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UNITED STATES
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 Quarter Ended September 30, 2002

Commission file Number 0-11538

Overseas Partners Ltd.
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (441) 295-0788

Not Applicable
Former name, former address and former fiscal year, if changed since last report

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, and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x NO o

Common Stock, par value $.10 per share
(Title of Class)

118,855,342 Shares
Outstanding at November 13, 2002

PART I. FINANCIAL INFORMATION
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

See condensed notes to unaudited consolidated financial statements.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

See condensed notes to unaudited consolidated financial statements.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)

See condensed notes to unaudited consolidated financial statements.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
Nine Months Ended September 30, 2002 and 2001
(In thousands)
(Unaudited)

See condensed notes to unaudited consolidated financial statements.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S.$ in thousands)
(Unaudited)

See condensed notes to unaudited consolidated financial statements.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

1.      GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Overseas Partners Ltd. and its subsidiaries (collectively OPL or the Company). OPL is engaged in the property, casualty and finite risk reinsurance business and in the real estate and leasing business. On February 13, 2002 the Board of Directors of OPL announced its decision to restructure OPL and cause its operations to begin an orderly runoff. OPL and its reinsurance subsidiaries have discontinued writing new business. OPL has continued to dispose of its real estate assets such that as of September 30, 2002 OPL has only one remaining leased asset.

The decision to put the reinsurance operations into runoff will significantly change the future results of our operations and the associated cash flows. There will be no new business written, therefore the cash received for premiums will significantly decrease. We have become cash flow negative in our reinsurance operations and we expect this to continue over the next few years. Nevertheless, we believe that our current cash holdings and future sales and maturities of investments are adequate sources of liquidity for the future payment of claims and operating expenses.

The results of operations for the three and nine-month periods ended September 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year.

2.      SIGNIFICANT ACCOUNTING POLICIES

The interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the Overseas Partners Ltd. Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

Interim financial statements are subject to possible adjustments in connection with the annual audit of the Company’s financial statements for the full year; in the Company’s opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature.

Except as described above, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All activity is recorded in U.S. dollars. Inter-company balances and transactions have been eliminated in consolidation.

Investments are reviewed periodically to determine if they have sustained an impairment of value that is considered to be other than temporary. The identification of potentially impaired investments and the assessment of whether any decline in value is other than temporary involves significant management judgment. If investments are determined to be impaired, the cost basis of the investment is written down to fair value at the balance sheet date and a corresponding realized loss is charged to the income statement in the period in which it is determined.

On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This Statement made significant changes to the accounting for goodwill and intangible assets. SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain indicators are encountered. The Company has adopted this standard effective January 1, 2002 and the impact on its financial statements is not material.

The Company tests goodwill for impairment on an annual basis and between annual tests if certain indicators are encountered. During the nine months ended September 30, 2002 the Company reviewed goodwill for impairment, resulting in a $2.5 million write-off of goodwill.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which supersedes Statement of Financial Accounting Standards No. 121 (SFAS 121). SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. However, SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. The Company has adopted this standard effective January 1, 2002 and the impact on its financial statements is not material.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

2.      SIGNIFICANT ACCOUNTING POLICIES (continued)

Long-lived assets held for use are assessed for impairment under SFAS 144 whenever a trigger event occurs. The impairment test is based on whether estimated future undiscounted cash flow from such assets on an individual basis will be less than their net carrying value. If an asset is impaired, its basis is adjusted to fair market value, (net of expected costs to sell), and any such adjustment is recorded as part of depreciation and impairment expense in the consolidated statement of income. No such impairment was booked in the period ended September 30, 2002.

3.      SALE OF SUBSIDIARY

On May 10, 2002 OPL sold its wholly owned subsidiary Overseas Partners Cat Ltd. (OPCat) to Renaissance Re Holdings Ltd for $25 million. Prior to, and in anticipation of, the sale, OPCat returned approximately $420 million of capital to OPL. The sale proceeds of $25 million were equal to OPCat’s net book value at the date of sale. At the date of sale OPCat’s assets included $63.6 million of cash, therefore the sale resulted in a net cash outflow of $38.6 million. OPL remains liable for adverse development on losses incurred prior to February 13, 2002 and, conversely, is entitled to a profit commission for any favorable development.

4.      TAXES

Overseas Partners Ltd. and certain of its subsidiaries are incorporated under the laws of the Islands of Bermuda. Overseas Partners Ltd. believes that neither it nor its Bermuda subsidiaries carries on business through a permanent establishment in the United States. Therefore, it does not expect itself or its Bermuda subsidiaries to be subject to United States income taxes. Under current Bermuda law, Overseas Partners Ltd. and its Bermuda subsidiaries are not obligated to pay any tax in Bermuda based upon income or capital gains.

On December 22, 1998, the IRS issued a Notice of Deficiency with respect to Overseas Partners Ltd.’s 1988 through 1990 taxable years in which it asserted that Overseas Partners Ltd. is subject to United States taxation in the aggregate amount of approximately $170 million, plus additions to tax and interest, for those years. On March 19, 1999, Overseas Partners Ltd. filed a petition in the United States Tax Court contesting the asserted deficiencies in tax and additions to tax in the Notice. On May 18, 1999, the IRS filed its Answer to Overseas Partners Ltd.’s Petition. The IRS has also asserted that Overseas Partners Ltd. is subject to United States taxation for its 1991 through 1994 taxable years and has proposed an aggregate assessment of $319 million of tax, plus additions to tax and interest, for those years. Overseas Partners Ltd. has filed a Protest against the proposed assessment with the Appellate Division of the IRS with respect to the years 1991 through 1994. The IRS has not proposed an assessment for years subsequent to 1994, although a Notice of Proposed Adjustment, reflecting similar positions, has been issued recently by the IRS in connection with the audit of the years 1995 through 1998. The IRS also may take similar positions for the 1999 year pending resolution of the years currently in dispute.

Overseas Partners Ltd. believes that it has no tax liability, that it is not subject to United States taxation, and that there is substantial authority for its position. It is vigorously contesting the Notice of Deficiency for 1988 through 1990 and will vigorously contest the proposed assessments for 1991 through 1994 and any future assessments.

In connection with a related Tax Court case involving UPS, pursuant to mediation conducted by a judge of the Tax Court, a tentative basis for settlement recently has been reached which could result in the substantial reduction of the liabilities asserted against OPL, although some amount of asserted liability may remain in dispute following any finalization of such settlement. The final terms of the settlement remain under negotiation, and there can be no assurance that the tentative basis for settlement will not materially change, or that it or any other settlement ultimately will be approved or finalized.

Certain of OPL’s subsidiaries are incorporated in the United States, including Overseas Partners Capital Corp. (OPCC) and Overseas Partners US Reinsurance Company (OPUS Re). These subsidiaries are subject to United States income taxes. 

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

5.      BUSINESS SEGMENTS

The Company’s operations are presently conducted through two segments - reinsurance and real estate and leasing. The reinsurance segment is managed from the Bermuda and Philadelphia offices (through United States subsidiaries) and includes the runoff of accident & health, agricultural, aviation, casualty, professional liability, property, property catastrophe, workers’ compensation and finite risk business. Real estate and leasing activities are owned and managed through United States subsidiaries of OPCC, a wholly-owned subsidiary of Overseas Partners Ltd. There were no inter-segment revenues earned for the three and nine-month periods ended September 30, 2002 and 2001. Inter-segment expenses, such as corporate overhead, were allocated based on estimated utilization for the three and nine-month periods ended September 30, 2002 and 2001.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in the Overseas Partners Ltd. Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Income before income taxes by segment consists of revenues less expenses related to the respective segment’s operations. The reinsurance segment maintains a portfolio of cash and liquid investments to support its reserves for accrued losses and loss expenses and unearned premiums as well as its capital requirements. At September 30, 2002 the portfolio included $853.5 million (December 31, 2001 - $ nil) of cash and investments that are restricted and are used to collateralize obligations to our cedants. Investments relating to real estate and leasing are primarily restricted and used to collateralize long-term debt originally issued in connection with the purchase of assets held for leasing. Summary financial information about the Company’s segments is presented in the following table:

Substantially all of the Company’s long-lived assets, interest expense, depreciation expense and income tax expense relate to the Company’s real estate and leasing operations. The Company’s long-lived assets also include $5.8 million relating to the capitalized cost of insurance licenses owned by OPUS Re and goodwill of $3.3 million relating to the Company’s 22% ownership of a Florida based workers’ compensation insurance company.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

5.      BUSINESS SEGMENTS (continued)

For the nine-month periods ended September 30, 2002 and 2001 approximately 89% and 75%, respectively, of reinsurance revenues were derived primarily from sources located in the United States. Other revenues were derived from customers located primarily in European countries. All of the Company’s leasing and real estate revenues are generated in the United States. For 2002 and 2001, all of the Company’s long-lived assets were located in the United States.

OPL earned premiums of $4.7 million for the three months ended September 30, 2001 and $14.0 million for the nine months ended September 30, 2001 for the reinsurance of workers’ compensation insurance, written by Liberty Mutual Insurance Company, for employees of a United Parcel Service, Inc. (UPS) subsidiary located in the State of California. This contract was not renewed in 2002.

Until January 31, 2002 OPL’s real estate and leasing segment included a data processing facility leased to a UPS subsidiary. UPS had an option to purchase the building in which the data processing facility is located at the higher of fair market value or a settlement value, as defined in the lease agreement, prevailing at that time. On September 21, 2001 UPS notified the Company of their election to terminate the data processing facility lease and their election to exercise their option to purchase the building. On January 31, 2002 UPS purchased the building for $127.9 million, equivalent to the settlement value, and also purchased the land on which the building is located for $13.6 million, resulting in a total pre-tax gain on sale of $47.1 million. Total rent from the facility lease was $4.6 million for the three months ended September 30, 2001. Total rent from the facility lease was $3.6 million and $13.9 million for the nine months ended September 30, 2002 and 2001, respectively.

6.      DEBT REPURCHASE

In 1989 a subsidiary of OPCC acquired five 757 aircraft and a data processing facility. The acquisition of the aircraft and the facility were financed by two series of privately placed, fixed rate, non-callable bonds issued by OPL Funding Corp. (“OPL Funding”), incorporated in Delaware as a single purpose subsidiary of Overseas Capital Co. One series (“Series A Bonds”), in the principal amount of $171.6 million, is due in 2012; the other (“Series B Bonds”), in the principal amount of $73.4 million, is due in 2019. Overseas Partners Credit, Inc. (“Overseas Credit”), a single purpose subsidiary of OPL incorporated in the Cayman Islands, guaranteed the principal of these bonds and pledged zero-coupon treasury notes as security for the guarantee. Such securities were classified as held-to-maturity, consistent with our stated intent and ability and also the non-callable status of the bond obligations.

The aircraft were sold in July 1998 and the data processing facility was sold in January 2002. OPL Funding invested $186.6 million of the proceeds from the sale of the aircraft into United States zero-coupon treasury notes and corporate bonds as substitute collateral for the interest obligations associated with the Series A Bonds. Following the sale of the data processing facility, OPL Funding invested $84.2 million of the proceeds from the sale into United States zero-coupon treasury notes as substitute collateral for the interest obligations associated with the Series B Bonds. These investments were sufficient to defease all remaining interest payments due on the bonds and were also classified as held-to-maturity, consistent with our stated intent and ability and also the non-callable status of the bond obligations.

Following our February 2002 decision to put our operations into runoff we have sought to accelerate the settlement of reinsurance and real estate liabilities. During June 2002 we approached and obtained the consent of all the bondholders to amend the Trust Indenture to permit the repurchase and cancellation of the Series A Bonds and Series B Bonds. The terms of the repurchase and cancellation required the Company to pay an amount equivalent to the fair value of the collateral securities (relating to both principal and interest) to the bondholders. On June 27, 2002 OPL Funding completed the repurchase and cancellation of $111.6 million of the Series A Bonds and $58.4 million of the Series B Bonds for a total premium of $78.0 million recorded in interest expense. The corresponding sale of the collateral securities with an amortized cost of $211.5 million resulted in an offsetting $34.8 million gain on sale.

There remains $60 million of Series A Bonds and $15 million of Series B Bonds outstanding, all held by one bondholder, an insurance company unrelated to OPL. Following these actions, we reclassified the remaining collateral securities relating to these outstanding bonds from the held-to-maturity category to the available-for-sale category. As at September 30, 2002 these bonds had an amortized cost of $92.9 million and a fair value of $117.9 million. An amount corresponding to the unrealized gains of $25.0 million is recorded in Accounts Payable and Other Liabilities to reflect the bondholder’s interest in the underlying collateral securities. 

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

7.      STATUTORY FINANCIAL INFORMATION

OPL’s ability to repurchase shares, pay dividends, or make other distributions to shareowners is subject to certain regulatory restrictions including the following:

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

8.      CONTINGENCIES

On November 19, 1999 and January 27, 2000 OPL was named as a defendant in two class action lawsuits, filed on behalf of customers of UPS, in Montgomery County, Ohio Court and Butler County, Ohio Court, respectively. The lawsuits allege, amongst other things, that UPS told its customers that they were purchasing insurance for coverage of loss or damage to goods shipped by UPS. The lawsuits further allege that UPS wrongfully enriched itself with the monies paid by its customers to purchase such insurance. The November 19, 1999 and January 27, 2000 actions were removed to federal court and thereafter transferred to the United States District Court for the Southern District of New York and consolidated in a multi-district litigation for pretrial discovery purposes with other actions asserting claims against UPS. Plaintiffs subsequently amended those claims against all defendants to join a Racketeer Influenced and Corrupt Organizations (“RICO”) claim as well. On August 7, 2000, the Company and its wholly owned subsidiary, OPCC, were added as defendants in a third class action lawsuit, also consolidated in the multi-district litigation, which alleges violations of United States antitrust laws, and state unfair trade practice and consumer protection laws. The allegations in the lawsuits are drawn from an opinion by the United States Tax Court that found that the insurance program, as offered through UPS, by domestic insurance companies, and ultimately reinsured by OPL, should not be recognized for federal income tax purposes. In June 2001, the Tax Court opinion was reversed by the United States Court of Appeals for the Eleventh Circuit and remanded to the Tax Court for further consideration. The parties to the Tax Court action filed Supplemental Briefs on remand on March 18, 2002. OPL is not a party to the Tax Court action.

The Company filed or joined in motions to dismiss all of the consolidated actions on a number of grounds, including that the antitrust claim fails to state a claim upon which relief can be granted, and that the remaining claims are preempted by federal law. In orders dated July 30, 2002, the Court granted in part and denied in part the motions to dismiss. Pursuant to the Court’s orders, the claims remaining against the Company are RICO, antitrust, and common law interference with contract claims. On November 8, 2002, the parties presented to the Court a stipulation and proposed order certifying a nationwide class with respect to certain of the claims brought by the plaintiffs, including the RICO and interference with contract claims against the Company. The Court indicated that it would sign the stipulation and proposed order. The stipulation does not certify the antitrust claims brought against the Company. The Company believes that it has meritorious defenses to all claims asserted against it and intends to defend them vigorously. There can be no assurance, however, that an adverse determination of the lawsuits would not have a material effect on the Company.

OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Transacted in U.S. Dollars)

The following is a discussion and analysis of our results of operations, financial condition, liquidity and capital resources as of and for the three and nine-months ended September 30, 2002 and 2001. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto and the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the audited consolidated financial statements of the Company at and for the year ended December 31, 2001 and notes thereto included in the Company’s 2001 Annual Report to Shareholders.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2002 and 2001

Reinsurance:

Underwriting

On February 13, 2002 the Board of Directors of OPL announced its decision to restructure OPL and cause its Bermuda based reinsurance operations to begin an orderly runoff. During the second quarter of 2002 we made the decision to place our United States subsidiary, OPUS Re, into runoff and to cease writing any further reinsurance business in that subsidiary. These decisions mean that OPL will not write any new reinsurance business. Premiums will continue to be earned on business written prior to the runoff decisions.

Prior to the runoff decision the Company focused on a small number of specialized products including finite risk, accident & health and property catastrophe in Bermuda and working layer casualty in the United States through OPUS Re.

Following the decision to place the Company into runoff, we have completed the early commutation (i.e. negotiated settlement and cancellation) and novation (i.e. transfer of our rights and obligations to another reinsurer) of several multi-year reinsurance programs, particularly in our finite risk division, which had significant exposure to future loss and / or cash flow needs. Loss reserve settlements that are structured as commutations are recorded as an increase or decrease in incurred claims whereas the commutation of unexpired risks and novations are recorded as a return of the original premium income and attendant claims and expenses. During the three months ended September 30, 2002, the Company was able to novate two finite risk contracts that had original gross written premium estimates of $144.3 million to other reinsurers. These contracts had been written between January 1, 2002 and February 13, 2002. In addition OPUS Re commuted several contracts during the three months ended September 30, 2002 such that original gross written premium estimates were reduced by $26.1 million. Gross premiums written for the three months ended September 30, 2002 of negative $175.3 million reflect the effect of these commutations and novations.

Premiums ceded for the three months ended September 30, 2002 decreased to negative $0.5 million compared to $54.9 million for the three months ended September 30, 2001. Premiums ceded for the three months ended September 30, 2001 were primarily comprised of $43.4 million for the cost of reinstatement premiums in respect of the utilization of our per occurrence aviation excess of loss covers following the terrorist attacks of September 11, 2001 and $8.6 million related to the reinsurance of our property catastrophe business that was sold to Renaissance Re Holdings Ltd. in May 2002.

Reinsurance: (continued)

Premiums earned for the three months ended September 30, 2002 decreased to $67.7 million compared to $140.1 million for the three months ended September 30, 2001. This decrease was due to significant reductions in premiums earned by our finite risk division following the commutations and novations discussed above and a reduction in premiums earned in our property and workers’ compensation lines of business as no new business was being written following the decision to put our reinsurance operations into runoff. These reductions were partially offset by an increase in premiums earned by OPUS Re as a result of continued growth in premiums written from the commencement of operations in the first quarter of 2001 until its runoff announcement in the second quarter of 2002.

Commission and fee income increased to $2.7 million for the three months ended September 30, 2002 compared with $0.4 million for the corresponding period in 2001. This increase is due to an increase in fees earned on our finite risk contracts that were not accounted for as reinsurance as they do not satisfy the risk transfer criteria of Statement of Financial Accounting Standards No. 113.

Commissions, taxes and underwriting expenses for the three months ended September 30, 2002 decreased by $51.1 million to $15.4 million from $66.5 million for the three months ended September 30, 2001. This decrease was due to the reduction in premiums earned in the three months ended September 30, 2002 and changes in the mix of business.

Our combined ratio, which is the ratio of the sum of losses, loss expenses, commissions, taxes and other underwriting expenses to earned premiums was 185.7% for the three months ended September 30, 2002 and we experienced a net underwriting loss of $55.3 million. The underwriting loss is primarily due to:

The combined ratio for the three months ended September 30, 2001 was 208.9% and we experienced a net underwriting loss of $152.3 million. The combined ratio for the three months ended September 30, 2001 was affected by the following factors:

The Company provided retrocessional reinsurance to a reinsurer that has commenced an arbitration to rescind its own reinsurance contract with the primary carrier, principally on the grounds that the primary carrier did not fully disclose the risks to be covered by the reinsurance contract. That contract is expected to be unprofitable. Thus, if the reinsurer succeeds in the arbitration it will be relieved of any obligation to pay losses under its contract and therefore would not cede to the Company any share of those losses. The arbitration is at an early stage and will likely take many months to resolve. As such, it is too early to determine whether the arbitration decision is likely to be in the reinsurer’s favor and therefore benefit OPL as its retrocessionaire. The Company continues to reserve for losses and loss expenses without regard to any possibility that the reinsurer’s contract will be rescinded.

The Company is involved in a complex reinsurance program that covers the worldwide property risks of a large oil company. As part of the program, a portion of the Company’s risks have been retroceded to a reinsurer (“our reinsurer”), which in turn ceded all of its risk to a retrocessionaire. This retrocessionaire has commenced litigation against our reinsurer alleging fraud and misrepresentation on the part of one or more of the other program participants. In the event that the retrocessionaire is successful in the litigation it may be relieved of any obligation to pay losses under its reinsurance contract to our reinsurer. Such an outcome would likely cause our reinsurer to seek similar legal redress against us which, if successful, could (a) require us to return loss payments already received of approximately $17 million; and (b) result in the cancellation of our reinsurance protection for future claims, the impact which cannot be determined at this time. However, in such circumstances, management believes that the Company would be able to pursue legal remedies of its own. The litigation and related disputes are at an early stage and will likely take many months to resolve. As such, it is too early to determine the outcome of the dispute nor the ultimate impact on the Company’s financial condition.

The Company is engaged in several other ongoing disputes, including arbitration and litigation that have arisen in the ordinary course of business. The Company continues to reserve for losses and loss expenses based on the terms of contractual arrangements currently in force.

As discussed below in the Liquidity and Capital Resources section, the asset allocation of our reinsurance investment portfolio changed significantly between September 30, 2001 and September 30, 2002, as a result of the change in the Company’s business and the decision to put the reinsurance operations into runoff. The revised asset allocation reflects our lower risk tolerance and provides more short-term liquidity. However, there may still be periods in which the Company records an investment loss as a result of the continued volatility in worldwide equity and bond markets.

The Company’s reinsurance investments are classified as either trading or available-for-sale. The trading portfolio is recorded at fair value with unrealized gains and losses recorded in net income. The available-for-sale portfolio is recorded at fair value with unrealized gains and losses recorded in members’ equity as other comprehensive income. The Company periodically reviews the available-for-sale portfolio for any impairment in value that is considered to be other-than-temporary. Any such impairments are recorded as a write down in the cost basis with a corresponding realized loss recorded in income.

Our reinsurance portfolio generated a loss of $56.4 million for the three months ended September 30, 2002. This consisted of a net loss of $171.6 million recorded in income and a change in net unrealized gains of $115.2 million that was recorded in other comprehensive income compared to a total negative return of $92.7 million consisting of a net loss of $32.0 million recorded in income and net unrealized losses of $60.8 million for the three months ended September 30, 2001.

For the three months ended September 30, 2002 our equity portfolio has generated a loss of 23.9%, or $79.9 million, consisting of a loss of $185.2 million that was recorded in income and a change in net unrealized gains of $105.3 million that was recorded in other comprehensive income. These results included the effects of the write-down in the cost basis of equity investments in certain stocks in our S&P 500 portfolio and our investment in a Bermuda based life reinsurer, where the decline in value was considered other than temporary. In accordance with SFAS 115, such a write-down is recognized as a realized loss in the income statement, even though there were no sales of the securities. For the three months ended September 30, 2002 the amount of the write-down was $177.5 million. Our investment in the Bermuda based life reinsurer has generated a total negative return of $25.0 million for the three months ended September 30, 2002 compared to a total negative return of $3.4 million for the same period in 2001. The rest of our equity portfolio closely tracks the S&P 500 index, which fell from 990 at June 30, 2002 to 815 at September 30, 2002. During the three months ended September 30, 2001, our equity portfolio generated a loss of 13.4% or $101.8 million, consisting of income of $0.2 million and net unrealized losses of $102.0 million that were recorded in other comprehensive income.

For the three months ended September 30, 2002 our fixed income portfolios generated a gain of 2.6%, or $21.4 million, consisting of $11.7 million that was recorded in income and net unrealized losses of $9.7 million recorded in other comprehensive income. For the three months ended September 30, 2001 our fixed income portfolios generated a return of 5.8%, or $53.2 million, consisting of $12.1 million that was recorded in income and net unrealized gains of $41.1 million recorded in other comprehensive income.

Our multi-manager funds, which are primarily a combination of fixed income strategies, lost $0.9 million for the three months ended September 30, 2002 compared to a loss of $5.7 million for the three months ended September 30, 2001. For both our emerging markets equity portfolio and multi-manager funds we record unrealized gains and losses in income. Cash and cash equivalents earn short-term money market rates which equated to an annualized return of 1.84% for the three months ended September 30, 2002 compared to 5.2% for the same period in 2001.

Real Estate and Leasing:

Office building revenue decreased by $15.3 million to $3.7 million for the three months ended September 30, 2002 from $19.1 million for the three months ended September 30, 2001. The reduction in revenue is due to the sale of our two-thirds partnership interest in the Copley Place retail center and office complex, located in Boston. Copley Place was sold on July 19, 2002 for net cash proceeds of $119.6 million resulting in a pre-tax gain on sale of $34.3 million. The purchaser of the property assumed the associated existing debt of $184.6 million.

Hotel revenue for the three months ended September 30, 2002 was $nil due to the sale of the Marriott Copley Hotel on June 13, 2002.

Leasing revenue of $0.8 million for the three months ended September 30, 2002 related to a finance lease with the Kmart Corporation. The reduction in leasing revenue from $5.5 million for the three months ended September 30, 2001 was due to the sale to UPS of the data processing facility leased to UPS and the termination of the lease on January 31, 2002.

On January 22, 2002 the Kmart Corporation and 37 of its United States subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code. Kmart Corporation has not to date filed a request to reject our unexpired lease. However, there can be no assurance that it will not file this request or default on its future payments. To date the Kmart Corporation has not defaulted on any of its lease payments. We believe that any rejection of the unexpired lease by Kmart would not have a material effect on the consolidated financial position or future results of operations of OPL as we believe that the facility would be available for other uses.

For the three months ended September 30, 2002 operating expenses, interest expense and depreciation decreased to $2.6 million, $3.0 million and $0.5 million, respectively, compared to $25.4 million, $12.0 million and $4.9 million, respectively, for the three months ended September 30, 2001. These decreases were primarily due to the sales of the data processing facility in January 2002, the Marriott Copley Hotel in June 2002 and Copley Place in July 2002 and the debt repurchase in June 2002.

Net Loss:

The net loss for the three months ended September 30, 2002 was $210.9 million compared to $183.6 million for the same period in 2001, an increase of $27.2 million. This increase was primarily due to the other-than-temporary impairment charge of $177.5 million recorded in our equity portfolio, offset by a reduction in underwriting losses and the gain on sale of Copley Place. For the three months ended September 30, 2002 there was a tax charge of $14.3 million compared to a charge $0.6 million for the same period in 2001. The increase was primarily due to the tax due on the gain on sale of Copley Place. Basic and diluted net loss per share was $1.77 for the three months ended September 30, 2002 compared to a net loss per share of $1.54 for the same period in 2001.

Nine Months Ended September 30, 2002 and 2001

Reinsurance:

Underwriting

Gross premiums written for the nine months ended September 30, 2002 reflect $0.8 million of new business written in Bermuda (net of the effect of subsequent novations) and $221.8 million of renewals compared with $121.9 million and $402.1 million, respectively, for the same period in the prior year. In addition, OPUS Re wrote $263.6 million of gross premiums in the nine months ended September 30, 2002 compared to $152.3 million for the same period in the prior year. Gross premiums written for the nine months ended September 30, 2002 also reflect an increase in premium estimates of approximately $23.0 million compared with a decrease of $40.8 million for the nine months ended September 30, 2001.

Reinsurance: (continued)

The following table provides an analysis of gross premiums written by line of business, both in the aggregate and as a percentage of total premiums, for each of the nine-month periods ended September 30, 2002 and 2001:

Premiums earned for the nine months ended September 30, 2002 decreased to $393.8 million compared to $445.7 million for the nine months ended September 30, 2001. This decrease was primarily due to decreases in premiums earned on our workers’ compensation, property catastrophe and finite risk lines of business following the runoff decision. This was partially offset by an increase in premiums earned by OPUS Re reflecting the fact that OPUS Re only commenced writing business in the first quarter of 2001.

Commission and fee income increased to $6.2 million for the nine months ended September 30, 2002 compared with $3.7 million for the corresponding period in 2001. This increase is due to an increase in the fees earned on our finite risk contracts that were not accounted for as reinsurance as they do not satisfy the risk transfer criteria of Statement of Financial Accounting Standards No. 113.

For the nine months ended September 30, 2002 premiums ceded increased to $83.9 million compared to $81.9 million for the nine months ended September 30, 2001. Premium ceded for the nine months ended September 30, 2002 primarily related to:

Commissions, taxes and underwriting expenses for the nine months ended September 30, 2002 decreased by $36.4 million from $160.5 million for the nine months ended September 30, 2001. This decrease was related to the decrease in premiums earned and also the change in the mix of business.

Our combined ratio, which is the ratio of the sum of losses, loss expenses, commissions, taxes and other underwriting expenses to earned premiums was 122.7% for the nine months ended September 30, 2002 and we experienced a net underwriting loss of $83.2 million. The underwriting loss is primarily due to:

The combined ratio for the nine months ended September 30, 2001 was 143.2% and we experienced a net underwriting loss of $189.0 million. The combined ratio for the nine months ended September 30, 2001 was affected by the following factors:

Reinsurance Investment Loss