UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

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

Commission File Number: 1-16535

 

Odyssey Re Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		52-2301683 (I.R.S. Employer Identification Number)
Odyssey Re Holdings Corp. 300 First Stamford Place Stamford, Connecticut (Address of Principal Executive Offices)		06902 (Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
8.125% Series A Preferred Stock		New York Stock Exchange
Floating Rate Series B Preferred Stock		New York Stock Exchange

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes o No þ

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

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

          The aggregate market value of the shares of all classes of voting shares of the registrant held by non-affiliates of the registrant on June 30, 2009 was $825.3 million, computed upon the basis of the closing sale price of the Common Stock on that date. For purposes of this computation, shares held by directors (and shares held by entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

          As of February 25, 2010, there were 56,604,650 outstanding shares of Common Stock, par value $0.01 per share, of the registrant, all of which were held by Fairfax Financial Holdings Limited and its affiliates.

 

 

ODYSSEY RE HOLDINGS CORP.

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			5
Item 1A. Risk Factors			36
Item 1B. Unresolved Staff Comments			44
Item 2. Properties			44
Item 3. Legal Proceedings			44
Item 4. Submission of Matters to a Vote of Security Holders			45
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			45
Item 6. Selected Financial Data			46
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			93
Item 8. Financial Statements and Supplementary Data			96
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			174
Item 9A. Controls and Procedures			174
Item 9B. Other Information			174
PART III
Item 10. Directors, Executive Officers and Corporate Governance			175
Item 11. Executive Compensation			178
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			205
Item 13. Certain Relationships and Related Transactions, and Director Independence			206
Item 14. Principal Accountant Fees and Services			209
PART IV
Item 15. Exhibits and Financial Statement Schedules			210
EX-10.13
EX-10.15
EX-10.23
EX-21.1
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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

SAFE HARBOR DISCLOSURE

          In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements contained in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

          We have included in this Annual Report on Form 10-K filing, and from time to time our management may make, written or oral statements that may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements relate to, among other things, our plans and objectives for future operations. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to:

	•		a reduction in net income if our loss reserves are insufficient;
	•		the occurrence of catastrophic events with a frequency or severity exceeding our estimates;
	•		the lowering or loss of one or more of our financial or claims-paying ratings, including those of our subsidiaries;
	•		an inability to realize our investment objectives;
	•		a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry;
	•		emerging claim and coverage issues, which could expand our obligations beyond the amount we intend to underwrite;
	•		ongoing legislative and regulatory developments that may disrupt our business or mandate changes in industry practices in a fashion that increases our costs or requires us to alter aspects of the way we conduct our business;
	•		changes in economic conditions, including interest rate, currency, equity and credit conditions that could affect our investment portfolio;
	•		a change in the requirements of one or more of our current or potential customers relating to counterparty financial strength, claims-paying ratings, or collateral requirements;
	•		actions of our competitors, including industry consolidation, and increased competition from alternative sources of risk management products, such as the capital markets;
	•		our 100% shareholder’s ability to determine the outcome of our corporate actions that require board or shareholder approval;
	•		our ability to raise additional capital if it is required;
	•		the availability of dividends from our reinsurance and insurance company subsidiaries;
	•		the loss of services of any of our key employees;
	•		our use of reinsurance brokers in contract negotiations and as cash settlement agents;
	•		the failure of our reinsurers to honor their obligations to us;
	•		the growth of our specialty insurance business and the development of our infrastructure to support this growth;

	•		operational and financial risks relating to our utilization of program managers, third-party administrators, and other vendors to support our specialty insurance operations;
	•		the passage of federal or state legislation subjecting our business to additional supervision or regulation, including additional tax regulation, in the United States or other jurisdictions in which we operate;
	•		our reliance on computer and data processing systems; and
	•		acts of war, terrorism or political unrest.

          The words “believe,” “anticipate,” “estimate,” “project,” “expect,” “intend,” “will likely result,” “will seek to” or “will continue” and similar expressions or their negative or variations identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We have described some important factors that could cause our actual results to differ materially from those expressed in any forward-looking statement we make, including factors discussed below in Item 1A — “Risk Factors.” Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I

Item 1.		Business

The Company

          OdysseyRe is a leading underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer both treaty and facultative reinsurance to property and casualty insurers and reinsurers. We also write insurance business through our offices throughout the United States and in London. Our global presence is established through 21 offices, with principal locations in the United States, London, Paris, Singapore, Toronto and Mexico City. We had gross premiums written of $2.2 billion in 2009 and our shareholders’ equity as of December 31, 2009 was $3.6 billion. For the year ended December 31, 2009, reinsurance represented 64.4% of our gross premiums written, and primary insurance represented the remainder, or 35.6%.

          The United States is our largest market, generating 50.5% of our gross premiums written for the year ended December 31, 2009. Our operations are managed through four divisions: Americas, EuroAsia, London Market and U.S. Insurance. The Americas division is comprised of our reinsurance operations in the United States, Canada and Latin America. The Americas division primarily writes treaty property, general casualty, specialty casualty, surety and facultative casualty reinsurance business, primarily through professional reinsurance brokers. The EuroAsia division, headquartered in Paris, writes treaty reinsurance. Our London Market division operates through Newline Syndicate (1218) at Lloyd’s and Newline Insurance Company Limited, where the business focus is casualty insurance, and our London branch, which focuses on worldwide property and casualty reinsurance. The U.S. Insurance division writes specialty insurance in the United States, including medical professional liability, professional liability and crop business. Across our operations, 50.8% of our gross premiums written were generated from casualty business, 41.0% from property business and 8.2% from specialty classes, including marine, aviation, surety and credit.

          Odyssey Re Holdings Corp. was incorporated on March 21, 2001 in the state of Delaware. In June 2001, we completed our initial public offering. On September 18, 2009, Fairfax Financial Holdings Limited (“Fairfax”), which at the time owned approximately 72.5% of our outstanding common stock, and OdysseyRe announced that they had entered into an agreement and plan of merger (the “Merger Agreement”) pursuant to which Fairfax would promptly commence a tender offer to acquire all of the outstanding shares of common stock of OdysseyRe that Fairfax and its subsidiaries did not currently own, for $65.00 in cash per share, representing total cash consideration of approximately $1.1 billion. Pursuant to the Merger Agreement, on September 23, 2009, Fairfax commenced a tender offer for all of the outstanding shares of common stock of OdysseyRe (the “Offer”) other than shares owned by Fairfax and its subsidiaries for $65.00 in cash per share. The Board of Directors of OdysseyRe, following the unanimous recommendation of a special committee comprised solely of independent directors, which had been formed to review and consider any Fairfax proposal, recommended that OdysseyRe’s minority stockholders tender their shares to the Fairfax offer and vote or consent to approve and adopt the Merger Agreement if it were to be submitted for their approval and adoption.

          Pursuant to the Offer, which expired on October 21, 2009 at 12:00 midnight, New York City time, Fairfax acquired a total of approximately 14.3 million shares of common stock of OdysseyRe (the “Tendered Shares”). The Tendered Shares, combined with the shares previously owned by Fairfax and its subsidiaries, represented approximately 97.1% of the 58,451,922 shares of common stock of OdysseyRe then outstanding. Following the purchase of the Tendered Shares, Fairfax caused a short-form merger pursuant to which Fairfax Investments USA Corp., a newly-formed, wholly-owned subsidiary of Fairfax, merged with and into OdysseyRe (the “Merger”).

          The Merger was effected on October 28, 2009 pursuant to Section 253 of the General Corporation Law of the State of Delaware (the “DGCL”) by the execution and filing of a Certificate of Ownership and Merger with the Secretary of State of the State of Delaware. As a result of the Merger, all of the remaining shares of OdysseyRe’s common stock held by the remaining minority shareholders of OdysseyRe (the “Remaining Shares”) were cancelled and, subject to appraisal rights under Delaware law, converted into the right to receive $65.00 per share in cash, without interest, and subject to any applicable withholding of taxes. As a result of the Merger, Fairfax and its subsidiaries became the owner of 100% of the outstanding shares of our common stock.

We subsequently withdrew our shares of common stock from listing on the New York Stock Exchange and terminated registration of these shares under the Securities Exchange Act of 1934.

          The following is a summary of our operating subsidiaries:

	•		Odyssey America Reinsurance Corporation (“Odyssey America”), a Connecticut property and casualty reinsurance company, is a direct subsidiary of OdysseyRe and is our principal reinsurance subsidiary. Odyssey America underwrites reinsurance on a worldwide basis.
	•		Newline Holdings U.K. Limited, a direct subsidiary of Odyssey America, is a holding company with several wholly-owned operating subsidiaries, including Newline Underwriting Management Ltd., through which it manages Newline Syndicate (1218) at Lloyd’s of London, and Newline Corporate Name Limited (“NCNL”), which provides capital for and receives the distributed earnings of Newline Syndicate (1218), and Newline Insurance Company Limited (“NICL”) (collectively, “Newline”).
	•		Clearwater Insurance Company (“Clearwater”), a Delaware company, is a direct subsidiary of Odyssey America. Clearwater holds insurance licenses in 43 states.
	•		Hudson Insurance Company (“Hudson”), a Delaware company, is a direct subsidiary of Clearwater. Hudson, based in New York City, is the principal platform for our specialty insurance business and holds insurance licenses in 50 states.
	•		Hudson Specialty Insurance Company (“Hudson Specialty”), a New York company, is a direct subsidiary of Clearwater and is an eligible surplus lines insurer in 49 states.
	•		Clearwater Select Insurance Company (“Clearwater Select”), a Delaware company, is a direct subsidiary of Clearwater. Clearwater Select is licensed in 40 states.

Business Objectives

          Our objective is to build shareholder value by achieving an average annual growth in shareholders’ equity of 15% over the long-term by focusing on underwriting profitability and generating superior investment returns. We intend to continue to achieve our objective through:

	•		Adhering to a strict underwriting philosophy. We emphasize disciplined underwriting over premium growth, concentrating on carefully selecting the risks we reinsure and determining the appropriate price for such risks. We seek to achieve our principal goal of attracting and retaining high quality business by centrally managing our diverse operations.
	•		Increasing our position in specialty insurance business. We intend to continue expanding our specialty insurance business by exploring underserved market segments or classes of business, while maintaining our commitment to underwriting discipline.
	•		Pursuing attractive lines of business. We seek to take advantage of opportunities to write new lines of business or expand existing classes of business, based on market conditions and expected profitability. We expect to expand our position over time in domestic and international markets by delivering high quality service and developing and maintaining knowledge of the markets that we serve.
	•		Maintaining our commitment to financial strength and security. We are committed to maintaining a strong and transparent balance sheet. We will sustain financial flexibility through maintaining prudent operating and financial leverage and investing our portfolio primarily in high quality fixed income securities and value-oriented equity securities.
	•		Achieving superior returns on invested assets. We manage our investments using a total return philosophy, seeking to maximize the economic value of our investments, as opposed to current income. We apply a long-term value-oriented philosophy to optimize the total returns on our invested assets.

Enterprise Risk Management

          We seek to apply prudent risk management principles and practices throughout our company. We are engaged in continuous enhancement of our risk management framework through the identification of risks that threaten our ability to achieve certain financial and operational objectives. Our primary risk exposures emanate from underwriting, loss reserving, investing and operations. Our Chief Risk Officer, who reports directly to the Chief Executive Officer, leads a multi-disciplinary team whose tasks are to identify, measure, evaluate and manage risk. To assist with the measurement process, we have established risk tolerances for our business. Comparison of actual risk indications to established levels of tolerance are performed regularly. Results of these comparisons are reviewed with the Chief Executive Officer and others within senior management, and are periodically reported to our Board of Directors.

Overview of Reinsurance

          Reinsurance is an arrangement in which the reinsurer agrees to indemnify an insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance or reinsurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks or classes of risks, and catastrophe protection from large or multiple losses. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks. Reinsurance, however, does not discharge the ceding company from its liability to policyholders. Rather, reinsurance serves to indemnify a ceding company for losses payable by the ceding company to its policyholders or cedants.

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

risk management and underwriting practices in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty.

          With facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance or reinsurance contract. Facultative reinsurance is negotiated separately for each contract that is reinsured and normally is purchased by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the dollar limits of their reinsurance treaties or for unusual risks.

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

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

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

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

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

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

Lines of Business

          Our reinsurance operations primarily consist of the following lines of business:

•

Casualty. Our casualty business includes a broad range of specialty casualty products, including professional liability, directors’ and officers’ liability, workers’ compensation and accident and health, as well as general casualty products, including general liability, and automobile liability and personal accident coverages written on both a treaty proportional and excess of loss basis as well as on a facultative basis.

	•		Property. Our property business includes reinsurance coverage to insurers for property damage or business interruption losses covered in industrial and commercial property and homeowners’ policies. This business is written on a treaty proportional and excess of loss basis. Outside the U.S., we also write property reinsurance on a facultative basis. Our most significant exposure is typically to losses from windstorms and earthquakes, although we are also exposed to losses from events as diverse as freezes, riots, floods, industrial explosions, fires, hail and a number of other loss events. Our property reinsurance treaties generally exclude certain risks such as losses resulting from acts of war, nuclear, biological and chemical contamination, radiation and environmental pollution.
	•		Marine and Aerospace. We provide reinsurance protection for marine hull, cargo, transit and offshore oil and gas operations on a proportional and non-proportional basis. We also provide specialized reinsurance protection in airline, general aviation and space insurance business, primarily on a non-proportional basis.
	•		Surety and Credit. Credit reinsurance, written primarily on a proportional basis, provides coverage to commercial credit insurers, while our surety lines relate primarily to bonds and other forms of security written by specialized surety insurers.

          Our insurance operations primarily consist of the following lines of business:

	•		Medical Professional Liability. Our medical professional liability business primarily provides coverage for group and individual physicians and small and medium-sized hospital accounts.
	•		Professional Liability. Our professional liability business primarily consists of coverages for architects and engineers, directors’ and officers’ liability, fiduciary, media professional and environmental consultants.
	•		Commercial Automobile and Personal Automobile. Our specialty commercial automobile book of business consists primarily of off-duty liability for truckers as well as liability coverages for transporters and West Coast regional waste haulers. Our private passenger automobile book of business is focused in California.
	•		Specialty Liability. Our specialty liability business primarily focuses on casualty risks in the excess and surplus markets. Our target classes include mercantile, manufacturing and building/premises, with particular emphasis on commercial and consumer products, miscellaneous general liability and other niche markets. We also provide occupational benefit and liability coverages targeted to federally recognized tribes.
	•		Property and Package. Our property and package business is primarily focused on agriculture, offshore energy, and risks of restaurant franchisees, written throughout the United States.

          The following table sets forth our gross premiums written, by line of business, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property excess of loss		$	414.9				18.8	%		$	393.8				17.2	%		$	351.4				15.4	%
Property proportional			282.2				12.9				335.7				14.6				319.7				14.0
Property facultative			21.8				1.0				18.2				0.8				21.8				0.9
Property reinsurance			718.9				32.7				747.7				32.6				692.9				30.3
Casualty excess of loss			276.3				12.6				231.0				10.1				255.0				11.2
Casualty proportional			166.0				7.6				236.9				10.3				290.0				12.7
Casualty facultative			57.1				2.6				72.0				3.1				82.0				3.6
Casualty reinsurance			499.4				22.8				539.9				23.5				627.0				27.5
Marine and aerospace			104.1				4.7				123.9				5.4				128.7				5.6
Surety and credit			92.1				4.2				90.7				4.0				97.3				4.3
Total reinsurance			1,414.5				64.4				1,502.2				65.5				1,545.9				67.7
Property and package			135.0				6.1				111.5				4.9				68.5				3.0
Professional liability			119.9				5.5				130.9				5.7				139.3				6.1
Specialty liability			114.0				5.2				90.9				3.9				90.3				4.0
Medical professional liability			96.9				4.4				113.9				4.9				130.2				5.7
Commercial automobile			65.6				3.0				68.2				3.0				52.4				2.3
Personal automobile			15.6				0.7				24.3				1.1				51.6				2.3
U.S. Insurance			547.0				24.9				539.7				23.5				532.3				23.4
Liability lines			227.9				10.4				248.2				10.8				201.5				8.8
Other lines			5.6				0.3				4.4				0.2				3.0				0.1
Total insurance			780.5				35.6				792.3				34.5				736.8				32.3
Total gross premiums written		$	2,195.0				100.0	%		$	2,294.5				100.0	%		$	2,282.7				100.0	%

          For the year ended December 31, 2009, total reinsurance gross premiums written were $1,414.5 million, or 64.4% of our gross premiums written, and the remaining $780.5 million, or 35.6%, was insurance business. Our insurance premiums include our U.S. Insurance division and business written by Newline, which is part of our London Market division. Treaty reinsurance represents 60.8% of our total gross premiums written and 94.4% of our total reinsurance gross premiums written. Facultative reinsurance is 3.6% of our gross premiums written and 5.6% of our total reinsurance business. During 2009, 41.6% of our total reinsurance gross premiums written was proportional and 58.4% was excess of loss.

          We write property catastrophe excess of loss reinsurance, covering loss or damage from unpredictable events such as hurricanes, windstorms, hailstorms, freezes or floods, which provides aggregate exposure limits and requires cedants to incur losses in specified amounts before our obligation to pay is triggered. For the year ended December 31, 2009, $305.3 million, or 13.9%, of our gross premiums written were derived from property catastrophe excess of loss reinsurance. We also write property business, which has exposure to catastrophes, on a proportional basis, in all divisions.

          Treaty casualty business accounted for $442.4 million, or 20.2%, of gross premiums written for the year ended December 31, 2009, of which 37.5% was written on a proportional basis and 62.5% was written on an excess of loss basis. Our treaty casualty portfolio principally consists of specialty casualty products, including professional liability, directors’ and officers’ liability, workers’ compensation and accident and health, as well as general casualty products, including general liability and automobile liability. Treaty property business represented $697.1 million, or 31.8%, of gross premiums written for the year ended December 31, 2009,

primarily consisting of commercial property and homeowners’ coverage, of which 40.5% was written on a proportional basis and 59.5% was written on an excess of loss basis. Marine and aerospace business accounted for $104.1 million, or 4.7%, of gross premiums written for the year ended December 31, 2009, of which 30.7% was written on an excess of loss basis and 69.3% on a proportional basis. Surety and credit lines accounted for 4.2% of gross premiums written in 2009.

          Facultative reinsurance accounted for $78.9 million, or 3.6%, of gross premiums written for the year ended December 31, 2009, all of which was derived from the Americas division. With respect to facultative business in the United States, we write only casualty lines of business, including general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial automobile lines; with respect to facultative business in Latin America, we write primarily property lines of business.

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

          We provide insurance products through our U.S. Insurance division. This business is comprised of specialty insurance business underwritten on both an admitted (licensed to write insurance in a particular state) and non-admitted (approved, but not licensed, to write insurance in a particular state) basis. Business is generated through national and regional agencies and brokers, as well as through program administrators. Each program administrator has strictly defined limitations on lines of business, premium capacity and policy limits. Many program administrators have limited geographic scope and all are limited regarding the type of business they may accept on our behalf.

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

Divisions

          Our business is organized across four operating divisions: the Americas, EuroAsia, London Market, and U.S. Insurance divisions. The table below illustrates gross premiums written, by division, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
Division		$				%				$				%				$				%
										(In millions)
Americas		$	745.9				34.0	%		$	776.4				33.8	%		$	834.9				36.6	%
EuroAsia			559.2				25.5				596.7				26.0				565.6				24.8
London Market			342.9				15.6				381.7				16.7				349.9				15.3
U.S. Insurance			547.0				24.9				539.7				23.5				532.3				23.3
Total gross premiums written		$	2,195.0				100.0	%		$	2,294.5				100.0	%		$	2,282.7				100.0	%

          Our commitment to disciplined underwriting is evidenced by (i) the decline in gross premiums written from 2007 (5.9%) in the Americas and London Market divisions following significant market softening over the past three years, and (ii) modest but carefully cultivated growth in gross premiums written in the U.S. Insurance division, in targeted markets ripe for expansion.

Americas Division

          The Americas is our largest division, accounting for $745.9 million, or 34.0%, of our gross premiums written for the year ended December 31, 2009. The Americas division is organized into three major units: the United States, Latin America and Canada. The Americas division writes treaty casualty and property reinsurance and facultative casualty reinsurance in the United States and Canada. In Latin America, we write treaty and facultative property reinsurance along with other predominantly short-tail lines. The Americas division operates through five offices: Stamford, New York City, Mexico City, Miami and Toronto, and as of December 31, 2009 had 301 employees. The Americas division’s principal client base includes small to medium-sized regional and specialty ceding companies, as well as various specialized departments of major insurance companies. The Americas division operates primarily as a broker market reinsurer. The top five brokers, Guy Carpenter & Co. Inc., Aon Benfield, Willis Re Group Holdings, Ltd., Towers Perrin Reinsurance and Risk Solutions Corporation generated 79.5% of the division’s gross premiums written. The Americas division primarily underwrites business in U.S. dollars or Canadian dollars.

          The following table displays gross premiums written by each of the units within the Americas division for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
United States		$	561.7				75.3	%		$	578.0				74.5	%		$	650.2				77.9	%
Latin America			146.2				19.6				158.1				20.3				141.4				16.9
Canada			38.0				5.1				40.3				5.2				43.3				5.2
Total gross premiums written		$	745.9				100.0	%		$	776.4				100.0	%		$	834.9				100.0	%

          The following table displays gross premiums written for the Americas division, by type of business, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property excess of loss		$	157.7				21.2	%		$	144.3				18.6	%		$	125.1				15.0	%
Property proportional			97.9				13.1				132.4				17.0				123.3				14.8
Property facultative			21.8				2.9				17.9				2.3				19.5				2.3
Property reinsurance			277.4				37.2				294.6				37.9				267.9				32.1
Casualty excess of loss			203.4				27.2				150.5				19.4				181.5				21.7
Casualty proportional			134.4				18.0				186.6				24.0				232.5				27.9
Casualty facultative			57.1				7.7				72.0				9.3				82.0				9.8
Casualty reinsurance			394.9				52.9				409.1				52.7				496.0				59.4
Marine, aviation and space			23.9				3.2				27.6				3.6				25.4				3.0
Surety and credit			49.7				6.7				45.1				5.8				45.6				5.5
Total gross premiums written		$	745.9				100.0	%		$	776.4				100.0	%		$	834.9				100.0	%

          The unit in the United States provides treaty reinsurance of virtually all classes of non-life insurance. In addition to the specialty casualty and general casualty reinsurance lines, the unit also writes commercial and personal property as well as marine, aviation and space, accident and health, and surety lines. Facultative casualty reinsurance is also written in the United States unit, mainly for general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial automobile. The United States unit operates out of offices in Stamford and New York City. The following table displays gross premiums written, by business segment, for the United States for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Specialty casualty		$	232.2				41.3	%		$	221.6				38.3	%		$	295.4				45.4	%
Property			163.0				29.0				172.4				29.8				148.1				22.8
Facultative			57.1				10.2				72.0				12.4				82.0				12.6
General casualty			53.7				9.6				64.9				11.2				74.6				11.5
Surety			34.2				6.1				32.4				5.6				36.4				5.6
Marine			18.4				3.3				18.8				3.2				18.3				2.8
Other			3.1				0.5				(3.1	)			(0.5	)			(4.2	)			(0.7	)
Total gross premiums written		$	561.7				100.0	%		$	579.0				100.0	%		$	650.6				100.0	%

          The decline in our facultative business is due to the reclassification of $16.5 million of business previously managed by and included in the results of the Americas division that is now recorded in the results of the U.S. Insurance division. The decline in our property business reflects an increase in competitive market conditions and the non-renewal of certain business that did not meet our underwriting criteria.

          The Latin America unit writes primarily treaty and facultative business throughout Latin America and the Caribbean. The business is predominantly property in nature, but also includes automobile, marine and other lines. The Latin America unit has offices in Mexico City and Miami. The Canadian unit, which is based in Toronto, writes primarily property reinsurance and also underwrites casualty, crop and surety business, all on a treaty basis.

     EuroAsia Division

          The EuroAsia division accounted for $559.2 million, or 25.5%, of our gross premiums written for the year ended December 31, 2009. The division primarily writes property business. The EuroAsia division operates out of four offices, with principal offices in Paris and Singapore and satellite offices in Stockholm and Tokyo, and as of December 31, 2009 had 90 employees. Business is produced primarily (70.3%) through a strong network of global and regional brokers, with the remaining 29.7% of the business written directly with ceding companies. Our top five brokers for the EuroAsia division in 2009, Aon Benfield, Guy Carpenter & Co. Inc., Willis Re Group Holdings, Ltd., Protection Reinsurance Intermediaries, and Haakon Ltd., generated 56.3% of the division’s gross premiums written in 2009. The EuroAsia division primarily underwrites business in Euros, U.S. dollars and Japanese yen.

          The Paris branch office is the headquarters of the EuroAsia division and the underwriting center responsible for Europe, the Middle East and Africa, with an office in Stockholm, Sweden, covering the Nordic countries and Russia. The Paris branch writes reinsurance on a treaty basis. The primary lines of business offered are property, motor, credit and bond, marine and aerospace, liability and accident and health. The Asia Pacific Rim unit, headquartered in Singapore with an office in Tokyo, writes reinsurance on a treaty basis. The primary lines of business offered in the Asia Pacific Rim unit include property, marine, motor, liability, credit and bond coverage and accident and health.

          During 2009, Europe represented 67.3% of gross premiums written for the EuroAsia division, while Asia represented 18.2% and the Middle East, Africa and the Americas comprised the remaining 14.5%.

          The following table displays gross premiums written for the EuroAsia division, by type of coverage, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property		$	370.4				66.1	%		$	383.0				64.3	%		$	348.1				61.5	%
Motor			71.6				12.8				80.7				13.5				79.6				14.1
Surety and credit			42.4				7.6				45.5				7.6				51.6				9.1
Marine			29.4				5.3				37.6				6.3				36.4				6.4
Liability			23.9				4.3				30.1				5.0				28.0				5.0
Aerospace			14.9				2.7				11.5				1.9				11.8				2.1
Accident and health			6.6				1.2				8.3				1.4				10.1				1.8
Total gross premiums written		$	559.2				100.0	%		$	596.7				100.0	%		$	565.6				100.0	%

          The property business, including the property component of motor business, in EuroAsia is 48.7% proportional and 51.3% excess of loss. Per risk coverages account for 50.6% of the property business, while 34.9% relates to catastrophe coverage.

          The following table displays gross premiums written for the EuroAsia division, by type of business, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property excess of loss		$	193.4				34.6	%		$	187.5				31.4	%		$	160.0				28.3	%
Property proportional			183.4				32.8				201.9				33.8				195.3				34.5
Property facultative			—				—				0.2				0.1				2.2				0.4
Property			376.8				67.4				389.6				65.3				357.5				63.2
Casualty excess of loss			67.6				12.1				75.6				12.7				66.8				11.8
Casualty proportional			28.1				5.0				36.9				6.2				41.5				7.3
Casualty			95.7				17.1				112.5				18.9				108.3				19.1
Marine and aerospace			44.3				7.9				49.1				8.2				48.1				8.5
Surety and credit			42.4				7.6				45.5				7.6				51.7				9.2
Total gross premiums written		$	559.2				100.0	%		$	596.7				100.0	%		$	565.6				100.0	%

          The property and casualty components of motor business have been included in the property and casualty amounts in the above table.

     London Market Division

          The London Market division accounted for $342.9 million, or 15.6%, of our gross written premiums for the year ended December 31, 2009. The London Market division operates through the Newline Syndicate (1218) at Lloyd’s, Newline Insurance Company Limited and the London branch of Odyssey America, and as of December 31, 2009 had 98 employees. Newline’s business focus is international casualty, motor insurance, medical professional liability and facultative reinsurance, while the London branch writes worldwide treaty reinsurance. Our underwriting platforms are run by an integrated management team with a common business approach. Business is distributed through a diverse group of brokers, with the top five brokers, Aon Benfield, Marsh Inc., Heath Lambert Ltd., Willis Re Group Holdings Ltd., and Jardine Lloyd Thompson, Ltd.,

representing 70.2% of gross premiums written. The London Market division underwrites business in British pounds, U.S. dollars, Euros, Canadian dollars and Australian dollars.

          For the year ended December 31, 2009, the London branch had gross premiums written of $109.4 million, or 31.9% of the total London Market division. The London branch writes worldwide treaty reinsurance through three business units: property, marine and aerospace, and international casualty. The property unit (comprising mainly retrocessional and catastrophe excess of loss business) represents 59.1% of the total gross premiums written for the year ended December 31, 2009. Geographically, 42.6%, 29.3% and 20.7% of the branch business is located in the United Kingdom, the United States and Western Europe, respectively.

          For the year ended December 31, 2009, Newline had gross premiums written of $233.5 million, or 68.1% of the total London Market division. Newline writes international casualty and motor insurance and facultative reinsurance in seven sectors: professional indemnity, directors’ and officers’ liability, commercial crime and bankers’ blanket bond, motor, satellite, medical professional liability and public and products liability. Newline’s target market is generally small to medium-sized accounts, which could be either private or public companies. The United Kingdom, Western Europe and Australia represent 32.5%, 32.5% and 16.2% of Newline’s business, respectively.

          The following table displays gross premiums written for the London Market division, by type of business, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property excess of loss		$	63.8				18.6	%		$	62.1				16.3	%		$	66.3				19.0	%
Property proportional			0.9				0.3				1.4				0.3				1.1				0.3
Property reinsurance			64.7				18.9				63.5				16.6				67.4				19.3
Casualty excess of loss			5.3				1.5				4.9				1.3				6.8				1.9
Casualty proportional			3.5				1.0				13.5				3.5				16.0				4.6
Casualty reinsurance			8.8				2.5				18.4				4.8				22.8				6.5
Marine and aerospace			35.9				10.5				47.2				12.4				55.1				15.7
Total reinsurance			109.4				31.9				129.1				33.8				145.3				41.5
Liability lines			227.9				66.5				248.2				65.0				201.5				57.6
Other			5.6				1.6				4.4				1.2				3.1				0.9
Total insurance			233.5				68.1				252.6				66.2				204.6				58.5
Total gross premiums written		$	342.9				100.0	%		$	381.7				100.0	%		$	349.9				100.0	%

     U.S. Insurance Division

          Operating under the name “Hudson Insurance Group,” a registered trademark of the Company, the U.S. Insurance division provides underwriting capacity on an admitted and non-admitted (surplus lines) basis to specialty insurance markets nationwide. The U.S. Insurance division generated $547.0 million, or 24.9%, of our gross premiums written for the year ended December 31, 2009. The U.S. Insurance division operates principally from offices in New York, Chicago, Napa, California and Overland Park, Kansas, and as of December 31, 2009 had 232 employees.

          Our medical professional liability business provides coverages principally to small and medium-sized hospitals, physicians and physician groups, and is primarily focused on 15 states throughout the United States. Medical professional liability coverage is offered exclusively on a claims-made basis (covering all claims reported to the insured during the policy period regardless of when the underlying loss occurred) and is primarily written on a surplus lines (non-admitted) basis to provide rate and form flexibility.

          The Hudson Insurance Group is approved by the Risk Management Agency of the U.S. Department of Agriculture to participate in the federally-sponsored multi-peril crop insurance program made available to farmers throughout the United States. In addition, we also underwrite related insurance products, including crop hail. Crop-related gross premiums written for 2009 were $79.2 million and are included in the property and package line of business.

          We underwrite primary and excess directors’ and officers’ liability insurance, principally for small and mid-cap publicly-traded companies. Coverage is written on both an admitted and a surplus lines basis, with distribution primarily through regional brokers.

          Other lines of business written through our in-house specialty lines underwriters in 2009 include offshore marine and energy, environmental, personal umbrella and comprehensive personal liability insurance products.

          The U.S. Insurance division also provides primary insurance coverage for a variety of risks, including commercial automobile, specialty liability, private passenger automobile and other niche markets. We manage a limited number of active program administrator relationships, with a majority of this business concentrated in our top five relationships. We look to do business with organizations that have a long and well-documented track record in their area of expertise. Strong monitoring processes are in place and our program administrators are incentivized to produce profitable insurance business rather than to merely generate volume.

          The following table displays gross premiums written for the U.S. Insurance division, by type of business, for each of the three years in the period ended December 31, 2009:

		Years Ended December 31,
		2009								2008								2007
		$				%				$				%				$				%
										(In millions)
Property and package		$	135.0				24.7	%		$	111.5				20.7	%		$	68.5				12.9	%
Professional liability			119.9				21.9				130.9				24.3				139.3				26.2
Specialty liability			114.0				20.8				90.9				16.8				90.3				17.0
Medical professional liability			96.9				17.7				113.9				21.1				130.2				24.4
Commercial automobile			65.6				12.0				68.2				12.6				52.4				9.8
Personal automobile			15.6				2.9				24.3				4.5				51.6				9.7
Total gross premiums written		$	547.0				100.0	%		$	539.7				100.0	%		$	532.3				100.0	%

          Contributing to the growth in gross premiums written for property and package business was our crop business, and for specialty liability, a reclassification of one program previously recorded in the Americas and now recorded in the U.S. Insurance division. Professional liability decreased primarily due to the cancellation of an environmental program. The decline in medical professional liability reflects the more competitive market conditions as well as certain client groups retaining more exposure or self insuring their own programs. Personal automobile declined primarily due to market conditions.

Retention Levels and Retrocession Arrangements

          Under our underwriting guidelines, we impose maximum retentions on a per risk basis. We believe that the levels of gross capacity per property risk that are in place are sufficient to achieve our objectives in our marketplace. The following table illustrates the gross capacity, cession (reinsurance or retrocession) and net retention generally applicable under our underwriting guidelines as of December 31, 2009. Larger limits may occasionally be written subject to the approval of senior management.

		Gross				Retrocession/				Net
		Capacity				Reinsurance				Retention
						(In millions)
Treaty
Property		$	15.0			$	—			$	15.0
Casualty			7.5				—				7.5
Facultative
Property			10.0				8.0				2.0
Casualty			5.0				2.0				3.0
Insurance
Medical professional liability			16.0				15.1				0.9
Other casualty			15.0				10.5				4.5
Property			25.0				15.2				9.8
Newline			22.5				18.7				3.8

          We are subject to accumulation risk with respect to catastrophic events involving multiple treaties, facultative certificates and insurance policies. To protect against this risk we buy catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographical coverages and the cost vary from year to year. In 2007, we chose not to purchase non-proportional reinsurance for our core U.S. property account other than limited and/or partial covers. In 2008 and 2009, we purchased some non-U.S. catastrophe excess of loss protection as well as some additional specific protections for our facultative property account in Latin America.

          When we enter into retrocessional agreements, we cede to reinsurers a portion of our risks and pay premiums based upon the risk and exposure of the policies subject to the reinsurance. Although the reinsurer is liable to us for the reinsurance ceded, we retain the ultimate liability in the event the reinsurer is unable to meet its obligation at some later date. Our objective is to purchase reinsurance from reinsurers rated “A-” or better by Standard & Poor’s Insurance Ratings Services or A.M. Best Company, Inc. (“A.M. Best”). Reinsurers with a lower rating will be considered if reinsurance security is collateralized or with senior management approval.

          We purchase reinsurance to increase our aggregate premium capacity, to reduce and spread the risk of loss on insurance and reinsurance underwritten and to limit our exposure with respect to multiple claims arising from a single occurrence. We are subject to accumulation risk with respect to catastrophic events involving multiple treaties, facultative certificates and insurance policies. To protect against this risk, we may purchase catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographic scope of the coverage and the cost vary from year to year. Specific reinsurance protections are also placed to protect selected portions of our portfolio.

          Our ten largest reinsurers represent 46.0% of our total reinsurance recoverables as of December 31, 2009. Amounts due from all other reinsurers are diversified, with no other individual reinsurer representing more than

$22.7 million of reinsurance recoverables as of December 31, 2009, and with the average balance per reinsurer less than $1.5 million.

          The following table shows the total amount which is recoverable from each of our ten largest reinsurers for paid and unpaid losses as of December 31, 2009, the amount of collateral held, and each reinsurer’s A.M. Best rating (in millions):

		Reinsurance				% of								A.M. Best
Reinsurer		Recoverable				Total				Collateral				Rating
Lloyd’s of London		$	128.7				14.2	%		$	—				A
Federal Crop Insurance Corporation			44.0				4.8				—			NR
Underwriters Reinsurance Company (Barbados)			37.3				4.1				37.3			NR
Everest Re (Bermuda) Ltd.			36.8				4.0				—				A	+
D.E. Shaw Re Bermuda Ltd.			35.0				3.8				35.0			NR
Max Bermuda Ltd.			32.9				3.6				17.2				A	-
Swiss Reinsurance America Corporation			32.0				3.5				—				A
Arch Reinsurance Company			25.4				2.8				15.2				A
Brit Insurance Ltd.			24.4				2.7				—				A
Swiss Reinsurance Europe S.A.			22.9				2.5				—				A
Sub-total			419.4				46.0				104.7
All Other			492.6				54.0				115.5
Total		$	912.0				100.0	%		$	220.2

          For additional information on our retrocession agreements, please refer to Notes 11 and 12 to the consolidated financial statements included in this Annual Report on Form 10-K.

Claims

          Reinsurance claims are managed by our professional claims staff, whose responsibilities include the review of initial loss reports from ceding companies, creation of claim files, determination of whether further investigation is required, establishment and adjustment of case reserves, and payment of claims. Our claims staff recognizes that fair interpretation of our reinsurance agreements and timely payment of covered claims is a valuable service to clients and enhances our reputation. In addition to claims assessment, processing and payment, in the ordinary course of business our claims staff conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected ceding companies, which we believe benefits all parties to the reinsurance arrangement. In certain instances, a claims audit may be performed prior to assuming reinsurance business.

          A dedicated claims unit manages the claims related to asbestos-related illness and environmental impairment liabilities, due to the significantly greater uncertainty involving these exposures. This unit performs audits of cedants with significant asbestos and environmental exposure to assess our potential liabilities. This unit also monitors developments within the insurance industry that may have a potential impact on our reserves.

          For insurance claims relating to some London Market division insurance business and professional liability business written by the U.S. Insurance division, we employ a professional claims staff to confirm coverage, investigate and administer all other aspects of the adjusting process from inception to the final resolution. Other insurance claims are generally handled by third party administrators, typically specialists in a defined business, who have limited authority and are subject to continuous oversight and review by our internal professional claims staff.

Reserves for Unpaid Losses and Loss Adjustment Expenses

          We establish reserves to recognize our insurance and reinsurance obligations for unpaid losses and loss adjustment expenses (“LAE”), which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred on or before the

balance sheet date, including events which have not yet been reported to us. Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss by the insured to us or to the ceding company, the reporting of the loss by the ceding company to the reinsurer, the ceding company’s payment of that loss and subsequent payments to the ceding company by the reinsurer.

          We rely on initial and subsequent claim reports received from ceding companies for reinsurance business, and the estimates advised by our claims adjusters for insurance business, to establish our estimate of losses and LAE. The types of information we receive from ceding companies generally vary by the type of contract. Proportional contracts are generally reported on at least a quarterly basis, providing premium and loss activity as estimated by the ceding company. Our experienced accounting staff has the primary responsibility for managing the handling of information received on these types of contracts. Our claims staff may also assist in the analysis, depending on the size or type of individual loss reported on proportional contracts. Reporting for facultative, treaty excess of loss and insurance contracts includes detailed individual claim information, including the description of injury, confirmation of liability by the cedant or claims adjuster, and the cedant’s or claims adjuster’s current estimate of liability. Our experienced claims staff has the responsibility for managing and analyzing the individual claim information. Based on the claims staff’s evaluation of a cedant’s reported claim, we may choose to establish additional case reserves over that reported by the ceding company. Due to potential differences in ceding company reserving and reporting practices, our accounting, claims and internal audit departments perform reviews on ceding carriers to ensure that their underwriting and claims procedures meet our standards.

          We also establish reserves to provide for incurred but not reported (“IBNR”) claims and the estimated expenses of settling claims, including legal and other fees, and the general expenses of administering the claims adjustment process, known as loss adjustment expenses. We periodically revise such reserves to adjust for changes in the expected loss development pattern over time.

          We rely on the underwriting and claim information provided by ceding companies for reinsurance business, and the estimates advised by our claims adjusters for insurance business, to compile our analysis of losses and LAE. This data is aggregated by geographic region and type of business to facilitate analysis. We calculate incurred but not reported loss and LAE reserves using generally accepted actuarial reserving techniques to project the ultimate liability for losses and LAE. IBNR includes a provision for losses incurred but not yet reported to us as well as anticipated additional emergence on claims already reported by the ceding companies or claimants. The actuarial techniques for projecting loss and LAE reserves rely on historical paid and case reserve loss emergence patterns and insurance and reinsurance pricing and claim cost trends to establish the claims emergence of future periods with respect to all reported and unreported insured events that have occurred on or before the balance sheet date.

          Estimates of reserves for unpaid losses and LAE are contingent upon legislative, regulatory, social, economic and legal events that may or may not occur in the future, thereby affecting assumptions of claim frequency and severity. These events include losses arising from a variety of catastrophic events, such as hurricanes, windstorms and floods. The eventual outcome of these events may be different from the assumptions underlying our reserve estimates. In the event that loss trends diverge from expected trends, we adjust our reserves to reflect the actual emergence that is experienced during the period. On a quarterly basis, we compare actual loss emergence in the quarter and cumulatively since the implementation of the last reserve review to the expectation of reported loss for the period. Variation in actual loss emergence from expectations may result in a change in loss and LAE reserve. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results. Changes in expected claim payment rates, which represent one component of loss and LAE emergence, may also impact our liquidity and capital resources, as discussed in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

          The reserving process is complex and the inherent uncertainties of estimating reserves for unpaid losses and LAE are significant, due primarily to the longer-term nature of most reinsurance business, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. As a result, actual losses and LAE may deviate, perhaps substantially, from estimates of reserves reflected in our consolidated financial statements. During the loss settlement period, which can be

many years in duration, additional facts regarding individual claims and trends usually become known. As these become apparent, it usually becomes necessary to refine and adjust the reserves upward or downward, and even then, the ultimate net liability may be less than or greater than the revised estimates.

          We have exposure to asbestos, environmental pollution and other latent injury damage claims on contracts written prior to 1986. Included in our reserves are amounts related to asbestos-related illnesses and environmental impairment, which, net of related reinsurance recoverables, totaled $265.5 million and $260.3 million as of December 31, 2009 and 2008, respectively. The majority of our asbestos and environmental related liabilities arise from contracts written by Clearwater before 1986 that were underwritten as standard general liability coverages where the contracts contained terms which, for us and the industry overall, have been interpreted by the courts to provide coverage for asbestos and environmental exposures not contemplated by the original pricing or reserving of the covers. Our estimate of our ultimate liability for these exposures includes case basis reserves and a provision for liabilities incurred but not yet reported. Case basis reserves are a combination of reserves reported to us by ceding companies and additional case reserves determined by our dedicated asbestos and environmental claims unit. We rely on an annual analysis of Company and industry loss emergence trends to estimate the loss and LAE reserve for this exposure, including projections based on historical loss emergence and loss completion factors supplied from other company and industry sources, with monitoring of emerging experience on a quarterly basis.

          Estimation of ultimate asbestos and environmental liabilities is unusually complex due to several factors resulting from the long period between exposure and manifestation of these claims. This lag can complicate the identification of the sources of asbestos and environmental exposure, the verification of coverage and the allocation of liability among insurers and reinsurers over multiple years. This lag also exposes the claim settlement process to changes in underlying laws and judicial interpretations. There continues to be substantial uncertainty regarding the ultimate number of insureds with injuries resulting from these exposures.

          In addition, other issues have emerged regarding asbestos exposure that have further impacted the ability to estimate ultimate liabilities for this exposure. These issues include an increasingly aggressive plaintiffs’ bar, an increased involvement of defendants with peripheral exposure, the use of bankruptcy filings due to asbestos liabilities as an attempt to resolve these liabilities to the disadvantage of insurers, the concentration of litigation in venues favorable to plaintiffs, and the potential of asbestos litigation reform at the state or federal level.

          We believe these uncertainties and factors make projections of these exposures, particularly asbestos, subject to less predictability relative to non-asbestos and non-environmental exposures. See Note 10 to the consolidated financial statements for additional historical information on unpaid losses and LAE for these exposures.

          In the event that loss trends diverge from expected trends, we may have to adjust our reserves for unpaid losses and LAE accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results. Management believes that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at December 31, 2009. Due to the uncertainty involving estimates of ultimate loss and LAE, management does not attempt to produce a range around its best estimate of unpaid losses and LAE.

     Historical Loss Reserve Trends

          We have recognized significant increases to estimates for prior years’ recorded loss liabilities. Net income was adversely impacted in the calendar years where reserve estimates relating to prior years were increased. It is not possible to assure that adverse development on prior years’ losses will not occur in the future. If adverse development does occur in future years, it may have a material adverse impact on net income.

          The “Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table” that follows presents the development of balance sheet net loss and LAE reserves for calendar years 1999 through 2009. The upper half of the table shows the cumulative amounts paid, net of reinsurance, during successive years related to the opening reserve. For example, with respect to the reserves for unpaid losses and LAE of $1,831 million as of December 31, 1999, by the end of 2009, $2,361 million had actually been paid in settlement of those reserves. In addition, as reflected in the lower section of the table, the original reserve of $1,831 million was re-estimated to be $3,094 million as of December 31, 2009. This change from the original

estimate would normally result from a combination of a number of factors, including losses being settled for different amounts than originally estimated. The original estimates will also be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity patterns. The net deficiency or redundancy depicted in the table, for any particular calendar year, shows the aggregate change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective columns. For example, the cumulative deficiency of $1,263 million, which has been reflected in our consolidated financial statements as of December 31, 2009, related to December 31, 1999 reserves for unpaid losses and LAE of $1,831 million, represents the cumulative amount by which net reserves for 1999 have developed unfavorably from 2000 through 2009.

          Each amount other than the original reserves in the table below includes the effects of all changes in amounts for prior periods. For example, if a loss settled in 2002 for $150,000 was first reserved in 1999 at $100,000 and remained unchanged until settlement, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative net deficiency in each of the years in the period 1999 through 2001 shown in the following table. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future development based on this table.

Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table
Presented Net of Reinsurance With Supplemental Gross Data

		1999				2000				2001				2002				2003				2004				2005				2006				2007				2008				2009
																						(In millions)
Reserves for unpaid losses and LAE		$	1,831			$	1,667			$	1,674			$	1,864			$	2,372			$	3,172			$	3,911			$	4,403			$	4,475			$	4,560			$	4,666
Paid (cumulative) as of:
One year later			609				596				616				602				632				914				787				1,111				1,016				1,024
Two years later			1,042				1,010				985				999				1,213				1,298				1,614				1,808				1,646
Three years later			1,333				1,276				1,296				1,424				1,456				1,835				2,161				2,273
Four years later			1,506				1,553				1,602				1,563				1,898				2,220				2,521
Five years later			1,718				1,802				1,666				1,932				2,206				2,489
Six years later			1,901				1,827				1,968				2,188				2,426
Seven years later			1,904				2,061				2,173				2,374
Eight years later			2,102				2,224				2,327
Nine years later			2,248				2,352
Ten years later			2,361
Liability re-estimated as of:
One year later			1,846				1,690				1,760				1,993				2,561				3,345				4,051				4,444				4,465				4,549
Two years later			1,862				1,787				1,935				2,240				2,828				3,537				4,144				4,481				4,498
Three years later			1,951				2,018				2,194				2,573				3,050				3,736				4,221				4,564
Four years later			2,144				2,280				2,514				2,828				3,294				3,837				4,320
Five years later			2,332				2,581				2,726				3,077				3,414				3,950
Six years later			2,572				2,750				2,973				3,202				3,534
Seven years later			2,702				2,969				3,078				3,325
Eight years later			2,893				3,069				3,192
Nine years later			2,985				3,182
Ten years later			3,094
Cumulative redundancy/ (deficiency)		$	(1,263	)		$	(1,515	)		$	(1,518	)		$	(1,461	)		$	(1,162	)		$	(778	)		$	(409	)		$	(161	)		$	(23	)		$	11
Gross liability — end of year		$	2,570			$	2,566			$	2,720			$	2,872			$	3,400			$	4,225			$	5,118			$	5,142			$	5,119			$	5,250			$	5,507
Reinsurance recoverables			739				899				1,046				1,008				1,028				1,053				1,207				739				644				690				841
Net liability — end of year			1,831				1,667				1,674				1,864				2,372				3,172				3,911				4,403				4,475				4,560				4,666
Gross re-estimated liability at December 31, 2009			4,459				4,691				4,853				4,876				4,888				5,241				5,649				5,357				5,198				5,308
Re-estimated recoverables at December 31, 2009			1,365				1,509				1,661				1,551				1,354				1,291				1,329				793				700				759
Net re-estimated liability at December 31, 2009			3,094				3,182				3,192				3,325				3,534				3,950				4,320				4,564				4,498				4,549
Gross cumulative redundancy/(deficiency)		$	(1,889	)		$	(2,125	)		$	(2,133	)		$	(2,004	)		$	(1,488	)		$	(1,016	)		$	(531	)		$	(215	)		$	(79	)		$	(58	)

          The cumulative redundancy in 2008 reserves for unpaid losses and LAE for the year ended December 31, 2009 was $11 million. The cumulative deficiencies in 2007 and 2006 reserves for unpaid losses and LAE as of December 31, 2009 were $23 million and $161 million, respectively. The cumulative deficiencies in 2007 and 2006 reserves for unpaid losses and LAE as of December 31, 2009 principally resulted from increased reserves for U.S. casualty business, including asbestos and environmental pollution liabilities associated with contracts generally written prior to 1986. These contracts contained terms that, for us and the industry overall, have been interpreted by the courts to provide coverage for exposures that were not contemplated by the original pricing or reserving of the covers. In addition, increased loss estimates for U.S. casualty business written in the late 1990s and early 2000s contributed to the cumulative deficiency in 2007 and 2006 reserves for unpaid losses and LAE. The U.S. casualty classes of business include general liability, professional liability and excess workers’ compensation. In recent calendar years, we experienced loss emergence, resulting from a combination of higher

claim frequency and severity that was greater than our expectations, which were previously established based on a review of prior years’ loss trends for this business written in the late 1990s and early 2000s. General liability and excess workers’ compensation classes of business during these years were adversely impacted by the competitive conditions in the industry at that time. These competitive conditions resulted in pricing pressure and relatively broader coverage terms, thereby affecting the ability of standard actuarial techniques to generate reliable estimates of ultimate loss. Professional liability was impacted by the increase in frequency and severity of claims relating to bankruptcies and other financial and management improprieties in the late 1990s and early 2000s.

          We believe that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at December 31, 2009. In the event that loss trends diverge from expected trends, we may have to adjust our reserves for losses and LAE accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results.

          The following table is derived from the “Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table” above. It summarizes the effect of re-estimating prior year loss reserves, net of reinsurance, on pre-tax income for the latest ten calendar years through December 31, 2009. Each column represents the calendar year development by each accident year. For example, in calendar year 2009, the impact of re-estimates of prior year loss reserves increased pre-tax income by $11.3 million.

		Development in Calendar Year
		2000				2001				2002				2003				2004				2005				2006				2007				2008				2009
																		(In millions)
Accident Year Contributing to Loss Reserve Development
1999 and Prior		$	(15.9	)		$	(16.6	)		$	(88.9	)		$	(192.5	)		$	(187.9	)		$	(240.8	)		$	(129.9	)		$	(190.9	)		$	(92.2	)		$	(108.5	)
2000							(6.5	)			(9.0	)			(38.0	)			(74.6	)			(59.3	)			(39.8	)			(27.5	)			(7.3	)			(4.3	)
2001											12.4				56.0				2.5				(19.0	)			(42.4	)			(29.4	)			(5.6	)			(1.6	)
2002															46.6				12.2				(13.8	)			(42.3	)			(1.7	)			(20.0	)			(8.2	)
2003																			57.8				66.7				32.4				5.2				5.0				2.2
2004																							93.5				29.6				45.2				19.2				7.8
2005																											52.5				106.4				23.5				13.3
2006																															52.2				40.0				16.4
2007																																			47.5				49.5
2008																																							44.7
Total Calendar Year Effect on Pre-tax Income Resulting from Reserve Re-estimation		$	(15.9	)		$	(23.1	)		$	(85.5	)		$	(127.9	)		$	(190.0	)		$	(172.7	)		$	(139.9	)		$	(40.5	)		$	10.1			$	11.3