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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002;

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission File No. 000-11538

OVERSEAS PARTNERS LTD.

(Exact name of registrant as specified in its charter)

Cumberland House, One Victoria Street, Hamilton, HM 11, Bermuda
(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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

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

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

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based on a price per share of $11.07, the price per share as of June 28, 2002, at which the Registrant has rights of first refusal for the purchase of its shares offered for sale by shareowners, was $1,315,728,636.

The number of shares of Registrant’s Common Stock outstanding as of February 28, 2003 was 118,855,342.

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OVERSEAS PARTNERS LTD.

INDEX 10-K

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PART I

Item 1.             Business

GENERAL

Overseas Partners Ltd. (“OPL” or the “Company”) is a company headquartered in Bermuda. Unless the context otherwise indicates, the term “Company” refers to one or more of OPL and its consolidated subsidiaries.

The Company was organized as a corporation under the laws of Bermuda in 1983 as a subsidiary of United Parcel Service of America, Inc. (“UPS”). On December 31, 1983, the Company ceased to be a subsidiary of UPS when UPS paid a special dividend to its shareowners of one share of OPL Common Stock for each UPS share then outstanding to its shareowners of record as of November 18, 1983.

OPL’s primary business segment is reinsurance. OPL’s other business segment is ownership and management of United States real estate and property leasing.

OPL was originally formed to provide reinsurance against loss or damage to packages carried by UPS (the “shipper’s risk business”). Although the Company diversified into other lines of reinsurance, this remained OPL’s largest single reinsurance program until it was cancelled effective October 1, 1999. The shipper’s risk business was significant to the Company, not only because of the magnitude of the underwriting income that it generated, but also because its unique characteristics influenced our strategic and operational decision making. Our long-term investment philosophy, our underwriting risk tolerance and our real estate diversification were all functions of the profitability, stability and liquidity of the shipper’s risk business as were our dividend and share repurchase programs.

On February 13, 2002, the Board of Directors of OPL announced its decision to restructure OPL and to begin an orderly runoff of its operations. The Board concluded that OPL’s then existing capital structure would not allow it to continue to grow and compete effectively in the reinsurance market while at the same time satisfying the desire of many of OPL’s 98,000 shareowners to have greater liquidity for their investment in OPL, for which there is no trading market and no prospect of such a market. OPL’s capital requirements have constrained its ability to purchase shares from its shareowners since the end of 1999. See “Item 5 – Market for Registrant’s Common Equity and Related Stockholder Matters” for further discussion about our dividend policy and share repurchase rights.

During the runoff of our operations we will continue to pay losses as they become due and collect outstanding receivables. OPL’s reinsurance operations are still exposed to new losses on unexpired policies and adverse development on prior year accrued loss and loss expense reserves.

The following table provides financial highlights of OPL, broken down by business segments. More information concerning identifiable segment assets, revenues and net income for the years ended December 31, 2002, 2001 and 2000 can be found in Note 12 of the Notes to the Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data.”

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REINSURANCE SEGMENT

Reinsurance Overview

Reinsurance is an arrangement in which a reinsurer agrees to indemnify a “primary” or “ceding” company against all or part of the risks assumed by the primary insurer under a policy or policies it has issued. Primary insurers purchase reinsurance for various reasons, including:

•              protection from catastrophes or multiple losses,

•              increased underwriting capacity,

•              ability to write larger individual risks,

•              withdrawal from certain markets or product lines,

•              reduced financial leverage, and

•              stability of operating results.

Reinsurance, however, generally does not discharge the primary insurer from its liability to policyholders.

There are generally two basic types of reinsurance arrangements: treaty and facultative reinsurance. In treaty reinsurance, the ceding company (or cedant) is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company, while facultative reinsurance involves the underwriting of individual risks.

Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis. Pro rata (or proportional) reinsurance describes all forms of reinsurance in which the reinsurer shares in a proportional part of the original premiums and losses of the business ceded by the primary insurer. Excess (or non-proportional) reinsurance refers to reinsurance that indemnifies the primary company for that portion of a loss that exceeds an agreed-upon amount, known as the ceding company’s retention or reinsurer’s attachment point.

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

Reinsurers may also purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’s business is called retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause primary insurers to purchase reinsurance.

Reinsurance Activities

OPL’s reinsurance activity began with the shipper’s risk program – the reinsuring of insured packages carried by subsidiaries of UPS. Customers of UPS insured their packages for amounts greater than $100 by paying excess value charges. Insured values were typically limited to a maximum of $25,000 per occurrence.

Until October 1, 1999, OPL received premiums under this reinsurance equal to the excess value charges received by primary insurers, less appropriate ceding commissions, brokerage fees and taxes. OPL reimbursed the primary insurers for the losses they paid on the underlying package insurance policies.

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The shipper’s risk reinsurance described above was historically OPL’s largest source of revenue, generating $273.5 million of premiums earned for 1999. The program was cancelled effective October 1, 1999, as UPS decided to provide shipper’s risk reinsurance for its customers through a UPS subsidiary. This followed an August 9, 1999, opinion issued in the United States Tax Court against UPS (United Parcel Service of America, Inc. v. Commissioner of Internal Revenue) concerning the taxation of premiums paid by shippers to UPS for the original insurance against risk of loss or damage to packages carried by them. The decision of the United States Tax Court was subsequently reversed in June 2001 in the United States Court of Appeals for the Eleventh Circuit. However, OPL will not write shipper’s risk reinsurance again.

Over the years OPL diversified into a number of other lines of reinsurance business through subsidiaries based in both Bermuda and Philadelphia, USA.

The Company’s wholly owned subsidiary, Overseas Partners Re Ltd. (“OPRe”), was incorporated in 1995 to diversify into additional lines of treaty business, including accident & health, automobile, financial, marine, property, space & aviation and workers’ compensation. OPRe discontinued writing new business on February 13, 2002.

The Company established a wholly owned subsidiary, Overseas Partners Assurance Ltd. (“OPAL”), during 1998 to enhance and broaden its reinsurance relationships. OPAL provides rent-a-captive facilities to reinsurance clients, allowing them to participate in the underwriting and investment profits associated with their programs. OPAL discontinued writing new business on February 13, 2002.

In November 1999, the Company established another wholly owned subsidiary, Overseas Partners Cat Ltd. (“OPCat”), to further diversify the portfolio of reinsurance risk. OPCat had an underwriting services agreement with RenaissanceRe Holdings Ltd. (“RenRe”) to write worldwide property catastrophe reinsurance business. OPCat discontinued writing new business on February 13, 2002. Effective February 15, 2002, Renaissance Reinsurance Ltd., a subsidiary of RenRe, assumed a 100% quota share of the in-force reinsurance policies written by OPCat. 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. On May 10, 2002 OPL sold OPCat to RenRe for $25 million, equal to OPCat’s net book value at the date of sale.

In October 2000 OPL, through its wholly owned subsidiary Overseas Partners US Holding Company (“OPUS Holding”), completed the acquisition of Overseas Partners US Reinsurance Company (“OPUS Re”) for $6 million plus its capital and surplus of $28.6 million. OPUS Re is a property & casualty reinsurer and its principal operations are located in Philadelphia. OPUS Re discontinued writing new business in the second quarter of 2002.

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 years ended December 31, 2002, 2001 and 2000:

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OPL and its reinsurance subsidiaries obtained business through brokers who represent the ceding companies in negotiations for the purchase of reinsurance. The process of effecting a brokered placement typically begins when a client or ceding company enlists the aid of a broker in structuring a reinsurance program. Often the various parties will consult with one or more lead underwriters as to the pricing and contract terms of the protection being sought. Once the terms quoted by the lead underwriter have been approved, the broker will offer participation to qualified reinsurers until the program is fully subscribed at terms agreed to by all parties.

The Company paid such brokers commissions representing negotiated percentages of the premium it wrote. These commissions constitute part of the Company’s acquisition costs and are included in its underwriting expenses. We have never been obligated to accept any business from any particular broker, and brokers have not had the authority to bind any of our Companies.

Bermuda Reinsurance

Prior to February 13, 2002, OPL and its wholly owned subsidiaries, OPRe and OPCat, underwrote reinsurance on a treaty and facultative basis for insurance and reinsurance companies in the United States and selected international markets. We received underwriting submissions for new and renewal business from independent brokers and ceding reinsurance companies located in the United States and internationally. Our underwriting teams built relationships with key brokers and cedants by explaining their underwriting approach and demonstrating responsiveness to customer needs.

During 2000 there was a comprehensive review of our operations and we decided to discontinue our marine, property, and financial lines, based on poor profitability and other considerations. For the same reasons, we also terminated a number of programs in our aviation and accident & health lines of business. From 2000 until February 2002 we concentrated on a smaller number of specialty lines in which we could add value to our clients by building on our competitive advantages, which included: our Bermuda domicile, strong capital, “A” (Excellent) financial strength rating from A.M. Best Company, (which has subsequently been removed; see “Item 1 – Business – Ratings”), and our technical approach to underwriting. Our underwriting incorporated a detailed technical analysis of risk and return characteristics through actuarial analysis and financial modeling and required the involvement of underwriting, claims, actuarial, finance and legal professionals. All business written had to meet strict, Board-approved, underwriting standards and minimum risk and return criteria.

We did not separately evaluate each of the individual risks assumed under our treaties and were largely dependent on the original risk underwriting decisions made by the ceding company. This dependence subjected the Company to the possibility that the ceding companies had not adequately evaluated the risks to be reinsured and, therefore, that the premiums ceded in connection therewith may not have adequately compensated the Company for the risk that we assumed.

To mitigate these risks, we focused on those ceding companies that effectively manage the underwriting process through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance were compatible with our profitability objectives. We reviewed treaties for compliance with our general underwriting standards and evaluated certain larger treaties in part based upon actuarial analyses conducted by the Company and/or independent consulting actuaries. The actuarial models used in such analyses were tailored in each case to the exposures and experience underlying the specific treaty and the loss experience for the risks covered by such treaties. When appropriate we conducted underwriting audits at the offices of ceding companies to ensure that the ceding companies operated within their guidelines. Underwriting audits focused on the quality of the underwriting staff, the selection and pricing of risks and the capability of monitoring price levels over time. We also perform claims audits, when appropriate, in order to evaluate the client’s claims handling abilities and practices. We will continue to perform these claim audits as the Company’s operations run off.

For both treaty and facultative business, we also considered factors such as cash flows, return on risk capital invested, the establishment of long-term ceding company and broker relationships, new product or innovative offerings, market conditions, potential partnerships with market leaders and diversification.

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Our reinsurance contracts sometimes included sliding scale and profit commission features to motivate the ceding companies to maintain disciplined underwriting standards. Depending on the risk, we sometimes also worked with the ceding companies to purchase common account reinsurance protection to further reduce exposure to large individual claims or an accumulation of claims. We also purchased several layers of excess of loss protection for the aviation and property books of business and entered into a quota share retrocession of our property catastrophe business. The aviation excess of loss protection provides coverage of $87.0 million, in excess of $3.0 million, for a single loss event, for policies written during the period January 1, 2000 to December 31, 2000, $14.5 million, in excess of $0.5 million, for a single loss event, for policies written during the period January 1, 2001 to December 31, 2001 and $12.0 million in excess of $3.0 million for a single loss event for losses occurring up until August 2003. The lower coverage limits for 2001, 2002 and 2003 reflect the reduction in our underlying book of business. However, the number of times that this coverage can be reinstated is limited and much of our excess of loss reinsurance protection limits have been exhausted by the effects of the losses due to the events of September 11, 2001. Replacement reinsurance is not readily available at this time. The property excess of loss protection covers our discontinued property lines of business and provides coverage of 41.5% of $100.0 million in excess of $33.0 million for a single loss event. Reinsurance premiums ceded by the Company totaled $78.6 million, $93.9 million and $62.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Of the reinsurance premiums ceded by the Company in 2002 $77.4 million was for property catastrophe premiums ceded to Renaissance Reinsurance Ltd. including $50.9 million as a result of a 100% quota share of the in-force property catastrophe business that became effective on February 15, 2002.

United States Reinsurance

OPUS Re’s treaty operation underwrote property and casualty treaty business exclusively in the United States. Additionally, OPUS Re had a casualty facultative underwriting unit that focused on both facultative certificate business for a host of carriers, as well as some automatic facultative facilities in the general and auto liability lines.

The business was sourced exclusively through various intermediaries based in the United States who work on behalf of their cedant account relationships. The underwriting goals were focused towards working layer casualty where the results tend to be more predictable and where OPUS Re could apply its multi-disciplined underwriting analytical processes most effectively. OPUS Re also took advantage of selective opportunities in the proportional agricultural reinsurance and proportional private passenger auto market. The underwriting methodologies used for the United States Reinsurance operations were similar to those described above in the Bermuda Reinsurance section.

Runoff

Despite the decision to restructure OPL and cause its operations to go into runoff, OPL’s reinsurance operations are still exposed to new losses on unexpired policies and to adverse development on prior year accrued loss and loss expense reserves. Some of these policies do not expire for several years and include launch and in-orbit satellite exposures through to 2007, financial guaranty programs that expire in 2005 and a residual value reinsurance program where the Company is exposed to losses until 2013. During the runoff we will continue to pay losses as they fall due and collect outstanding receivables. Approximately 80% of accrued losses and loss expenses are expected to be paid within the next five years. Remaining losses will continue to be paid beyond 2014. OPL will distribute equity to shareowners as and when the Board of Directors feels that it is prudent to do so and regulatory requirements allow. In order to accelerate the distribution of equity to shareowners we may attempt to commute or novate our remaining reinsurance contracts as this reduction in exposure will also reduce the amount of capital we are required to hold to satisfy regulatory requirements.

A commutation is an agreement between the ceding insurer and the reinsurer that provides for the valuation, payment and complete discharge of all obligations between the parties under particular reinsurance contracts. Commutation agreements can be used whenever the parties wish to settle and discharge all future obligations. Novation is the process where one reinsurer replaces another reinsurer, usually with policyholder approval.

Ratings

Following the announcement of the Board of Directors on February 13, 2002 of its decision to restructure OPL and cause most of its operations to begin an orderly runoff, A.M. Best Company announced that they placed the financial strength ratings of “A” (Excellent) for the reinsurance operating subsidiaries of OPL under review with negative implications.

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On May 31, 2002, A.M. Best Company removed the Company’s financial strength ratings from “under review” status and downgraded the financial strength rating of OPL from “A” (Excellent) to “B++” (Very Good). On January 13, 2003, at the Company’s request, A.M. Best Company withdrew the Company’s financial strength rating. A.M. Best Company will no longer formally evaluate OPL or its reinsurance subsidiaries for the purposes of assigning a rating opinion. The lack of financial strength ratings should not significantly affect the operations of OPL and its subsidiaries given their current runoff status.

Claims

Claims are managed by OPL’s professional claims staff, whose responsibilities include the review of initial cession statements, determination of whether further investigation is required, establishment and adjustment of case reserves and payment of claims. In addition, the claims staff conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected brokers and ceding companies.

The Company’s gross liability for accrued losses and loss expenses, which provides for estimated future payments arising from current and prior reinsurance transactions, amounted to approximately $1,510.6 million and $1,831.3 million at December 31, 2002 and 2001, respectively. Accrued losses and loss expenses are carried at the full amount estimated for ultimate expected liabilities, without any discount to reflect the time value of money. This is in accordance with generally accepted accounting principles and the Securities and Exchange Commission’s regulations.

Reinsurance balances receivable included losses recoverable from reinsurers totaling $114.6 million and $191.2 million as of December 31, 2002 and 2001, respectively. OPL remains liable with respect to reinsurance ceded in the event that the reinsurer is unable to meet its obligations. The senior management of OPL re-evaluates the financial condition of reinsurers at least annually and establishes provisions for unrecoverable amounts as necessary. At December 31, 2002 the Company had established a provision of $10 million for unrecoverable amounts.

The reserve for accrued losses and loss expenses includes an estimate of outstanding losses and an estimate for losses incurred but not reported (“IBNR”). Outstanding losses are estimated based on ceding company reports and other data considered relevant to the estimation process. The estimate for IBNR reflects management’s best estimates based on the recommendations of an independent actuary using common actuarial techniques that project ultimate losses from the past loss experience of the Company and relevant industry data. The actuaries utilize two common methods of actuarial evaluation used within the insurance industry, the Loss Development Method and the Bornhuetter-Ferguson Method. The Loss Development Method involves projecting current values of paid and reported losses to their ultimate value based on historical paid and reported loss patterns, adjusted to reflect the changing characteristics of the book of business written by the Company. Because actual paid and reported losses fluctuate over time around the expected pattern, the Bornhuetter-Ferguson Method is employed to stabilize projected ultimate losses from the Loss Development Method. The Bornhuetter-Ferguson Method is essentially an averaging of two estimates of ultimate loss - the Loss Development indicated ultimate losses and an expectation of ultimate losses made independent of actual loss experience. At any point in time, the weights assigned to each estimate are judgmentally determined with greater weight initially assigned to the Bornhuetter-Ferguson Method and then to the Loss Development Method once a greater percentage of ultimate losses have been reported.

Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors, which could vary significantly as claims are settled. During the claim settlement period, which may be many years, additional facts regarding individual claims may become known. For example, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could significantly affect future loss development.

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While the reserving process is difficult and subjective for the ceding companies, the inherent uncertainties of estimating such reserves are even greater for reinsurers such as the Company, due primarily to the length of time between the date of an occurrence and the reporting of any attendant claims to the reinsurer, the necessary reliance on the ceding companies for information regarding reported claims, differing reserving practices among ceding companies, and the diversity of loss reporting and payment patterns among different types of reinsurance treaties or facultative contracts. In particular, there are significant uncertainties over the estimates of the ultimate losses on the Company’s satellite reinsurance portfolio. The Company may suffer further losses on various satellites as a result of higher power degradation experienced than was anticipated at the time of underwriting. There are also significant uncertainties surrounding the estimates of losses incurred as a result of the terrorist attacks on the World Trade Center and the related events of September 11, 2001. The unprecedented nature and magnitude of these events increases the level of uncertainty surrounding the estimates of losses incurred.

While the Company has recorded its current best estimate of its liabilities for unpaid losses and loss expenses, it is reasonably possible that these estimated liabilities may increase or decrease in the future and that the increase or decrease may be material to its results from operations, cash flows and financial position. The reserves as established by management are reviewed regularly and adjustments are made in the period in which they become known.

The “Analysis of Losses and Loss Expenses Development” shown below presents the subsequent development of the estimated year-end liability for accrued losses and loss expenses, (net of reinsurance recoveries), at the end of each of the years in the ten year period ended December 31, 2002. The top line of the table shows the estimated liability for unpaid losses and loss expenses, (net of reinsurance recoveries), recorded at the balance sheet date for each of the indicated periods. This net liability represents the estimated amount of losses and loss expenses for claims arising from all prior years’ policies and agreements that were unpaid at the balance sheet date. The upper portion of the table shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. This estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “Cumulative (Redundancy) / Deficiency” line represents the aggregate change in the estimates over all prior years. The lower portion of the table presents the amounts paid as of subsequent periods on those claims for which reserves were carried as of each balance sheet date. Conditions and trends that have affected development of the liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the tables below.

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Analysis of Losses and Loss Expenses Development

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Reconciliation of Unpaid Losses and Loss Expenses

The following table presents an analysis of paid and unpaid losses and loss expenses and a reconciliation of beginning and ending unpaid losses and loss expenses for the years indicated:

The following summarizes the development of incurred losses as depicted in the prior two tables: Prior to 1996 the vast majority of the Company’s reinsurance business was shipper’s risk. The shipper’s risk business was characterized by relatively predictable claim experience as a result of the maximum claim exposure being limited to $25,000 per occurrence. The shipper’s risk was also short-tail business (i.e. claims would be notified and settled quickly). In 1996 the Company started to diversify into other lines of business that were less predictable and generally had a longer-tail than the shipper’s risk business. The diversification came at a time of intense competition in the reinsurance industry resulting in industry pricing that has proven inadequate for the exposures being reinsured. The proliferation of large industry loss events in the late 1990’s also compounded the effects of inadequate pricing.

Prior to 1999 the Company had not experienced any significant adverse loss development, primarily as a result of the stability of the shipper’s risk results and the recentness of the Company’s expansion into other lines of business. However, in the third and fourth quarters of 1999 the Company recorded reserve strengthening adjustments of $223 million relating primarily to two programs written in 1998. We also made significant reserve strengthening adjustments in the second quarter of 2000 relating primarily to accident & health, aviation, multi-line, marine and property programs written during the period from 1997 to 1999. The reserve increases in 2001 related mainly to adverse loss development on the discontinued reinsurance of the workers’ compensation risks of a UPS subsidiary in the State of California and on discontinued auto and property programs. This was partially offset by a $20.8 million decrease in the provision for losses and loss adjustment expenses relating to our property catastrophe business.

Additional information on these matters is included in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Investments

The Company’s reinsurance programs are expected to provide a significant amount of investment income due to the time lag between receiving premiums and paying claims. As such our investment activities are an integral part of our reinsurance operations.

The Company maintains portfolios of highly liquid investments and cash to support its reserves for accrued losses and loss expenses and unearned premiums as well as its capital requirements. The fair value of such cash and investments was approximately $2.3 billion at December 31, 2002. Investments include U.S. bonds, U.S. equities (primarily issuers in the S&P 500 Index) and investments in multi-manager funds.

For accounting purposes we classify our investments as either trading or available-for-sale; however, we manage the Company’s cash and investments in total and make asset allocation decisions primarily on a consolidated basis but with due regard to the individual needs and regulatory requirements of each subsidiary.

Our investment objective has historically been to maximize long-term investment income while ensuring that the level of short-term fluctuations in value is within our risk tolerances. Risk and return objectives are incorporated into an asset allocation model that develops an optimal portfolio of specific asset classes that provides for diversification, enhanced returns and lower overall portfolio volatility. We frequently monitor the performance of our investment portfolio, our risk tolerances and future cash flow needs and realign the asset allocation accordingly.

Our risk tolerance has decreased over recent years as a result of the cancellation of the profitable shipper’s risk reinsurance program in October 1999, the increase in accrued losses and loss expenses due to be paid in the next five years and the reduction in our capital base. Further, following our February 13, 2002 announcement to go into runoff, our investment objective has been and will continue to be more focused on capital preservation and short- to medium-term liquidity to pay claims when they fall due, as opposed to long-term return.

The investments of OPL’s United States reinsurance subsidiary, OPUS Re, must comply with the respective laws of the jurisdiction of domicile of that subsidiary and of the other jurisdictions in which it is licensed or authorized to write business. These laws prescribe the kind, quality and concentration of investments which may be made. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stock, real estate mortgages and real estate.

Further information concerning the Company’s investment portfolio, including a discussion of the significant market risk associated with the portfolio, can be found in “Item 7A – Quantitative and Qualitative Disclosures About Market Risk” and Note 6 to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data”.

Competition

Following the February 13, 2002 decision to put the Company into runoff, it no longer competes in the international property and casualty reinsurance market.

Regulation

Reinsurance companies are generally regulated by the jurisdictions in which they operate:

Bermuda

OPL, OPRe and OPAL conduct their reinsurance business from their principal offices in Bermuda and are subjected to regulation under Bermuda law, which, among other things requires them to register and comply with certain requirements as to capitalization. For purposes of Bermuda insurance law and regulation, each of these reinsurance entities are considered to be engaged in general business; OPL is also licensed to write long-term business.

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OPL, OPRe and OPAL must prepare an annual statutory financial return and statutory financial statements in accordance with the requirements of the Bermuda Insurance Act of 1978, amendments thereto and related Regulations (the “Act”), and an annual audit is also required. Each company must also appoint a loss reserve specialist to review and report on its loss reserves on an annual basis.

The minimum paid up share capital to be maintained by OPL under Bermuda insurance law and regulations is $370,000, while OPRe and OPAL each require $120,000. In addition, these Bermuda reinsurance companies are individually required to maintain a minimum solvency margin at least equal to the greater of: (i) $1.0 million or (ii) the aggregate of $1.2 million and 15% of the amount by which net premium income from general business exceeds $6 million; or (iii) 15% of the aggregate of accrued losses and loss expense provisions and other general business insurance reserves. The minimum solvency margin for OPL, OPRe and OPAL is approximately $15 million, $177 million and $1 million, respectively. As of December 31, 2002, OPL, OPRe and OPAL had approximately $1.2 billion, $487 million and $25 million respectively, of statutory capital and surplus in excess of these requirements.

Bermuda insurance law and regulations do not limit the categories of assets in which an insurance company may invest. However OPL, OPRe and OPAL are also required to each maintain a minimum liquidity ratio whereby the value of their relevant assets (mainly cash, investments, receivables and other liquid assets) are not less than 75% of the amount of their relevant liabilities (mainly accrued losses and loss expenses, unearned premiums, reinsurance balances payable and other accounts payable). Investments in and advances to subsidiaries are not included in the definition of relevant assets for purposes of this test. OPRe and OPAL met these requirements for the year ended December 31, 2002. OPL did not meet the minimum liquidity ratio requirement at December 31, 2001 as significantly all of its liquid assets were invested in subsidiaries. In February 2002 OPL received a distribution of cash from OPCC and has since been in compliance with the minimum liquidity ratio requirement.

As a holding company, a significant proportion of OPL’s assets relate to its investments in subsidiaries. As such, OPL’s ability to make future distributions is dependent upon it receiving distributions from its subsidiaries. The Act prohibits OPL, OPRe and OPAL from distributing more than 15% of the prior year’s statutory capital unless specific approval is obtained from the Bermuda Monetary Authority. In addition to the requirements of the Act, the Bermuda Monetary Authority has requested that it pre-approve all distributions from OPL, OPRe and OPAL. In addition to these regulatory restrictions, each subsidiary needs to consider, inter alia, the potential for future adverse development in the ultimate cost of reinsurance liabilities, the potential for significant losses from unexpired policies and the contingencies described in Notes 5 and 15 to the Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data” prior to making such distributions.

OPL, OPRe and OPAL are not admitted or authorized to conduct business in any jurisdictions except Bermuda. They do not maintain an office or solicit, advertise, settle claims or conduct other insurance activities in any jurisdictions other than Bermuda and therefore are not subject to the insurance regulatory requirements of jurisdictions other than Bermuda. However, the statutory standards adopted by the jurisdictions that regulate the companies to which OPL, OPRe and OPAL provide life, property and casualty and other reinsurance affect each of these reinsurance entities indirectly. OPL, OPRe and OPAL record all transactions on their statutory accounts in a manner that complies with statutory accounting principles required by the Bermuda Insurance Act of 1978.

From time to time, there have been congressional and other initiatives in the United States regarding the supervision and regulation of the insurance industry, including proposals to supervise and regulate foreign reinsurers, such as OPL. While none of these proposals have been adopted to date on either the federal or state level, there can be no assurance that federal or state legislation will not be enacted subjecting OPL, OPRe and OPAL to supervision and regulation in the United States, which could have a material adverse effect on the Company. In addition, no assurance can be given that if OPL, OPRe and OPAL were to become subject to any laws of the United States or any state thereof or of any other country at any time in the future, they would be compliant with such laws.

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United States

OPUS Re is subject to regulation under the insurance laws and regulations of all the jurisdictions where it is licensed or authorized to write reinsurance including Delaware, where it is domiciled. OPUS Re is licensed or otherwise authorized to write reinsurance in all 50 states, the District of Columbia and Puerto Rico. Insurance laws and regulations vary from state to state, but in general grant broad powers to supervisory agencies and officials to examine all insurance and reinsurance companies authorized to do business in their state, enforce rules, and exercise discretion, (and impose fines and penalties for violations of regulatory requirements), touching almost every significant aspect of the conduct of the insurance business. As a general rule, most insurance law and regulation focuses on the conduct of an insurance company’s relationship with the policyholder and permit a ceding insurer and a reinsurer to negotiate, without material regulatory involvement, the terms and conditions of and rates charged under almost all reinsurance contracts with unaffiliated parties except for the criteria for statutory accounting statement credit for the reinsurance provided by a reinsurer to an insurer domiciled in a given state. Thus, in general, state insurance laws and regulations are primarily designed for the protection of solvency and policyholders (insureds) rather than for the benefit of ceding insurers or investors. Nevertheless, state regulatory authorities do monitor compliance with, and periodically conduct examinations with respect to, state mandated standards of solvency, licensing requirements, investment limitations, restrictions on the net amount of risk that may be retained, deposits of securities for the benefit of insured’s, methods of accounting, and reserves for unearned premium, losses and other purposes. While insurers and reinsurers are principally regulated by the states, most insurance and reinsurance companies remain obligated to comply with applicable federal laws such as the Employee Retirement Income Security Act of 1974 (“ERISA”), the Financial Services Modernization Act (commonly known as “Gramm-Leach-Bliley”), applicable federal securities laws, and the federal anti-trust laws to the extent not preempted by the McCarran-Ferguson Act.

The National Association of Insurance Commissioners (“NAIC”) is an organization which assists state insurance supervisory officials in the United States to achieve insurance regulatory objectives, including the maintenance and improvement of state regulation. From time to time various regulatory and legislative changes have been proposed in the insurance industry, some of which could have an effect on reinsurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. OPUS Re is unable to predict what effect, if any, these developments may have on its operations and financial condition.

The NAIC has adopted Risk-Based Capital (“RBC”) requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that may be inadequately capitalized. In addition, the formula defines minimum capital standards that supplement the system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the enterprise’s regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The ratios of total adjusted capital to authorized control level RBC for OPUS Re exceeded all the RBC trigger points at December 31, 2002.

Insurance holding company laws and regulations require insurers/reinsurers that are subsidiaries of holding companies to register and file with the regulatory authorities of their state of domicile certain reports, including information concerning their capital structure, ownership, financial condition and general business operations. Additionally, these laws and regulations require that all transactions with affiliates meet certain standards, including that the terms be fair and reasonable, that prior approval be obtained for certain types of transactions between affiliates, and that prior approval be obtained for the declaration and payment of certain kinds of dividends. These Insurance holding company laws and regulations also require prior approval of any change in control of the insurer/reinsurer. In most states, including Delaware, “control” is presumed to exist if 10% or more of the voting securities of the insurer/reinsurer are owned or controlled by a party though the actual existence of control may be established or rebutted where the ownership of voting securities is greater or lesser than that amount.

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Dividend payments by OPUS Re are limited by statutory regulations. These dividend restrictions are generally based on net investment income, statutory net income and on certain levels of policyholders’ surplus as determined under statutory accounting practices (which also require the direct approval of regulatory authorities for any proposed “extraordinary dividend” as defined). OPUS Re’s statutory net loss for 2002 was $4,028,270, and statutory surplus was $73,406,942 as of December 31, 2002. The maximum amount of dividends out of unassigned surplus that may be paid by OPUS Re without prior approval of the Delaware Insurance Commissioner is limited to the greater of (i) ten percent of OPUS Re’s surplus as regards policyholders as shown in the preceding year’s annual statement or (ii) OPUS Re’s net income, excluding realized capital gains, as shown in the preceding year’s annual statement, but shall not include pro rata distributions of any class of OPUS Re’s own securities. The maximum allowable dividend payable in 2003 is $nil unless regulatory authority approval for an “extraordinary dividend” is obtained.

On October 28, 2002 OPUS Re distributed $198.5 million to OPUS Holding following approval from the Delaware Department of Insurance.

REAL ESTATE AND LEASING SEGMENT

An important aspect of the Company’s previous strategy had been the ownership of income-producing real estate and the leasing of assets through subsidiaries of Overseas Partners Capital Corp. (“OPCC”). Prior to 2000, OPCC owned a portfolio of Class A properties in three key United States markets: Atlanta, Boston and Chicago. The portfolio consisted of four large office complexes, one office/retail mixed-use development and a large convention hotel. In addition, OPCC owned two properties and other assets that were leased to major companies. Since August 2000, OPCC and its subsidiaries have sold all of these properties with the exception of a regional distribution facility in Manteno, Illinois, which is leased to Kmart Corporation.

Until January 31, 2002, an OPCC subsidiary, Overseas Capital Co. (“OCC”), leased its Ramapo Ridge Facility (“the Facility”) to United Parcel Service General Services Co., a subsidiary of UPS, for data processing and telecommunications operations. UPS had an option to purchase the building in which the Facility is located at the higher of fair market value or settlement value 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 and the land on which the building is located for $13.6 million, yielding a total gain on sale before income taxes of $47.1 million.

Until July 8, 1998, OCC leased five Boeing 757 air package freighters to UPS. The aircraft were sold pursuant to the terms of a purchase option granted to UPS in a May 31, 1990 Aircraft Lease Agreement between the parties.

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 special purpose subsidiary of OCC. 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. Prior to the scheduled maturity date of each series of bonds, the zero coupon treasury notes will mature in amounts equal to the principal amount of the bonds in that series. In July 1998, 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 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.

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Following our February 2002 decision to put our operations into runoff, we have sought to accelerate the settlement of our 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.

OCC owns all of the limited partnership interests in, and OPCC owns all of the common stock of the corporate general partner of, KMS II Realty Limited Partnership, a Delaware limited partnership (“KMS II”). KMS II owns a 1.5 million square foot regional distribution facility in Manteno, Illinois, which it leases to Kmart Corporation. The initial term of the Kmart lease expires in 2020 and yearly lease payments are approximately $4.2 million. After the initial term, Kmart has the option to extend the lease for ten consecutive terms of five years each. Kmart has the option to purchase the Kmart facility at the end of the initial term of the lease for a price equal to the fair market value of the Kmart facility on that date. 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. 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.

Information concerning identifiable real estate and leasing assets, revenues and net operating income for the years ended 2002, 2001 and 2000 can be found in Notes 8 and 12 of the Notes to the Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data.”

Competition

The commercial real estate industry offers a variety of investment opportunities, each with unique characteristics of type, location, risk and reward. OPCC’s one remaining property is a 1.5 million square foot regional distribution facility in Manteno, Illinois, which it leases to Kmart Corporation. OPCC is not currently actively marketing this property. However, any prospective buyers of the property are likely to be very conservative in their valuations as the Kmart Corporation is currently operating under chapter 11 of the United States Bankruptcy Code.

TAXATION

Under current Bermuda law, OPL and its Bermuda domiciled insurance subsidiaries (“Bermuda insurance subsidiaries”) are not obligated to pay any tax in Bermuda based upon income or capital gains.

Pursuant to the income tax treaty between the United States and Bermuda, a Bermuda insurance company would be subject to United States income tax and United States branch profits tax on its income which is attributable to a United States permanent establishment. Under current law, United States income tax would be imposed at a 35% rate, and the United States branch profits tax would be imposed at a 30% rate. Based on the operations of OPL and its Bermuda insurance subsidiaries, OPL believes that neither it nor its Bermuda insurance subsidiaries have a United States permanent establishment. Moreover, OPL and its Bermuda insurance subsidiaries intend to conduct their activities so that they will not do business in the United States through a permanent establishment. However, as there are no definitive standards provided by the Code, regulations or court decisions concerning what activities constitute a permanent establishment in the United States, and as the determination is essentially factual in nature, there can be no assurance that the United States Internal Revenue Service (“IRS”) will not contend successfully that either OPL or one or more of the Bermuda insurance subsidiaries has income which is attributable to a United States permanent establishment.

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On December 22, 1998, the IRS issued a Notice of Deficiency with respect to OPL’s 1988 through 1990 taxable years in which it asserted that OPL 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, OPL 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 OPL’s Petition. The IRS has also asserted that OPL 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. OPL 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 based its challenges for all years on the assertion that OPL was engaged in a U.S. business with respect to two lines of business: (1) the reinsurance of certain shipper’s risk coverage for United Parcel Service of America, Inc. (“UPS”) customers and (2) the reinsurance of certain workers’ compensation coverage for UPS. 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 could take similar positions for the 1999 year.

On January 22, 2003, OPL and the IRS jointly filed a Stipulation of Settled Issues and entered into a Closing Agreement on Final Determination Covering Specific Matters (the “Closing Agreement”) that substantially reduced the liabilities asserted against OPL described above. More specifically, OPL and the IRS agreed that there is no adjustment to OPL’s income deriving from or relating to premiums earned in connection with the shipper’s risk program for the years 1984 through 1999. However, income associated with the workers’ compensation program (including underwriting and investment income) remains subject to dispute for the years 1988 through 1999. At this time, OPL does not have sufficient information to determine how much remains in dispute, although the amounts involved are presumed to be material.

OPL 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 remaining issue in the Notice of Deficiency for 1988 through 1990 and will vigorously contest the remaining proposed assessments for 1991 through 1994 and any future assessments.

OPL has a number of subsidiaries that are incorporated in the United States, including OPCC and OPUS Re. These United States companies are subject to United States income taxes.

Various provisions of the Internal Revenue Code of 1986 (the “Code”) provide rules designed to approximate current taxation at the shareowner level with respect to certain kinds of undistributed earnings of foreign corporations owned in whole or part by United States residents. Among such provisions are those concerned with “passive foreign investment companies” (“PFICs”), and those concerned with “controlled foreign corporations”. If one or more of these provisions were to apply, some or all of the United States shareowners of OPL would be liable for federal income taxes with respect to certain of the earnings of OPL, whether or not an amount equal to such earnings was distributed to such shareowners as a dividend.

Sections 1291 through 1298 of the Code contain special rules applicable to United States shareowners of foreign corporations that are PFICs. In general, a foreign corporation will be a PFIC if 75% or more of its gross income constitutes “passive income” or 50% or more of its assets produce passive income. In general, if a foreign corporation were to be characterized as a PFIC, a United States shareowner of the foreign corporation would be subject to a special tax and an interest charge on the amount of an “excess distribution” with respect to the foreign corporation’s stock or on the amount of any gain recognized on the disposition of such stock. In addition, certain otherwise tax-free transactions by a United States shareowner involving the foreign corporations’ stock would be subject to tax, and any gain recognized generally would be recharacterized as ordinary income. In general, a distribution a shareowner receives from a PFIC is an “excess distribution” if the amount of the distribution is more than 125% of the average of the distributions (other than certain excess distributions) with respect to the stock during the three preceding taxable years (or shorter period during which the taxpayer held the stock).

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The special tax and interest charge generally are designed to capture the value of the deferral in the payment of taxes that are deemed due under the PFIC rules during the period that the United States shareowner owned the stock. The special tax is computed by assuming that the excess distribution, (or gain in the case of a sale), with respect to the stock was subject to tax in equal portions throughout the United States shareowner’s period of stock ownership at the highest marginal tax rate, rather than at the time the distribution is received (or gain is recognized). The interest charge is computed using the applicable rate imposed on underpayment of United States federal income tax for such period.

For PFIC purposes, “passive income” generally includes interest, dividends, annuities and other investment income. The PFIC rules contain an exception from the “passive income” definition for income “derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business....” (the “Insurance Company Exception”). This exception does not apply to income attributable to reserves and capital to the extent such reserves and capital exceed the reasonable needs of an insurance business.

In general, if a United States shareowner owns stock in a foreign corporation during any taxable year in which such corporation is a PFIC, that stock will be treated as stock in a PFIC for the year in which the corporation is a PFIC and for all subsequent years, even if the corporation is not a PFIC in one or more of those later years. Stock acquired in a foreign corporation that is not a PFIC in the year the stock is acquired should not be treated as stock in a PFIC simply because the corporation issuing the stock was a PFIC in prior years.

During 2000, OPL was advised by the IRS of the existence of an internal IRS memorandum that concludes that the shipper’s risk reinsurance premiums, which OPL received in years before 2000, were not income of OPL and that the associated investment income was not “active income” for purposes of the PFIC rules. Based upon the assumptions and conclusions in the IRS memorandum, the IRS could seek to impose the PFIC rules against OPL’s United States shareowners who owned OPL stock in one or more past years. However, in the Closing Agreement recently entered into between OPL and the IRS, OPL and the IRS agreed that, for the years 1984 through 1999, OPL’s shipper’s risk program was part of the active conduct of an insurance business for purposes of the PFIC rules.

If OPL were found to be a PFIC in any year, those United States shareowners who held OPL shares in that year would suffer adverse tax consequences under the rules described above with respect to certain dispositions of, and distributions on, the shares. In general, gain realized on the disposition of the shares would not be eligible for capital gain treatment, and such gain as well as certain distributions on the shares would be subject to substantially increased tax costs. In addition, under the PFIC regime, gain generally must be recognized from transactions that otherwise would be entitled to non-recognition treatment.

Under section 951(a) of the Code, each “United States 10% shareowner” (as defined below) who owns shares of a controlled foreign corporation (“CFC”) (as defined below) at the end of the year must include in its gross income for United States federal income tax purposes its pro rata share of the CFC’s “subpart F income” earned during the year, even if that income is not distributed. In addition, the United States 10% shareowners of a CFC may be deemed to have received taxable distributions to the extent the CFC increases the amount of its earnings that are invested in certain types of United States property. “Subpart F income” includes, among other things, (1) “foreign personal holding company income,” such as interest, dividends, and other types of passive investment income and (2) “insurance income,” which is defined to include any income (including underwriting and investment income) that is attributable to the issuing (or reinsuring) of any insurance or annuity contract and which (subject to certain modifications) would be taxed under the insurance company provisions of the Code if such income were the income of a domestic insurance company absent an applicable exception (“Subpart F Insurance Income”).

Under section 951(b) of the Code, any United States person who owns 10% or more of the total combined voting power of all classes of stock of a foreign corporation will be considered to be a “United States 10% shareowner.” In general, a foreign corporation is treated as a CFC only if its United States 10% shareowners collectively own more than 50% of the total combined voting power or total value of the corporation’s stock on any day. However, for purposes only of taking into account Subpart F Insurance Income, a foreign corporation will be treated as a CFC if (1) more than 25% of the total combined voting power or total value of its stock is owned by United States 10% shareowners, and (2) the gross amount of premiums or other consideration in respect of Subpart F Insurance Income exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks. No United States shareowner of OPL should be taxed under the general subpart F rules as long as the shareowner does not purchase more than 10% of OPL’s stock.

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A different definition of “controlled foreign corporation” is applicable in the case of a foreign corporation which earns related person insurance income (“RPII”). RPII is defined in section 953(c)(2) of the Code as any “insurance income” attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a “RPII Shareholder” (as defined below) of the foreign corporation or a “related person” to such a shareowner. For purposes only of taking into account RPII, a foreign corporation will be treated as a CFC if its “RPII Shareholders” collectively own, directly, indirectly through foreign entities, or by attribution, 25% or more of the total combined voting power or value of the foreign corporation’s shares on any day during the taxable year. The term “RPII Shareholder” includes all United States persons who own, directly or indirectly through foreign entities, any amount of the stock of the foreign corporation. Generally, the term “related person” for purposes of the RPII rules means someone who controls or is controlled by the RPII Shareholder or someone who is controlled by the same person or persons which control the RPII Shareholder.

The RPII rules do not apply if (i) less than 20% of the voting power and less than 20% of the value of the shares of the foreign corporation are owned, directly or indirectly, by United States persons insured or reinsured by the foreign corporation or persons related to such insured’s or reinsured’s or (ii) the RPII of the foreign corporation, determined on a gross basis, is less than 20% of the corporation’s gross income for such taxable year. OPL currently falls within both of these exceptions, and it expects to continue to fall within at least one of these exceptions.

Section 1248 of the Code provides that if a United States person owns 10% or more of the voting shares of a corporation that is a CFC, any gain from the sale or exchange of the shares may be treated as ordinary income to the extent of the CFC’s earnings and profits during the period that the shareowner held the shares (with certain adjustments). Section 953(c)(7) of the Code generally provides that Code section 1248 also will apply to the sale or exchange of any shares in a foreign corporation by any United States person who is treated as a United States shareowner of the foreign corporation under the RPII rules if the foreign corporation would be taxed as an insurance company if it were a domestic corporation. A United States person would be treated as a United States shareowner under the RPII rules only for purposes of taking into account RPII. Therefore, OPL believes that any potential application of section 1248 of the Code should be limited to a shareowner’s proportionate share of any RPII.

It should be noted that Congress has historically sought to broaden the taxation of foreign enterprises owned by United States residents, and future legislation could affect the United States federal tax treatment of OPL and its shareowners.

The United States imposes an excise tax at the rate of 1% of gross premiums paid to foreign reinsurance companies for reinsurance covering risks located in the United States. Reinsurance premiums paid to OPL and its Bermuda reinsurance subsidiaries by United States insurers are subject to this excise tax.

EMPLOYEES

As of February 28, 2003 OPL, directly and through its subsidiaries, had a total of 41 employees, with 26 in Bermuda, 13 in Philadelphia and 2 in Atlanta.

The Company purchases administrative and other services from a number of suppliers both in the United States and Bermuda. The individuals who provide these outsourced services are not included as employees.

The Company does not have any employees who are represented by a labor union and believes that its employee relations are good.

See “Item 10 – Directors and Executive Officers of the Registrant”.

Financial Information by Geographic Areas

See Note 12 of the Notes to Consolidated Financial Statements of “Item 8 – Financial Statements and Supplementary Data”.

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Available Information

Our Internet website address is www.overseaspartners.com. Under the “SEC Filings” tab at this website, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).

Item 2.             Properties

The Company’s conducts its reinsurance business from leased office premises in Bermuda and Philadelphia. The Company’s conducts its real estate & leasing business from leased office premises in Atlanta. These facilities are generally in good condition and are adequate for the requirements of the Company. For a description of the property held by the Company for its leasing activities, see “Item 1 – Business – Real Estate and Leasing Segment”.

Item 3.             Legal Proceedings

OPL was subject to a tax audit by the IRS for the years 1988 through 1994. Information regarding the tax audit is included in Note 5 of the Notes to Consolidated Financial Statements of “Item 8 – Financial Statements and Supplementary Data”. See also “Item 1 – Business – Taxation” for a description of the outcome of past IRS assessments and proposed IRS assessments against the Company.

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 (the “Court”) 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.

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 signed the stipulation and proposed order. The stipulation does not certify the antitrust claims brought against the Company. Discovery has commenced. The relief sought by the Plaintiffs includes compensatory (including treble) damages, punitive damages and such other relief as the Court may deem equitable and proper. The Company believes that it has meritorious defenses to all claims asserted against it and intends to defend itself vigorously. There can be no assurance, however, that an adverse determination of the lawsuits would not have a material effect on the Company.

Certain of OPL’s subsidiaries are party to legal proceedings in the investigation and defense of claims arising out of their reinsurance business. We do not believe that the eventual outcome of any such proceedings will have a material effect on their condition or business.

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Item 4.             Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended December 31, 2002.

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PART II

Item 5.             Market for Registrant’s Common Equity and Related Stockholder Matters

Summary of OPL Stock

We are currently authorized to issue 900,000,000 shares of our Common Stock, par value $0.10 per share, of which 127,500,000 shares were issued and 118,855,342 outstanding as of February 28, 2003. We are also authorized to issue 200,000,000 shares of preference stock of par value $.10 per share. At present no shares of preference stock have been issued or are outstanding, nor are there any plans to issue any shares of preference stock in the foreseeable future.

Our Common Stock is not listed on a securities exchange and is not traded in the organized over-the-counter markets. Prior to July 21, 1999, units of our Common Stock had been bundled with shares of UPS Common Stock and sold and provided as stock compensation awards to UPS employees under the UPS Managers’ Incentive and UPS Stock Purchase Plans (the “UPS Plans”). On July 21, 1999, we suspended the sale of our Common Stock under the UPS Plans following the announcement by UPS of an initial public offering.

There were approximately 98,000 record holders of our Common Stock as of February 28, 2003.

Voting Rights

Each share of our Common Stock is entitled to one vote in the election of directors and on other matters, except that any Substantial Stockholder, as defined in our Bye-Laws, is entitled to only one one-hundredth of a vote with respect to each vote which is in excess of 10 percent of our outstanding voting stock. The term Substantial Stockholder is defined to mean any shareowner or shareowners acting as a group, other than UPS or any employee benefit plan of ours or UPS or our subsidiaries, who is the beneficial owner of more than 10 percent of the voting power of our outstanding shares entitled to vote generally in the election of directors. There are no limitations imposed by foreign law, or by our Memorandum of Association and Bye-Laws, or by any agreement or other instrument to which we are a party or to which we are subject, on the right of shareowners, solely by reason of their citizenship or domicile, to vote our Common Stock. Upon liquidation, our shareowners are entitled to share on a pro rata basis in our assets legally available for distribution to shareowners.

Transferability of Common Stock - Our Right of First Refusal

Our Bye-Laws provide that no outstanding shares of our voting stock, including shares of our Common Stock, may be transferred, except by operation of law, including a bona fide gift or inheritance, unless the shares shall have first been offered, by written notice, for sale to us at the lower of their fair value or the price at which they are to be offered to the proposed transferee and on the same terms upon which they are to be offered to the proposed transferee. Notices of proposed transfers must be sent to our Treasurer, must set forth the number of shares proposed to be sold, the proposed price per share, the name and address of the proposed transferee and the terms of the proposed sale and must contain a statement by the proposed transferee that the information contained in the notice is true and correct. We have the option, within 30 days after receipt of the notice, to purchase all or a portion of the offered shares. If we fail to exercise or waive the option, the shareowner may, within a period of 20 days thereafter, sell to the proposed transferee all, but not part, of the shares that were previously offered to us and not purchased by us pursuant to our option, for the price and on the terms described in the notice. All transferees of shares hold their shares subject to the same restrictions. Shares previously offered to us but not transferred within the 20-day period remain subject to the initial restrictions.

Under our Bye-Laws, we have the right to purchase shares of our Common Stock that may be issued as stock dividends, or in stock splits, re-capitalization’s or reorganizations similar to the rights that we have to purchase the shares on which the dividend, split, re-capitalization’s or reorganization shares were issued. We also have the right to purchase our Common Stock in a number of other circumstances under our Bye-Laws.

Shares of our Common Stock may be pledged, but they may not be transferred upon foreclosure unless they have first been offered to us in the manner described above.

In addition, any shareowner who is our “affiliate” for purposes of the Securities Act of 1933, may effect a public resale of their shares to a purchaser other than us only upon delivery of an effective prospectus applicable to the resale as permitted by applicable securities laws or upon other compliance with applicable securities laws.

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We have historically exercised our right of first refusal and held such purchased shares in treasury, pending future distributions as incentive awards to current employees of UPS and OPL. However, as discussed further below, on November 23, 1999 the Board decided to impose a temporary limit on the number of shares the Company was willing to repurchase from any shareowner who was looking to sell such shares. On August 8, 2001 the Board suspended the repurchase of all shares for the foreseeable future.

Our Purchase Rights - Recall

We have the right under our Bye-Laws to purchase (or “recall”) shares of our Common Stock from shareowners following their retirement, death or other termination of employment with UPS, OPL, or any of their respective subsidiaries. We may exercise this right to recall all or a portion of the shares of a former employee at any time within a period of three years or thirteen years following the holder’s termination of employment. The purchase price will be the fair value of the shares at the time of purchase.

Until January 1999, the Company had exercised this right of recall each year and held such purchased shares in treasury, pending future distributions as incentive awards to current employees of UPS and OPL. Given our runoff status it is unlikely that we will recall any shares in the future.

Dividend Policy

The declaration and payment of dividends is at the discretion of the Board of Directors and depends on many factors, including our earnings, financial condition, business needs, capital and surplus requirements of our operating subsidiaries and legal and regulatory considerations.

We declared and paid two cash dividends in the amounts of $0.45 and $0.25 per share in 2001 and two cash dividends each in the amount of $0.60 per share in 2000. No dividends were paid during 2002.

Dividends paid by us on shares of our Common Stock to persons residing in the United States will be subject to United States federal income taxes to the same extent that the dividends would be taxable if paid by a domestic corporation, but without the dividend received deduction available to corporations. Similar treatment is likely to be accorded under applicable state law. There are currently no applicable tax treaties or Bermuda laws, decrees or regulations that would adversely affect our payment or remittance of dividends, require withholding for tax purposes or restrict the export or import of capital.

Our Ability to Purchase Shares and Make Dividend and Other Distributions

As the Company continued its transformation into a respected specialty reinsurance company, it became increasingly difficult to balance the short-term liquidity demands of our shareowners with our need to retain a large and stable capital base to support our growth to remain truly competitive in our industry.

On November 23, 1999, following the cancellation of the shipper’s risk business, the Board announced that it would limit the number of shares of our Common Stock that we were willing to purchase from any shareowners seeking to sell such shares between November 23, 1999 and November 1, 2000. During such period, we were willing to purchase up to 10% of the shares of our Common Stock held by any shareowner as of November 23, 1999. On November 1, 2000 the Board announced that it would similarly limit the number of shares that we would be willing to purchase from any shareowners seeking to sell such shares between November 1, 2000 and December 31, 2001. Accordingly, during such period, we were willing to purchase up to 10% of the shares of our Common Stock held by any shareowner as of November 1, 2000. These limits were necessary to preserve the Company’s strong capital base while the Company implemented its specialty reinsurance growth strategy with the aim of providing both long-term value and liquidity to all shareowners.

Between November 23, 1999 and November 1, 2000 the Company purchased 2.9 million shares from 3,020 shareowners for a total cost of $55.9 million. Between November 1, 2000 and August 7, 2001 the Company purchased 3.1 million shares from 5,479 shareowners for a total cost of $52.1 million.

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On August 8, 2001, following a further decline in our capital base as result of poor underwriting and investment performance, we announced that it was now necessary to suspend the share repurchase program entirely. Following this action, and recognizing the desire of many of OPL’s shareowners to have greater liquidity for their investment in OPL, the Board of Directors initiated a comprehensive review of strategic alternatives to provide future liquidity, which resulted in our announcement on February 13, 2002 that we would begin an orderly runoff.

The ultimate goal of the runoff is to distribute equity to shareowners as and when the Board of Directors feels that it is prudent to do so and regulatory requirements allow. However, due to the regulated nature of the reinsurance business and other business reasons, it could take many years to complete the runoff of OPL’s businesses and fully return shareowners’ equity. See Note 13 to the Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data” for a more detailed discussion of this issue.

We expect that such distributions to shareowners will be in the form of liquidating distributions rather than as share repurchases or dividends. If the distributions are liquidating distributions for U.S. federal income tax purposes, they will be treated as payments in exchange for stock. Accordingly, an OPL shareowner would recognize capital gain or capital loss on the difference between (i) the value of the consideration received in a liquidating distribution for each share of OPL stock and (ii) such shareowner’s adjusted tax basis in each share. Any such capital gain or loss would be long-term capital gain or loss if the shareowner held the shares for more than one year on the date of distribution and short-term capital gain or loss if the shareowner held the shares for less than one year on the date of distribution. If there are a series of liquidating distributions, amounts paid are first applied to basis; distributions are only taxed as capital gain once the aggregate amount of the distributions exceeds such basis. Capital losses on a series of liquidating distributions may be recognized only when a shareowner receives the final liquidating distribution with respect to his shares. Notwithstanding the foregoing, in any OPL shares were determined to be shares of a PFIC, any gain realized by a shareowner with respect to such shares as a result of a liquidating distribution would be treated as ordinary income and would be subject to an interest charge. See “Item 1 – Business – Taxation.”

Determination of Fair Value

We currently value our shares of Common Stock at their fair value as determined by the Board of Directors. The current fair value of $10.16 per share was determined by our Board of Directors at their meeting on February 25, 2003.

In determining the fair value, the Board has considered a variety of factors, including past and current earnings and cash flow, the present value of discounted projected future earnings and cash flow, the stock price, earnings and book value of comparable companies, industry considerations, liquidity, debt-to-equity ratios and industry multiples as well as opinions furnished from time to time by investment counselors acting as independent appraisers. In its determination of the fair value of our stock, the Board has not followed any predetermined formula, although more recently it has placed significant weight on the Company’s current Book Value, recognizing the runoff status of the Company. The Board has considered a number of formulas commonly used in the evaluation of securities of closely held and publicly held companies, but its decisions have been based primarily on the judgment of the Board as to our long-range prospects rather than what the Board considers to be short-range trends relating to our Company or to the values of comparable companies. The Board does consider factors generally affecting the market prices of publicly traded securities within the reinsurance market, and prolonged changes in those prices could have an effect on the prices offered by us. One factor in determining the price at which securities trade in the organized securities markets is that of supply and demand. When demand is high in relation to the shares that investors seek to sell, prices tend to increase, while prices tend to decrease when demand is low in relation to shares being sold. Our Board of Directors does not give significant weight to supply-demand considerations in determining the fair value for our shares.

The Board will evaluate the fair value of our Common Stock on a semi-annual basis, with evaluations occurring in February and August of each year.

The following table reflects the price at which we have purchased shares of Common Stock since August 10, 2000:

The Company has not repurchased shares of common stock since August 8, 2001. The fair value per share, as determined by our board of directors since that date has been as follows:

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Custody Arrangements for Certificates of OPL Common Stock

Each shareowner may elect to have Wachovia Bank hold his or her certificates as custodian without cost to the shareowner. Wachovia’s Employee Shareholder Service Department is located in Philadelphia, Pennsylvania and can be contacted at the following address:

Wachovia Bank
Employee Shareholder Services Corporate
Trust Department
P.O. Box 41784
123 South Broad Street
Philadelphia, PA
19101-1784

Phone: (215) 875-1144
Toll Free: (877) 223-6966

If a shareowner elects to have Wachovia hold the shares of Common Stock in custody, Wachovia will have the shares registered in its name, or that of a nominee, and will sell or otherwise dispose of the shares only upon the shareowner’s instruction and in conformity with our Bye-Laws. Distributions on Common Stock held in custody will be promptly remitted by Wachovia to the shareowner. Shareowners will receive periodic statements of the number of shares held by Wachovia for their account and of distributions paid on those shares. Notice of any regular or special meeting of our shareowners will be forwarded to shareowners by Wachovia, which will vote the shares as directed by the shareowner in a letter of instruction if returned to Wachovia in a timely fashion, or, on request, furnish the shareowner with a proxy thus permitting the shareowner to vote the number of shares of Common Stock held for him or her at the meeting.

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Item 6.             Selected Financial Data

The following selected financial information should be read in conjunction with OPL’s consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which follow this section. Reference is also made to “Item 1–Business–Real Estate and Leasing Segment” for a discussion of the sales and financing of real estate and leasing assets. All currency amounts herein are expressed in U.S. dollars.

Five-Year Selected Financial Data
(In thousands U.S.$, except per share amounts)

Income Statement Data:

Balance Sheet Data:

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Item 7.             Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements contain certain amounts that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If actual events or results differ materially from management’s underlying assumptions or estimates, there could be a material effect on our results of operations and financial condition and liquidity.

We believe that the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements:

•         reserving for accrued losses and loss expenses,

•         the recognition of premiums written and ceded,

•         the deferral and recognition of acquisition expenses,

•         the recognition of other-than-temporary impairments to our available-for-sale investment portfolio.

The reserve for accrued losses and loss expenses includes an estimate of outstanding losses and an estimate for losses incurred but not reported (“IBNR”). Outstanding losses are estimated based on ceding company reports and other data considered relevant to the estimation process. The estimate for IBNR reflects management’s best estimates based on the recommendations of an independent actuary using common actuarial techniques that project ultimate losses from the past loss experience of the Company and relevant industry data. The actuaries utilize two common methods of actuarial evaluation used within the insurance industry, the Loss Development Method and the Bornhuetter-Ferguson Method. The Loss Development Method involves projecting current values of paid and reported losses to their ultimate value based on historical paid and reported loss patterns, adjusted to reflect the changing characteristics of the book of business written by the Company. Because actual paid and reported losses fluctuate over time around the expected pattern, the Bornhuetter-Ferguson Method is employed to stabilize projected ultimate losses from the Loss Development Method. The Bornhuetter-Ferguson Method is essentially an averaging of two estimates of ultimate loss - the Loss Development indicated ultimate losses and an expectation of ultimate losses made independent of actual loss experience. At any point in time, the weights assigned to each estimate are judgmentally determined with greater weight initially assigned to the Bornhuetter-Ferguson Method and then to the Loss Development Method once a greater percentage of ultimate losses have been reported.

Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors, which could vary significantly as claims are settled. During the claim settlement period, which may be many years, additional facts regarding individual claims may become known. For example, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could significantly affect future loss development.

While the reserving process is difficult and subjective for the ceding companies, the inherent uncertainties of estimating such reserves are even greater for reinsurers such as the Company, due primarily to the length of time between the date of an occurrence and the reporting of any attendant claims to the reinsurer, the necessary reliance on the ceding companies for information regarding reported claims, differing reserving practices among ceding companies, and the diversity of loss reporting and payment patterns among different types of reinsurance treaties or facultative contracts. In particular, there are significant uncertainties over the estimates of the ultimate losses on the Company’s satellite reinsurance portfolio. The Company may suffer further losses on various satellites as a result of higher power degradation experienced than was anticipated at the time of underwriting. There are also significant uncertainties surrounding the estimates of losses incurred as a result of the terrorist attacks on the World Trade Center and the related events of September 11, 2001. The unprecedented nature and magnitude of these events increases the level of uncertainty surrounding the estimates of losses incurred.

While the Company has recorded its current best estimate of its liabilities for unpaid losses and loss expenses, it is reasonably possible that these estimated liabilities may increase or decrease in the future and that the increase or decrease may be material to its results from operations, cash flows and financial position. The reserves as established by management are reviewed regularly and adjustments are made in the period in which they become known.

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Premiums written and ceded are recorded based on estimates of ultimate amounts at inception of the contract. Such estimates are based on information received from brokers, ceding companies and insureds, and are regularly reviewed with adjustments, if any, recorded in the period in which they are determined. Adjustments to original premium estimates, without a corresponding adjustment in expenses and incurred claims, could be material. The subjectivity of these estimates is demonstrated by the decrease in premium estimates of approximately $45.3 million for the year ended December 31, 2001. Further adjustments in premium estimates could adversely affect net income in future periods.

Premiums written and ceded are recognized as earned on a pro-rata basis over the period the coverage is provided. Contracts written on a policies attaching basis cover losses which attach to the underlying insurance policies written during the terms of the contracts. Premiums earned on a policies attaching basis usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24 month period rather than the traditional 12 month period. The selection of the expected coverage period is subject to significant management judgment. Unearned premiums and acquisition expenses, primarily commissions and taxes, applicable to the unexpired periods of the policies in force are deferred.

Policy acquisition expenses, which include commissions, taxes and certain other expenses that vary with and are primarily associated with acquiring business, are deferred and amortized over the estimated lives of the reinsurance contracts. The deferred expenses are recorded as an asset commonly referred to as deferred acquisition costs. The deferral of acquisition expenses is limited to their realizable value by giving consideration to losses and expenses expected to be incurred as premiums are earned and to the anticipated future investment income related to such premiums. If, after limiting the deferral of acquisition expenses, the remaining unearned premium and anticipated future investment income is insufficient to cover anticipated future losses and loss expenses then the premium deficiency is recorded as part of incurred losses and loss expenses. The deferral of acquisition expenses is reviewed on a program-by-program basis.

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 fair value of securities is based on quoted market prices. On a quarterly basis the Company 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. The primary factors considered in evaluating whether a decline in value for securities is other than temporary include: (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial condition and near-term prospects of the issuer and (c) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery. The identification of potentially impaired investments and the assessment of whether any decline in value is other than temporary involves significant management judgment.

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RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Year Ended December 31, 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, and losses will be incurred, on business written prior to the runoff decisions. Some of these policies do not expire for several years and include launch and in-orbit satellite exposures through to 2007, financial guaranty programs that expire in 2005 and a residual value reinsurance program where the Company is exposed to losses until 2013.

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) or 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.

Gross premiums written for the year ended December 31, 2002 reflect $0.8 million of new business written in Bermuda (net of the effect of subsequent novations) and $203.7 million of renewals compared with $139.7 million and $427.9 million, respectively, for the year ended December 31, 2001. In addition, OPUS Re wrote $235.9 million of gross premiums in the year ended December 31, 2002 compared to $172.1 million for the year ended December 31, 2001. Gross premiums written for the year ended December 31, 2002 also reflect an increase in premium estimates of approximately $4.5 million compared with a decrease of $45.3 million for the year ended December 31, 2001.

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Premiums earned for the year ended December 31, 2002 decreased to $457.3 million compared to $609.4 million for the year ended December 31, 2001. This decrease was primarily due to decreases in premiums earned on our workers’ compensation, property catastrophe, accident & health and finite risk lines of business following the runoff decision. The decreases in these lines were partially offset by an increase in premiums earned by OPUS Re reflecting the fact that OPUS Re continued to increase its book of business from when it first commenced writing business in the first quarter of 2001 until the date it was placed into runoff.

Commission and fee income decreased to $6.9 million for the year ended December 31, 2002 compared with $12.1 million for the corresponding period in 2001. Approximately $3.4 million of the decrease is due to a decrease 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. This decrease was primarily due to the runoff decision. The remainder of the decrease was due to commission income earned by Parcel Insurance Plan, Inc. (“PIP”), our subsidiary, prior to its sale in May 2001.

For the year ended December 31, 2002 premiums ceded decreased to $78.6 million compared to $93.9 million for the year ended December 31, 2001. Premium ceded for the year ended December 31, 2002 primarily related to:

•         $77.4 million of property catastrophe premiums ceded to Renaissance Reinsurance Ltd., including $50.9 million as a result of a 100% quota share of the in-force property catastrophe business that became effective on February 15, 2002;

•         $3.4 million of premiums ceded relating to our purchase of several layers of excess of loss protection for our aviation book of business. The reinsurance protection provides coverage of $12.0 million in excess of $3.0 million for a single loss event for losses occurring up until August 2003. Each layer of this excess of loss protection can be reinstated a maximum of either one or two times; and

•         A reduction in estimated premiums ceded of $3.0 million relating to our accident & health programs primarily due to the commutation of a contract originally written in 2001 and a significant reduction in premium estimates for another contract.

Commissions, taxes and underwriting expenses for the year ended December 31, 2002 decreased by $69.8 million from $211.4 million for the year ended December 31, 2001. This decrease was related to the decrease in premiums earned and 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 126.7% for the year ended December 31, 2002, and we experienced a net underwriting loss of $115.3 million. The underwriting loss was primarily due to:

•         Incurred losses of $46.7 million as a result of credit default events on two multi-year financial lines programs;

•         Incurred losses of $10.8 million reflecting the cost of commutations of three of our satellite programs;

•         Internal underwriting expenses and runoff costs of $28.5 million;

•         Incurred losses of approximately $14.8 million relating to OPUS Re casualty business, and other long tail programs, where we expect to generate profits through future investment income; and

•         Adverse development in the estimate of ultimate losses on a number of programs, primarily a marine contract and two multi-year contracts in our property and accident & health lines of business, respectively.

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Our combined ratio was 150.8% for the year ended December 31, 2001, when we experienced an underwriting loss of $297.6 million. The underwriting loss and combined ratio for the year ended December 31, 2001 were affected by the following factors:

•         Estimated losses incurred of $130 million as a result of the terrorist attacks that occurred on September 11, 2001 at the World Trade Center and other locations within the United States. Losses incurred are net of reinsurance recoverables of $176.7 million. The estimated losses consist of the following: