRED INCOME TAXES
Balance, beginning of period		112,430			21,736
Net (decrease) increase during the period		(102,848	)		72,187

Balance, end of period		9,582			93,923

RETAINED EARNINGS
Balance, beginning of period		489,556			247,239
Net income		118,006			159,266
Dividends to stockholders		(4,058	)		(3,250	)

Balance, end of period		603,504			403,255

TOTAL STOCKHOLDERS’ EQUITY	$	1,392,230		$	1,284,853

COMMON SHARES OUTSTANDING
Balance, beginning of period		64,996,166			65,003,963
Net treasury shares acquired during the period		(212,340	)		—

Balance, end of period		64,783,826			65,003,963

See accompanying notes.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

(IN THOUSANDS)


			Six Months			Six Months
			Ended			Ended
			June 30,			June 30,
			2004			2003

OPERATING ACTIVITIES
Net income			$	118,006		$	159,266
Adjustments to reconcile net income to net cash provided by operating activities:
	Reinsurance balances and funds held, net			(29,823	)		(228,532	)
	Unearned premiums			(18,776	)		107,504
	Unpaid losses and loss adjustment expenses			273,279			313,000
	Federal and foreign income taxes			4,579			25,304
	Other assets and liabilities, net			(39,862	)		26,361
	Deferred acquisition costs			1,010			(15,656	)
	Net realized investment gains			(67,256	)		(169,815	)
	Bond discount amortization, net			(6,740	)		(4,263	)

		Net cash provided by operating activities		234,417			213,169

INVESTING ACTIVITIES
Maturities of fixed income securities				3,542			17,050
Sales of fixed income securities				892,172			3,766,631
Purchases of fixed income securities				(1,873,284	)		(3,019,833	)
Sales of equity securities				131,454			71,752
Purchases of equity securities				(115,783	)		(67,079	)
Purchases of other invested assets				(164,423	)		(6,327	)
Decrease in short-term investments				16,505			52,667

		Net cash (used in) provided by investing activities		(1,109,817	)		814,861

FINANCING ACTIVITIES
Dividends				(4,058	)		(3,250	)
Sale of interest rate contract				—			8,667
Purchase of treasury stock				(10,091	)		—

		Net cash (used in) provided by financing activities		(14,149	)		5,417

Effect of exchange rate changes on cash				(3,094	)		—

(Decrease) increase in cash and cash equivalents				(892,643	)		1,033,447
Cash and cash equivalents, beginning of period				1,588,659			484,744

		Cash and cash equivalents, end of period	$	696,016		$	1,518,191

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, which include Clearwater Insurance Company (“Clearwater”), Odyssey UK Holdings Corporation (“UK Holdings”), Newline Underwriting Management Ltd., which owns and manages a syndicate at Lloyd’s, Newline Syndicate 1218 (collectively, “Newline”), Hudson Insurance Company (“Hudson”) and Hudson Specialty Insurance Company (“Hudson Specialty”). As of June 30, 2004, Fairfax Financial Holdings Limited (“Fairfax”), a Canadian financial services holding company, owned approximately 81% of OdysseyRe.

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 six and three months ended June 30, 2004 and 2003 are not necessarily indicative of the results for a full year.

During each of the first and second quarters of 2004, dividends of $0.03125 per common share were declared, resulting in an aggregate dividend of approximately $2.0 million in each period. During each of the first and second quarters of 2003, dividends of $0.025 per common share were declared, resulting in an aggregate dividend of approximately $1.6 million in each period.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. Accumulated Other Comprehensive Income

The following table shows the components of the change in accumulated other comprehensive income (loss) for the six and three months ended June 30, 2004 and 2003 (in thousands):


	Six Months			Six Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2004			2003			2004			2003

Beginning balance of accumulated other comprehensive income	$	112,430		$	21,736		$	107,199		$	49,219

Beginning balance of foreign currency translation adjustments		39,896			(2,202	)		33,822			7,524
Ending balance of foreign currency translation adjustments		24,853			11,915			24,853			11,915

Current period change in foreign currency translation adjustments		(15,043	)		14,117			(8,969	)		4,391

Beginning balance of unrealized net gains on securities		73,756			23,938			74,599			42,858
Ending balance of unrealized net (losses) gains on securities		(14,049	)		83,171			(14,049	)		83,171

Current period change in unrealized net (losses) gains on securities		(87,805	)		59,233			(88,648	)		40,313

Beginning balance of minimum pension liability		(1,222	)		—			(1,222	)		(1,163	)
Ending balance of minimum pension liability		(1,222	)		(1,163	)		(1,222	)		(1,163	)

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

Current period change in accumulated other comprehensive (loss) income		(102,848	)		72,187			(97,617	)		44,704

Ending balance of accumulated other comprehensive income	$	9,582		$	93,923		$	9,582		$	93,923

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of comprehensive income (loss) for the six and three months ended June 30, 2004 and 2003 are shown in the following table (in thousands):


	Six Months			Six Months			Three Months			Three Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2004			2003			2004			2003

Net income	$	118,006		$	159,266		$	59,051		$	112,687

Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments		(23,143	)		21,718			(13,798	)		6,755
Unrealized net (losses) gains on securities arising during the period		(174,653	)		100,871			(196,135	)		62,830
Reclassification adjustment for realized losses (gains) included in net income		39,568			(9,743	)		59,753			(810	)
Minimum pension liability		—			(1,789	)		—			—

Other comprehensive (loss) income, before tax		(158,228	)		111,057			(150,180	)		68,775

Tax benefit (expense):
Foreign currency translation adjustments		8,100			(7,601	)		4,829			(2,364	)
Unrealized net losses (gains) on securities arising during the period		61,129			(35,305	)		68,648			(21,991	)
Reclassification adjustment for realized gains (losses) included in net income		(13,849	)		3,410			(20,914	)		284
Minimum pension liability		—			626			—			—

Total tax benefit (expense)		55,380			(38,870	)		52,563			(24,071	)

Other comprehensive (loss) income, net of tax		(102,848	)		72,187			(97,617	)		44,704

Comprehensive income (loss)	$	15,158		$	231,453		$	(38,566	)	$	157,391

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Earnings Per Share

Net income per common share for the six and three months ended June 30, 2004 and 2003 has been computed in the following table based upon weighted average common shares outstanding (in thousands, except share amounts):


		Six Months		Six Months		Three Months		Three Months
		Ended		Ended		Ended		Ended
		June 30,		June 30,		June 30,		June 30,
		2004		2003		2004		2003

Net income		$	118,006	$	159,266	$	59,051	$	112,687

Weighted average common shares outstanding — basic			64,385,021		64,721,288		64,311,432		64,732,356
Effect of dilutive shares			830,606		364,128		850,164		389,334

Weighted average common shares outstanding — dilutive			65,215,627		65,085,416		65,161,596		65,121,690

Earnings per common share:
	Basic	$	1.83	$	2.46	$	0.92	$	1.74

	Diluted	$	1.81	$	2.45	$	0.91	$	1.73

Diluted earnings per share do not reflect the conversion of the Company’s convertible debentures into common stock of the Company because, under the terms of the indenture under which the convertible debentures were issued, the convertible debentures were not convertible as of June 30, 2004 and 2003. The 2003 diluted earnings per common share amount assumes that the Company’s stock options would not be exercised as of June 30, 2003.

4. Stock Based Compensation

Effective January 1, 2003, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (“SFAS”) 123, on a prospective basis, in accordance with SFAS 148, “Accounting for Stock-Based Compensation-Transaction and Disclosure” with respect to the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan. The prospective method requires the application of the fair value based method to compensation awards granted, modified, or settled on or after the date of adoption. Accordingly, net income for the six and three months ended June 30, 2004 and 2003 reflects stock-based compensation expense related to stock options granted subsequent to December 31, 2002. For stock options granted during 2002, the Company accounts 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 SFAS 123. 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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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):


			Six Months			Six Months			Three Months			Three Months
			Ended			Ended			Ended			Ended
			June 30,			June 30,			June 30,			June 30,
			2004			2003			2004			2003

Net income, as reported			$	118,006		$	159,266		$	59,051		$	112,687
	Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			167			34			92			34
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects			(341	)		(226	)		(171	)		(130	)

Pro forma net income			$	117,832		$	159,074		$	58,972		$	112,591

Net income per common share:
	As reported:
		Basic	$	1.83		$	2.46		$	0.92		$	1.74
		Diluted		1.81			2.45			0.91			1.73
	Pro forma:
		Basic	$	1.83		$	2.46		$	0.92		$	1.74
		Diluted		1.81			2.44			0.91			1.73

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses for the six and three months ended June 30, 2004 and 2003 are as follows (in thousands):


		Six Months		Six Months		Three Months		Three Months
		Ended		Ended		Ended		Ended
		June 30,		June 30,		June 30,		June 30,
		2004		2003		2004		2003

Gross unpaid losses and loss adjustment expenses, beginning of period		$	3,400,277	$	2,871,552	$	3,535,411	$	2,949,133
Less ceded unpaid losses and loss adjustment expenses, beginning of period			1,058,623		1,026,979		1,070,448		898,157

Net unpaid losses and loss adjustment expenses, beginning of period			2,341,654		1,844,573		2,464,963		2,050,976

Losses and loss adjustment expenses incurred related to:
	Current year		679,034		596,586		341,878		302,481
	Prior years		68,284		30,873		41,883		19,253

Total losses and loss adjustment expenses incurred			747,318		627,459		383,761		321,734

Paid losses and loss adjustment expenses related to:
	Current year		87,018		50,617		60,079		32,908
	Prior years		395,691		269,422		175,861		189,526

Total paid losses and loss adjustment expenses			482,709		320,039		235,940		222,434

Effects of exchange rate changes			8,670		5,581		2,149		7,298

Net unpaid losses and loss adjustment expenses, end of period			2,614,933		2,157,574		2,614,933		2,157,574
Add ceded unpaid losses and loss adjustment expenses, end of period			1,069,798		907,958		1,069,798		907,958

Gross unpaid losses and loss adjustment expenses, end of period		$	3,684,731	$	3,065,532	$	3,684,731	$	3,065,532

The prior years’ loss development for the six months and three months ended June 30, 2004 is primarily related to loss reserve strengthening on United States casualty business for accident years 1997 through 2000. The prior years’ loss development for the six months and three months ended June 30, 2003 is primarily related to adverse loss emergence on United States casualty business written in the late 1990’s, including discontinued auto lease residual value business in the Americas business segment.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. Asbestos and Environmental Losses and Loss Adjustment Expenses

The Company has exposure to asbestos, environmental pollution and latent injury damage claims and exposures. 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 cedants and additional case reserves determined by the Company’s dedicated asbestos and environmental claims unit based on claims audits of cedants. The provision for liabilities incurred but not reported is established based on various methods such as loss development, market share and frequency and severity.

Estimation of ultimate liabilities for these exposures is unusually difficult due to outstanding issues such as whether coverage exists, definition of an occurrence, determination of ultimate damages and allocation of such damages to financially responsible parties. The determination of ultimate liabilities for waste site pollution exposure is especially uncertain due to the potential for an amendment to the Superfund Law proposed by various business groups, environmental groups and government agencies. In addition, proposed legislation has been introduced in Congress which, if adopted, would move all U.S. asbestos bodily injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The proposed trust would be funded by asbestos defendants and their insurers. The Company likely would be among the insurer participants and, because the trust would avoid payments to unimpaired victims and might obviate the need for extensive legal costs, we believe our ultimate funding obligation under the trust could be less than under the current tort system. However, we cannot predict with any certainty whether any such proposed legislation will be enacted or, if enacted, the effects that such legislation would have upon the Company’s asbestos liability exposure.

The Company’s reserves for asbestos and environmental related liabilities displayed below are from business written for accident years 1985 and prior. The Company has minimal exposure and no specific reported reserves in the more recent accident years. The Company’s asbestos and environmental reserve

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

development, gross and net of reinsurance, for the six and three months ended June 30, 2004 and 2003 is set forth in the table below (in thousands):


	Six Months		Six Months		Three Months		Three Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2004		2003		2004		2003

ASBESTOS
Gross unpaid losses and loss adjustment expenses, beginning of period	$	215,662	$	189,720	$	225,296	$	195,742
Less ceded unpaid losses and loss adjustment expenses, beginning of period		186,178		160,236		195,812		166,258

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		199,814		167,070		199,814		167,070

Gross unpaid losses and loss adjustment expenses, end of period	$	229,298	$	196,554	$	229,298	$	196,554

ENVIRONMENTAL
Gross unpaid losses and loss adjustment expenses, beginning of period	$	33,272	$	45,712	$	34,330	$	50,911
Less ceded unpaid losses and loss adjustment expenses, beginning of period		1,135		13,575		2,193		18,774

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		257		9,479		257		9,479

Gross unpaid losses and loss adjustment expenses, end of period	$	32,394	$	41,616	$	32,394	$	41,616

Our survival ratio for environmental and asbestos related liabilities as of June 30, 2004 is ten years, reflecting full utilization of remaining indemnifications. Our underlying survival ratio for environmental related liabilities is six years and for asbestos related liabilities is thirteen years. The survival ratio represents the environmental impairment and asbestos related illness reserves, net of reinsurance, on June 30, 2004, plus

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

indemnifications, divided by the average paid environmental and asbestos claims, net of reinsurance, for the last three years. Our survival ratio is nine years for environmental and asbestos related liabilities as of June 30, 2004, 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 6, 2003.

7. Segment Reporting

The Company’s operations are managed through four distinct divisions, Americas, EuroAsia, London Market and U.S. Insurance. The Americas division is comprised of the Company’s United States reinsurance operations and its Canadian and Latin America offices. The United States operations write treaty property, general casualty, specialty casualty, surety, and facultative casualty reinsurance business primarily through professional reinsurance brokers. Treaty business is written through its Canadian branch, while Latin America writes both treaty and facultative business. The EuroAsia division is comprised of offices in Paris, Stockholm, Singapore and Tokyo. The EuroAsia division writes primarily treaty and facultative property business. The Company’s London Market division operates through two distribution channels, Newline at Lloyd’s, where the business focus is casualty insurance, and our London branch, where the business focus is worldwide property and casualty reinsurance. The U.S. Insurance division is comprised of Hudson, Hudson Specialty and Clearwater. The U.S. Insurance division writes specialty program insurance business, medical malpractice and hospital professional liability business.

The financial results of these divisions for the six and three months ended June 30, 2004 and 2003 are as follows (in thousands):


								London			U.S.
Six months ended June 30, 2004		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written(1)		$	618,879		$	268,416		$	187,601		$	184,428		$	1,259,324

Net premiums written		$	592,230		$	255,702		$	161,380		$	93,938		$	1,103,250

Net premiums earned		$	607,677		$	231,822		$	203,178		$	83,698		$	1,126,375

Losses and loss adjustment expenses			405,720			148,291			134,189			59,118			747,318
Acquisition costs and other underwriting expenses			193,392			60,896			51,415			15,666			321,369

Total underwriting deductions			599,112			209,187			185,604			74,784			1,068,687

	Underwriting income	$	8,565		$	22,635		$	17,574		$	8,914			57,688

Net investment income															70,567
Net realized investment gains															67,256
Other expense, net															(4,956	)
Interest expense															(12,799	)

	Income before income taxes													$	177,756

Underwriting ratios:
	Losses and loss adjustment expenses		66.8	%		64.0	%		66.1	%		70.6	%		66.4	%
	Acquisition costs and other underwriting expenses		31.8			26.2			25.3			18.7			28.5

	Combined ratio		98.6	%		90.2	%		91.4	%		89.3	%		94.9	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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

Gross premiums written(1)		$	682,135		$	182,169		$	190,345		$	137,871		$	1,192,520

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

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

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

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

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

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

	Income before income taxes													$	242,283

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

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

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


								London			U.S.
Three months ended June 30, 2004		Americas			EuroAsia			Market			Insurance			Total

Gross premiums written(1)		$	289,879		$	142,603		$	102,896		$	83,134		$	618,512

Net premiums written		$	278,033		$	133,953		$	91,863		$	46,162		$	550,011

Net premiums earned		$	310,453		$	116,197		$	106,515		$	46,949		$	580,114

Losses and loss adjustment expenses			213,029			72,196			66,618			31,918			383,761
Acquisition costs and other underwriting expenses			95,763			32,193			26,652			11,371			165,979

Total underwriting deductions			308,792			104,389			93,270			43,289			549,740

	Underwriting income	$	1,661		$	11,808		$	13,245		$	3,660			30,374

Net investment income															35,105
Net realized investment gains															32,417
Other expense, net															(2,596	)
Interest expense															(6,405	)

	Income before income taxes													$	88,895

Underwriting ratios:
	Losses and loss adjustment expenses		68.6	%		62.1	%		62.5	%		68.0	%		66.2	%
	Acquisition costs and other underwriting expenses		30.9			27.7			25.0			24.2			28.6

	Combined ratio		99.5	%		89.8	%		87.5	%		92.2	%		94.8	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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

Gross premiums written(1)		$	340,747		$	99,274		$	117,275		$	57,272		$	614,568

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

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

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

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

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

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

	Income before income taxes													$	171,891

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

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

(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 $1,241.5 million and $1,173.7 million for the six months ended June 30, 2004 and 2003 and $612.0 and $609.9 million for the three months ended June 30, 2004 and 2003, respectively, reflected in the consolidated statements of operations.

The Company does not maintain separate balance sheet data for each of its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

8. Debt Obligations

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


	As of		As of
	June 30,		December 31,
	2004		2003

7.65% Senior Notes	$	224,594	$	224,572
4.375% Convertible Senior Debentures		110,000		110,000
7.49% Senior Notes		41,922		42,320

Total debt obligations	$	376,516	$	376,892

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the fourth quarter of 2003, OdysseyRe issued $225.0 million aggregate principal amount of senior notes due November 1, 2013. The issue was sold at a discount of $0.4 million, which is being amortized over the life of the notes. Interest accrues on the senior notes at a fixed rate of 7.65%, which is due semi-annually on May 1st and November 1st. The senior notes are redeemable at a premium, prior to maturity, at the discretion of OdysseyRe.

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 specified in the indenture under which the Convertible Debt was issued, each Convertible Debt holder has the right to convert its Convertible Debt into 46.9925 shares of OdysseyRe common stock for every $1,000 principal amount of the Convertible Debt held by such holder; however, as of June 30, 2004 such circumstances had not occurred and therefore the Convertible Debt was not convertible as of such date. Upon conversion of the Convertible Debt, OdysseyRe may choose to deliver, in lieu of the Company’s common stock, cash or a combination of cash and common stock. It is OdysseyRe’s intent to settle any debt conversion in cash. 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, due November 30, 2006, pursuant to a private placement. 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 at a premium, prior to maturity, at OdysseyRe’s option. In November 2003 and June 2002, OdysseyRe prepaid $50.0 million and $10.0 million, respectively, aggregate principal amount of senior notes. 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. In May 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. In conjunction with the prepayment of the senior notes, a portion of the capitalized gain was immediately realized. As of June 30, 2004, the aggregate principal amount of senior notes outstanding was $40.0 million and the remaining capitalized gain is $1.9 million.

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


Years	Amount

2006	$	40,000
2013		225,000
2022		110,000

Total	$	375,000

Under the terms of the note purchase agreement pursuant to which the Company’s 7.49% senior notes were issued, the Company is subject to certain covenants, none of which significantly restrict the Company’s operating activities or dividend-paying ability. As of June 30, 2004, the Company was in compliance with all covenants.

9. Employee Benefits

The Company maintains a qualified, non-contributory, defined benefit pension plan (“Qualified Plan”) covering substantially all employees who have reached age twenty-one and who have completed one year of service. The Company also maintains non-qualified excess benefit plans (“Excess Plans”) that provide officers

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and certain employees with defined retirement benefits in excess of qualified plan limits imposed by federal tax law. In addition, certain health care and life insurance benefits for retired employees (“Postretirement Plan”) are provided by the Company. Substantially all employees may become eligible for these postretirement benefits if they reach retirement age while working for the Company.

The net periodic cost for each of the benefit plans for the six and three months ended June 30, 2004 and 2003 is as follows (in thousands):


		Six Months			Six Months			Three Months			Three Months
		Ended			Ended			Ended			Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Qualified Plan:
Service cost		$	1,105		$	877		$	552		$	438
Interest cost			1,053			949			527			475
Return on assets			(822	)		(811	)		(411	)		(405	)
Net amortization and deferral			5			(16	)		3			(8	)

	Net pension cost	$	1,341		$	999		$	671		$	500

Excess Plans:
Service cost		$	272		$	272		$	136		$	136
Interest cost			349			354			175			177
Recognized net actuarial loss			90			83			46			42
Recognized prior service cost			(19	)		(19	)		(10	)		(10	)
Other			34			75			17			37

	Net pension cost	$	726		$	765		$	364		$	382

Postretirement Plan:
Service cost		$	531		$	272		$	231		$	136
Interest cost			224			187			87			93
Curtailment Credit			(291	)		—			(291	)		—
Other			(32	)		14			(45	)		7

	Net pension cost	$	432		$	473		$	(18	)	$	236

For the six months ended June 30, 2004, $4.9 million of contributions have been made to the Qualified Plan. There were no contributions made during the first six months of 2003.

10. Contingencies

Clearwater agreed to allow Ranger Insurance Company (“Ranger”), a subsidiary of Fairfax, to attach an assumption of liability endorsement to Ranger’s policies issued from July 1, 1999 to April 30, 2004 where required. Clearwater has terminated the agreement effective April 30, 2004. Clearwater remains liable for any losses occurring prior to the effective date of the termination, pursuant to the terms of the endorsements. While Clearwater’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 Clearwater for any obligation under this agreement. The Company anticipates that Ranger will meet all of its obligations in the normal course of business, and Clearwater does not anticipate making any payments under this guarantee that would require Clearwater 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 became insolvent and CTR was not

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 and was terminated effective December 31, 2001. 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, Odyssey America has established a clean irrevocable letter of credit and a deposit trust account in favor of the Society and Council of Lloyd’s. As of June 30, 2004, Odyssey America had pledged U.S. treasuries in the amount of $147.1 million in support of a letter of credit and $144.5 million in a deposit trust account in London. The letter of credit and deposit trust account effectively secure the future contingent obligations of UK Holdings should the Lloyd’s underwriting syndicate in which Odyssey America participates incur net losses. Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the letter of credit and the deposit 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. We deem immaterial Odyssey America’s potential exposure in connection with this agreement. Additionally, 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 Contracts on a quarterly basis. For each of the six months ended June 30, 2004 and 2003, Falcon 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 connection with the guarantee, Falcon has granted Odyssey America the option (the “Option”) to assume a ten percent quota share reinsurance participation for a period of up to three years of all of Falcon’s liabilities under the Subject Contracts entered into by Falcon on or after the date of the exercise of the Option by Odyssey America. If the Option is exercised, the one percent fee will be cancelled during the term of the quota share reinsurance agreement.

In December 2002, Odyssey America and a retrocessionaire each demanded arbitration to resolve a dispute arising from an excess of loss retrocessional contract, effective January 1, 1998, pursuant to which the retrocessionaire reinsured Odyssey America for 50% of certain accident and health exposures assumed by Odyssey America from a third-party insurer. The dispute arose in October 2002 when the retrocessionaire asserted that the third-party insurer violated the reinsurance agreement with Odyssey America such that no further payments under the agreement should be made. 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 it incurs resulting from Odyssey America’s cooperation or the retrocessionaire’s assertion of its defenses. Subsequently, Odyssey America entered into a substantially identical agreement (also, an “Agreement”) with the retrocessionaire that reinsured the remaining 50% of the business it had assumed. Odyssey America believes the Agreements make remote the likelihood that Odyssey America will incur any material liability in connection with the reinsurance agreement or retrocession contract.

Odyssey America provided quota share reinsurance to Gulf Insurance Company (“Gulf”) from January 1, 1996 to December 31, 2002 on a book of automobile residual value business. In March 2003, Gulf requested a payment of approximately $30.0 million, including a “special payment” of $26.0 million, due on April 28, 2003, representing Odyssey America’s purported share of a settlement (“Settlement”) between Gulf and one of the insureds whose policies, Gulf contends, were reinsured under the Residual Value Quota Share

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reinsurance Agreements (the “Treaties”). In May 2003, Gulf initiated litigation against two other reinsurers that participated with Odyssey America on the Treaties, demanding payment relating to the Settlement. In late July 2003, Gulf added Odyssey America to its complaint against the other reinsurers. Odyssey and the other reinsurers have answered the complaint and discovery has commenced. Among other things, Odyssey America contends that, (i) Gulf breached its duty to Odyssey America of utmost good faith when it placed the Treaties by failing to disclose material information concerning the policy it issued to the insured; and (ii) alternatively, the Settlement is not covered under the terms of the Treaties. Among the remedies Odyssey America seeks is rescission of the Treaties. Odyssey America intends to vigorously assert its claims and defend itself against any claims asserted by Gulf. At this early stage, it is not possible to make any determination regarding the likely outcome of this matter.

In January 2004, two retrocessionaires under common control of London Reinsurance Group Inc. (each, a “retrocessionaire”; together, “London Life”) filed a demand for arbitration seeking to resolve a dispute arising under a series of aggregate stop-loss retrocession agreements covering the years 1994 and 1996 to 2001 pursuant to which they participated and provided a layer of retrocession protection for Odyssey America in excess of a predetermined loss ratio and subject to a limit. Among other things, London Life seeks a determination of its liability under the retrocession agreements. Odyssey America will seek enforcement of the retrocession agreements and confirmation of the liability of London Life pursuant to such agreements. Odyssey America and London Life have each appointed an arbitrator, and the arbitrators recently completed the selection of the umpire, completing the arbitration panel. Odyssey America expects the arbitration panel to convene in the third quarter of 2004. Odyssey America finds London Life’s claims to be without merit and intends to vigorously pursue the arbitration. Odyssey America expects the arbitration panel to enforce the contracts in Odyssey America’s favor.

During the second quarter of 2004, Odyssey America pledged £110 million ($199.5 million) of U.S. treasury notes and placed them on deposit at Lloyd’s on behalf of Advent Capital (Holdings) PLC (“Advent”). Advent is 46.8% owned by Fairfax and its affiliates, including 15.0% by the Company. Odyssey America retains the right to withdraw the funds at Lloyd’s at any time upon 180-days advance written notice. In any event, the placement of funds at Lloyd’s will automatically terminate effective December 31, 2008.

OdysseyRe and its subsidiaries are involved from time to time in ordinary routine litigation and arbitration proceedings in the normal course of 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.


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. As of June 30, 2004, Fairfax Financial Holdings Limited (“Fairfax”), a Canadian financial services company, owned approximately 81% of OdysseyRe.

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. OdysseyRe also underwrites specialty insurance business through its subsidiaries, Newline, Hudson, Hudson Specialty and Clearwater.

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 principally in Napa, California. During 2003, we reinsured this business through a 100% quota share agreement with an affiliate. On October 28, 2003, we acquired an excess and surplus lines insurance company, Hudson Specialty, which, in 2004, serves as the main platform for the Healthcare business. The Healthcare business is included in our U.S. Insurance division.

On July 2, 2004, OdysseyRe announced it entered into a stock purchase agreement to acquire Overseas Partners US Reinsurance Company for $43.0 million. The completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals.

Our gross premiums written for the six months ended June 30, 2004 were $1,241.5 million, an increase of $67.8 million, or 5.8%, compared to gross premiums written for the six months ended June 30, 2003 of $1,173.7 million. Continued premium growth was evident in the EuroAsia, London Market and U.S. Insurance business divisions while gross premiums written remained relatively flat in the Americas business division. We continue to opportunistically expand in certain classes of business and in each of our geographic business divisions. Our non-United States operations accounted for 44.0% of our premium volume for the six months ended June 30, 2004. For the six months ended June 30, 2004 and 2003, our net premiums written were $1,103.3 million and $1,032.6 million, respectively, and our net income was $118.0 million and $159.3 million, respectively. As of June 30, 2004, we had total assets of $6.7 billion and total stockholders’ equity of $1.4 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. Our combined ratio was 94.9% for the six months ended June 30, 2004, a decrease of 2.7 percentage points from the 97.6% combined ratio for the six months ended June 30, 2003. 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.

The Americas division is our largest division and writes casualty, surety and property treaty reinsurance, and facultative casualty reinsurance in the United States and Canada, and primarily 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 operates out of four offices, with principal offices in Paris and Singapore. The EuroAsia business consists of international reinsurance business that 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 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 lines 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 division writes insurance and reinsurance business worldwide, principally through brokers.

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

Revenues

We derive our revenues from two principal sources: premiums from insurance placed 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 for our reinsurance business. 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. These estimates are considered “critical accounting estimates” because changes in these estimates can materially affect net income.

Expenses

We determine our reserves for unpaid losses and loss adjustment expenses based on the evaluation of our in-house claims department of the reports and individual case estimates received from ceding companies for reinsurance business, or the estimates advised by our outside claims adjusters for insurance business. We use generally accepted actuarial methodologies to determine reserves 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.

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 us.

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.

Our reserves for losses and loss adjustment expenses are estimates of amounts required to pay reported and unreported claims and related loss adjustment expenses. We believe the estimate of these reserves is a “critical accounting estimate” because changes in these reserves can materially affect net income. The estimates are based on assumptions related to the ultimate cost to settle these claims. Our reserves for losses and loss adjustment expenses are determined in accordance with sound actuarial practices. However, the inherent uncertainties of estimating reserves are greater for reinsurers than for primary insurers, due to the diversity of development patterns among different types of reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. As a result, we cannot be sure that our ultimate liability will not exceed amounts we have reserved. As of June 30, 2004, our estimate of these liabilities net of reinsurance recoverables was $2,614.9 million, and as of December 31, 2003 was $2,341.7 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. The methods of making such estimates and establishing the deferred costs are continually reviewed by the Company, and any adjustments are made in the accounting period in which the adjustment arose. We believe the estimate of these deferred acquisition costs is a “critical accounting estimate,” because changes in these estimates can materially affect net income.

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

Results of Operations


	*Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003*

Gross Premiums Written. Gross premiums written for the three months ended June 30, 2004 increased by $2.1 million, or 0.3%, to $612.0 million from $609.9 million for the three months ended June 30, 2003. The increase in premium volume is attributable to increases in the EuroAsia division of $43.3 million, or 43.6%, and the U.S. Insurance division of $25.8 million, or 45.0%. These increases are offset by decreases in the Americas division of $50.8 million, or 14.9%, and in the London Market division of $14.4 million, or 12.3%.

The Americas division accounted for $289.9 million, or 46.9%, of our gross premiums written for the three months ended June 30, 2004, a decrease of $50.8 million, or 14.9%, compared to $340.7 million, or 55.4%, of our gross premiums written for the three months ended June 30, 2003. Gross premiums written by the United States unit for the three months ended June 30, 2004 were $252.5 million, a decrease of $18.6 million, or 6.9%, compared to $271.1 million for the three months ended June 30, 2003. Gross premiums written by the Latin America unit for the three months ended June 30, 2004 were $25.2 million, a decrease of $22.9 million, or 47.6%, compared to $48.1 million for the three months ended June 30, 2003. The Canadian unit had gross premiums written of $11.8 million for the three months ended June 30, 2004, a decrease of $8.0 million, or 40.4%, compared to $19.8 million for the three months ended June 30, 2003.

For the three months ended June 30, 2004, the EuroAsia division had gross premiums written of $142.6 million, or 23.1%, of our gross premiums written, an increase of $43.3 million, or 43.6%, compared to $99.3 million, or 16.2%, of our gross premiums written for the three months ended June 30, 2003. Our EuroAsia division continues to access an increased level of profitable opportunities resulting from recent years’ catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. For the three months ended June 30, 2004 and 2003, our Paris office had gross premiums written of $102.5 million and $70.5 million, respectively, an increase of $32.0 million, or 45.4%. For the three months ended June 30, 2004 and 2003, our Singapore office had $23.5 million and $23.2 million, respectively, an increase of $0.3 million, or 1.3%.

The London Market division generated $102.9 million, or 16.6%, of our gross premiums written for the three months ended June 30, 2004, a decrease of $14.4 million, or 12.3%, compared to $117.3 million, or 19.1%, of our gross premiums written for the three months ended June 30, 2003. Gross premiums written by the London branch for the three months ended June 30, 2004 were $38.3 million, a decrease of $5.0 million, or 11.5%, compared to $43.3 million for the three months ended June 30, 2003. Our Lloyd’s syndicate had gross premiums written of $64.6 million for the three months ended June 30, 2004, a decrease of $9.4 million, or 12.7%, compared to $74.0 million for the three months ended June 30, 2003.

The U.S. Insurance division accounted for $83.1 million, or 13.4%, of our gross premiums written for the three months ended June 30, 2004, an increase of $25.8 million, compared to $57.3 million, or 9.3%, of our gross premiums written for the three months ended June 30, 2003. The Program unit had gross premiums written of $61.8 million for the three months ended June 30, 2004, an increase of $16.7 million, or 37.0%, compared to $45.1 million for the three months ended June 30, 2003. Our Healthcare unit had $21.3 million of premiums written for the three months ended June 30, 2004, an increase of $9.1 million, or 74.6%, compared to $12.2 million for the three months ended June 30, 2003.

Ceded Premiums Written. Ceded premiums written for the three months ended June 30, 2004 decreased by $5.2 million, or 7.7%, to $62.0 million from $67.2 million for the three months ended June 30, 2003. The decrease in ceded premiums written is primarily attributable to decreases in cessions to our aggregate excess of loss contract combined with decreases in cessions related to our Latin America and Canadian branch businesses.

Net Premiums Written. Net premiums written for the three months ended June 30, 2004 increased by $7.3 million, or 1.3%, to $550.0 million from $542.7 million for the three months ended June 30, 2003. Net premiums written represents gross premiums written less ceded premiums written.

Net Premiums Earned. Net premiums earned for the three months ended June 30, 2004 increased by $99.0 million, or 20.6%, to $580.1 million from $481.1 million for the three months ended June 30, 2003. The change in earned premiums is greater than the increase in premiums written, which reflects the effect of growth in 2002 and 2003 of net written premiums of 66.0% and 32.0%, respectively, now becoming fully earned.

Net Investment Income. Net investment income for the three months ended June 30, 2004 increased by $8.4 million, or 31.5%, to $35.1 million from $26.7 million for the three months ended June 30, 2003. This increase is mainly attributable to the reinvestment in 2004 of the significant cash balances maintained during 2003.

Net Realized Investment Gains. Net realized investment gains for the three months ended June 30, 2004 decreased by $99.2 million, to $32.4 million from a gain of $131.6 million for the three months ended June 30, 2003. The net realized gains recognized in the second quarter of 2003 were primarily related to the sale of mid-maturity fixed income securities, which generated gains as we realized the benefits of appreciation in the portfolio due to interest rates being at low levels.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the three months ended June 30, 2004 increased by $62.1 million, or 19.3%, to $383.8 million from $321.7 million for the three months ended June 30, 2003. The increase in losses is a direct result of the increase in net premiums earned. The losses and loss adjustment expense ratio for the three months ended June 30, 2004 was 66.2%, compared to 66.9% for the three months ended June 30, 2003.

Acquisition Costs. Acquisition costs for the three months ended June 30, 2004 were $132.0 million, compared to $117.0 million for the three months ended June 30, 2003 with the increase due to premium growth. The resulting acquisition cost ratio, i.e., acquisition expenses expressed as a percent of earned premium, was 22.8% for the three months ended June 30, 2004, compared to 24.3% for the three months ended June 30, 2003.

Other Underwriting Expenses. Other underwriting expenses for the three months ended June 30, 2004 were $34.0 million, compared to $25.2 million for the three months ended June 30, 2003. The other underwriting expense ratio, expressed as a percent of premiums earned, was 5.9% for the three months ended June 30, 2004, compared to 5.2% for the three months ended June 30, 2003. The increase in other underwriting expenses is attributable to an increase in headcount, personnel related costs and other expenses generated by our substantial growth over the last three years.

Other Expenses, Net. Other expenses, net for the three months ended June 30, 2004, were $2.6 million, compared to $0.7 million of net expense for the three months ended June 30, 2003. The other expense is primarily comprised of the operating expenses of OdysseyRe, our holding company.

Interest Expense. We incurred interest expense related to debt obligations of $6.4 million for the three months ended June 30, 2004, compared to $2.9 million for the three months ended June 30, 2003. The increase is due primarily to the fourth quarter 2003 issuance of $225.0 million aggregate principal amount of 7.65% senior notes due 2013, offset by the prepayment of $50.0 million aggregate principal amount of our 7.49% senior notes due 2006.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the three months ended June 30, 2004 decreased by $29.4 million to $29.8 million, compared to $59.2 million for the three months ended June 30, 2003, as a result of the decrease in pre-tax income. Our effective tax rates were 33.6% and 34.4% for the three months ended June 30, 2004 and 2003, respectively.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Gross Premiums Written. Gross premiums written for the six months ended June 30, 2004 increased by $67.8 million, or 5.8%, to $1,241.5 million from $1,173.7 million for the six months ended June 30, 2003. The increase in premium volume is attributable to increases in the EuroAsia division of $86.2 million, or 47.3%, and the U.S. Insurance division of $46.5 million, or 33.7%. These increases are offset by decreases to the Americas division of $63.2 million, or 9.3%, and the London Market division of $2.7 million, or 1.4%.

The Americas division accounted for $618.9 million, or 49.1%, of our gross premiums written for the six months ended June 30, 2004, a decrease of $63.2 million, or 9.3%, compared to $682.1 million, or 57.2%, of our gross premiums written for the six months ended June 30, 2003. Gross premiums written by the United States unit for the six months ended June 30, 2004 were $528.6 million, a decrease of $43.1 million, or 7.5%, compared to $571.7 million for the six months ended June 30, 2003. Gross premiums written by the Latin America unit for the six months ended June 30, 2004 were $66.7 million, a decrease of $4.7 million, or 6.6%, compared to $71.4 million for the six months ended June 30, 2003. The Canadian unit had gross premiums written of $22.6 million for the six months ended June 30, 2004, a decrease of $14.1 million, or 38.4%, compared to $36.7 million for the six months ended June 30, 2003.

For the six months ended June 30, 2004, the EuroAsia division had gross premiums written of $268.4 million, or 21.3%, of our gross premiums written, an increase of $86.2 million, or 47.3%, compared to $182.2 million, or 15.3%, of our gross premiums written for the six months ended June 30, 2003. Our EuroAsia division continues to access an increased level of profitable opportunities resulting from recent years’ catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. For the six months ended June 30, 2004 and 2003, our Paris office had gross premiums written of $202.4 million and $131.9 million, respectively, an increase of $70.5 million, or 53.4%. For the six months ended June 30, 2004 and 2003, our Singapore office had gross premiums written of $46.5 million and $41.6 million, respectively, an increase of $4.9 million, or 11.8%.

The London Market division generated $187.6 million, or 14.9%, of our gross premiums written for the six months ended June 30, 2004, a decrease of $2.7 million, or 1.4%, compared to $190.3 million, or 16.0%, of our gross premiums written for the six months ended June 30, 2003. Gross premiums written by the London branch for the six months ended June 30, 2004 were $74.4 million, a decrease of $1.2 million, or 1.6%, compared to $75.6 million for the six months ended June 30, 2003. Our Lloyd’s syndicate had gross premiums written of $113.2 million for the six months ended June 30, 2004, a decrease of $1.5 million, or 1.3%, compared to $114.7 million for the six months ended June 30, 2003.

The U.S. Insurance division accounted for $184.4 million, or 14.6%, of our gross premiums written for the six months ended June 30, 2004, an increase of $46.5 million, compared to $137.9 million, or 11.6%, of our gross premiums written for the six months ended June 30, 2003. The Program unit had gross premiums written of $118.1 million for the six months ended June 30, 2004, an increase of $26.1 million, or 28.4%, compared to $92.0 million for the six months ended June 30, 2003. Our Healthcare unit had $66.3 million of premiums written for the six months ended June 30, 2004, an increase of $20.4 million, or 44.4%, compared to $45.9 million for the six months ended June 30, 2003.

Ceded Premiums Written. Ceded premiums written for the six months ended June 30, 2004 decreased by $2.9 million, or 2.1%, to $138.2 million from $141.1 million for the six months ended June 30, 2003. The decrease in ceded premiums written is primarily attributable to decreases in cessions to our aggregate excess of loss contract combined with decreases in cessions related to our Latin America and Canadian branch businesses.

Net Premiums Written. Net premiums written for the six months ended June 30, 2004 increased by $70.6 million, or 6.8%, to $1,103.2 million from $1,032.6 million for the six months ended June 30, 2003. Net premiums written represents gross premiums written less ceded premiums written.

Net Premiums Earned. Net premiums earned for the six months ended June 30, 2004 increased by $197.9 million, or 21.3%, to $1,126.4 million from $928.5 million for the six months ended June 30, 2003. The change in earned premiums is greater than the increase in premiums written, which reflects the effect of growth in 2002 and 2003 of net written premiums of 66.0% and 32.0%, respectively, now becoming fully earned.

Net Investment Income. Net investment income for the six months ended June 30, 2004 increased by $11.5 million, or 19.5%, to $70.6 million from $59.1 million for the six months ended June 30, 2003. Net investment yield for the six months ended June 30, 2004 was 3.2% on an annualized basis, compared to 3.6% for the comparable period in 2003.

Net Realized Investment Gains. Net realized investment gains for the six months ended June 30, 2004 decreased by $102.5 million, to $67.3 million from $169.8 million for the six months ended June 30, 2003. The net realized gains recognized for the six months ended June 30, 2003 were 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 low interest rates.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the six months ended June 30, 2004 increased by $119.8 million, or 19.1%, to $747.3 million from $627.5 million for the six months ended June 30, 2003. The increase in losses is a direct result of the increase in net premiums earned. The

losses and loss adjustment expense ratio for the six months ended June 30, 2004 was 66.4%, compared to 67.6% for the six months ended June 30, 2003.

Acquisition Costs. Acquisition costs for the six months ended June 30, 2004 were $257.5 million, compared to $233.1 million for the six months ended June 30, 2003 with the increase due to premium growth. The resulting acquisition cost ratio, i.e., acquisition expenses expressed as a percent of earned premium, was 22.9% for the six months ended June 30, 2004, compared to 25.1% for the six months ended June 30, 2003.

Other Underwriting Expenses. Other underwriting expenses for the six months ended June 30, 2004 were $63.9 million, compared to $46.0 million for the six months ended June 30, 2003. The other underwriting expense ratio, expressed as a percent of premiums earned, was 5.7% for the six months ended June 30, 2004, compared to 4.9% for the six months ended June 30, 2003. The increase in other underwriting expenses is attributable to an increase in headcount, personnel related costs and other expenses generated by our substantial growth over the last three years.

Other Expenses, Net. Other expenses, net for the six months ended June 30, 2004, were $5.0 million, compared to $3.7 million for the six months ended June 30, 2003. The other expense is primarily comprised of the operating expenses of OdysseyRe, our holding company.

Interest Expense. We incurred interest expense related to debt obligations of $12.8 million for the six months ended June 30, 2004, compared to $4.9 million for the six months ended June 30, 2003. The increase is due primarily to the fourth quarter 2003 issuance of $225.0 million aggregate principal amount of 7.65% senior notes due 2013 offset by the prepayment of $50.0 million aggregate principal amount of our 7.49% senior notes due 2006.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the six months ended June 30, 2004 decreased by $23.2 million to $59.8 million, compared to $83.0 million for the six months ended June 30, 2003, as a result of the decrease in pre-tax income. Our effective tax rates were 33.6% and 34.3% for the six months ended June 30, 2004 and 2003, respectively.

Liquidity and Capital Resources

Our stockholders’ equity increased by $2.0 million, or 0.1%, to $1.392 billion as of June 30, 2004, from $1.390 billion as of December 31, 2003. The net increase was mainly attributable to net income of $118.0 million, which is offset by decreases in accumulated other comprehensive income, net of deferred taxes, of $102.8 million, change in treasury stock of $6.1 million and dividends paid to stockholders of $4.1 million for the six months ended June 30, 2004. We have flexibility with respect to capitalization as a result of our access to the debt and equity markets. On February 23, 2004, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission. Upon becoming effective, this registration statement will provide for the offer and sale by OdysseyRe of securities, including equity and debt securities, having a total offering price of up to $400.0 million.

Our liquidity requirements are principally met on a short-term and long-term basis by cash flows from operating activities, which principally result from premiums, collections on losses recoverable and investment income, net of paid losses, acquisition costs and underwriting and investment expenses. Cash provided by operations was $234.4 million for the six months ended June 30, 2004, compared to $213.2 million for the six months ended June 30, 2003. Increased premium collections are directly attributable to the increase in premium volume realized since the latter part of calendar year 2001, which occurred as a result of substantially improved market conditions. Each of our business segments contributed to the improvement in our operating cash flow.

Total cash used in investing activities for the six months ended June 30, 2004 was $1,109.8 million. Total cash provided by investing activities was $814.9 million for the six months ended June 30, 2003. Cash and cash equivalents were $696.0 million and $1,588.7 million, as of June 30, 2004 and December 31, 2003, respectively. The decrease in cash and cash equivalents resulted from purchases of fixed income securities. It is anticipated that our cash and cash equivalents will continue to be re-invested on a basis consistent with our long-term value oriented investment philosophy. Cash and short-term investments are maintained for liquidity

purposes and represented 20.7% and 42.6% as of June 30, 2004 and December 31, 2003, respectively, of total financial statement investments and cash on such dates. Total fixed income securities were $2.5 billion as of June 30, 2004. Total investments and cash amounted to $4.3 billion as of June 30, 2004, an increase of $101.9 million compared to December 31, 2003. The fixed income securities portfolio has a weighted average security rating of AA, as measured by Standard and Poor’s.

An additional source of funds for OdysseyRe is the dividend capacity of its subsidiary, Odyssey America. During 2004, Odyssey America can pay dividends to us of $178.7 million without prior regulatory approval.

During the fourth quarter of 2003, we issued $225.0 million aggregate principal amount of senior notes due November 1, 2013. The issue was sold at a discount of $0.4 million, which is being amortized over the life of the notes. Interest accrues on the senior notes at a fixed rate of 7.65%, which is due semi-annually on May 1st and November 1st. The senior notes are redeemable at a premium, prior to maturity, at our discretion.

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 specified in the indenture under which the Convertible Debt was issued, each Convertible Debt holder has the right to convert its Convertible Debt into 46.9925 shares of OdysseyRe common stock for every $1,000 principal amount of the Convertible Debt held by such holder; however, as of June 30, 2004, such circumstances had not occurred and therefore the Convertible Debt was not convertible as of such date. Upon conversion of the Convertible Debt, we may choose to deliver, in lieu of our common stock, cash or a combination of cash and common stock. It is our intent to settle any debt conversion in cash. 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 due November 30, 2006, pursuant to a private placement. 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 at a premium, prior to maturity, at our option. In November 2003 and June 2002, we prepaid $50.0 million and $10.0 million, respectively, aggregate principal amount of the senior notes. 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. In May 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. In conjunction with the prepayment of the senior notes, a portion of the capitalized gain was immediately realized. As of June 30, 2004, the aggregate principal amount of the senior notes outstanding was $40.0 million and the remaining capitalized gain is $1.9 million.

Through UK Holdings Corp., Odyssey America became a limited liability participant in the Lloyd’s market in 1997. In order to continue underwriting at Lloyd’s, Odyssey America has established a clean irrevocable letter of credit and a deposit trust account in favor of the Society and Council of Lloyd’s. As of June 30, 2004, Odyssey America had pledged U.S. treasuries in the amount of $147.1 million in support of a letter of credit and $144.5 million in a deposit trust account in London. The letter of credit and deposit trust account effectively secure the future contingent obligations of UK Holdings should the Lloyd’s underwriting syndicate in which Odyssey America participates incur net losses. Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the letter of credit and the deposit trust account.

During each of the first and second quarters of 2004, our Board of Directors declared quarterly cash dividends of $0.03125 per share, or approximately $2.0 million to be paid on or before June 30, 2004 to all stockholders of record as of June 16, 2004. The total dividend of approximately $2.0 million was paid on June 30, 2004. During each of the first and second quarters of 2003, dividends of $0.025 per common share were declared resulting in an aggregate dividend of approximately $1.6 million in each quarter.

Financial Strength and Credit Ratings

The Company and its subsidiaries are assigned financial strength (insurance) and credit ratings from internationally recognized rating agencies such as A.M. Best Company and Standard & Poor’s Ratings Service.

Financial strength ratings represent the opinions of the rating agencies of the financial strength of a company and its capacity to meet the obligations of insurance policies and reinsurance contracts. The rating agencies consider many factors in determining the financial strength rating of an insurance or reinsurance company, including the relative level of statutory surplus necessary to support the business operations of the company.

These ratings are used by insurers and reinsurance and insurance intermediaries as an important means of assessing the financial strength and quality of reinsurers. In addition, the rating of a company purchasing reinsurance may be adversely affected by an unfavorable rating of its reinsurer. A reduction in our financial strength ratings could limit or prevent us from writing new reinsurance or insurance policies. Our financial strength ratings as of June 30, 2004 were: A.M. Best Company: “A” (Excellent) and Standard & Poor’s Ratings Service: “A-” (Strong). These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.

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.

Off-Balance Sheet Arrangements

We have certain business arrangements with affiliated companies that have financial implications. A description of these arrangements is provided in note 10 of our consolidated financial statements included in this Form 10-Q.


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

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 in this section relate to our investment assets which are classified as available for sale. As of June 30, 2004, our $4.3 billion investment portfolio includes $2.5 billion of fixed income securities that are subject primarily to interest rate risk and credit risk.

Interest Rate Risk

The table below displays the potential impact of market value fluctuations on the fixed income securities portfolio as of June 30, 2004 and December 31, 2003, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. This analysis was performed on each security individually.



	As of June 30, 2004								As of December 31, 2003

	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	$	2,100.5		(370.6	)		(15.0	)%	$	1,386.8	$	(210.9	)		(13.2	)%
100 basis point rise		2,270.9		(200.2	)		(8.1	)%		1,487.2		(110.5	)		(6.9	)
Base Scenario		2,471.1		—			0.0%			1,597.7		—			—
100 basis point decline		2,710.9		239.8			9.7%			1,748.7		151.0			9.5
200 basis point decline		2,985.4		514.3			20.8%			1,916.4		318.7			19.9

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 3% and 5% of fair market value of the total fixed income portfolio as of June 30, 2004 and December 31, 2003, respectively. The asymmetric market value response reflects our ability to put these bonds back to the issuer for early maturity in a rising interest rate environment (thereby limiting market value loss) but to hold these bonds to their much longer full maturity dates in a falling interest rate environment (thereby maximizing the full benefit of higher market values in that environment).

As of June 30, 2004, we had gross unrealized appreciation on our entire investment portfolio of $159.1 million, which is offset by gross unrealized depreciation of $180.7 million.

Disclosure about Limitations of Interest Rate Sensitivity Analysis

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

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

Credit Risk

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

As of June 30, 2004 and December 31, 2003, 86.1% and 92.3%, respectively, the aggregate of our fixed income securities, short-term investments, cash and cash equivalents portfolio consisted of securities rated investment grade, with 13.9% and 7.7%, respectively, rated below investment grade.

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

Equity Price Risk

As of June 30, 2004 and December 31, 2003, 12.9% and 13.3%, respectively, of our investment and cash portfolio, was in common stocks (unaffiliated and affiliated). Marketable equity securities, which represented approximately 11.8% and 12.2% on June 30, 2004 and December 31, 2003, respectively, of our investment and cash portfolio, 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 $51.1 million and $51.5 million as of June 30, 2004 and December 31, 2003, respectively, in the fair market value of the total investment portfolio.

Foreign Currency Risk

Through investment in securities denominated in foreign currencies, we are exposed to foreign (non-U.S.) currency risk. Foreign currency exchange rate risk is the potential for loss in market value owing to a decline in the U.S. dollar value of these investments due to a decline in the exchange rate of the foreign currency in which these assets are denominated. As of June 30, 2004 and December 31, 2003, our total exposure to foreign denominated securities in U.S. dollar terms was approximately $999.6 million and $816.4 million, respectively, or 23.0% and 18.9%, respectively, of our investment portfolio, including cash and cash equivalents. The primary foreign currency exposure was in Canadian dollar denominated securities, which represented 5.4% as of both June 30, 2004 and December 31, 2003, respectively, and the British pound, which represented 9.9% and 5.4%, respectively, of our investment portfolio, including cash and cash equivalents. As of June 30, 2004, 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 $100.0 million dollar decline in the fair value of the total investment portfolio.

PART I — Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, such officers have concluded that our disclosure controls and procedures are effective as of the end of such period.

(b) Changes in internal controls over financial reporting. There have been no changes during the period covered by this Quarterly Report in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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 2.	*Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities*

Issuer Purchases of Equity Securities

The following table sets forth purchases made by the Company of its shares of common stock under the stock purchase program during the six months ended June 30, 2004:


					Total Number		Maximum
					of Shares		Number
					Purchased as		of Shares that
					Part of Publicly		May Yet be
	Total Number		Average Price		Announced		Purchased Under
	of Shares		Paid Per		Plans or		the Plans or
Period	Purchased		Share		Programs(1)		Programs

As of March 31, 2004		—		—		—		788,700
April 1 – April 30, 2004		1,700		26.37		1,700		787,000
May 1 – May 31, 2004		186,500		24.21		186,500		600,500
June 1 – June 30, 2004		13,500		24.71		13,500		587,000

Total		201,700	$	24.26		201,700		587,000

(1) The Odyssey Re Holdings Corp. stock repurchase program was publicly announced on December 19, 2003 and effective as of such date and expires two years following such date. The Company may repurchase up to 1,000,000 shares of its common stock from time to time, in the open market, through block trades or otherwise.


PART II — Item 3.	*Defaults on Senior Securities*

None.


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

The annual meeting of our stockholders was held on April 21, 2004. Proxies for the meeting had previously been solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

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


Directors	For		Withheld

V. Prem Watsa		60,527,047		3,113,417
James F. Dowd		60,328,059		3,312,409
Andrew A. Barnard		60,497,456		3,143,008
Frank B. Bennett		62,620,477		1,019,987
Anthony F. Griffiths		62,582,647		1,057,817
Robbert Hartog		62,604,109		1,036,355
Brandon W. Sweitzer		62,620,322		1,020,142


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 February 17, 2004. The information appearing under “Risk Factors” in such Annual Report on Form 10-K is incorporated by reference into and made a part of this Form 10-Q. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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

(a) Exhibits

*31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2 Certification of Executive Vice President and Chief Financial Officer 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 adopted 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 adopted 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 February 17, 2004)

* Filed herewith.

OdysseyRe furnished a form 8-K to the Securities Exchange Commission on April 29, 2004, in connection with the issuance of its press release announcing its results for the quarter ended March 31, 2004.

SIGNATURES

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

ODYSSEY RE HOLDINGS CORP.

Date: August 3, 2004

By /s/ ANDREW A. BARNARD

Andrew A. Barnard

President and Chief Executive Officer

Date: August 3, 2004

By /s/ CHARLES D. TROIANO

Charles D. Troiano

Executive Vice President and

Chief Financial Officer

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	(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 $1,241.5 million and $1,173.7 million for the six months ended June 30, 2004 and 2003 and $612.0 and $609.9 million for the three months ended June 30, 2004 and 2003, respectively, reflected in the consolidated statements of operations.


(1)	The Odyssey Re Holdings Corp. stock repurchase program was publicly announced on December 19, 2003 and effective as of such date and expires two years following such date. The Company may repurchase up to 1,000,000 shares of its common stock from time to time, in the open market, through block trades or otherwise.


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

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

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

	•	risks associated with implementing our business strategies;

	•	uncertainties in our reserving process;

	•	failure of our reinsurers to honor their obligations;

	•	actions of our competitors, including industry consolidation;

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

	•	loss of services of any of our key employees;

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

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


	*31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	*31.2	Certification of Executive Vice President and Chief Financial Officer 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 adopted 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 adopted 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 February 17, 2004)



	Charles D. Troiano
	Executive Vice President and
	Chief Financial Officer