ODYSSEY RE HOLDINGS CORP - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - ODYSSEY RE HOLDINGS CORP	o61507exv31w1.htm
EX-32.1 - EX-32.1 - ODYSSEY RE HOLDINGS CORP	o61507exv32w1.htm
EX-31.2 - EX-31.2 - ODYSSEY RE HOLDINGS CORP	o61507exv31w2.htm
EX-32.2 - EX-32.2 - ODYSSEY RE HOLDINGS CORP	o61507exv32w2.htm
EX-10.28 - EX-10.28 - ODYSSEY RE HOLDINGS CORP	o61507exv10w28.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended: March 31, 2010


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 Number: 1-16535

Odyssey Re Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)


Delaware		52-2301683
(State or Other Jurisdiction Of Incorporation or Organization)		(I.R.S. Employer Identification Number)

Odyssey Re Holdings Corp.
300 First Stamford Place
Stamford, Connecticut		06902
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (203) 977-8000

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES o NO þ

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



Class	Number of Shares Outstanding at May 6, 2010
Common Stock, par value $0.01 per share		56,604,650

TABLE OF CONTENTS

ODYSSEY RE HOLDINGS CORP.

INDEX TO FORM 10-Q

PART I FINANCIAL INFORMATION


Item 1 Financial Statements			2
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (unaudited)			2
Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited)			3
Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2010 and 2009 (unaudited)			4
Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3 Quantitative and Qualitative Disclosures About Market Risk			59
Item 4 Controls and Procedures			70

PART II OTHER INFORMATION

Item 1 Legal Proceedings			71
Item 1A Risk Factors			71
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 3 Defaults Upon Senior Securities			71
Item 4 (Removed and Reserved)			71
Item 5 Other Information			72
Item 6 Exhibit Index			73
Signatures			74
EX-10.28
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

PART I — Item 1. Financial Statements

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2010 AND DECEMBER 31, 2009 (UNAUDITED)
(In thousands, except share and per share amounts)


	March 31,		December 31,
	2010		2009
ASSETS
Investments and cash:
Fixed income securities, available for sale, at fair value (amortized cost $3,974,251 and $3,971,139, respectively)	$	4,387,344	$	4,373,965
Fixed income securities, held as trading securities, at fair value (amortized cost $608,457 and $598,918, respectively)		579,164		532,718
Redeemable preferred stock, at fair value (cost $108 and $108, respectively)		108		108
Convertible preferred stock, held as trading securities, at fair value (cost $75,000 and $75,000, respectively)		69,293		82,470
Equity securities:
Common stocks, at fair value (cost $1,539,412 and $1,679,748, respectively)		2,076,358		2,071,037
Common stocks, at equity		160,345		158,460
Short-term investments, at fair value (amortized cost $74,582 and $125,100, respectively)		74,582		125,100
Short-term investments, held as trading securities, at fair value (cost $153,025 and $238,419, respectively)		153,025		238,403
Cash and cash equivalents		1,077,601		941,444
Cash and cash equivalents held as collateral		63,182		56,720
Other invested assets		203,576		146,728

Total investments and cash		8,844,578		8,727,153
Accrued investment income		86,269		79,400
Premiums receivable		436,931		473,878
Reinsurance recoverable on paid losses		42,228		70,511
Reinsurance recoverable on unpaid losses		899,470		841,486
Prepaid reinsurance premiums		117,601		113,047
Funds held by reinsureds		145,062		140,480
Deferred acquisition costs		129,243		126,466
Federal and foreign income taxes receivable		18,233		45,333
Other assets		231,382		167,686

Total assets	$	10,950,997	$	10,785,440


LIABILITIES
Unpaid losses and loss adjustment expenses	$	5,636,968	$	5,507,766
Unearned premiums		709,375		691,213
Reinsurance balances payable		158,430		178,428
Funds held under reinsurance contracts		41,172		41,250
Debt obligations		489,433		489,402
Other liabilities		196,542		322,147

Total liabilities		7,231,920		7,230,206

Commitments and Contingencies (Note 10)
SHAREHOLDERS’ EQUITY
Preferred shares, $0.01 par value; 200,000,000 shares authorized; 2,000,000 Series A shares issued and outstanding; 1,167,263 Series B shares issued and outstanding		32		32
Common shares, $0.01 par value; 500,000,000 shares authorized; 56,604,650 shares issued		567		567
Additional paid-in capital		529,522		515,066
Accumulated other comprehensive income, net of deferred income taxes		659,449		546,580
Retained earnings		2,529,507		2,492,989

Total shareholders’ equity		3,719,077		3,555,234

Total liabilities and shareholders’ equity	$	10,950,997	$	10,785,440

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
(In thousands, except share and per share amounts)


	Three Months Ended
	March 31,
	2010			2009
REVENUES
Gross premiums written	$	561,656		$	554,920
Ceded premiums written		88,469			75,941

Net premiums written		473,187			478,979
Increase in net unearned premiums		(16,092	)		(8,961	)

Net premiums earned		457,095			470,018
Net investment income		84,104			67,461
Net realized investment gains (losses):
Net realized investment gains (losses)		58,010			(17,989	)
Other-than-temporary impairment losses		(4,053	)		(81,374	)

Total net realized investment gains (losses)		53,957			(99,363	)

Total revenues		595,156			438,116

EXPENSES
Losses and loss adjustment expenses		375,898			317,591
Acquisition costs		89,040			93,004
Other underwriting expenses		51,007			43,105
Other expense, net		31,939			4,202
Interest expense		7,485			8,085

Total expenses		555,369			465,987

Income (loss) before income taxes		39,787			(27,871	)

Federal and foreign income tax provision (benefit):
Current		37,797			34,622
Deferred		(35,799	)		(56,702	)

Total federal and foreign income tax provision (benefit)		1,998			(22,080	)

Net income (loss)		37,789			(5,791	)
Preferred dividends		(1,271	)		(1,336	)
Gain on purchase of Series B preferred shares		—			7,997

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	36,518		$	870


BASIC
Weighted average common shares outstanding		N/A			59,375,095
Basic earnings per common share	$	N/A		$	0.01
DILUTED
Weighted average common shares outstanding		N/A			59,848,828
Diluted earnings per common share	$	N/A		$	0.01
DIVIDENDS
Dividends declared per common share	$	N/A		$	0.075
COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	37,789		$	(5,791	)
Other comprehensive income (loss), net of tax		112,869			(86,810	)

Comprehensive income (loss)	$	150,658		$	(92,601	)

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
(In thousands, except share amounts)


	Three Months Ended
	March 31,
	2010			2009
PREFERRED SHARES (par value)
Balance, beginning of period	$	32		$	39
Preferred shares purchased		—			(7	)

Balance, end of period		32			32

COMMON SHARES (par value)
Balance, beginning and end of period		567			603

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period		515,066			614,203
Capital contribution		14,456			—
Preferred shares purchased		—			(17,173	)
Net change due to stock option exercises and restricted share awards		—			(7,512	)
Net effect of share-based compensation		—			2,914
Common shares issued		—			37

Balance, end of period		529,522			592,469

TREASURY SHARES (at cost)
Balance, beginning of period		—			(795	)
Purchases of treasury shares		—			(9,390	)
Reissuance of treasury shares		—			7,512

Balance, end of period		—			(2,673	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) NET OF DEFERRED INCOME TAXES
Balance, beginning of period		546,580			82,421
Unrealized net appreciation (depreciation) on securities, net of reclassification adjustments		102,497			(85,479	)
Foreign currency translation adjustments		10,372			(1,331	)

Balance, end of period		659,449			(4,389	)

RETAINED EARNINGS
Balance, beginning of period		2,492,989			2,131,264
Net income (loss)		37,789			(5,791	)
Gain on purchase of Series B preferred shares		—			7,997
Dividends to preferred shareholders		(1,271	)		(1,336	)
Dividends to common shareholders		—			(4,514	)

Balance, end of period		2,529,507			2,127,620

TOTAL SHAREHOLDERS’ EQUITY	$	3,719,077		$	2,713,662

COMMON SHARES OUTSTANDING
Balance, beginning of period		56,604,650			60,242,949
Net treasury shares acquired		—			(50,920	)
Shares issued		—			2,000

Balance, end of period		56,604,650			60,194,029

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
(In thousands)


	Three Months Ended
	March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	37,789		$	(5,791	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Decrease in premiums receivable and funds held, net		43,489			56,810
Increase in unearned premiums and prepaid reinsurance premiums, net		16,814			7,609
Increase in unpaid losses and loss adjustment expenses, net		108,980			18,428
Change in current and deferred federal and foreign income taxes, net		(37,073	)		(211,698	)
(Increase) decrease in deferred acquisition costs		(3,406	)		314
Change in other assets and liabilities, net		(71,767	)		(41,834	)
Net realized investment (gains) losses		(53,958	)		99,363
Bond discount amortization, net		(3,950	)		(2,397	)
Amortization of compensation plan costs		7,875			2,914

Net cash provided by (used in) operating activities		44,793			(76,282	)

CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed income securities, available for sale		—			160,000
Sales of fixed income securities, available for sale		181,771			90,505
Purchases of fixed income securities, available for sale		(187,609	)		(466,883	)
Sales of equity securities		151,462			65,056
Purchases of equity securities		(67,574	)		(312,978	)
Net (settlements) sales of other invested assets		(17,421	)		37,030
Purchases of other invested assets		(60,036	)		(11,915	)
Net change in cash and cash equivalents held as collateral		(6,462	)		75,891
Sales of trading securities		275,366			16,966
Purchases of trading securities		(196,341	)		(111,522	)
Net change in short-term investments		51,866			278,239

Net cash provided by (used in) investing activities		125,022			(179,611	)

CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution		14,456			—
Purchase of treasury shares		—			(9,390	)
Purchase of Series B preferred shares		—			(9,183	)
Dividends paid to preferred shareholders		(1,273	)		(1,923	)
Dividends paid to common shareholders		—			(4,514	)
Proceeds from exercise of stock options		—			37

Net cash provided by (used in) financing activities		13,183			(24,973	)

Effect of exchange rate changes on cash and cash equivalents		(46,841	)		(13,096	)

Increase (decrease) in cash and cash equivalents		136,157			(293,962	)
Cash and cash equivalents, beginning of period		941,444			755,747

Cash and cash equivalents, end of period	$	1,077,601		$	461,785

Supplemental disclosures of cash flow information:
Interest paid	$	889		$	1,515

Income taxes paid	$	38,952		$	189,561

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Basis of Presentation

Odyssey Re Holdings Corp. (together with its subsidiaries, the “Company” or “OdysseyRe”) is an underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis, and an underwriter of specialty insurance, primarily in the United States and through the Lloyd’s of London marketplace. Odyssey Re Holdings Corp. was formed as a holding company and incorporated in Delaware in 2001 in conjunction with its initial public offering. Odyssey Re Holdings Corp. owns all of the common shares of Odyssey America Reinsurance Corporation (“Odyssey America”), its principal operating subsidiary, which is domiciled in the state of Connecticut. Odyssey America directly or indirectly owns all of the common shares of the following subsidiaries: Clearwater Insurance Company (“Clearwater”); Clearwater Select Insurance Company; Newline Holdings U.K. Limited, Newline Underwriting Management Limited, which manages Newline Syndicate (1218), a member of Lloyd’s of London, Newline Insurance Company Limited (“NICL”), Newline Corporate Name Limited (“NCNL”), which provides capital for and receives the distributed earnings from Newline Syndicate (1218) (collectively, “Newline”); Hudson Insurance Company (“Hudson”); Hudson Specialty Insurance Company (“Hudson Specialty”), Napa River Insurance Services, Inc. and Hudson Crop Insurance Services, Inc. As of March 31, 2010, Fairfax Financial Holdings Limited (“Fairfax”), a publicly-traded financial services holding company based in Canada, owned 100% of OdysseyRe.

In September 2009, Fairfax commenced a tender offer (the “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. Pursuant to the Offer, which expired on October 21, 2009, 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. As a result of the Merger, all of the remaining shares of OdysseyRe’s common stock held by the remaining minority shareholders of OdysseyRe 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 the Company’s common stock. The Company subsequently withdrew its 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. All OdysseyRe common shares remaining in the Company’s treasury following the Merger were cancelled.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions, which could differ materially from actual results that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Certain financial information and disclosures that are usually included in annual financial statements prepared in accordance with GAAP have been omitted since they are not required for interim reporting purposes. Readers should review the Company’s 2009 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies. The Company’s unaudited interim consolidated financial statements include all normal recurring adjustments that, in the Company’s opinion, are required for a fair statement of its financial position on such dates, and the results of operations and cash flows for the periods presented. Certain amounts from prior periods have been reclassified to conform to the current year’s presentations. The results for the three months ended March 31, 2010 are not necessarily indicative of the results for a full year.

In January 2010, the FASB issued an accounting standard to require more detailed disclosures for assets and liabilities measured at fair value. The standard requires gross presentation of purchases, issuances, settlements and sales of Level 3 assets and liabilities (see Note 3 for a description of the Fair Value levels). The

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

standard also requires disclosures of transfers between all levels and the policy and rationale for the transfer. The disclosure requirements have been incorporated into this Form 10-Q.

2. Earnings Per Common Share

As a result of the Merger (see Note 1), Fairfax attained 100% ownership of the Company; accordingly, the Company has not presented earnings per common share for the three months ended March 31, 2010. On January 1, 2009, the Company adopted an accounting standard that resulted in the Company treating its unvested share-based payment awards, for the purpose of calculating earnings per share, as a separate class of securities, due to the non-forfeitable rights to dividends. The following table shows the allocation of net income available to common shareholders as calculated in accordance with the two-class method for the three months ended March 31, 2009 (in thousands):


	Three Months Ended
	March 31, 2009
Net loss	$	(5,791	)
Preferred dividends		(1,336	)
Gain on purchase of Series B preferred shares		7,997

Net income available to common shareholders	$	870


Allocation of net income for basic earnings per share:

Common shares	$	860
Participating securities		10

Net income available to common shareholders	$	870

Net income per common share for the three months ended March 31, 2009, as presented in the following table, has been computed based upon weighted average common shares outstanding (in thousands, except share and per share amounts):


	Three Months Ended
	March 31, 2009
Net income to common shares — basic	$	860
Undistributed earnings allocated to share-based payments		4


Net income to common shares — diluted	$	864


Weighted average common shares outstanding — basic		59,375,095
Effect of dilutive shares:
Restricted shares		400,154
Stock options		73,579

Total effect of dilutive shares		473,733

Weighted average common shares outstanding — diluted		59,848,828


Net earnings per common share:
Basic	$	0.01
Diluted		0.01

In calculating diluted earnings per share, the Company is required to evaluate each stock option and

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

restricted stock grant to determine if it is dilutive or anti-dilutive in nature. For the three months ended March 31, 2009, 110,044 existing stock options and restricted stock awards outstanding were excluded from the computation of weighted average common shares for diluted earnings per common share, due to the anti-dilutive effect.

Net income per participating security for the three months ended March 31, 2009, as presented in the following table, has been computed based upon weighted average restricted shares outstanding (in thousands, except share and per share amounts):


	Three Months Ended
	March 31, 2009
Net income to participating securities — basic	$	10

Weighted average restricted shares outstanding — basic		840,472

Net earnings per participating security — basic	$	0.01

3. Fair Value Measurements

The Company accounts for a significant portion of its financial instruments at fair value as permitted or required by GAAP.

Fair Value Hierarchy

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Gains and losses for assets and liabilities categorized within the Level 3 table below, therefore, may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Financial assets and liabilities recorded in the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1: Level 1 financial instruments are financial assets and liabilities for which the values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2: Level 2 financial instruments are financial assets and liabilities for which the values are based on quoted prices in markets that are not active, or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

	a)		Quoted prices for similar assets or liabilities in active markets;

	b)		Quoted prices for identical or similar assets or liabilities in non-active markets;

	c)		Pricing models, the inputs for which are observable for substantially the full term of the asset or

			liability; and

	d)		Pricing models, the inputs for which are derived principally from, or corroborated by, observable market data through correlation or other means, for substantially the full term of the asset or liability.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Level 3: Level 3 financial instruments are financial assets and liabilities for which the values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s own assumptions about the methodology and valuation techniques that a market participant would use in pricing the asset or liability.

The Company is responsible for determining the fair value of its investment portfolio by utilizing market-driven fair value measurements obtained from active markets where available, by considering other observable and unobservable inputs and by employing valuation techniques that make use of current market data. For the majority of the Company’s investment portfolio, the Company uses quoted prices and other information from independent pricing sources in determining fair values.

For determining the fair value of its Level 1 investments, the Company utilizes quoted market prices. The majority of the Company’s Level 1 investments are common stocks that are actively traded in a public market. Short-term investments and cash equivalents, for which the cost basis approximates fair value, are also classified as Level 1 investments.

The Company’s Level 2 investments, the majority of which are in government, corporate and municipal fixed income securities, are priced using publicly traded over-the-counter prices and broker-dealer quotes. Observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads and bids are available for these investments. For determining the fair value of derivatives, which are classified as Level 2, the Company utilizes broker-dealer quotes that include observable market information. Also included in Level 2 are inactively traded convertible corporate debentures that are valued using a pricing model that includes observable inputs such as credit spreads and discount rates in the calculation.

The Company uses valuation techniques to establish the fair value of Level 3 investments. During the three months ended March 31, 2010, the Company purchased $6.3 million of investments that are classified as Level 3. As of March 31, 2010, the Company held $48.5 million of investments that are classified as Level 3. These Level 3 investments are valued using a discounted cash flow model, including unobservable inputs that are supported by limited market-based activity. To verify Level 3 pricing, the Company assesses the reasonableness of the fair values by comparison to economic pricing models, by reference to movements in credit spreads, and by comparing the fair values to recent transaction prices for similar assets, where available.

A review of fair value hierarchy classifications is conducted on a quarterly basis. To ensure accuracy in the classification within the fair value hierarchy, the Company evaluates changes in market conditions, availability of observable market data, changes in pricing methodologies and other critical factors to determine if it is appropriate to re-classify any of its investments between levels. Reclassifications impacting any of the levels of the fair value hierarchy are generally reported as transfers in or out of the level as of the beginning of the period in which the reclassifications occur. The Company has determined that it should not re-classify any of its investments between levels for the three months ended March 31, 2010.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 (in thousands):


			Fair Value Measurements as of March 31, 2010
	Asset / Liability		Quoted Prices in		Significant
	Measured at		Active Markets		Other		Significant
	Fair Value		for Identical		Observable		Unobservable
	March 31,		Assets / Liabilities		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Fixed income securities, available for sale:
United States government, government agencies and authorities	$	142,897	$	—	$	142,897	$	—
States, municipalities and political subdivisions		3,193,678		—		3,193,678		—
Foreign governments		760,909		—		760,909		—
Corporate		289,860		—		289,860		—

Total fixed income securities, available for sale		4,387,344		—		4,387,344		—
Fixed income securities, held as trading securities:
Foreign governments		103,494		—		103,494		—
Mortgage-related		90,066		—		72,867		17,199
Corporate		385,604		—		385,604		—

Total fixed income securities, held as trading securities		579,164		—		561,965		17,199
Redeemable preferred stock, available for sale		108		—		108		—
Convertible preferred stock, held as trading securities		69,293		—		69,293		—
Common stocks, available for sale		2,076,358		2,040,982		35,376		—
Short-term investments, available for sale		74,582		74,582		—		—
Short-term investments, held as trading securities		153,025		153,025		—		—
Cash equivalents		802,503		802,503		—		—
Derivatives		65,487		—		65,487		—
Other investments		46,857		3,899		11,649		31,309

Total assets measured at fair value	$	8,254,721	$	3,074,991	$	5,131,222	$	48,508

Derivative liabilities	$	38,071	$	—	$	38,071	$	—

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


			Fair Value Measurements as of December 31, 2009
	Asset / Liability		Quoted Prices in		Significant
	Measured at		Active Markets		Other		Significant
	Fair Value		for Identical		Observable		Unobservable
	December 31,		Assets / Liabilities		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Fixed income securities, available for sale:
United States government, government agencies and authorities	$	141,037	$	—	$	141,037	$	—
States, municipalities and political subdivisions		3,087,556		—		3,087,556		—
Foreign governments		796,611		—		796,611		—
Corporate		348,761		—		348,761		—


Total fixed income securities, available for sale		4,373,965		—		4,373,965		—

Fixed income securities, held as trading securities:
Foreign governments		99,399		—		99,399		—
Mortgage-related		70,344		—		56,098		14,246
Corporate		362,975		—		362,975		—


Total fixed income securities, held as trading securities		532,718		—		518,472		14,246

Redeemable preferred stock, available for sale		108		—		108		—
Convertible preferred stock, held as trading securities		82,470		—		82,470		—
Common stocks, available for sale		2,071,037		2,035,131		35,906		—
Short-term investments, available for sale		125,100		125,100		—		—
Short-term investments, held as trading securities		238,403		238,403		—		—
Cash equivalents		776,136		776,136		—		—
Derivatives		19,981		—		19,981		—
Other investments		46,131		1,553		11,280		33,298


Total assets measured at fair value	$	8,266,049	$	3,176,323	$	5,042,182	$	47,544


Derivative liabilities	$	39,295	$	—	$	39,295	$	—

The following tables provide a summary of changes in the fair value of Level 3 financial assets for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009			2010
	Fixed Income						Other Invested
	Securities						Assets
Beginning balance	$	14,246		$	67,423		$	33,298
Total realized investment gains (losses) included in net income		1,675			(3,201	)		(2,689	)
Purchases		5,567			17,632			700
Settlements		(4,289	)		(3,974	)		—
Transfers from Level 3 to Level 2		—			(47,787	)		—

Ending balance	$	17,199		$	30,093		$	31,309

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The following table presents realized investment gains and losses included in net income related to Level 3 assets for the three months ended March 31, 2010 and 2009 (in thousands):


	Net Realized Investment Gains (Losses) on:
	Fixed						Other
	Income						Invested
	Securities						Assets
	2010			2009			2010
Realized investment gains related to securities sold	$	1,766		$	270		$	—
Realized investment losses related to securities held		(91	)		(3,471	)		(2,689	)

Total net realized investment gains (losses) relating to Level 3 assets	$	1,675		$	(3,201	)	$	(2,689	)

Fair Value Option

The fair value option (“FVO”) available under GAAP allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in the fair value of assets and liabilities for which the election is made will be recognized in net income as they occur. The FVO election is permitted on an instrument-by-instrument basis at initial recognition of an asset or liability or upon the occurrence of an event that gives rise to a new basis of accounting for that instrument.

On January 1, 2008, the Company elected the FVO for its investment in Advent Capital (Holdings) PLC (“Advent”). At the time, Advent was publicly traded on a foreign stock exchange and its traded price was determined to be a better indicator of its value than its carrying value under the equity method. During 2009, Fairfax and certain of its subsidiaries, including the Company, purchased additional shares of Advent, bringing Fairfax’s ownership in Advent to 100%, of which the Company holds 21.7%.

To determine the fair value of Advent, the Company evaluates observable price-to-book multiples of peer companies and applies such to Advent’s most recently available book value per share. As of March 31, 2010, the Company’s investment in Advent is recorded at fair value of $30.6 million in other invested assets, with related changes in fair value recognized as a realized investment gain or loss in the period in which they occur. The change in Advent’s fair value resulted in the recognition of a realized investment loss of $2.3 million for both the three months ended March 31, 2010 and 2009. Advent’s value as of March 31, 2010, calculated in accordance with the equity method of accounting, would have been $38.5 million.

As of March 31, 2010, the Company has not elected the FVO for any of its liabilities.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

4. Investments and Cash

A summary of the Company’s investment portfolio as of March 31, 2010, excluding common stocks, at equity, other invested assets, fixed income securities held as trading securities, convertible preferred stock held as trading securities and short-term investments held as trading securities, is as follows (in thousands):


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Appreciation		Depreciation		Fair Value
Fixed income securities, available for sale:
United States government, government agencies and authorities	$	139,849	$	7,966	$	4,918	$	142,897
States, municipalities and political subdivisions		2,890,254		309,098		5,674		3,193,678
Foreign governments		709,946		52,017		1,054		760,909
Corporate		234,202		56,710		1,052		289,860

Total fixed income securities, available for sale		3,974,251		425,791		12,698		4,387,344
Redeemable preferred stock, at fair value		108		—		—		108
Common stocks, at fair value		1,539,412		540,920		3,974		2,076,358
Short-term investments, at fair value		74,582		—		—		74,582
Cash and cash equivalents		1,077,601		—		—		1,077,601
Cash and cash equivalents held as collateral		63,182		—		—		63,182

Total	$	6,729,136	$	966,711	$	16,672	$	7,679,175

Common stocks accounted for under the equity method of accounting were carried at $160.3 million as of March 31, 2010, reflecting gross unrealized appreciation of $35.8 million and no gross unrealized depreciation. Other invested assets were carried at $203.6 million as of March 31, 2010, reflecting no gross unrealized appreciation or depreciation. Fixed income securities held as trading securities were carried at fair value of $579.2 million as of March 31, 2010, with changes in fair value reflected as realized investment gains or losses in the consolidated statement of operations. Fixed income securities held as trading securities include corporate, foreign government and mortgage-related securities, with fair values of $385.6 million, $103.5 million and $90.1 million, respectively, as of March 31, 2010. Convertible preferred stock and short-term investments held as trading securities were carried at fair value of $69.3 million and $153.0 million, respectively, as of March 31, 2010, with changes in fair value reflected in realized investment gains or losses in the consolidated statement of operations.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

A summary of the Company’s investment portfolio as of December 31, 2009, excluding common stocks, at equity, other invested assets, fixed income securities held as trading securities, convertible preferred stock held as trading securities, and short-term investments held as trading securities, is as follows (in thousands):


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Appreciation		Depreciation		Fair Value
Fixed income securities, available for sale:
United States government, government agencies and authorities	$	138,033	$	7,309	$	4,305	$	141,037
States, municipalities and political subdivisions		2,808,873		318,037		39,354		3,087,556
Foreign governments		748,680		48,060		129		796,611
Corporate		275,553		73,292		84		348,761

Total fixed income securities, available for sale		3,971,139		446,698		43,872		4,373,965
Redeemable preferred stock, at fair value		108		—		—		108
Common stocks, at fair value		1,679,748		395,222		3,933		2,071,037
Short-term investments, at fair value		125,100		—		—		125,100
Cash and cash equivalents		941,444		—		—		941,444
Cash and cash equivalents held as collateral		56,720		—		—		56,720


Total	$	6,774,259	$	841,920	$	47,805	$	7,568,374

Common stocks accounted for under the equity method of accounting were carried at $158.5 million as of December 31, 2009, reflecting gross unrealized appreciation of $34.1 million and no gross unrealized depreciation. Other invested assets were carried at $146.7 million as of December 31, 2009, reflecting no gross unrealized appreciation or depreciation. Fixed income securities held as trading securities were carried at fair value of $532.7 million as of December 31, 2009, with changes in fair value reflected as realized investment gains or losses in the consolidated statement of operations. Fixed income securities held as trading securities include corporate, foreign government and mortgage-related securities, with fair values of $363.0 million, $99.4 million and $70.3 million, respectively, as of December 31, 2009. Convertible preferred stock and short-term investments held as trading securities were carried at fair value of $82.5 million and $238.4 million, respectively, as of December 31, 2009, with changes in fair value reflected in realized investment gains or losses in the consolidated statement of operations.

The fair values of fixed income securities and common stocks are based on the quoted market prices of the investments as of the close of business on March 31, 2010 and December 31, 2009, respectively.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(a) Net Investment Income and Realized Investment Gains (Losses)

The following table sets forth the components of net investment income for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010		2009
Interest on fixed income securities	$	69,870	$	56,589
Dividends on common stocks, at fair value		10,785		16,886
Net income (loss) of common stocks, at equity		64		(802	)
Interest on cash and short-term investments		2,417		4,890
Other invested assets		10,597		(4,837	)

Gross investment income		93,733		72,726
Less: investment expenses		8,785		4,352
Less: interest on funds held under reinsurance contracts		844		913

Net investment income	$	84,104	$	67,461

The following table sets forth the components of net realized investment gains and losses for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31, 2010							Three Months Ended March 31, 2009
	Gross		Gross		Net Realized			Gross		Gross		Net Realized
	Realized		Realized		Investment			Realized		Realized		Investment
	Investment		Investment		Gains			Investment		Investment		(Losses)
	Gains		Losses		(Losses)			Gains		Losses		Gains
Fixed income securities, available for sale	$	19,416	$	3,677	$	15,739		$	3,760	$	4,057	$	(297	)
Fixed income securities, held as trading securities		40,240		1,479		38,761			6,020		26,795		(20,775	)
Redeemable preferred stock		—		—		—			—		178		(178	)
Convertible preferred stock, held as trading securities		—		13,178		(13,178	)		—		—		—
Equity securities		82,301		1,867		80,434			3,351		78,423		(75,072	)
Derivative securities		13,594		66,830		(53,236	)		21,644		6,978		14,666
Other securities		29,040		43,603		(14,563	)		20,651		38,358		(17,707	)


Total	$	184,591	$	130,634	$	53,957		$	55,426	$	154,789	$	(99,363	)

Included in net realized investment gains for the three months ended March 31, 2010 and 2009 are $4.1 million and $81.4 million, respectively, of realized investment losses on the other-than-temporary impairment of investments, as follows (in thousands):


	Three Months Ended
	March 31,
	2010		2009
Fixed income securities	$	2,911	$	3,136
Equity securities		1,142		78,238

Total other-than-temporary impairments	$	4,053	$	81,374

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

For those fixed income securities that were determined to be other-than-temporarily impaired, the Company determined that such impairments were either related to credit or were incurred on securities maturing before sufficient time would elapse for market value recovery, requiring the recognition of an impairment charge to income. Impairments related to other factors for securities not maturing in the near term (e.g., interest rates and market conditions) would have required charges to other comprehensive income.

(b) Unrealized Appreciation (Depreciation)

The following table sets forth the changes in unrealized net appreciation (depreciation) of investments, and the related tax effect, reflected in accumulated other comprehensive income for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Fixed income securities	$	10,267		$	110,533
Redeemable preferred stock		—			179
Equity securities		147,421			(242,272	)
Short-term investments		—			50

Increase (decrease) in unrealized net appreciation of investments		157,688			(131,510	)
Deferred income tax (expense) benefit		(55,191	)		46,031

Change in net unrealized appreciation (depreciation) of investments included in other comprehensive income	$	102,497		$	(85,479	)

(c) Common Stocks, at Equity

Common stocks, at equity, totaled $160.3 million as of March 31, 2010 and $158.5 million as of December 31, 2009. The following table sets forth the components of common stocks, at equity, as of March 31, 2010 and December 31, 2009 (in thousands):


	March 31,		December 31,
	2010		2009
Fairfax Asia Limited	$	85,991	$	84,086
TRG Holding Corporation		74,327		74,347
Other		27		27

Total common stocks, at equity	$	160,345	$	158,460

For common stocks, at equity, as of March 31, 2010, the relative ownership held by the Company was 13.0% for TRG Holding Corporation (which is 100% owned by Fairfax) and 26.2% (economic) for Fairfax Asia Limited (which is 100% owned by Fairfax).

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(d) Derivative Investments and Short Sales

The Company has utilized credit default swaps, call options and warrants, total return swaps, interest rate options, forward currency contracts, futures contracts and short sales to manage against adverse changes in the values of assets and liabilities. These products are typically not linked to specific assets or liabilities on the consolidated balance sheets or a forecasted transaction and, therefore, do not qualify for hedge accounting. The following tables set forth the Company’s derivative positions, which are included in other invested assets or other liabilities in the consolidated balance sheets, as of March 31, 2010 and December 31, 2009, respectively (in thousands):


	As of March 31, 2010
	Exposure/
	Notional				Fair Value		Fair Value
	Amount		Cost		Asset		Liability
Credit default swaps	$	1,161,002	$	19,779	$	8,691	$	—
Total return swaps		985,936		—		—		1,242
Forward currency contracts		512,003		—		—		34,791
Other		—		71,101		56,797		2,038


	As of December 31, 2009
	Exposure/
	Notional				Fair Value		Fair Value
	Amount		Cost		Asset		Liability
Credit default swaps	$	1,295,187	$	20,583	$	9,986	$	—
Total return swaps		818,416		—		3,132		—
Forward currency contracts		416,293		—		—		39,251
Other		—		9,335		6,864		43

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The following tables summarize the effect of the hedging instruments and related hedged items on the Company’s historical financial position, results of operations and cash flows as of and for the three months ended March 31, 2010 and 2009 (in thousands):


	As of and for the Three Months Ended March 31, 2010
						Effect on Pre-tax:
	Exposure /					Other		Net Realized						Net Cash
	Notional		Carrying			Comprehensive		Investment						Flow from
	Value		Value			Income		Gains			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	69,401	$	69,401		$	—	$	(13,178	)	$	(13,178	)	$	—
Common stocks, at fair value		2,076,358		2,076,358			145,657		80,435			226,092			80,837
Other		129,855		(1,504	)		—		(1,504	)		(1,504	)		—

Total equity exposure	$	2,275,614	$	2,144,255			145,657		65,753			211,410			80,837

Hedging instruments:
Other invested assets:
Total return swaps	$	856,081	$	262			—		(40,534	)		(40,534	)		(37,664	)

Total equity hedging instruments	$	856,081	$	262			—		(40,534	)		(40,534	)		(37,664	)

Net equity impact						$	145,657	$	25,219		$	170,876		$	43,173


Credit risk exposures:
Fixed income securities	$	4,966,508	$	4,966,508		$	10,267	$	54,500		$	64,767		$	16,564
Derivatives — other invested assets		56,797		56,797			—		(11,692	)		(11,692	)		141
Cash, cash equivalents and short-term investments		1,368,390		1,368,390			—		(11,221	)		(11,221	)		(11,221	)
Premiums receivable		436,931		436,931			—		(250	)		(250	)		(250	)
Reinsurance recoverable		1,204,361		1,204,361			—		(250	)		(250	)		—

Total credit risk exposure	$	8,032,987	$	8,032,987			10,267		31,087			41,354			5,234

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	317,683	$	2,845			—		(253	)		(253	)		(804	)
Insurance		843,319		5,846			—		(1,042	)		(1,042	)		—

Total credit default swaps	$	1,161,002	$	8,691			—		(1,295	)		(1,295	)		(804	)

Net equity impact						$	10,267	$	29,792		$	40,059		$	4,430

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


	As of and for the Three Months Ended March 31, 2009
					Effect on Pre-tax:
	Exposure /				Other			Net Realized						Net Cash
	Notional		Carrying		Comprehensive			Investment						Flow from
	Value		Value		Loss			Losses			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	108	$	108	$	179		$	(178	)	$	1		$	(1,096	)
Common stocks, at fair value		1,485,873		1,485,873		(243,567	)		(75,072	)		(318,639	)		3,166

Total equity exposure	$	1,485,981	$	1,485,981		(243,388	)		(75,250	)		(318,638	)		2,070

Hedging instruments:
Other invested assets:
Total return swaps	$	—	$	—		—			—			—			—

Total equity hedging instruments	$	—	$	—		—			—			—			—

Net equity impact					$	(243,388	)	$	(75,250	)	$	(318,638	)	$	2,070


Credit risk exposures:
Fixed income securities	$	4,258,802	$	4,258,802	$	110,533		$	(21,072	)	$	89,461		$	3,092
Derivatives — other invested assets		40,246		40,246		—			12,043			12,043			(237	)
Cash, cash equivalents and short-term investments		1,371,515		1,371,515		50			(10,848	)		(10,798	)		(10,848	)
Premiums receivable		486,337		486,337		—			—			—			—
Reinsurance recoverable		981,838		981,838		—			(750	)		(750	)		—

Total credit risk exposure	$	7,138,738	$	7,138,738		110,583			(20,627	)		89,956			(7,993	)

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	486,673	$	19,511		—			8,939			8,939			7,715
Insurance		843,767		29,027		—			(5,868	)		(5,868	)		20,665

Total credit default swaps	$	1,330,440	$	48,538		—			3,071			3,071			28,380

Net equity impact					$	110,583		$	(17,556	)	$	93,027		$	20,387

In the normal course of effecting its economic hedging strategy with respect to credit risk and equity risk, the Company expects that there may be periods where the notional value of the hedging instrument may exceed or be less than the exposure item being hedged. This situation may arise when management compensates for imperfect correlations between the hedging item and the hedge, due to the timing of opportunities related to the Company’s ability to exit and enter hedged or hedging items at attractive prices or when management desires to only partially hedge an exposure.

The Company holds credit default swaps, referenced to certain issuers in the banking and insurance sectors of the financial services industry worldwide, that serve as an economic hedge against declines in the fair value of investments and other corporate assets resulting from systemic financial and credit risk. Under a credit default swap, as the buyer, the Company agrees to pay to a specific counterparty, at specified periods, fixed premium amounts based on an agreed notional principal amount in exchange for protection against default by the issuers of specified referenced debt securities. The credit events, as defined by the respective credit default swap contracts, establishing the rights to recover amounts from the counterparties are comprised of ISDA-standard credit events, which are: bankruptcy, obligation acceleration, obligation default, failure to pay, repudiation/moratorium and restructuring. As of March 31, 2010, all credit default swap contracts held by the Company have been purchased from and entered into with either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as the counterparty, with positions on certain covered risks with more than one of these counterparties. The Company obtains market-derived fair values for its credit default swaps from third-party

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

providers, principally broker-dealers. The Company assesses the reasonableness of the fair values obtained from these providers by comparison to models validated by qualified personnel, by reference to movements in credit spreads and by comparing the fair values to recent transaction prices for similar credit default swaps, where available.

The initial premium paid for each credit default swap contract is recorded as a derivative asset and is subsequently adjusted for changes in the unrealized fair value of the contract at each balance sheet date. As these contracts do not qualify for hedge accounting, changes in the unrealized fair value of the contract are recorded as net realized investment gains or losses in the Company’s consolidated statements of operations and comprehensive income. Sales of credit default swap contracts required the Company to reverse through net realized investment gains previously recorded unrealized fair value changes since the inception of the contract, and to record the actual amount based upon the final cash settlement. Derivative assets are reported gross, on a contract-by-contract basis, at fair value in other invested assets in the consolidated balance sheets. The sale, expiration or early settlement of a credit default swap will not result in a cash payment owed by the Company; rather, such an event can only result in a cash payment by a third party purchaser of the contract, or the counterparty, to the Company. Accordingly, there is no opportunity for netting of amounts owed in settlement. Cash receipts at the date of sale of the credit default swaps are recorded as cash flows from investing activities arising from net sales of assets and liabilities classified as held for trading.

The fair values of credit default swaps may be subject to significant volatility, given potential differences in the perceived risk of default of the underlying issuers, movements in credit spreads and the length of time to the contracts’ maturities. The fair value of the credit default swaps may vary dramatically either up or down in short periods, and their ultimate value may therefore only be known upon their disposition. Credit default swap transactions generally settle in cash. As a result of the appreciation in the fair value of the credit default swaps, counterparties to these transactions are required to place government securities as collateral, pursuant to the swap agreements. The fair value of the collateral as of March 31, 2010 was $0.9 million. As the Company funds all of its obligations relating to these contracts upon initiation of the transaction, there are no requirements in these contracts for the Company to provide collateral.

The Company’s holdings of credit default swap contracts declined significantly in 2009 relative to prior years, largely as a result of significant sales in 2008. In the latter part of 2008, the Company revised the financial objectives of its hedging program by determining not to replace its credit default swap hedge position as sales or expiries occurred, primarily based on the Company’s judgment that its exposure to elevated levels of credit risk had moderated, but also due to (i) the significant increase in the cost of purchasing credit protection (reducing the attractiveness of the credit default swap contract as a hedging instrument), (ii) improvement in the Company’s capital and liquidity (having benefited significantly from, among other things, more than $568.0 million in gains from sales of credit default swaps realized since 2007), and (iii) the Company’s judgment that managing credit risk through means other than the use of derivatives was, given the market environment, once again appropriate for mitigating the Company’s credit exposure arising from financial assets.

The fair value of the credit default swaps portfolio was $8.7 million as of March 31, 2010, compared to $10.0 million as of December 31, 2009. The credit default swaps portfolio has an average term to expiration of 1.4 years as of March 31, 2010, a decrease from 1.5 years as of December 31, 2009.

The Company has entered into forward currency contracts to manage its foreign currency exchange rate risk on a macro basis. Under a forward currency contract, the Company and the counterparty are obligated to purchase or sell an underlying currency at a specified price and time. The collateral requirement related to the forward currency contracts was $6.6 million as of March 31, 2010. As a result in the appreciation in the fair value of some of the forward currency contracts, counterparties to these contracts are required to place government securities as collateral, pursuant to the forward currency agreements. The fair value of this collateral as of March 31, 2010 was $2.4 million. Forward currency contracts are recorded at fair value in other liabilities as of March 31, 2010 and December 31, 2009, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The Company has investments in warrants, which are contracts that grant the holder the right, but not the obligation, to purchase an underlying financial instrument at a given price and time or at a series of prices and times. Warrants, which are included in other invested assets as of March 31, 2010 and December 31, 2009, are recorded at fair value, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

The Company has entered into interest rate swaps to protect it from adverse movements in interest rates. Under its current interest rate swap contracts, the Company receives a floating interest rate and pays a fixed interest rate based on the notional amounts in the contracts. Interest rate swaps are recorded at fair value in other liabilities as of March 31, 2010 and December 31, 2009, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

The Company has purchased equity index total return swaps as an “economic hedge” against a broad market downturn. During the fourth quarter of 2008, the Company had removed the then-existing economic hedge on its portfolio, closing all of its total return swap contracts for a gain. Since closing these positions, however, the Company has increased its holdings in equity securities through additional acquisitions. In addition, the equity markets have experienced significant appreciation in value since the end of 2008, further increasing the value of the Company’s holdings as well as the Company’s exposure to market volatility. As a result, in September 2009, the Company initiated U.S. equity index total return swap contracts, which had a notional value of $856.1 million as of March 31, 2010, to protect against potential future broad market downturns. The collateral requirement related to entering the total return swaps was $65.2 million as of March 31, 2010. These total return swap transactions terminate during the third quarter of 2010. The equity index total return swaps, in the aggregate, are recorded at fair value in other liabilities and other invested assets as of March 31, 2010 and December 31, 2009, respectively, with the related changes in the fair values recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur.

During the first quarter of 2010, the Company purchased a common stock total return swap, with a total notional value of $129.9 million, as a replication of a long position in a publicly-listed common stock. The collateral requirement related to this swap, which terminates in the first quarter of 2011, was $13.0 million as of March 31, 2010. The common stock total return swap was in a loss position as of March 31, 2010, and is recorded in other liabilities. Changes in the fair value of common stock total return swaps are recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur.

As an economic hedge against the potential adverse impact on the Company of changes in price levels in the economy, the Company has purchased inflation-linked derivative contracts referenced to inflation indices in the geographic regions in which the Company operates. As of March 31, 2010 and December 31, 2009, the Company had 34 and three inflation-linked derivative contracts, respectively, outstanding, with a carrying value in the consolidated balance sheet of $55.2 million and $4.1 million, respectively, and a cost of $65.7 million and $4.0 million, respectively. The initial premium paid for inflation-linked derivative contracts is recorded as a derivative asset and subsequently adjusted for changes in the unrealized fair value of the contracts at each balance sheet date. Changes in the unrealized fair value of the contracts are recorded as realized gains or losses on investments in the Company’s consolidated statements of operations with a corresponding adjustment to the carrying value of the derivative asset. In the event of a sale, expiration or early settlement of one of the Company’s inflation-linked derivative contracts, the Company would receive the fair value of that contract on the date of the transaction. The Company’s maximum potential cash loss is limited to the premiums paid to enter into the derivative contracts. Pursuant to the agreements governing the inflation-linked derivatives, counterparties to these transactions are contractually required to periodically deposit eligible collateral for the benefit of the Company in support of the then-current fair value of the derivative contracts. As of March 31, 2010, the fair value of this collateral was $39.1 million.

During 2008, the Company entered into Eurodollar futures contracts to manage its interest rate risk with

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

respect to certain investments. During the first quarter of 2009, the Company closed the futures contracts. A futures contract is a variation of a forward currency contract, with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and trading on an organized electronic or floor trading facility. Futures contracts are entered either long or short. The Company had entered into the long position, which agrees to buy the underlying currency at the future date at the price agreed upon.

Counterparties to the derivative instruments expose the Company to credit risk in the event of non-performance. The Company believes this risk is low, given the diversification among various highly rated counterparties. The credit risk exposure is reflected in the fair value of the derivative instruments.

The net realized investment gains or losses on disposal in the table below represent the total gains or losses from the purchase dates of the investments and have been reported in net realized investment gains in the consolidated statements of operations. The change in fair value presented below consists of two components: (i) the reversal of the gain or loss recognized in previous years on securities sold and (ii) the change in fair value resulting from mark-to-market adjustments on contracts still outstanding. The following table sets forth the total net realized investment gains and losses on derivatives for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Credit default swaps:
Net realized investment (losses) gains on disposal	$	(804	)	$	28,380
Change in fair value		(491	)		(25,309	)


Net realized investment (losses) gains		(1,295	)		3,071


Total return swaps:
Net realized investment losses on disposal		(37,664	)		—
Change in fair value		(4,374	)		—


Net realized investment losses		(42,038	)		—

Forward currency contracts:
Net realized investment gains on disposal		107			—
Change in fair value		4,460			11,997


Net realized investment gains		4,567			11,997


Other:
Net realized investment losses on disposal		(642	)		(687	)
Change in fair value		(13,828	)		285


Net realized investment losses		(14,470	)		(402	)


Total derivatives:
Net realized investment (losses) gains on disposal		(39,003	)		27,693
Change in fair value		(14,233	)		(13,027	)


Net realized investment (losses) gains	$	(53,236	)	$	14,666

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

(e) Assets on Deposit

The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutes and regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company utilizes trust funds in certain transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit requirements. As of March 31, 2010, restricted assets supporting these deposits and trust fund requirements totaled $1,099.7 million, as depicted in the following table (in thousands):


	As of March 31, 2010
	Restricted Assets Relating to:
	U.S.		Foreign
	Regulatory		Regulatory
	Requirements		Requirements		Total
Fixed income securities	$	387,340	$	574,559	$	961,899
Cash, cash equivalents and short-term investments		6,768		130,997		137,765

Total	$	394,108	$	705,556	$	1,099,664

5. Accumulated Other Comprehensive Income (Loss)

The following table shows the components of the change in accumulated other comprehensive income (loss), net of deferred income taxes, for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010			2009

Beginning balance of accumulated other comprehensive income	$	546,580		$	82,421


Beginning balance of unrealized net appreciation on securities		538,335			75,166

Ending balance of unrealized net appreciation (depreciation) on securities		640,832			(10,313	)


Current period change in unrealized net appreciation (depreciation) on securities		102,497			(85,479	)


Beginning balance of foreign currency translation adjustments		13,484			10,716

Ending balance of foreign currency translation adjustments		23,856			9,385


Current period change in foreign currency translation adjustments		10,372			(1,331	)


Beginning balance of benefit plan liabilities		(5,239	)		(3,461	)

Ending balance of benefit plan liabilities		(5,239	)		(3,461	)


Current period change in benefit plan liabilities		—			—


Current period change in accumulated other comprehensive income (loss)		112,869			(86,810	)


Ending balance of accumulated other comprehensive income (loss)	$	659,449		$	(4,389	)

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The components of comprehensive income (loss) for the three months ended March 31, 2010 and 2009 are shown in the following table (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Net income (loss)	$	37,789		$	(5,791	)


Other comprehensive income (loss), before tax:
Unrealized net appreciation (depreciation) on securities arising during the period		255,602			(199,020	)

Reclassification adjustment for realized investment (gains) losses
included in net income (loss)		(97,914	)		67,510
Foreign currency translation adjustments		15,957			(2,047	)

Other comprehensive income (loss), before tax		173,645			(133,557	)


Tax (provision) benefit:
Unrealized net (appreciation) depreciation on securities arising during the period		(89,461	)		69,659
Reclassification adjustment for realized investment gains (losses) included in net income (loss)		34,270			(23,628	)
Foreign currency translation adjustments		(5,585	)		716

Total tax (provision) benefit		(60,776	)		46,747


Other comprehensive income (loss), net of tax		112,869			(86,810	)


Comprehensive income (loss)	$	150,658		$	(92,601	)

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

6. Unpaid Losses and Loss Adjustment Expenses

The following table sets forth the activity in the liability for unpaid losses and loss adjustment expenses for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Gross unpaid losses and loss adjustment expenses, beginning of period	$	5,507,766		$	5,250,484
Less: Ceded unpaid losses and loss adjustment expenses, beginning of period		841,486			690,171

Net unpaid losses and loss adjustment expenses, beginning of period		4,666,280			4,560,313

Add: Net losses and loss adjustment expenses incurred related to:
Current period		380,774			329,405
Prior periods		(4,876	)		(11,814	)

Total net losses and loss adjustment expenses incurred		375,898			317,591

Less: Net paid losses and loss adjustment expenses related to:
Current period		20,963			26,624
Prior periods		259,739			268,042

Total net paid losses and loss adjustment expenses		280,702			294,666

Effects of exchange rate changes		(23,978	)		(6,143	)

Net unpaid losses and loss adjustment expenses, end of period		4,737,498			4,577,095
Add: Ceded unpaid losses and loss adjustment expenses, end of period		899,470			689,208

Gross unpaid losses and loss adjustment expenses, end of period	$	5,636,968		$	5,266,303

Estimates of reserves for unpaid losses and loss adjustment expenses, with respect to loss events that have occurred on or before the balance sheet date, are contingent on many assumptions that may or may not occur in the future. These assumptions include loss estimates attributable to a variety of loss events, including earthquakes, hurricanes, windstorms and floods. The eventual outcome of these loss events may be different from the assumptions underlying the Company’s reserve estimates. When the business environment and loss trends diverge from expected trends, the Company may have to adjust its reserves accordingly, potentially resulting in adverse or favorable effects to the Company’s financial results. The Company believes that the recorded estimate represents the best estimate of unpaid losses and loss adjustment expenses based on the information available as of March 31, 2010. The estimate is reviewed on a quarterly basis and the ultimate liability may be more or less than the amounts provided, for which any adjustments will be reflected in the periods in which they become known.

Net losses and loss adjustment expenses incurred related to the current year, as reflected in the table above, were $380.8 million and $329.4 million for the three months ended March 31, 2010 and 2009, respectively. The increase in losses and loss adjustment expenses incurred for the three months ended March 31, 2010 was principally attributable to an increase in property catastrophe losses. For the three months ended March 31, 2010 and 2009, current year property catastrophe losses were $121.1 million and $47.7 million, respectively. For the three months ended March 31, 2010, current year property catastrophe losses included $85.2 million related to the Chile earthquake and $17.6 million related to Windstorm Xynthia in Europe. For the three months ended March 31, 2009, current year property catastrophe losses included $43.9 million related to Windstorm Klaus in Europe.

The loss estimates for property catastrophe losses such as the Chile earthquake and Windstorm Xynthia represent the Company’s best estimate based on the most recent information available. The Company used various approaches in estimating its losses, including a detailed review of exposed contracts and information from ceding companies. As additional information becomes available, including information from ceding companies, actual

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

losses may exceed the Company’s estimated losses, potentially resulting in adverse effects to the Company’s financial results.

Net losses and loss adjustment expenses incurred related to prior years decreased $4.9 million and $11.8 million for the three months ended March 31, 2010 and March 31, 2009, respectively. The decrease in prior period losses and loss adjustment expenses for the three months ended March 31, 2010 was attributable to reduced loss estimates due to loss emergence lower than expectations in the period on business written in the London Market and U.S. Insurance divisions, partially offset by increased loss estimates due to loss emergence greater than expectations in the period on business written in the Americas division. The decrease in prior period losses and loss adjustment expenses for the three months ended March 31, 2009 was attributable to reduced loss estimates due to loss emergence lower than expectations in the period on business written in all divisions.

The effects of exchange rate changes on net unpaid losses and loss adjustment expenses resulted in decreases of $24.0 million and $6.1 million for the three months ended March 31, 2010 and 2009, respectively. The effects of exchange rate changes were attributable to changes in foreign currency exchange rates for unpaid losses and loss adjustment expenses in the London Market division.

Ceded unpaid losses and loss adjustment expenses were $899.5 million and $689.2 million as of March 31, 2010 and 2009, respectively. The increase in ceded unpaid losses and loss adjustment expenses was principally attributable to a $104.1 million increase in unpaid reinsurance recoverables related to non-catastrophe exposure in the London Market division and an $80.7 million increase in unpaid reinsurance recoverables related to property catastrophe events.

The Company uses tabular reserving for workers’ compensation indemnity loss reserves, which are considered to be fixed and determinable, and discounts such reserves using an interest rate of 3.5%. Workers’ compensation indemnity loss reserves have been discounted using the Life Table for Total Population: United States, 2004. Reserves reported at the discounted value were $117.2 million and $115.8 million as of March 31, 2010 and December 31, 2009, respectively. The amount of case reserve discount was $54.2 million and $54.3 million as of March 31, 2010 and December 31, 2009, respectively. The amount of incurred but not reported reserve discount was $22.1 million and $21.9 million as of March 31, 2010 and December 31, 2009, respectively.

7. Asbestos and Environmental Losses and Loss Adjustment Expenses

The Company has exposure to losses from asbestos, environmental pollution and other latent injury damage claims. Net unpaid asbestos and environmental losses and loss adjustment expenses as of March 31, 2010 were $252.8 million, representing 5.3% of total net unpaid losses and loss adjustment expenses, compared to $265.5 million, or 5.7% of total net unpaid losses and loss adjustment expenses as of December 31, 2009. Exposure arises from reinsurance contracts written by Clearwater prior to 1986 under which the Company has assumed liabilities, on an indemnity or assumption basis, from ceding companies, primarily in connection with general liability insurance policies issued by such ceding companies. The Company’s estimate of its ultimate liability for these exposures includes “case basis” reserves and a provision for liabilities incurred but not reported. Case basis reserves are a combination of reserves reported to the Company by ceding companies and additional case reserves determined by the Company. The provision for liabilities incurred but not reported is established based on an annual review of the Company’s experience and external trends in reported loss and claim payments, with monitoring of emerging experience on a quarterly basis.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

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.

The Company’s reserves for asbestos and environmental-related liabilities displayed below are from business written prior to 1986. The Company’s asbestos and environmental reserve development, gross and net of reinsurance, for the three months ended March 31, 2010 and 2009, is set forth in the table below (in thousands):


	Three Months Ended
	March 31,
	2010		2009
Asbestos
Gross unpaid losses and loss adjustment expenses, beginning of period	$	386,735	$	360,733
Add: Gross losses and loss adjustment expenses incurred		—		—
Less: Gross calendar period paid losses and loss adjustment expenses		18,335		11,582

Gross unpaid losses and loss adjustment expenses, end of period	$	368,400	$	349,151

Net unpaid losses and loss adjustment expenses, beginning of period	$	241,572	$	230,486
Add: Net losses and loss adjustment expenses incurred		—		—
Less: Net calendar period paid losses and loss adjustment expenses		12,365		5,589

Net unpaid losses and loss adjustment expenses, end of period	$	229,207	$	224,897

Environmental
Gross unpaid losses and loss adjustment expenses, beginning of period	$	27,142	$	34,242
Add: Gross losses and loss adjustment expenses incurred		—		—
Less: Gross calendar period paid losses and loss adjustment expenses		249		4,479

Gross unpaid losses and loss adjustment expenses, end of period	$	26,893	$	29,763

Net unpaid losses and loss adjustment expenses, beginning of period	$	23,885	$	29,819
Add: Net losses and loss adjustment expenses incurred		—		—
Less: Net calendar period paid losses and loss adjustment expenses		249		3,115

Net unpaid losses and loss adjustment expenses, end of period	$	23,636	$	26,704

The Company did not incur net losses and loss adjustment expenses related to asbestos or environmental claims for either of the three month periods ended March 31, 2010 or 2009.

The Company’s survival ratio for asbestos and environmental-related liabilities as of March 31, 2010 is seven years. The Company’s underlying survival ratio for asbestos-related liabilities is seven years and for environmental-related liabilities is three years. The asbestos and environmental-related liability survival ratio represents the asbestos and environmental reserves, net of reinsurance, as of March 31, 2010, divided by the average paid asbestos and environmental claims for the last three years of $39.0 million, which is net of reinsurance. Our survival ratios may fluctuate over time due to the variability of large payments and adjustments to liabilities.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

8. Debt Obligations and Preferred Shares

Debt Obligations

The components of the Company’s debt obligations as of March 31, 2010 and December 31, 2009 were as follows (in thousands):


	March 31,		December 31,
	2010		2009
7.65% Senior Notes due 2013	$	224,844	$	224,833
6.875% Senior Notes due 2015		124,589		124,569
Series A Floating Rate Senior Debentures due 2021		50,000		50,000
Series B Floating Rate Senior Debentures due 2016		50,000		50,000
Series C Floating Rate Senior Debentures due 2021		40,000		40,000

Total debt obligations	$	489,433	$	489,402

On November 28, 2006, the Company completed the private sale of $40.0 million aggregate principal amount of floating rate senior debentures, series C, due December 15, 2021 (the “Series C Notes”). Interest on the Series C Notes accrues at a rate per annum equal to the three-month London Interbank Offer Rate (“LIBOR”), reset quarterly, plus 2.50%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The Company has the option to redeem the Series C Notes at par, plus accrued and unpaid interest, in whole or in part on any interest payment date on or after December 15, 2011. For the three months ended March 31, 2010 and 2009, the average annual interest rate on the Series C Notes was 2.75% and 4.37%, respectively.

On February 22, 2006, the Company issued $100.0 million aggregate principal amount of floating rate senior debentures, pursuant to a private placement. The net proceeds from the offering, after fees and expenses, were $99.3 million. The debentures were sold in two tranches: $50.0 million of series A, due March 15, 2021 (the “Series A Notes”), and $50.0 million of series B, due March 15, 2016 (the “Series B Notes”). Interest on each series of debentures is due quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The interest rate on each series of debentures is equal to the three-month LIBOR, reset quarterly, plus 2.20%. The Series A Notes are callable by the Company on any interest payment date on or after March 15, 2011 at their par value, plus accrued and unpaid interest, and the Series B Notes are callable by the Company on any interest payment date on or after March 15, 2009 at their par value, plus accrued and unpaid interest. For the three months ended March 31, 2010 and 2009, the average annual interest rate on each series of notes was 2.45% and 4.07%, respectively.

During the second quarter of 2005, the Company issued $125.0 million aggregate principal amount of senior notes due May 1, 2015. The issue was sold at a discount of $0.8 million, which is being amortized over the life of the notes. Interest accrues on the senior notes at a fixed rate of 6.875% per annum, which is due semi-annually on May 1 and November 1.

During the fourth quarter of 2003, the Company issued $225.0 million aggregate principal amount of senior notes due November 1, 2013. The issue was sold at a discount of $0.4 million, which is being amortized over the life of the notes. Interest accrues on the senior notes at a fixed rate of 7.65% per annum, which is due semi-annually on May 1 and November 1.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

As of March 31, 2010, the aggregate maturities of the Company’s debt obligations, at face value, were as follows (in thousands):


Year	Amount
2013	$	225,000
2015		125,000
2016		50,000
2021		90,000

Total	$	490,000

As of both March 31, 2010 and December 31, 2009, the amortized cost of the Company’s debt obligations was $489.4 million as reflected in the respective consolidated balance sheets. As of March 31, 2010 and December 31, 2009, the estimated fair value of the Company’s debt obligations was $509.7 million and $503.6 million, respectively. The estimated fair value is based on quoted market prices of the Company’s debt, where available, and for debt similar to the Company’s, and discounted cash flow calculations.

On July 13, 2007, the Company entered into a $200.0 million credit facility (the “Credit Agreement”) with Wachovia Bank National Association (“Wachovia”), KeyBank National Association and a syndicate of lenders. The original Credit Agreement provided for a five-year credit facility of $200.0 million, $100.0 million of which was available for direct, unsecured borrowings by the Company, and all of which was available for the issuance of collateralized letters of credit to support the Company’s insurance and reinsurance business. As of June 17, 2009, the Credit Agreement was amended to explicitly permit the Company to pledge collateral to secure its obligations under swap agreements, subject to certain financial limitations, in the event that such collateral is required by the counterparty or counterparties. As of February 24, 2010, the Credit Agreement was amended (i) to reduce the size of the facility to $100.0 million, removing the unsecured $100.0 million tranche, (ii) to remove the previous limitation on dividends and other “restricted payments” that the Company may pay to its shareholders and (iii) amend certain of the covenants and default provisions, the minimum ratings requirement, and the pricing of the credit facility.

The amended Credit Agreement contains an option that permits the Company to request an increase in the aggregate amount of the facility by an amount up to $50.0 million, to a maximum facility size of $150.0 million. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion of the proposed increase. As of March 31, 2010, there was $33.7 million outstanding under the Credit Agreement, all of which was in support of secured letters of credit.

In December 2008, the Company entered into interest rate swaps, with an aggregate notional value of $140.0 million, to protect it from adverse movements in interest rates. Under these swap contracts, the Company receives a floating interest rate of three-month LIBOR and pays a fixed interest rate of 2.49% on the $140.0 million notional value of the contracts, for a five-year period ending in December 2013.

Preferred Shares

During the first quarter of 2009, Odyssey America purchased 704,737 shares of the Company’s Series B preferred shares, with a liquidation preference of $17.2 million, for $9.2 million. As a result of the purchase of the Series B preferred shares, the Company recorded a gain of $8.0 million during the three months ended March 31, 2009, which was reflected in the Company’s retained earnings and included in net income available to common shareholders.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

9. Segment Reporting

The Company’s operations are managed through four operating divisions: Americas, EuroAsia, London Market and U.S. Insurance. The Americas division is comprised of the Company’s reinsurance operations in the United States, Canada and Latin America, and writes property and casualty reinsurance business on a treaty and facultative basis. The EuroAsia division writes treaty reinsurance business. The London Market division operates through three distribution channels: Newline Syndicate (1218) at Lloyd’s and NICL, which focus on casualty insurance, and the London branch of Odyssey America, which focuses on worldwide property and casualty reinsurance. The U.S. Insurance division writes specialty insurance lines and classes of business, such as medical professional liability, professional liability, crop and commercial automobile.

The financial results of these divisions for the three months ended March 31, 2010 and 2009 are as follows (in thousands):


							London			U.S.
Three Months Ended March 31, 2010	Americas			EuroAsia			Market			Insurance			Total
Gross premiums written	$	197,683		$	164,839		$	82,952		$	116,182		$	561,656
Net premiums written		183,396			155,487			67,855			66,449			473,187
Net premiums earned	$	176,656		$	137,812		$	67,584		$	75,043		$	457,095

Losses and loss adjustment expenses		186,282			96,062			44,831			48,723			375,898
Acquisition costs and other underwriting expenses		62,294			33,710			18,494			25,549			140,047

Total underwriting deductions		248,576			129,772			63,325			74,272			515,945

Underwriting (loss) income	$	(71,920	)	$	8,040		$	4,259		$	771			(58,850	)

Net investment income														84,104
Net realized investment gains														53,957
Other expense, net														(31,939	)
Interest expense														(7,485	)

Income before income taxes													$	39,787

Underwriting ratios:
Losses and loss adjustment expenses		105.4	%		69.7	%		66.3	%		64.9	%		82.3	%
Acquisition costs and other underwriting expenses		35.3			24.5			27.4			34.1			30.6

Combined ratio		140.7	%		94.2	%		93.7	%		99.0	%		112.9	%

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


							London			U.S.
Three Months Ended March 31, 2009	Americas			EuroAsia			Market			Insurance			Total
Gross premiums written	$	195,297		$	160,317		$	72,942		$	126,364		$	554,920
Net premiums written		190,697			153,586			52,487			82,209			478,979
Net premiums earned	$	195,203		$	138,215		$	54,424		$	82,176		$	470,018

Losses and loss adjustment expenses		117,375			110,675			34,661			54,880			317,591
Acquisition costs and other underwriting expenses		60,524			34,680			15,400			25,505			136,109

Total underwriting deductions		177,899			145,355			50,061			80,385			453,700

Underwriting income (loss)	$	17,304		$	(7,140	)	$	4,363		$	1,791			16,318

Net investment income														67,461
Net realized investment losses														(99,363	)
Other expense, net														(4,202	)
Interest expense														(8,085	)

Loss before income taxes													$	(27,871	)

Underwriting ratios:
Losses and loss adjustment expenses		60.1	%		80.1	%		63.7	%		66.8	%		67.6	%
Acquisition costs and other underwriting expenses		31.0			25.1			28.3			31.0			28.9

Combined ratio		91.1	%		105.2	%		92.0	%		97.8	%		96.5	%

10. Commitments and Contingencies

On February 8, 2007, the Company was added as a co-defendant in an amended and consolidated complaint in an existing action against the Company’s then-majority (now 100%) shareholder, Fairfax, and certain of Fairfax’s officers and directors, who included certain of the Company’s current and former directors. The amended and consolidated complaint was filed in the United States District Court for the Southern District of New York by the lead plaintiffs, who sought to represent a class of all purchasers and acquirers of securities of Fairfax between May 21, 2003 and March 22, 2006, inclusive, and allege, among other things, that the defendants violated U.S. federal securities laws by making material misstatements or failing to disclose certain material information. The amended and consolidated complaint sought, among other things, certification of the putative class, unspecified compensatory damages, unspecified injunctive relief, reasonable costs and attorneys’ fees and other relief. Motions to dismiss were argued before the Court in December 2007. On March 29, 2010, the Court granted defendants’ motion to dismiss on the grounds that the Court lacked subject matter jurisdiction over the case. The Court also denied plaintiffs’ request to move for leave to file a second amended complaint.

In July 2006, Fairfax, the Company’s then-majority (now 100%) shareholder, filed a lawsuit in the Superior Court, Morris County, New Jersey, seeking damages from a number of defendants who, the complaint alleges, participated in a stock market manipulation scheme involving Fairfax shares, and the complaint was subsequently amended to add additional allegations and two defendants. In January 2008, two of these defendants filed a counterclaim against Fairfax and a third-party complaint against, among others, OdysseyRe and certain of its directors. Those counterclaims and third-party claims were voluntarily withdrawn in March 2008. In September 2008, the same two defendants filed an amended counterclaim against Fairfax, as well as third-party claims against certain Fairfax executives, OdysseyRe and certain directors, Fairfax’s outside legal counsel and PricewaterhouseCoopers. The complaint alleges, among other things, claims of racketeering, intentional infliction of emotional distress, tortious interference with economic advantage and other torts, and seeks unspecified compensatory and punitive damages and other relief. In September 2008, the Court granted a motion for summary judgment brought by two defendants, and dismissed Fairfax’s claims against those defendants without prejudice. OdysseyRe denies the allegations and intends to vigorously defend against these

ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

claims. OdysseyRe has not yet responded to the complaint, and the timing of that response has not been set. Discovery in this action is ongoing. At this early stage of the proceedings, it is not possible to make any determination regarding the likely outcome of this matter.

The Company participates in Lloyd’s through its 100% ownership of Newline Syndicate (1218), for which the Company provides 100% of the capacity. The results of Newline Syndicate (1218) are consolidated in the financial statements of the Company. In support of Newline Syndicate (1218)’s capacity at Lloyd’s, NCNL and Odyssey America have pledged securities and cash with a fair value of $136.5 million and $123.8 million, respectively, as of March 31, 2010 in a deposit trust account in favor of the Society and Council of Lloyd’s. These securities may be substituted with other securities at the discretion of the Company, subject to approval by Lloyd’s. The securities are carried at fair value and are included in investments and cash in the Company’s consolidated balance sheets. Interest earned on the securities is included in investment income. The pledge of assets in support of Newline Syndicate (1218) provides the Company with the ability to participate in writing business through Lloyd’s, which remains an important part of the Company’s business. The pledged assets effectively secure the contingent obligations of Newline Syndicate (1218) should it not meet its obligations. NCNL and Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the pledged assets. The Company has the ability to remove funds at Lloyd’s annually, subject to certain minimum amounts required to support outstanding liabilities as determined under risk-based capital models and approved by Lloyd’s. The funds used to support outstanding liabilities are adjusted annually and the obligations of the Company to support these liabilities will continue until they are settled or the liabilities are reinsured by a third party approved by Lloyd’s. The Company expects to continue to actively operate Newline Syndicate (1218) and support its requirements at Lloyd’s. The Company believes that Newline Syndicate (1218) maintains sufficient liquidity and financial resources to support its ultimate liabilities and the Company does not anticipate that the pledged assets will be utilized.

As of July 14, 2000, Odyssey America agreed to guarantee the performance of all the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), a subsidiary of Fairfax, in the event CTR became insolvent and CTR was not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. The guarantee, which was entered into while Odyssey America and CTR were each 100% owned by Fairfax, was provided by Odyssey America to facilitate the transfer of renewal rights to CTR’s business, together with certain CTR employees, to Odyssey America in 2000 in order to further expand the Company’s international reinsurance business. The guarantee was terminated effective December 31, 2001. There were no amounts received from CTR under the guarantee, and the Company did not provide any direct consideration for the renewal rights to the business of CTR. CTR was dissolved and its assets and liabilities were assumed by subsidiaries of Fairfax that have the responsibility for the run-off of its liabilities. Although CTR’s liabilities were assumed by Fairfax subsidiaries, the guarantee only pertains to those liabilities attaching to the policies written by CTR. Fairfax has agreed to indemnify Odyssey America for all its obligations incurred under its guarantee. The Company’s potential exposure in connection with this agreement stems from CTR’s remaining gross reserves, which are estimated to be $107.6 million as of March 31, 2010. The Company believes that the financial resources of the Fairfax subsidiaries that have assumed CTR’s liabilities provide adequate protection to satisfy the obligations that are subject to this guarantee. The Company does not expect to make payments under this guarantee and does not consider its potential exposure under this guarantee to be material to its consolidated financial position.

Odyssey America agreed, as of April 1, 2002, to guarantee the payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agreement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), a subsidiary of Fairfax Asia Limited (“Fairfax Asia”), in the event Falcon becomes insolvent. Fairfax Asia is 100% owned by Fairfax, which includes a 26.2% economic interest owned by the Company. The guarantee by Odyssey America was made to assist Falcon in writing business through access to Odyssey America’s financial strength ratings and capital resources. Odyssey America is paid a fee for this guarantee of one quarter of one percent of all gross premiums earned associated with the Subject Contracts on a quarterly basis. For each of the three month periods ended March 31, 2010 and 2009, Falcon paid $0.1 million to Odyssey America in connection with this guarantee. Odyssey America’s potential exposure in

ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

connection with this agreement is estimated to be $55.7 million, based on Falcon’s loss reserves at March 31, 2010. Falcon’s shareholders’ equity on a U.S. GAAP basis is estimated to be $61.6 million as of March 31, 2010. Fairfax has agreed to indemnify Odyssey America for any obligation under this guarantee. The Company believes that the financial resources of Falcon provide adequate protection to support its liabilities in the ordinary course of business. The Company anticipates that Falcon will meet all of its obligations in the normal course of business and does not expect to make any payments under this guarantee. The Company does not consider its potential exposure under this guarantee to be material to its consolidated financial position.

The Company organized O.R.E Holdings Limited (“ORE”), a corporation domiciled in Mauritius, on December 30, 2003 to act as a holding company for various investments in India. On January 29, 2004, ORE was capitalized by the Company in the amount of $16.7 million. ORE is consolidated in the Company’s consolidated financial statements. During 2004, ORE entered into a joint venture agreement relating to the purchase by ORE of 45% of the shares of Cheran Enterprises Private Limited (“CEPL”). CEPL is a corporation domiciled in India, engaged in the purchase, development and sale of commercial real estate properties. The joint venture agreement governing CEPL contains a provision whereby Odyssey America could have been called upon to provide a guarantee of a credit facility, if such a facility had been established by CEPL, in an amount up to $65.0 million for the funding of proposed developments. The credit facility was never established, and the requisite conditions for any future provision of the guarantee no longer exist. ORE’s Indian joint venture partner claimed that the guarantee should be available and pursued legal actions against the Company. The Company found this claim without merit and vigorously defended the legal actions. On August 13, 2008, the Company Law Board in Chennai, India ruled in ORE’s favor and directed CEPL to return to ORE the full amount of its investment in CEPL, plus 8% interest, within the one-year period commencing November 1, 2008. As of March 31, 2010, the Company had written down the value of its investment in ORE by $9.9 million. The carrying value of the Company’s investment in ORE as of both March 31, 2010 and 2009 was $6.7 million. Because no payment of the award has yet been received and collection may require additional legal action on the part of ORE, the Company has taken no steps to reverse the write-downs that have been taken to date. The Company continues to vigorously pursue collection of the award.

The Company and its subsidiaries are involved from time to time in ordinary litigation and arbitration proceedings as part of the Company’s business operations. In the Company’s opinion, the outcome of these suits, individually or collectively, is not likely to result in judgments that would be material to the financial condition or results of operations of the Company.

11. Employee Benefits

The Company maintains a qualified, non-contributory, defined benefit pension plan (“Defined Benefit Pension Plan”) covering substantially all employees who have reached age twenty-one and who have completed one year of service. The Company also maintains two non-qualified excess benefit plans (the “Supplemental Employee Retirement Plan” and the “Supplemental Plan”) that provide officers and certain employees with defined retirement benefits in excess of qualified plan limits imposed by federal tax law. In addition, certain health care and life insurance benefits for retired employees (“Postretirement Benefit Plan”) are provided by the Company. Generally, all employees may become eligible for these postretirement benefits if they reach retirement age while working for the Company.

ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Net periodic benefit cost, before taxes, included in the Company’s consolidated statements of operations for the three months ended March 31, 2010 and 2009 is comprised of the following components (in thousands):


	Three Months Ended
	March 31,
	2010			2009
Defined Benefit Pension Plan:
Service cost	$	1,475		$	1,280
Interest cost		981			858
Return on Plan assets		(861	)		(547	)
Net amortization and deferral		16			14

Net periodic benefit cost	$	1,611		$	1,605


Excess Benefit Plans:
Service cost	$	180		$	183
Interest cost		229			238
Recognized net actuarial loss		27			31
Recognized prior service cost		(9	)		(9	)

Net periodic benefit cost	$	427		$	443


Postretirement Benefit Plan:
Service cost	$	736		$	391
Interest cost		349			256
Net amortization and deferral		63			(43	)

Net periodic benefit cost	$	1,148		$	604

The Company contributed $1.1 million to the Defined Benefit Pension Plan for the three months ended March 31, 2010. No contributions were made to the above plans for the three months ended March 31, 2009.

Effective January 1, 2010, the Company established the Odyssey Re Holdings Corp. Non-Qualified 2010 Employee Share Purchase Plan (the “Plan”). Under the terms of the Plan, eligible employees are provided the opportunity to purchase subordinate voting shares of Fairfax in an amount up to 10% of their annual base salary. The Company purchases, on behalf of each employee, Fairfax shares equal in value to 30% of the employee’s contributions. In addition, if the total shareholders’ equity of the Company attributable to the common equity increases at least 15% in any calendar year, additional Fairfax shares will be purchased by the Company for each employee’s benefit, in an amount equal in value to 20% of each employee’s contribution during that year. Employees eligible for the previously established Odyssey Re Holdings Corp. Non-Qualified Employee Share Purchase Plan prior to its suspension on October 2, 2009 are eligible to make a one-time retroactive contribution to the Plan in an amount up to 10% of their gross pay for the suspended period.

12. Federal and Foreign Income Taxes

The Company’s federal and foreign income tax provisions for the three months ended March 31, 2010 and 2009 were a $2.0 million tax expense and a $22.1 million tax benefit, respectively, resulting in effective tax rates of 5.0% and 79.2%, respectively. The effective tax rate of 5.0% for the three months ended March 31, 2010 is not necessarily indicative of the effective tax rate for the 2010 interim or annual periods.

ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

The following table reconciles federal and foreign income taxes at the statutory federal income tax rate to the Company’s tax provision and effective tax rate for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010						2009
				% of						% of
				Pre-tax						Pre-tax
	Amount			Income			Amount			Income
Income (loss) before income taxes	$	39,787					$	(27,871	)

Income tax provision (benefit) computed at the U.S. statutory tax rate on income	$	13,926			35.0	%	$	(9,755	)		35.0	%
Decrease in income taxes resulting from:
Dividend received deduction		(2,176	)		(5.5	)		(2,883	)		10.3
Tax-exempt income		(9,661	)		(24.3	)		(9,389	)		33.7
Other, net		(91	)		(0.2	)		(53	)		0.2

Total federal and foreign income tax provision (benefit)	$	1,998			5.0	%	$	(22,080	)		79.2	%

13. Subsequent Event

Effective May 1, 2010, the Company and Fairfax, Inc. (a wholly-owned subsidiary of Fairfax, and the direct and indirect holder of 100% of the common shares of the Company) entered into a $300.0 million two-way revolving credit facility, under which either party may borrow up to $300.0 million from the other party. Loans under the facility are unsecured and bear interest at a rate of 7.5% per annum, payable quarterly, and the principal amount is payable on demand. Either party may terminate the facility at any time upon demand, at which time all outstanding principal and unpaid interest shall become due. On May 3, 2010, the Company loaned $200.0 million to Fairfax, Inc. under the facility.


PART I — Item 2.		*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Overview

Odyssey Re Holdings Corp. (together with its subsidiaries, “OdysseyRe”) is a holding company, incorporated in the state of Delaware, which owns all of the common shares of Odyssey America Reinsurance Corporation (“Odyssey America”), its principal operating subsidiary. Odyssey America directly or indirectly owns all of the capital stock of the following companies: Clearwater Insurance Company (“Clearwater”); Clearwater Select Insurance Company; Newline Holdings U.K. Limited, Newline Underwriting Management Ltd., which manages Newline Syndicate (1218), a member of Lloyd’s of London, and Newline Insurance Company Limited (“NICL”) (collectively “Newline”); Hudson Insurance Company (“Hudson”); Hudson Specialty Insurance Company (“Hudson Specialty”); Napa River Insurance Services, Inc.; and Hudson Crop Insurance Services, Inc. As of March 31, 2010, 100% of the common stock of OdysseyRe is owned by Fairfax Financial Holdings Limited (“Fairfax”) and its subsidiaries (see Note 1 to the consolidated financial statements in this Form 10-Q).

OdysseyRe is a leading underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer a broad range of both treaty and facultative reinsurance to property and casualty insurers and reinsurers. We also write insurance in the United States and through Newline.

Our gross premiums written for the three months ended March 31, 2010 were $561.7 million, an increase of $6.8 million, or 1.2%, compared to gross premiums written of $554.9 million for the three months ended March 31, 2009. Our United States business accounted for 46.7% of our gross premiums written for the three months ended March 31, 2010, compared to 49.8% for the three months ended March 31, 2009. For the three months ended March 31, 2010 and 2009, our net premiums written were $473.2 million and $479.0 million, respectively. For the three months ended March 31, 2010 and 2009, we had net income available to common shareholders of $36.5 million and $0.9 million, respectively. As of March 31, 2010, we had total assets of $11.0 billion and total shareholders’ equity of $3.7 billion.

The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio, computed when using amounts reported in financial statements prepared under United States generally accepted accounting principles (“GAAP”), is the sum of losses and loss adjustment expenses (“LAE”) incurred as a percentage of net premiums earned, plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percentage of net premiums earned. The combined ratio reflects only underwriting results and does not include investment results. Underwriting profitability is subject to significant fluctuations due to catastrophic events, competition, economic and social conditions, foreign currency fluctuations and other factors. Our combined ratio was 112.9% for the three months ended March 31, 2010, compared to 96.5% for the three months ended March 31, 2009.

We operate our business through four divisions: the Americas, EuroAsia, London Market and U.S. Insurance.

The Americas division is our largest division and writes casualty, surety and property treaty reinsurance, and casualty facultative reinsurance in the United States and Canada, and primarily property treaty and facultative reinsurance in Latin America.

The EuroAsia division consists of our international reinsurance business, which is geographically dispersed, mainly throughout Europe, and includes business in Asia, the Middle East, Africa and the Americas.

The London Market division is comprised of our Lloyd’s of London business, in which we participate through our 100% ownership of Newline Syndicate (1218), our London branch office, and NICL, our London-based insurance company. The London Market division writes insurance and reinsurance business worldwide, principally through brokers.

The U.S. Insurance division writes specialty insurance lines and classes of business, such as medical and other professional liability, non-standard personal and commercial automobile, specialty liability, property and package, and crop business.

Critical Accounting Estimates

The consolidated financial statements and related notes included in Part I, Item 1 of this Form 10-Q have been prepared in accordance with GAAP and include the accounts of Odyssey Re Holdings Corp. and its subsidiaries.

Critical accounting estimates are defined as those that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.

We review our critical accounting estimates and assumptions on a quarterly basis. These reviews include the estimate of reinsurance premiums and premium related amounts, establishing deferred acquisition costs, an evaluation of the adequacy of reserves for unpaid losses and LAE, review of our reinsurance and retrocession agreements, an analysis of the recoverability of deferred income tax assets and an evaluation of our investment portfolio, including a review for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

Premium Estimates

We derive our revenues from two principal sources: (i) premiums from insurance placed and reinsurance assumed, net of premiums ceded (net premiums written) and (ii) income from investments. Net premiums written are earned (net premiums earned) as revenue over the terms of the underlying contracts or certificates in force. The relationship between net premiums written and net premiums earned will, therefore, vary depending on the volume and inception dates of the business assumed and ceded, and the mix of such business between proportional and excess of loss reinsurance.

Consistent with our significant accounting policies, for our reinsurance business we utilize estimates in establishing premiums written, the corresponding acquisition expenses, and unearned premium reserves. These estimates are required to reflect differences in the timing of the receipt of accounts from the ceding company and the actual due dates of the accounts at the close of each accounting period.

The following table displays, by division, the estimates included in our consolidated financial statements as of and for the three months ended March 31, 2010 and 2009 and December 31, 2009 and 2008 related to gross premiums written, acquisition costs, premiums receivable and unearned premium reserves (in millions):


	As of		As of					As of		As of
	March 31,		December 31,					March 31,		December 31,
Division	2010		2009		Change			2009		2008		Change
	Gross Premiums Written

Americas	$	127.0	$	111.5	$	15.5		$	144.2	$	162.4	$	(18.2	)
EuroAsia		164.2		135.9		28.3			154.3		125.7		28.6
London Market		27.1		21.9		5.2			22.9		22.8		0.1

Total	$	318.3	$	269.3	$	49.0		$	321.4	$	310.9	$	10.5


	Acquisition Costs

Americas	$	27.5	$	26.0	$	1.5		$	31.6	$	42.5	$	(10.9	)
EuroAsia		41.6		35.2		6.4			43.4		36.9		6.5
London Market		2.2		1.9		0.3			1.6		1.7		(0.1	)

Total	$	71.3	$	63.1	$	8.2		$	76.6	$	81.1	$	(4.5	)


	Premiums Receivable

Americas	$	99.5	$	85.5	$	14.0		$	112.6	$	119.9	$	(7.3	)
EuroAsia		122.4		100.7		21.7			110.9		88.8		22.1
London Market		25.0		20.0		5.0			21.3		21.1		0.2

Total	$	246.9	$	206.2	$	40.7		$	244.8	$	229.8	$	15.0


	Unearned Premium Reserves

Americas	$	78.6	$	83.6	$	(5.0	)	$	101.4	$	115.5	$	(14.1	)
EuroAsia		103.3		93.1		10.2			108.8		102.2		6.6
London Market		7.4		3.3		4.1			8.3		6.9		1.4

Total	$	189.3	$	180.0	$	9.3		$	218.5	$	224.6	$	(6.1	)

Estimates of gross premiums written, acquisition costs, premiums receivable and unearned premium reserves are established on a contract level for significant accounts due but not reported by the ceding company at the end of each accounting period. The estimated ultimate premium for the contract, actual accounts reported by the ceding company, and our own experience on the contract are considered in establishing the estimate at the end of each accounting period. Subsequent adjustments based on actual results are recorded in the period in which they become known. The estimated premiums receivable balances are considered fully collectible. The estimates primarily represent the unreported amounts for the most current two underwriting years of account. The estimates are considered “critical accounting estimates” because changes in these estimates can materially affect net income.

The difference between estimates and the actual accounts received may be material as a result of different reporting practices by ceding companies across geographic locations. Estimates may be subject to material fluctuations on an individual contract level compared to the actual information received, and any differences are recorded in the respective financial period in which they become known. Since the assumptions used to determine the estimates are reviewed quarterly and compared to the information received during the quarter, the variance in the aggregate estimates compared to the actual information when received is minimized. In addition, during the quarter’s review of these contracts, any change in original estimate compared to the new estimate is

reflected in the appropriate financial period. In any specific financial period, the original estimated premium for a specific contract may vary from actual premium reported through the life of the contract due to the reporting patterns of the ceding companies and, in some cases, movements in foreign exchange rates over the period.

In any specific financial period, the original estimated premium for a specific contract may vary from actual premium reported through the life of the contract by up to 15% due to the reporting patterns of the ceding companies and, in some cases, movements in foreign exchange rates over the period. However, historically, the final reported premium compared to the original estimated premium has deviated by insignificant amounts.

Our estimates are based on contract and policy terms. Estimates are based on information typically received in the form of a bordereau, broker notifications and/or discussions with ceding companies. These estimates, by necessity, are based on assumptions regarding numerous factors. These can include premium or loss trends, which can be influenced by local conditions in a particular region, or other economic factors and legal or legislative developments that can develop over time. The risk associated with estimating the performance under our contracts with our ceding companies is the impact of events or trends that could not have been reasonably anticipated at the time the estimates were performed. Our business is diversified across ceding companies and there is no individual ceding company that represents more than 2.6% of our gross premiums written during the three months ended March 31, 2010. As a result, we believe the risks of material changes to these estimates over time are mitigated.

We review information received from ceding companies for reasonableness based on past experience with the particular ceding company or our general experience across the subject class of business. We also query information provided by ceding companies for reasonableness. Reinsurance contracts under which we assume business generally contain specific provisions that allow us to perform audits of the ceding company to ensure compliance with the terms and conditions of the contract, including accurate and timely reporting of information.

We must make judgments about the ultimate premiums written and earned by us. Reported premiums written and earned are based upon reports received from ceding companies, supplemented by our internal estimates of premiums written for which ceding company reports have not been received. We establish our own estimates based on discussions and correspondence with our ceding companies and brokers during the contract negotiation process and over the contract risk period. The determination of premium estimates requires a review of our experience with the ceding companies, familiarity with each market, an analysis and understanding of the characteristics of each line of business, and the ability to project the impact of current economic indicators on the volume of business written and ceded by our cedants. Premium estimates are updated when new information is received. Differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined.

Reserves for Unpaid Losses and Loss Adjustment Expenses

Our losses and LAE reserves, for both reported and unreported claims obligations, are maintained to cover the estimated ultimate liability for all of our reinsurance and insurance obligations. Losses and LAE reserves are categorized in one of three ways: (i) case reserves, which represent unpaid losses and LAE as reported by cedants and insureds to us, (ii) additional case reserves (“ACRs”), which are reserves we establish in excess of the case reserves reported by the cedant on individual claim events, and (iii) incurred but not reported reserves (“IBNR”), which are reserves for losses and LAE that have been incurred, but have not yet been reported to us, as well as additional amounts relating to losses already reported, that are in excess of case reserves and ACRs. Incurred but not reported reserves are estimates based on all information currently available to us and are reevaluated quarterly utilizing the most recent information supplied from our cedants and claims adjusters.

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 estimates of unpaid losses and LAE. The type of information that we receive from ceding companies generally varies by the type of contract. Proportional, or quota share, reinsurance contracts are typically reported on a quarterly basis, providing premium and loss activity as estimated by the ceding company. Reporting for excess of loss, facultative and insurance contracts includes detailed individual claim information, including a description of the loss, confirmation of liability by the cedant or claims adjuster and the cedant’s or claims adjuster’s current estimate of the ultimate liability under the claim. Upon receipt of claim notices from cedants and insureds, we review the

nature of the claim against the scope of coverage provided under the contract. Questions arise from time to time regarding the interpretation of the characteristics of a particular claim measured against the scope of contract terms and conditions. Reinsurance contracts under which we assume business generally contain specific dispute resolution provisions in the event that there is a coverage dispute with the ceding company. The resolution of any individual dispute may impact estimates of ultimate claims liabilities. Reported claims are in various stages of the settlement process. Each claim is settled individually based on its merits, and certain claims may take several years to ultimately settle, particularly where legal action is involved. Based on an assessment of the circumstances supporting the claim, we may choose to establish additional case reserves over the amount reported by the ceding company. Aggregate case reserves established in addition to reserves reported by ceding companies were $11.6 million and $14.5 million as of March 31, 2010 and December 31, 2009, respectively. Due to potential differences in ceding company reserving and reporting practices, we perform periodic audits of our ceding companies to ensure the underwriting and claims procedures of the cedant are consistent with representations made by the cedant during the underwriting process and meet the terms of the reinsurance contract. Our estimates of ultimate loss liabilities make appropriate adjustment for inconsistencies uncovered in this audit process. We also monitor our internal processes to ensure that information received from ceding companies is processed in a timely manner.

The reserve methodologies employed by us are dependent on the nature and quality of the data that we collect from ceding companies for reinsurance business and claims adjusters for insurance business. This data primarily consists of loss amounts reported by ceding companies and claims adjusters, loss payments made by ceding companies and claims adjusters and premiums, written and earned, reported by ceding companies or estimated by us. Underwriting and claim information provided by our ceding companies and claims adjusters is aggregated by the year in which each treaty or policy is written into groups of business by geographic region and type of business to facilitate analysis, generally referred to as “reserve cells.” These reserve cells are reviewed annually and change over time as our business mix changes. We supplement this information with claims and underwriting audits of specific contracts and internally developed pricing trends, as well as loss trend data developed from industry sources. This information is used to develop point estimates of carried reserves for each business segment. These individual point estimates, when aggregated, represent the total carried losses and LAE reserves carried in our consolidated financial statements. Due to the uncertainty involving estimates of ultimate loss exposures, we do not attempt to produce a range around our point estimate of loss. The actuarial techniques for projecting losses and LAE reserves by reserve cell rely on historical paid and case reserve loss emergence patterns and insurance and reinsurance pricing 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.

Our estimate of ultimate loss is determined based on a review of the results of several commonly accepted actuarial projection methodologies incorporating the quantitative and qualitative information described above. The specific methodologies we utilize in our loss reserve review process include, but may not be limited to (i) incurred and paid loss development methods, (ii) incurred and paid Bornhuetter Ferguson (“BF”) methods and (iii) loss ratio methods. The incurred and paid loss development methods utilize loss development patterns derived from historical loss emergence trends usually based on cedant supplied claim information to determine ultimate loss. These methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. Loss ratio methods multiply expected loss ratios, derived from aggregated analyses of internally developed pricing trends, by earned premium to determine ultimate loss. The incurred and paid BF methods are a blend of the loss development and loss ratio methods. These methods utilize both loss development patterns, as well as expected loss ratios, to determine ultimate loss. When using the BF methods, the initial treaty year ultimate loss is based predominantly on expected loss ratios. As loss experience matures, the estimate of ultimate loss using this methodology is based predominantly on loss development patterns. We generally do not utilize methodologies that are dependent on claim counts reported, claim counts settled or claim counts open. Due to the nature of our business, this information is not routinely provided by ceding companies for every treaty. Consequently, actuarial methods utilizing this information generally cannot be relied upon by us in our loss reserve estimation process. As a result, for much of our business, the separate analysis of frequency and severity loss activity underlying overall loss emergence trends is not practical. Generally, we rely on BF and loss ratio methods for estimating ultimate loss liabilities for more recent treaty years. These methodologies, at least in part, apply a loss ratio, determined from aggregated analyses of internally developed pricing trends across reserve cells, to premium earned on that business. Adjustments to premium estimates generate appropriate adjustments to ultimate loss estimates in the quarter in which they occur using the BF and loss ratio methods. To

estimate losses for more mature treaty years, we generally rely on the incurred loss development methodology, which does not rely on premium estimates. In addition, we may use other methods to estimate liabilities for specific types of claims. For property catastrophe losses, we may utilize vendor catastrophe models to estimate ultimate loss soon after a loss occurs, where loss information is not yet reported to us from cedants. The provision for asbestos loss liabilities is established based on an annual review of internal and external trends in reported loss and claim payments. IBNR is determined by subtracting the total of paid loss and case reserves including ACRs from ultimate loss.

We complete comprehensive loss reserve reviews, which include a reassessment of loss development and expected loss ratio assumptions, on an annual basis. The results of these reviews are reflected in the period they are completed. Quarterly, we compare actual loss emergence to expectations established by the comprehensive loss reserve review process. 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. We believe that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at March 31, 2010.

Our most significant assumptions underlying our estimate of losses and LAE reserves are as follows: (i) that historical loss emergence trends are indicative of future loss development trends; (ii) that internally developed pricing trends provide a reasonable basis for determining loss ratio expectations for recent underwriting years; and (iii) that no provision is made for extraordinary future emergence of new classes of loss or types of loss that are not sufficiently represented in our historical database or that are not yet quantifiable if not in our database.

The ultimate settlement value of losses and LAE related to business written in prior periods for the three month periods ended March 31, 2010 and 2009 were 0.1% and 0.3% below our estimates of reserves for losses and LAE as previously established at December 31, 2009 and 2008, respectively. Any future impact to income from changes in losses and LAE estimates may vary considerably from historical experience. Our estimates of ultimate losses and LAE are based upon the information we have available at any given point in time and upon our assumptions derived from that information. Every one percentage point difference in the ultimate settlement value of losses and LAE compared to our estimate of reserves for losses and LAE as of March 31, 2010 will impact pre-tax income by $47.4 million.

If a change were to occur in the frequency and severity of claims underlying our March 31, 2010 unpaid losses and LAE, the approximate change in pre-tax income would be as follows (in millions):


	Decrease in
	Pre-tax
	Income
1.0% unfavorable change	$	47.4
2.5% unfavorable change		118.4
5.0% unfavorable change		236.9

Historically, our actual results have varied considerably in certain instances from our estimates of losses and LAE because historical loss emergence trends have not been indicative of future emergence for certain segments of our business. In this period, we experienced loss emergence, resulting from a combination of claim frequency and severity of losses, greater than expectations that were established based on a review of prior years’ loss emergence trends, particularly for 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 highly competitive conditions in the industry at that time. These competitive conditions resulted in price pressure and relatively broader coverage terms, thereby affecting the ability of standard actuarial techniques to generate reliable estimates of ultimate loss. Similarly, directors’ and officers’ professional liability lines were impacted by the increase in frequency and severity of claims resulting from an increase in shareholder lawsuits against corporations and their officers and directors, corporate bankruptcies and other financial and management improprieties in the late 1990s and early 2000s.

The following table provides detail on net adverse (favorable) loss and LAE development for prior years, by division, for the three months ended March 31, 2010 and 2009 (in millions):


	Three Months Ended
	March 31,
Division	2010			2009
Americas	$	2.9		$	(1.3	)
EuroAsia		0.1			(4.8	)
London Market		(4.3	)		(2.1	)
U.S. Insurance		(3.6	)		(3.6	)

Total loss and LAE development	$	(4.9	)	$	(11.8	)

The Americas division reported a net increase in prior period loss estimates of $2.9 million for the three months ended March 31, 2010, and a net decrease in prior period loss estimates of $1.3 million for the three months ended March 31, 2009. The increase in prior period loss estimates for the three months ended March 31, 2010 was principally attributable to loss emergence greater than expectations in the period on property business. The decrease in prior period loss estimates for the three months ended March 31, 2009 was principally attributable to loss emergence lower than expectations in the period on miscellaneous property lines of business.

The EuroAsia division reported a net increase in prior period loss estimates of $0.1 million for the three months ended March 31, 2010, and a net decrease in prior period loss estimates of $4.8 million for the three months ended March 31, 2009. The decrease in prior period loss estimates for the three months ended March 31, 2009 was driven by loss emergence lower than expectations in the period on miscellaneous property lines of business.

The London Market division reported net decreases in prior period loss estimates of $4.3 million and $2.1 million for the three months ended March 31, 2010 and 2009, respectively. The decrease in prior period loss estimates for the three months ended March 31, 2010 was principally attributable to loss emergence lower than expectations in the period on liability and miscellaneous property lines of business, partially offset by increased loss estimates due to loss emergence greater than expectations in the period on medical malpractice business. The decrease in prior period loss estimates for the three months ended March 31, 2009 resulted from loss emergence lower than expectations in the period on liability business.

The U.S. Insurance division reported net decreases in prior period loss estimates of $3.6 million for both the three months ended March 31, 2010 and 2009. The decrease in prior period loss estimates for the three months ended March 31, 2010 was principally due to loss emergence lower than expectations in the period on miscellaneous liability business. The decrease in prior period loss estimates for the three months ended March 31, 2009 was principally attributable to loss emergence lower than expectations in the period on miscellaneous liability business.

Estimates of reserves for unpaid losses and LAE are contingent upon legislative, regulatory, social, economic and legal events and trends that may or may not occur or develop in the future, thereby affecting assumptions of claim frequency and severity. Examples of emerging claim and coverage issues and trends in recent years that could affect reserve estimates include developments in tort liability law, legislative attempts at asbestos liability reform, an increase in shareholder derivative suits against corporations and their officers and directors, and increasing governmental involvement in the insurance and reinsurance industry. The eventual outcome of these events and trends may be different from the assumptions underlying our loss reserve estimates. In the event that loss trends diverge from expected trends during the period, we adjust our reserves to reflect the change in losses indicated by revised expected loss trends. On a quarterly basis, we compare actual emergence of the total value of newly reported losses to the total value of losses expected to be reported during the period and the cumulative value since the date of our last reserve review. Variation in actual loss emergence from expectations may result in a change in our estimate of losses and LAE reserves. 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 losses and LAE

emergence, may impact our liquidity and capital resources, as discussed below in “Liquidity and Capital Resources.”

The following table summarizes, by type of reserve and division, the unpaid losses and LAE reserves as of March 31, 2010 and December 31, 2009. Case reserves represent unpaid claim reports provided by cedants and claims adjusters plus additional reserves determined by us. IBNR is the estimate of unreported loss liabilities established by us.


	As of March 31, 2010									As of December 31, 2009
	Case						Total			Case						Total
	Reserves			IBNR			Reserves			Reserves			IBNR			Reserves
	(In millions)
Americas
Gross	$	1,325.3		$	1,487.4		$	2,812.7		$	1,369.2		$	1,356.6		$	2,725.8
Ceded		(171.7	)		(169.9	)		(341.6	)		(178.4	)		(120.2	)		(298.6	)

Net		1,153.6			1,317.5			2,471.1			1,190.8			1,236.4			2,427.2


EuroAsia
Gross		582.2			381.9			964.1			589.8			320.7			910.5
Ceded		(32.0	)		(20.6	)		(52.6	)		(33.0	)		(2.6	)		(35.6	)

Net		550.2			361.3			911.5			556.8			318.1			874.9


London Market
Gross		416.4			675.4			1,091.8			387.6			707.2			1,094.8
Ceded		(79.2	)		(174.9	)		(254.1	)		(67.1	)		(183.2	)		(250.3	)

Net		337.2			500.5			837.7			320.5			524.0			844.5


U.S. Insurance
Gross		237.7			530.7			768.4			255.2			521.5			776.7
Ceded		(70.6	)		(180.6	)		(251.2	)		(81.9	)		(175.1	)		(257.0	)

Net		167.1			350.1			517.2			173.3			346.4			519.7


Total
Gross		2,561.6			3,075.4			5,637.0			2,601.8			2,906.0			5,507.8
Ceded		(353.5	)		(546.0	)		(899.5	)		(360.4	)		(481.1	)		(841.5	)

Net	$	2,208.1		$	2,529.4		$	4,737.5		$	2,241.4		$	2,424.9		$	4,666.3

The provision for IBNR in unpaid losses and LAE as of March 31, 2010 was $2,529.4 million. For illustration purposes, a change in the expected loss ratio that increases the three months ended March 31, 2010 calendar year loss ratio by 2.5 loss ratio points would increase IBNR by $11.4 million. A change in loss emergence trends that increases unpaid losses and LAE at March 31, 2010 by 2.5% would increase IBNR by $118.4 million.

We have exposure to asbestos, environmental pollution and other latent injury damage claims resulting from contracts written by Clearwater prior to 1986. Exposure arises from reinsurance contracts under which we assumed liabilities from ceding companies, on an indemnity or assumption basis, primarily in connection with general liability insurance policies issued by such ceding companies. Our estimate of the ultimate liability for these exposures includes case basis reserves and a provision for IBNR claims. The provision for asbestos loss liabilities is established based on an annual review of Company and external trends in reported loss and claim payments, 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.

We believe that these uncertainties and factors make projections of these exposures, particularly asbestos, subject to less predictability relative to non-environmental and non-asbestos exposures. Current estimates, as of March 31, 2010, of our asbestos and environmental losses and LAE reserves, net of reinsurance, are $229.2 million and $23.6 million, respectively. See Note 7 to the consolidated financial statements of this Form 10-Q for additional historical information on losses and LAE reserves for these exposures.

We did not incur net losses and LAE related to asbestos or environmental claims for either of the three month periods ended March 31, 2010 or 2009.

Reinsurance and Retrocessions

We may purchase reinsurance to increase our aggregate premium capacity, to reduce and spread the risk of loss on our insurance and reinsurance business and to limit our exposure to multiple claims arising from a single occurrence. We are subject to accumulation risk with respect to catastrophic events involving multiple contracts. To protect against this risk, we have purchased catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographical scope of the coverage and the costs vary from year to year. Specific reinsurance protections are also placed to protect our insurance business outside of the United States.

We seek to limit our net after-tax probable maximum loss for a severe catastrophic event, defined as an occurrence with a return period of 250 years, to no more than 20% of our statutory surplus. There can be no assurances that we will not incur losses greater than 20% of our statutory surplus from one or more catastrophic events due to the inherent uncertainties in (i) estimating the frequency and severity of such events, (ii) the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, (iii) the modeling techniques and the application of such techniques and (iv) the values of securities in our investment portfolio, which may lead to volatility in our statutory surplus from period to period.

When we purchase reinsurance protection, 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 obligations at some later date.

Reinsurance recoverables are recorded as assets, based on our evaluation of the retrocessionaires’ ability to meet their obligations under the agreements. Premiums written and earned are stated net of reinsurance ceded in the consolidated statements of operations. Direct insurance, reinsurance assumed, reinsurance ceded and net amounts for these items follow (in millions):


	Three Months Ended
	March 31,
	2010		2009
Premiums Written
Direct	$	165.4	$	166.8
Add: assumed		396.3		388.1
Less: ceded		88.5		75.9

Net	$	473.2	$	479.0


Premiums Earned
Direct	$	181.9	$	169.5
Add: assumed		357.5		365.8
Less: ceded		82.3		65.3

Net	$	457.1	$	470.0

The total amount of reinsurance recoverables on paid and unpaid losses as of March 31, 2010 and December 31, 2009 was $941.7 million and $912.0 million, respectively. We have established a reserve for potentially uncollectible reinsurance recoverables based upon an evaluation of each retrocessionaire and our assessment as to the collectability of individual balances. The reserve for uncollectible recoverables as of March 31, 2010 and December 31, 2009, was $42.1 million and $41.9 million, respectively, and has been netted against reinsurance recoverables on paid losses. We have also established a reserve for potentially uncollectible insurance and assumed reinsurance balances of $5.8 million and $5.5 million as of March 31, 2010 and December 31, 2009, respectively, which has been netted against premiums receivable.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Underwriting Results

Gross Premiums Written. Gross premiums written for the three months ended March 31, 2010 increased by $6.8 million, or 1.2%, to $561.7 million, compared to $554.9 million for the three months ended March 31, 2009, as reflected in the following table (in millions):


	Three Months Ended
	March 31,				Change
Division	2010		2009		$			%
Americas	$	197.7	$	195.3	$	2.4			1.2	%
EuroAsia		164.8		160.3		4.5			2.8
London Market		83.0		72.9		10.1			13.9
U.S. Insurance		116.2		126.4		(10.2	)		(8.1	)

Total gross premiums written	$	561.7	$	554.9	$	6.8			1.2	%

Total reinsurance gross premiums written for the three months ended March 31, 2010 were $396.3 million, compared to $388.1 million for the three months ended March 31, 2009, an increase of 2.1%. Total insurance gross premiums written for the three months ended March 31, 2010, which include our U.S. Insurance division

and the insurance business underwritten by our London Market division, were $165.4 million, compared to $166.8 million for the three months ended March 31, 2009, a decrease of 0.8%. For the three months ended March 31, 2010, total reinsurance gross premiums written represented 70.6% (69.9% in the three months ended March 31, 2009) of our business, while insurance represented the remaining 29.4% (30.1% in the three months ended March 31, 2009) of our business.

Americas. Gross premiums written in the Americas division for the three months ended March 31, 2010 were $197.7 million, an increase of $2.4 million, or 1.2%, compared to $195.3 million for the three months ended March 31, 2009. These amounts represented 35.2% of our gross premiums written for both of the three month periods ended March 31, 2010 and 2009. Gross premiums written across each geographic region of the Americas division were as follows (in millions):


	Three Months Ended
	March 31,				Change
	2010		2009		$			%
United States	$	146.4	$	149.8	$	(3.4	)		(2.3	)%
Latin America		36.5		36.5		—			—
Canada		14.8		9.0		5.8			64.4

Total gross premiums written	$	197.7	$	195.3	$	2.4			1.2	%

	•		United States — The decrease in gross premiums written was primarily due to a decrease in casualty treaty business of $15.8 million, to $64.0 million, for the three months ended March 31, 2010, compared to $79.8 million for the three months ended March 31, 2009, and a decrease in casualty facultative business of $4.5 million, to $14.5 million, for the three months ended March 31, 2010, compared to $19.0 million for the three months ended March 31, 2009. These decreases were partially offset by an increase in property treaty business of $16.8 million, to $55.3 million, for the three months ended March 31, 2010, compared to $38.5 million for the three months ended March 31, 2009.

	•		Canada — The increase in gross premiums written was primarily due to increased volume from share increases on existing business, and new business written, in 2010.

EuroAsia. Gross premiums written in the EuroAsia division for the three months ended March 31, 2010 were $164.8 million, an increase of $4.5 million, or 2.8%, compared to $160.3 million for the three months ended March 31, 2009. These amounts represented 29.3% of our gross premiums written for the three months ended March 31, 2010 and 28.9% in the corresponding period of 2009. The increase in gross premiums written was principally comprised of $13.4 million attributable to the movement in foreign exchange rates. Excluding the effects of foreign exchange rate movement, gross premiums would have decreased by $8.9 million.

London Market. Gross premiums written in the London Market division for the three months ended March 31, 2010 were $83.0 million, an increase of $10.1 million, or 13.9%, compared to $72.9 million for the three months ended March 31, 2009. These amounts represented 14.8% of our gross premiums written for the three months ended March 31, 2010 and 13.1% for the three months ended March 31, 2009. Gross premiums written across each unit of the London Market division were as follows (in millions):


	Three Months Ended
	March 31,				Change
	2010		2009		$		%
London branch	$	33.8	$	32.5	$	1.3		4.0	%
Newline		49.2		40.4		8.8		21.8

Total gross premiums written	$	83.0	$	72.9	$	10.1		13.9	%

The increase in gross premiums written by the London branch was primarily attributable to marine and aviation business, which increased by $1.8 million, or 22.2%. This increase was offset by a decrease in casualty business of $0.5 million, or 16.1%, due to the non-renewal of business not meeting our underwriting standards.

The increase in gross premiums written by Newline was primarily attributable to increases in liability lines/financial institution and motor business of $5.8 million and $6.0 million, respectively. These amounts were offset by a decrease in medical professional liability business of $3.0 million.

U.S. Insurance. Gross premiums written in the U.S. Insurance division for the three months ended March 31, 2010 were $116.2 million, a decrease of $10.2 million, or 8.1%, compared to $126.4 million for the three months ended March 31, 2009. These amounts represented 20.7% of our gross premiums written for the three months ended March 31, 2010 and 22.8% for the three months ended March 31, 2009. Gross premiums written by line of business were as follows (in millions):


	Three Months Ended
	March 31,				Change
	2010		2009		$			%
Professional liability	$	30.7	$	27.9	$	2.8			10.0	%
Specialty liability		29.8		28.5		1.3			4.6
Medical professional liability		22.5		22.8		(0.3	)		(1.3	)
Property and package		18.0		26.0		(8.0	)		(30.8	)
Commercial automobile		13.5		16.6		(3.1	)		(18.7	)
Personal automobile		1.7		4.6		(2.9	)		(63.0	)

Total gross premiums written	$	116.2	$	126.4	$	(10.2	)		(8.1	)%

The reduction in gross premiums written for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 principally relates to the declines in crop (in property and package) and personal automobile books of business.

Ceded Premiums Written. Ceded premiums written for the three months ended March 31, 2010 increased by $12.6 million, or 16.6%, to $88.5 million (15.8% of gross premiums written), from $75.9 million (13.7% of gross premiums written) for the three months ended March 31, 2009. The increase in ceded premiums written was primarily related to an increase in reinsurance purchased for our professional and medical professional liability business in the U.S. Insurance division and reinstatement premiums related to the Chile earthquake.

Net Premiums Written. Net premiums written for the three months ended March 31, 2010 decreased by $5.8 million, or 1.2%, to $473.2 million, compared to $479.0 million for the three months ended March 31, 2009. Net premiums written represent gross premiums written less ceded premiums written.


	Three Months Ended
	March 31,				Change
Division	2010		2009		$			%
	(In millions)
Americas	$	183.4	$	190.7	$	(7.3	)		(3.8)	%
EuroAsia		155.5		153.6		1.9			1.2
London Market		67.9		52.5		15.4			29.3
U.S. Insurance		66.4		82.2		(15.8	)		(19.2	)

Total net premiums written	$	473.2	$	479.0	$	(5.8	)		(1.2)	%

Americas. Net premiums written in the Americas division for the three months ended March 31, 2010 were $183.4 million, compared to $190.7 million for the 2009 period, a decrease of 3.8%. These amounts represented 38.8% of our net premiums written for the three months ended March 31, 2010 and 39.8% for the three months ended March 31, 2009. The net retention ratio, which represents net premiums written as a percentage of gross premiums written, was 92.8% and 97.6% for the three months ended March 31, 2010 and 2009, respectively.

The decrease in net premiums written in the Americas division for the three months ended March 31, 2010 was primarily due to an increase in ceded premiums written related to reinstatement premiums due to the losses from the Chile earthquake in Latin America.

EuroAsia. Net premiums written in the EuroAsia division for the three months ended March 31, 2010 were $155.5 million, compared to $153.6 million for 2009, an increase of 1.2%. These amounts represented 32.9% of our net premiums written for the three months ended March 31, 2010 and 32.1% for the three months ended March 31, 2009. The net retention ratio was 94.4% for the three months ended March 31, 2010, compared to 95.8% for the three months ended March 31, 2009.

The increase in net premiums written consisted of an increase in gross premiums written of $4.5 million and an increase in ceded premiums written of $2.6 million.

London Market. Net premiums written in the London Market division for the three months ended March 31, 2010 were $67.9 million, compared to $52.5 million for 2009, an increase of 29.3%. These amounts represented 14.3% of our net premiums written for the three months ended March 31, 2010 and 11.0% for the three months ended March 31, 2009. The net retention ratio was 81.8% for the three months ended March 31, 2010, compared to 72.0% for the three months ended March 31, 2009.

The increase in net premiums written consisted of an increase in gross premiums written of $10.1 million, coupled with a decrease in ceded premiums written of $5.3 million.

U.S. Insurance. Net premiums written in the U.S. Insurance division for the three months ended March 31, 2010 were $66.4 million, compared to $82.2 million for the three months ended March 31, 2009, a decrease of 19.2%. These amounts represented 14.0% of our net premiums written for the three months ended March 31, 2010 and 17.1% for the three months ended March 31, 2009. The net retention ratio was 57.1% for the three months ended March 31, 2010, compared to 65.0% for the three months ended March 31, 2009.

The decrease in net premiums written was due to a decrease in gross premiums written of $10.2 million, combined with a lower retention rate.

Net Premiums Earned. Net premiums earned for the three months ended March 31, 2010 decreased by $12.9 million, or 2.7%, to $457.1 million, from $470.0 million for the three months ended March 31, 2009. Net premiums earned decreased by $18.5 million, or 9.5%, in the Americas division, $0.4 million, or 0.3%, in the EuroAsia division, $7.1 million, or 8.7%, in the U.S. Insurance division and increased by $13.1 million, or 24.2%, in the London Market division.

Losses and Loss Adjustment Expenses. Net losses and LAE incurred increased $58.3 million, or 18.4%, to $375.9 million for the three months ended March 31, 2010, from $317.6 million for the three months ended March 31, 2009, as follows (in millions):


	Three Months Ended
	March 31,				Change
	2010		2009		$		%
Gross losses and LAE incurred	$	508.3	$	352.9	$	155.4		44.0	%
Less: ceded losses and LAE incurred		132.4		35.3		97.1		275.1

Net losses and LAE incurred	$	375.9	$	317.6	$	58.3		18.4	%

The increase in net losses and LAE incurred was principally related to an increase in current year property catastrophe losses of $73.4 million, to $121.1 million for the three months ended March 31, 2010, from $47.7 million for the three months ended March 31, 2009. For the three months ended March 31, 2010, current year property catastrophe losses included $85.2 million related to the Chile earthquake and $17.6 million related to Windstorm Xynthia. For the three months ended March 31, 2009, current year property catastrophe losses included $43.9 million related to Windstorm Klaus. Losses and LAE for the three months ended March 31, 2010 included a decrease in prior period losses of $4.9 million, attributable to reduced loss estimates due to loss emergence lower than expectations in the period on business written in the London Market and U.S. Insurance divisions, partially offset by increased loss estimates due to loss emergence greater than expectations in the period on business written in the Americas division. Losses and LAE for the three months ended March 31, 2009 included a

decrease in prior period losses of $11.8 million, attributable to reduced loss estimates due to loss emergence lower than expectations in the period on business written in all divisions.

The loss estimates for property catastrophe losses, such as the Chile earthquake and Windstorm Xynthia, represent our best estimate based on the most recent information available. We used various approaches in estimating our losses, including a detailed review of exposed contracts and information from ceding companies. As additional information becomes available, including information from ceding companies, actual losses may exceed our estimated losses, potentially resulting in adverse effects to our financial results.

Ceded losses and LAE incurred increased $97.1 million, or 275.1%, to $132.4 million for the three months ended March 31, 2010, from $35.3 million for the three months ended March 31, 2009. This increase was principally attributable to increased loss cessions related to property catastrophe events.

The loss and LAE ratio for the three months ended March 31, 2010 and 2009 and the percentage point change for each of our divisions and in total are as follows:


	Three Months Ended						Percentage
	March 31,						Point
Division	2010			2009			Change
Americas		105.4	%		60.1	%		45.3
EuroAsia		69.7			80.1			(10.4	)
London Market		66.3			63.7			2.6
U.S. Insurance		64.9			66.8			(1.9	)

Total loss and LAE ratio		82.3	%		67.6	%		14.7

The following tables reflect total losses and LAE as reported for each division and include the impact of catastrophe losses and prior period reserve development, expressed as a percentage of net premiums earned (“NPE”), for the three months ended March 31, 2010 and 2009 (in millions):

Three Months Ended March 31, 2010


	Americas					EuroAsia					London Market						U.S. Insurance						Total
			% of					% of						% of						% of						% of
	$		NPE			$		NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	186.3		105.4	%	$	96.1		69.7	%	$	44.8			66.3	%	$	48.7			64.9	%	$	375.9			82.3	%

Catastrophe losses:
2010 events:
Chile earthquake		71.2		40.3			3.5		2.5			10.5			15.5			—			—			85.2			18.6
Windstorm Xynthia		—		—			17.5		12.7			0.1			0.1			—			—			17.6			3.9
Haiti earthquake		6.7		3.8			—		—			—			—			—			—			6.7			1.5
Other 2010 events		6.3		3.6			4.9		3.6			0.4			0.7			—			—			11.6			2.5

Total 2010 events		84.2		47.7			25.9		18.8			11.0			16.3			—			—			121.1			26.5
Prior period events		2.6		1.4			2.9		2.1			(1.1	)		(1.7	)		—			—			4.4			1.0

Total catastrophe losses	$	86.8		49.1	%	$	28.8		20.9	%	$	9.9			14.6	%	$	—			—	%	$	125.5			27.5	%


Prior period loss development including prior period catastrophe losses	$	2.9		1.6	%	$	0.1		0.1	%	$	(4.3	)		(6.4	)%	$	(3.6	)		(4.8	)%	$	(4.9	)		(1.1	)%

Three Months Ended March 31, 2009


	Americas						EuroAsia						London Market						U.S. Insurance						Total
				% of						% of						% of						% of						% of
	$			NPE			$			NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	117.3			60.1	%	$	110.7			80.1	%	$	34.7			63.7	%	$	54.9			66.8	%	$	317.6			67.6	%

Catastrophe losses:
2009 events:
Windstorm Klaus		—			—			43.9			31.8			—			—			—			—			43.9			9.3
Other 2009 events		3.1			1.5			0.3			0.2			0.4			0.7			—			—			3.8			0.8

Total 2009 events		3.1			1.5			44.2			32.0			0.4			0.7			—			—			47.7			10.1
Prior period events		0.7			0.4			2.0			1.4			5.6			10.3			0.6			0.7			8.9			1.9

Total catastrophe losses	$	3.8			1.9	%	$	46.2			33.4	%	$	6.0			11.0	%	$	0.6			0.7	%	$	56.6			12.0	%

Prior period loss development including prior period catastrophe losses	$	(1.3	)		(0.7	)%	$	(4.8	)		(3.5	)%	$	(2.1	)		(3.9	)%	$	(3.6	)		(4.4	)%	$	(11.8	)		(2.5	)%

Americas Division — Losses and LAE increased $69.0 million, or 58.8%, to $186.3 million for the three months ended March 31, 2010, from $117.3 million for the three months ended March 31, 2009. This resulted in a loss and LAE ratio of 105.4% for the three months ended March 31, 2010, compared to 60.1% for the three months ended March 31, 2009. This increase in losses and LAE was principally attributable to an increase in current year property catastrophe losses of $81.1 million, to $84.2 million for the three months ended March 31, 2010, from $3.1 million for the three months ended March 31, 2009. Losses and LAE for the three months ended March 31, 2010 included current year property catastrophe losses of $84.2 million, with $71.2 million for the Chile earthquake and $6.7 million for the Haiti earthquake, and an increase in prior period losses of $2.9 million, principally due to loss emergence greater than expectations in the period on property business. Losses and LAE for the three months ended March 31, 2009 included a decrease in prior period losses of $1.3 million, principally due to loss emergence lower than expectations in the period on miscellaneous property lines of business.

EuroAsia Division — Losses and LAE decreased $14.6 million, or 13.2%, to $96.1 million for the three months ended March 31, 2010, from $110.7 million for the three months ended March 31, 2009. This resulted in a loss and LAE ratio of 69.7% for the three months ended March 31, 2010, compared to 80.1% for the three months ended March 31, 2009. This decrease in losses and LAE was principally due to a decrease in current year property catastrophe losses of $18.3 million, to $25.9 million for the three months ended March 31, 2010, from $44.2 million for the three months ended March 31, 2009. Losses and LAE for the three months ended March 31, 2010 included current year property catastrophe losses of $25.9 million, with $17.5 million for Windstorm Xynthia and $3.5 million for the Chile earthquake. Losses and LAE for the three months ended March 31, 2009 included current year property catastrophe losses of $44.2 million, with $43.9 million for Windstorm Klaus, and a decrease in prior period losses of $4.8 million, principally due to loss emergence lower than expectations in the period on miscellaneous property lines of business.

London Market Division — Losses and LAE increased $10.1 million, or 29.1%, to $44.8 million for the three months ended March 31, 2010, from $34.7 million for the three months ended March 31, 2009. This resulted in a loss and LAE ratio of 66.3% for the three months ended March 31, 2010, compared to 63.7% for the three months ended March 31, 2009. This increase in losses and LAE was principally due to an increase in current year property catastrophe losses of $10.6 million, to $11.0 million for the three months ended March 31, 2010, from $0.4 million for the three months ended March 31, 2009. Losses and LAE for the three months ended March 31, 2010 included current year property catastrophe losses of $11.0 million, with $10.5 million for the Chile earthquake, and a decrease in prior period losses of $4.3 million, principally attributable to loss emergence lower than expectations in the period on liability and miscellaneous property lines of business, partially offset by increased loss estimates due to loss emergence greater than expectations in the period on medical malpractice business. Losses and LAE for the three months ended March 31, 2009 included a decrease in prior period losses of $2.1 million, principally due to loss emergence lower than expectations in the period on liability business.

U.S. Insurance Division — Losses and LAE decreased $6.2 million, or 11.3%, to $48.7 million for the three months ended March 31, 2010, from $54.9 million for the three months ended March 31, 2009. This resulted in a loss and LAE ratio of 64.9% for the three months ended March 31, 2010, compared to 66.8% for the three months ended March 31, 2009. This decrease in losses and LAE was principally due to a decline in loss exposure associated with a decline in net premiums earned of $7.1 million, to $75.0 million for the three months ended March 31, 2010, from $82.1 million for the three months ended March 31, 2009. Losses and LAE for the three months ended March 31, 2010 included a decrease in prior period losses of $3.6 million, principally attributable to loss emergence lower than expectations in the period on miscellaneous liability business. Losses and LAE for the three months ended March 31, 2009 included a decrease in prior period losses of $3.6 million, principally due to loss emergence lower than expectations in the period on miscellaneous liability business.

Acquisition Costs. Acquisition costs for the three months ended March 31, 2010 were $89.0 million, a decrease of $4.0 million or 4.3%, compared to $93.0 million for the three months ended March 31, 2009. The resulting acquisition expense ratio, expressed as a percentage of net premiums earned, was 19.5% for the three months ended March 31, 2010, compared to 19.8% for the three months ended March 31, 2009, a decrease of 0.3 points. The Americas and London Market divisions’ acquisition expense ratios increased by 1.2 points and 0.2 points, respectively, for the three months ended March 31, 2010 compared to the corresponding period in 2009. The EuroAsia and U.S. Insurance divisions’ acquisition expense ratios both decreased by 1.5 points for the three months ended March 31, 2010 compared to the corresponding period in 2009.

Other Underwriting Expenses. Other underwriting expenses for the three months ended March 31, 2010 were $51.0 million, compared to $43.1 million for the three months ended March 31, 2009. The other underwriting expense ratio, expressed as a percentage of net premiums earned, was 11.2% for the three months ended March 31, 2010, compared to 9.1% for the three months ended March 31, 2009. The increase in the other underwriting expense ratio was principally attributable to a decrease in net premiums earned of $12.9 million, combined with an increase in other underwriting expenses of $7.9 million.

The following table reflects the acquisition and other underwriting expenses, expressed as a percentage of net premiums earned, for the three months ended March 31, 2010 and 2009 for each of our divisions:


	Three Months Ended						Percentage
	March 31,						Point
Division	2010			2009			Change
Americas		35.3	%		31.0	%		4.3
EuroAsia		24.5			25.1			(0.6	)
London Market		27.4			28.3			(0.9	)
U.S. Insurance		34.1			31.0			3.1

Total acquisition costs and other underwriting expense ratio		30.6	%		28.9	%		1.7

Our combined ratio was 112.9% for the three months ended March 31, 2010, compared to 96.5% for the three months ended March 31, 2009. The following table reflects the combined ratio for the three months ended March 31, 2010 and 2009 for each of our divisions:


	Three Months Ended						Percentage
	March 31,						Point
Division	2010			2009			Change
Americas		140.7	%		91.1	%		49.6
EuroAsia		94.2			105.2			(11.0	)
London Market		93.7			92.0			1.7
U.S. Insurance		99.0			97.8			1.2

Total combined ratio		112.9	%		96.5	%		16.4

Investment Results

Net Investment Income. Net investment income for the three months ended March 31, 2010 increased by $16.6 million, or 24.6%, to $84.1 million, from $67.5 million for the three months ended March 31, 2009. Net investment income was comprised of gross investment income of $93.7 million less investment expenses of $9.6 million for the three months ended March 31, 2010, compared to gross investment income of $72.7 million less investment expenses of $5.2 million for the three months ended March 31, 2009. The increase in net investment income for the three months ended March 31, 2010 was primarily attributable to the following:

	•		investment income from fixed income securities was $69.9 million for the three months ended March 31, 2010, an increase of $13.3 million, or 23.5%, compared to the three months ended March 31, 2009;

	•		an increase in net investment income from other invested assets of $15.4 million for the three months ended March 31, 2010, compared to the three months ended March 31, 2009; offset by:

	•		a decrease of $5.2 million, or 32.5%, in net investment income from equity investments for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. Dividends on common stocks decreased $6.1 million, slightly offset by an increase in net income on common stocks, at equity, of $0.9 million;

	•		an increase in investment expenses of $4.4 million for the three months ended March 31, 2010, compared to the three months ended March 31, 2009, which was primarily due to dividend expenses related to total return swaps; and

	•		a decrease in net investment income from cash and short-term investments of $2.5 million, or 50.6%, for the three months ended March 31, 2010, compared to the three months ended March 31, 2009.

Our total effective annualized yield on average invested assets, net of expense but before the impact of interest expense from funds held balances, was 4.0% and 3.6% for the three months ended March 31, 2010 and 2009, respectively. The total effective annualized yield on average invested assets is calculated by dividing annual income by the annual average invested assets (computed using average amortized cost for fixed income securities and average carrying value for all other securities).

Net Realized Investment Gains/Losses. Net realized investment gains of $54.0 million for the three months ended March 31, 2010 increased by $153.4 million, from net realized investment losses of $99.4 million for the three months ended March 31, 2009. The increase in net realized investment gains was principally due to the following:

	•		increased net realized investment gains on equity securities of $155.5 million, compared to $75.1 million in realized investment losses for the three months ended March 31, 2009;

	•		an increase in net realized investment gains on fixed income securities of $75.6 million;

	•		a decrease in losses on other invested assets of $3.5 million; offset by:

	•		a decrease in net realized investment gains on derivative securities of $67.8 million, primarily attributable to a decrease of $42.0 million on total return swaps, a decrease of $7.4 million on forward currency contracts, a decrease of $4.4 million on credit default swaps and a decrease of $14.0 million on other derivatives;

	•		increased realized investment losses on preferred stock of $13.0 million; and

	•		an increase in losses on short-term investments, cash and cash equivalents of $0.4 million.

Net realized investment gains include other-than-temporary impairment losses in the amount of $4.1 million, relating to fixed income securities of $2.9 million and equity securities of $1.2 million for the three months ended March 31, 2010. During the three months ended March 31, 2009, net realized investment gains were reduced by other-than-temporary impairment losses in the amount of $81.4 million, relating to equity securities of $78.3 million and fixed income securities of $3.1 million. Other-than-temporary impairments reflect situations where the fair value was below the cost of the securities, and the ability of the security to recover its value could not be reasonably determined.

Other Results, Principally Holding Company and Income Taxes

Other Expenses, Net. Other expense, net, for the three months ended March 31, 2010 was $31.9 million, compared to $4.2 million for the three months ended March 31, 2009. The other expense is principally comprised of foreign currency exchange gains and losses and the operating expenses of our holding company, including audit related fees, corporate-related legal fees, consulting fees and compensation expense. The $27.7 million increase for the three months ended March 31, 2010 compared to the comparable 2009 period was primarily related to $19.6 million of foreign exchange related adjustments and $4.6 million of expense related to restricted equity value rights.

Interest Expense. We incurred interest expense related to our debt obligations of $7.5 million and $8.1 million for the three months ended March 31, 2010 and 2009, respectively. The lower amount of interest expense in 2010 primarily resulted from the decrease in interest rates on our Series A, B and C floating rate senior notes.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the three months ended March 31, 2010 increased by $24.1 million, to $2.0 million, compared to a $22.1 million tax benefit for the three months ended March 31, 2009, resulting from increased pre-tax income. Our effective tax rates were 5.0% and 79.2% for the three months ended March 31, 2010 and 2009, respectively.

Preferred Dividends and Purchases. We recorded preferred dividends related to our Series A and Series B non-cumulative perpetual preferred shares of $1.3 million and $1.3 million for the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2009, Odyssey America purchased 704,737 shares of our Series B preferred stock, with a liquidation preference of $17.2 million, for $9.2 million. The purchase of the Series B preferred shares resulted in an increase in net income attributable to common shareholders of $8.0 million for the three months ended March 31, 2009.

Liquidity and Capital Resources

Our shareholders’ equity increased by $163.9 million, or 4.6%, to $3,719.1 million as of March 31, 2010, from $3,555.2 million as of December 31, 2009, due to net income of $37.8 million, a capital contribution from Fairfax of $14.5 million, and an increase in net unrealized appreciation on securities of $102.5 million, and foreign currency translation adjustments of $10.4 million (both components of accumulated other comprehensive income). Offsetting these increases were dividends to our preferred shareholders of $1.3 million.

Odyssey Re Holdings Corp. is a holding company that does not have any significant operations or assets other than its ownership of Odyssey America, and its principal sources of funds are cash dividends and other permitted payments from its operating subsidiaries, primarily Odyssey America. If our subsidiaries are unable to make payments to the holding company, or are able to pay only limited amounts, we may be unable to pay

dividends on our preferred shares or make payments on our indebtedness. The payment of dividends by our operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of Connecticut, Delaware, New York and the United Kingdom. Holding company cash, cash equivalents and short-term investments totaled $109.4 million as of March 31, 2010, compared to $33.0 million as of December 31, 2009. The holding company has received dividends from Odyssey America of $200.0 million through May 6, 2010 and $200.0 million for the year ended December 31, 2009. During the remainder of 2010, Odyssey America can pay dividends to the holding company of $151.3 million without prior regulatory approval. Effective May 1, 2010, we entered into a $300.0 million two-way revolving credit facility with Fairfax, Inc. (a wholly-owned subsidiary of Fairfax, and the direct and indirect holder of 100% of our common shares). Pursuant to the facility, either party may borrow up to $300.0 million from the other party. Loans under the facility are unsecured and bear interest at a rate of 7.5% per annum, payable quarterly, and the principal amount is payable on demand. Either party may terminate the facility at any time upon demand, at which time all outstanding principal and unpaid interest shall become due. On May 3, 2010, we loaned $200.0 million to Fairfax, Inc. under the facility.

Odyssey America’s liquidity requirements are principally met by cash flows from operating activities, which primarily result from collections of premiums, reinsurance recoverables and investment income, net of paid losses, acquisition costs, income taxes and underwriting and investment expenses. We seek to maintain sufficient liquidity to satisfy the timing of projected claim payments and operating expenses. The estimate, timing and ultimate amount of actual claim payments is inherently uncertain and will vary based on many factors including the frequency and severity of losses across various lines of business. Claim payments can accelerate or increase due to a variety of factors, including losses stemming from catastrophic events, which are typically paid out in a short period of time, legal settlements or emerging claim issues. We estimate claim payments, net of associated reinsurance recoveries, of approximately $1.3 billion during 2010. The timing and certainty of associated reinsurance collections that may be due to us can add uncertainty to our liquidity position to the extent amounts are not received on a timely basis. As of March 31, 2010, our operating subsidiaries maintained cash and cash equivalents of $1.0 billion and short-term investments of $201.6 million, which is readily available for expected claim payments. In addition, our liquidity is enhanced through the collection of premiums on new business written through the year. We believe our cash resources, together with readily marketable securities, are sufficient to satisfy expected payment obligations, including any unexpected acceleration or increase in claim payments, or timing differences in collecting reinsurance recoverables.

Although the obligations of our reinsurers to make payments to us are based on specific contract provisions, these amounts only become recoverable when we make a payment of the associated loss amount, which may be several years, or in some cases decades, after the actual loss occurred. Reinsurance recoverables on unpaid losses, which represent 95.5% of our total reinsurance recoverables as of March 31, 2010, will not be due for collection until some time in the future, and over this period of time, economic conditions and the operational performance of a particular reinsurer may negatively impact its ability to meet its future obligations to us. We manage our exposure by entering into reinsurance transactions with companies that have a strong capital position and a favorable long term financial profile.

Our total reinsurance recoverable on paid losses as of March 31, 2010, net of the reserve for uncollectible reinsurance, was $42.2 million. The top ten reinsurers measured on total reinsurance recoverables represented $14.4 million, or 34.1%, of the total paid loss recoverable, of which $2.1 million is collateralized and the remaining $12.3 million is with highly rated companies. The remaining $27.8 million recoverable on paid losses is with numerous companies, and no single company has a balance greater than $5.4 million net of the reserve on uncollectible reinsurance.

Approximately $13.2 million of our total reinsurance paid recoverable is current billings, and $29.0 million is over 120 days past due. The change in the economic conditions of any of our retrocessionaires may impact their ability to meet their obligations and negatively impact our liquidity.

Cash provided by operations was $44.8 million for the three months ended March 31, 2010, compared to cash used in operations of $76.3 million for the three months ended March 31, 2009. This reflects an increase in cash provided by operations of $121.1 million, or 158.7%, over the three months ended March 31, 2009, due to the payment of income taxes in the first quarter of 2009 relating to realized investment gains on closed credit default and total return swap contracts in the fourth quarter of 2008.

Total investments and cash amounted to $8.8 billion as of March 31, 2010, an increase of $117.4 million compared to December 31, 2009. Our average invested assets were $8.8 billion for the three months ended March 31, 2010, compared to $7.7 billion for the three months ended March 31, 2009. We anticipate that our cash and cash equivalents will continue to be reinvested on a basis consistent with our long-term, value-oriented investment philosophy. Cash, cash equivalents and short-term investments, excluding cash and cash

equivalents held as collateral, represented 14.9% and 15.1% of our total investments and cash, excluding cash and cash equivalents held as collateral, as of March 31, 2010 and December 31, 2009, respectively. Total fixed income securities were $5.0 billion as of March 31, 2010, compared to $4.9 billion as of December 31, 2009. As of March 31, 2010, 59.6% of our fixed income portfolio was rated “AAA”, with 11.0% of securities rated below investment grade. The duration of our investment portfolio, including short-term investments, cash and cash equivalents, was 8.8 years.

Total investments and cash exclude amounts receivable for securities sold and amounts payable for securities purchased, representing the timing between the trade date and settlement date of securities sold and purchased. As of March 31, 2010 and December 31, 2009, we had receivables for securities sold of $135.8 million and $77.9 million, respectively, which are included in other assets, and payables for securities purchased of $4.1 million and $45.6 million, respectively, which are included in other liabilities.

On November 28, 2006, we completed the private sale of $40.0 million aggregate principal amount of floating rate senior debentures, series C due December 15, 2021 (the “Series C Notes”). Interest on the Series C Notes accrues at a rate per annum equal to the three-month LIBOR, reset quarterly, plus 2.50%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. We have the option to redeem the Series C Notes at par, plus accrued and unpaid interest, in whole or in part on any interest payment date on or after December 15, 2011. For the three months ended March 31, 2010 and 2009, the average annual interest rate on the Series C Notes was 2.75% and 4.37%, respectively.

On February 22, 2006, we issued $100.0 million aggregate principal amount of floating rate senior debentures, pursuant to a private placement. The net proceeds from the offering, after fees and expenses, were $99.3 million. The debentures were sold in two tranches: $50.0 million of series A, due March 15, 2021 (the “Series A Notes”), and $50.0 million of series B, due March 15, 2016 (the “Series B Notes”). Interest on each series of debentures is due quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The interest rate on each series of debentures is equal to the three-month LIBOR, reset quarterly, plus 2.20%. The Series A Notes are callable by us on any interest payment date on or after March 15, 2011 at their par value, plus accrued and unpaid interest, and the Series B Notes are callable by us on any interest payment date on or after March 15, 2009 at their par value, plus accrued and unpaid interest. For the three months ended March 31, 2010 and 2009, the average annual interest rate on each series of notes was 2.45% and 4.07%, respectively.

In December 2008, we entered into interest rate swaps, with an aggregate notional value of $140.0 million, to protect against adverse movements in interest rates. Under these swap contracts, we receive a floating interest rate of three-month London Interbank Offer Rate (“LIBOR”) and pay a fixed interest rate of 2.49% on the $140.0 million notional value of the contracts, for a five-year period ending in December 2013.

During the second quarter of 2005, we issued $125.0 million aggregate principal amount of senior notes due May 1, 2015. The issue was sold at a discount of $0.8 million, which is being amortized over the life of the notes. Interest accrues on the senior notes at a fixed rate of 6.875% per annum, which is due semi-annually on May 1 and November 1.

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

On July 13, 2007, we entered into a $200.0 million credit facility (the “Credit Agreement”) with Wachovia Bank National Association (“Wachovia”), KeyBank National Association and a syndicate of lenders. The original Credit Agreement provided for a five-year credit facility of $200.0 million, $100.0 million of which was available for direct, unsecured borrowings by us, and all of which was available for the issuance of collateralized letters of credit to support our insurance and reinsurance business. As of June 17, 2009, the Credit Agreement was amended to explicitly permit us to pledge collateral to secure our obligations under swap agreements, subject to certain financial limitations, in the event that such collateral is required by the counterparty or counterparties. As of February 24, 2010, the Credit Agreement was amended (i) to reduce the size of the facility to $100.0 million, removing the unsecured $100.0 million tranche, (ii) to remove the previous limitation on dividends and other “restricted payments” that we may pay to our shareholders during any fiscal year and (iii) to

amend certain of the covenants and default provisions, the minimum ratings requirement, and the pricing of the credit facility.

The amended Credit Agreement contains an option that permits us to request an increase in the aggregate amount of the facility by an amount up to $50.0 million, to a maximum facility size of $150.0 million. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion of the proposed increase. As of March 31, 2010, there was $33.7 million outstanding under the Credit Agreement, all of which was in support of secured letters of credit.

During March 2009, we filed a shelf registration statement on Form S-3ASR with the SEC, which became effective automatically upon filing. The registration statement provided for the offer and sale by us, from time to time, of debt and equity securities. On February 9, 2010, we filed a post-effective amendment to the Form S-3ASR to remove from registration the securities that remained unsold as of such date.

We participate in Lloyd’s through our 100% ownership of Newline Syndicate (1218), for which we provide 100% of the capacity. The results of Newline Syndicate (1218) are consolidated in our financial statements. In support of Newline Syndicate (1218)’s capacity at Lloyd’s, NCNL and Odyssey America have pledged securities and cash with a fair value of $136.5 million and $123.8 million, respectively, as of March 31, 2010 in a deposit trust account in favor of the Society and Council of Lloyd’s. These securities may be substituted with other securities at our discretion, subject to approval by Lloyd’s. The securities are carried at fair value and are included in investments and cash in our consolidated balance sheets. Interest earned on the securities is included in investment income. The pledge of assets in support of Newline Syndicate (1218) provides us with the ability to participate in writing business through Lloyd’s, which remains an important part of our business. The pledged assets effectively secure the contingent obligations of Newline Syndicate (1218) should it not meet its obligations. NCNL and Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the pledged assets. We have the ability to remove funds at Lloyd’s annually, subject to certain minimum amounts required to support outstanding liabilities as determined under risk-based capital models and approved by Lloyd’s. The funds used to support outstanding liabilities are adjusted annually and our obligations to support these liabilities will continue until they are settled or the liabilities are reinsured by a third party approved by Lloyd’s. We expect to continue to actively operate Newline Syndicate (1218) and support its requirements at Lloyd’s. We believe that Newline Syndicate (1218) maintains sufficient liquidity and financial resources to support its ultimate liabilities and we do not anticipate that the pledged assets will be utilized.

On March 1, 2010, our Board of Directors declared quarterly dividends of $0.5078125 per share on our 8.125% Series A preferred shares and $0.2186719 per share on our floating rate Series B preferred shares. The total dividends of $1.3 million were paid on April 20, 2010 to Series A and Series B preferred shareholders of record on March 31, 2010.

As described in Note 3 to our consolidated financial statements included in this Form 10-Q, as of March 31, 2010, we held $48.5 million of investments, or approximately 0.6% of net assets and liabilities measured at fair value, that are classified as Level 3 (which are financial instruments for which the values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement and that reflect our own assumptions about the methodology and valuation techniques that a market participant would use in pricing the asset or liability). These Level 3 investments are valued using a discounted cash flow model, including unobservable inputs that are supported by limited market-based activity. During the three months ended March 31, 2010, we purchased $6.3 million of investments classified as Level 3. In addition, Level 3 investments with a value of $4.3 million were sold during the three months ended March 31, 2010.

Healthcare Reform

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act”). The passage of the Act has resulted in comprehensive health care reform legislation, the effects of which on the U.S. economy could be as sweeping as those resulting from the passage of Medicare and Social Security. The Act will expand health care coverage by providing the following:

•

Medicaid eligibility for an estimated 16 million additional people;

	•		Insurance coverage for an estimate 16 million additional people through subsidiaries to purchase insurance through health care exchanges;

	•		Dependent coverage through age 26;

	•		No lifetime limits, or unreasonable annual limits, on insurance coverage;

	•		Health insurance for certain individuals with preexisting conditions; and

	•		A requirement that states maintain current eligibility levels for children in Medicaid and the Children’s Health Insurance Plan for a specified period.

The changes to insurance coverage will be largely funded by fees and excise taxes charged to entities in health-care-related industries, by excise taxes on high-cost group health plans (commonly referred to as “Cadillac plans” and include those plans that have annual cost of benefits in excess of $10,200 a year for individuals or $27,500 for families), by tax increases on high-income individuals, and by reductions to Medicare scheduled payments.

Other provisions of the Act may impact the amount of deferred tax assets that companies are allowed to recognize as a result of the elimination of the income tax deduction previously allowed for Medicare Part D subsidiaries relating to retiree prescription drug coverage.

Although we have not completed our analysis of the impact of the Act on our financial position and future operating results, we expect the impact to be minimal as (i) our group health plan is not a “Cadillac” plan and (ii) the deduction taken in previous years relating to Medicare Part D subsidies was not significant. With respect to healthcare business underwritten by us, principally through our U.S. Insurance division, it is too early to determine what impact the Act will have, if any, on our underlying insurance and reinsurance businesses.

Financial Strength and Credit Ratings

We and our subsidiaries are assigned financial strength (insurance) and credit ratings from internationally recognized rating agencies, which include A.M. Best Company, Inc. (“A.M. Best”), Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service (“Moody’s”). Financial strength ratings represent the opinions of the rating agencies of the financial strength of a company and its capacity to meet the obligations of insurance and reinsurance contracts. The rating agencies consider many factors in determining the financial strength rating of an insurance or reinsurance company, including the relative level of statutory surplus necessary to support our business operations.

These ratings are used by insurers, reinsurers and intermediaries as an important means of assessing the financial strength and quality of reinsurers. A reduction in our financial strength ratings could limit or prevent us from writing new reinsurance or insurance business. The financial strength ratings of our principal operating subsidiaries are as follows:

A.M. Best

Standard & Poor’s

Moody’s

Odyssey America

“A” (Excellent)

“A-” (Strong)

“A3” (Good)

Hudson

“A” (Excellent)

Not Rated

Hudson Specialty

“A” (Excellent)

“A-” (Strong)

Not Rated

Our senior unsecured debt is currently rated “BBB-” by Standard & Poor’s, “Baa3” by Moody’s and “bbb” by A.M. Best. Our Series A and Series B preferred shares are currently rated “BB” by Standard & Poor’s, “Ba2” by Moody’s and “bb+” by A.M. Best.

Accounting Pronouncements

Recently Adopted

A description of recently adopted accounting pronouncements is provided in Note 1 to our consolidated financial statements included in this Form 10-Q.

Off-Balance Sheet Arrangements

We have off-balance sheet arrangements, including certain arrangements with affiliated companies, that have financial implications. A description of these arrangements is provided in Note 10 to our consolidated financial statements included in this Form 10-Q.

Forward Looking Statements

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

	•		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. Additional information regarding these factors and others that could cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2010. The information appearing under “Risk Factors” in such Annual Report on Form 10-K is incorporated by reference into and made a part of this Form 10-Q. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Market Sensitive Instruments

The term “market risk” refers to the risk of loss arising from adverse changes in prices. We believe that we are principally exposed to four types of market risk related to our investment operations: interest rate risk, credit risk, equity price risk and foreign currency risk. Market sensitive instruments discussed in this section principally relate to our fixed income securities and common stocks carried at fair value, which are classified as available for sale. As of March 31, 2010, our total investments and cash of $8.8 billion include $5.0 billion of fixed income securities that are subject primarily to interest rate risk and credit risk.

Interest Rate Risk

The following table displays the potential impact of fair value fluctuations on our fixed income securities portfolio as of March 31, 2010 and December 31, 2009, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. This analysis was performed on each security individually.


			As of March 31, 2010										As of December 31, 2009
	Fair Value										Fair Value
	of Fixed										of Fixed
	Income			Hypothetical			Hypothetical				Income			Hypothetical			Hypothetical
Percent Change in Interest Rates	Portfolio			$ Change			% Change				Portfolio			$ Change			% Change
										(In millions)
200 basis point rise	$	4,116.7		$	(849.8	)		(17.1)	%		$	4,098.4		$	(808.3	)		(16.5)	%
100 basis point rise		4,534.2			(432.3	)		(8.7	)			4,500.1			(406.6	)		(8.3	)
Base scenario		4,966.5			—			—				4,906.7			—			—
100 basis point decline		5,387.7			421.2			8.5				5,297.3			390.6			8.0
200 basis point decline		5,846.8			880.3			17.7				5,717.1			810.4			16.5

The preceding table indicates an asymmetric fair value response to equivalent basis point shifts, up and down, in interest rates. This is partially caused by the impact of bonds in our portfolio that have put or call features, which reflect different dynamics in changing interest rate environments than bonds without these features. In an increasing interest rate environment, put features tend to limit losses in fair value by giving the holder the ability to put the bonds back to the issuer for early maturity. In a declining interest rate environment, call features tend to limit gains in fair value by giving the issuer the ability to call the bond, which limits the gain

in fair value. As the mix of bonds with puts and calls in our portfolio changes, different asymmetric results in hypothetical fair values occur.

As of March 31, 2010, we had net unrealized gains of $985.9 million, before taxes, related to our total investments and cash. This net amount was comprised of gross unrealized appreciation of $1,002.6 million, offset by gross unrealized depreciation of $16.7 million, all of which are related to fixed income securities and common stocks.

As of March 31, 2010, we were party to floating to fixed interest rate swap contracts with a notional amount of $140.0 million. As of March 31, 2010, the fair value of these contracts is reported in other liabilities at $2.0 million. Net realized investment losses on interest rate swaps totaled $2.8 million for the three months ended March 31, 2010.

During 2008, we entered into Eurodollar futures contracts to manage our interest rate risk with respect to certain investments. During the first quarter of 2009, we closed the futures contracts. A futures contract is a variation of a forward currency contract, with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and trading on an organized electronic or floor trading facility. Futures contracts are entered either long or short. We had entered into the long side, which agrees to buy the underlying currency at the future date at the agreed-upon price.

Disclosure About Limitations of Interest Rate Sensitivity Analysis

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

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

Credit Risk

Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and thereby causes financial loss to another party. Our exposure to credit risk is concentrated in investments and underwriting balances.

We have exposure to credit risk, primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade ratings in the fixed income securities we purchase. We also have exposure to credit risk associated with the collection of current and future amounts owing from our reinsurers. We control this exposure by emphasizing reinsurers with financial strength.

Our credit risk exposure, based upon carrying value, as of March 31, 2010 and December 31, 2009 (without taking into account amounts pledged as collateral for our benefit of $270.4 million and $220.2 million as of March 31, 2010 and December 31, 2009, respectively) was comprised as follows (in millions):


	As of		As of
	March 31,		December 31,
	2010		2009
Fixed income securities	$	4,966.5	$	4,906.7
Derivatives		65.5		20.0
Cash, cash equivalents and short-term investments		1,368.4		1,361.7
Premiums receivable		436.9		473.9
Recoverable from reinsurers		1,204.4		1,165.5

Total gross exposure	$	8,041.7	$	7,927.8

Our risk management strategy with respect to investments in debt instruments is to invest primarily in securities of high credit quality issuers and to limit the amount of credit risk exposure with respect to any one issuer. While we review third party ratings, we carry out our own analysis and do not delegate the credit decision to rating agencies. We endeavor to limit credit exposure by imposing fixed income portfolio limits on individual corporate issuers and limits based on credit quality and may, from time to time, invest in credit default swaps, or other types of derivatives, to further mitigate credit risk exposure.

The composition of the fair value of our fixed income securities portfolio as of the dates indicated, classified according to the higher of each security’s respective Standard & Poor’s and Moody’s issuer credit ratings, is presented below (in millions):


	As of March 31, 2010					As of December 31, 2009
	Fair					Fair
Issuer Credit Rating	Value		%			Value		%
AAA/Aaa	$	2,959.7		59.6	%	$	3,034.4		61.9	%
AA/Aa2		506.0		10.2			393.0		8.0
A/A2		733.7		14.8			706.5		14.4
BBB/Baa2		218.8		4.4			257.1		5.2
BB/Ba2		146.0		2.9			143.3		2.9
B/B2		100.7		2.0			87.5		1.8
CCC/Caa or lower or not rated		301.6		6.1			284.9		5.8

Total	$	4,966.5		100.0	%	$	4,906.7		100.0	%

As of March 31, 2010, 89.0% of our fixed income portfolio at fair value was rated investment grade (as compared to 89.5% as of December 31, 2009), with 69.8% (primarily consisting of government obligations) being rated AA/Aa2 or better (as compared to 69.9% as of December 31, 2009). As of March 31, 2010, holdings of fixed income securities in the ten issuers (excluding federal governments) to which we had the greatest exposure was $1.7 billion, which was approximately 18.8% of our total invested assets. The exposure to the largest single issuer of corporate bonds held as of March 31, 2010 was $151.5 million, which was approximately 1.7% of our total investment portfolio, or 4.1% of our total shareholders’ equity.

Our investment portfolio as of March 31, 2010 included $3.2 billion in U.S. taxable and tax exempt state and municipal bonds, most of which were purchased during 2008, and of which approximately $2.0 billion (61.4%) were fully insured by Berkshire Hathaway Assurance Corp. (“BHAC”) for the payment of interest and principal in the event of issuer default; we believe that the BHAC insurance significantly mitigates the credit risk associated with these bonds.

Our risk management objective is to mitigate the adverse change in the fair value of our financial assets that would likely result in the event of significant defaults or other adverse events in the U.S. credit markets. Beginning in 2003, we attempted to meet this objective by purchasing credit default protection (“credit default swaps”) referenced to various issuers in the banking, mortgage and insurance sectors of the financial services industry, which are representative of the systemic financial risk, versus hedging specific assets. We chose this approach because it was impossible to predict which of the hedged assets would be adversely affected and to what degree. As a result, we did not specifically align hedged items with hedging instruments.

Under a credit default swap, as the buyer, we agree to pay to a specific counterparty, at specified periods, fixed premium amounts based on an agreed notional principal amount in exchange for protection against default by the issuers of specified referenced debt securities. The credit events, as defined by the respective credit default swap contracts, establishing the rights to recover amounts from the counterparties are comprised of ISDA-standard credit events, which are: bankruptcy, obligation acceleration, obligation default, failure to pay, repudiation/moratorium and restructuring. As of March 31, 2010, all credit default swap contracts held by us have been purchased from and entered into with either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as the counterparty, with positions on certain covered risks with more than one of these counterparties.

We obtain market derived fair values for our credit default swaps from third party providers, principally broker-dealers. To validate broker-dealer credit default swap fair value quotations, two reasonability tests are performed. First, we obtain credit default swap bid-spreads from independent broker-dealers (non-counterparty broker-dealers). These spreads are entered as inputs into a discounted cash flow model, which calculates a fair value that is compared for reasonability to the counterparty broker-dealer provided fair values. The discounted cash flow model uses the independently obtained credit default swap bid-spreads to calculate the present value of the remaining protection payments using the appropriate currency-denominated swap curve, with consideration given to various other parameters including single name bid-spread in basis points and the remaining term to maturity of the credit default swap contract. Secondly, a comparison is performed against recently transacted credit default swap values as provided by independent broker-dealers, and to prices reflected in recent trades of identical financial instruments where available.

The initial premium paid for each credit default swap contract is recorded as a derivative asset and is subsequently adjusted for changes in the unrealized fair value of the contract at each balance sheet date. As these contracts do not qualify for hedge accounting, changes in the unrealized fair value of the contract are recorded as net realized investment gains (losses) on investments in our consolidated statements of operations and comprehensive income. Sales of credit default swap contracts require us to reverse through net gains (losses) on investments any previously recorded unrealized fair value changes since the inception of the contract, and to record the actual amount of the final cash settlement. Derivative assets are reported gross, on a contract-by-contract basis, and are recorded at fair value in other invested assets in the consolidated balance sheet. The sale, expiration or early settlement of a credit default swap will not result in a cash payment owed by us; rather, such an event can only result in a cash payment by a third party purchaser of the contract, or the counterparty, to us. Accordingly, there is no opportunity for netting of amounts owed in settlement. Cash receipts at the date of sale of the credit default swaps are recorded as cash flows from investing activities arising from net sales of assets and liabilities classified as held for trading.

The total cost of the credit default swaps was $19.8 million and $20.6 million as of March 31, 2010 and December 31, 2009, respectively, and the fair value was $8.7 million and $10.0 million, as of March 31, 2010 and December 31, 2009, respectively. The notional amount of the credit default swaps was $1.2 billion and $1.3 billion as of March 31, 2010 and December 31, 2009, respectively. The credit default swaps had net realized investment losses of $1.3 million and net realized investment gains of $3.1 million for the three months ended March 31, 2010, and 2009, respectively. The fair values of credit default swaps are subject to significant volatility given potential differences in the perceived risk of default of the underlying issuers, movements in credit spreads and the length of time to the contracts’ maturities. The fair value of the credit default swaps may vary dramatically either up or down in short periods, and their ultimate value may therefore only be known upon their disposition. Credit default swap transactions generally settle in cash. As a result of the appreciation in the fair value of the credit default swaps, counterparties to these transactions are required to place government securities as collateral, pursuant to the swaps agreements. The fair value of this collateral as of March 31, 2010 was $0.9 million. As we fund all of our obligations relating to these contracts upon initiation of the transaction, there are no requirements in these contracts for us to provide collateral.

The following tables summarize the effect of the credit default swap hedging instruments and related hedged items on our historical financial position, results of operations and cash flows as of and for the three months ended March 31, 2010 and 2009 (in millions):


	As of and for the Three Months Ended March 31, 2010
					Effect on Pre-tax:
	Exposure /				Other		Net Realized						Net Cash
	Notional		Carrying		Comprehensive		Investment						Flow from
	Value		Value		Income		Gains			Net Equity			Disposals
Credit risk exposures:
Fixed income securities	$	4,966.5	$	4,966.5	$	10.3	$	54.5		$	64.8		$	16.6
Derivatives — other invested assets		56.8		56.8		—		(11.7	)		(11.7	)		0.2

Cash, cash equivalents and short-term investments		1,368.4		1,368.4		—		(11.3	)		(11.3	)		(11.3	)
Premiums receivable		436.9		436.9		—		(0.3	)		(0.3	)		(0.3	)
Reinsurance recoverable		1,204.4		1,204.4		—		(0.3	)		(0.3	)		—

Total credit risk exposure	$	8,033.0	$	8,033.0		10.3		30.9			41.2			5.2

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	317.7	$	2.8		—		(0.3	)		(0.3	)		(0.8	)
Insurance		843.3		5.9		—		(1.0	)		(1.0	)		—

Total credit default swaps	$	1,161.0	$	8.7		—		(1.3	)		(1.3	)		(0.8	)

Net equity impact					$	10.3	$	29.6		$	39.9		$	4.4


	As of and for the Three Months Ended March 31, 2009
					Effect on Pre-tax:
	Exposure /				Other		Net Realized						Net Cash
	Notional		Carrying		Comprehensive		Investment						Flow from
	Value		Value		Loss		Losses			Net Equity			Disposals
Credit risk exposures:
Fixed income securities	$	4,258.8	$	4,258.8	$	110.5	$	(21.1	)	$	89.4		$	3.1
Derivatives — other invested assets		40.3		40.3		—		12.0			12.0			(0.3	)
Cash, cash equivalents and short-term investments		1,371.5		1,371.5		0.1		(10.8	)		(10.7	)		(10.8	)
Premiums receivable		486.3		486.3		—		—			—			—
Reinsurance recoverable		981.8		981.8		—		(0.8	)		(0.8	)		—

Total credit risk exposure	$	7,138.7	$	7,138.7		110.6		(20.7	)		89.9			(8.0	)

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking		486.7		19.5		—		9.0			9.0			7.7
Insurance		843.8		29.0		—		(5.9	)		(5.9	)		20.7

Total credit default swaps	$	1,330.5	$	48.5		—		3.1			3.1			28.4

Net equity impact					$	110.6	$	(17.6	)	$	93.0		$	20.4

In the normal course of effecting our economic hedging strategy with respect to credit risk, we expect that there may be periods where the notional value of the hedging instrument may exceed or be less than the exposure item being hedged. This situation may arise when management compensates for imperfect correlations between the hedging item and the hedge, due to the timing of opportunities related to our ability to exit and enter hedged or hedging items at attractive prices or when management desires to only partially hedge an exposure.

The fair values of credit default swap contracts are sensitive to individual issuer credit default swap yield curves and current market spreads. The timing and amount of changes in fair value of fixed income securities and underwriting balances are by their nature uncertain. As a result of these data limitations and market uncertainties, it is not possible to estimate the reasonably likely future impact of our economic hedging programs.

Our holdings of credit default swap contracts have declined significantly in recent quarters relative to prior years, largely as a result of significant sales in 2008. In the latter part of 2008, we revised the financial objectives of our hedging program by determining not to replace our credit default swap hedge position as sales or expiries occurred, primarily based upon our judgment that our exposure to elevated levels of credit risk had moderated, but also due to (i) the significant increase in the cost of purchasing credit protection (reducing the attractiveness of the credit default swap contract as a hedging instrument), (ii) improvement in our capital and liquidity (having benefited significantly from, among other things, $568.0 million in gains from sales of credit default swaps realized since the beginning of 2007), and (iii) our judgment that managing credit risk through means other than the use of derivatives was, given the market environment, once again appropriate for mitigating our credit exposure arising from financial assets. As a result, the effects that credit default swaps as hedging instruments may be expected to have on our future financial position, liquidity and operating results may be expected to diminish relative to the effects in recent years. We continue to evaluate the potential impact of the volatility in the U.S. credit markets on our financial statements and may, if conditions warrant, initiate new credit default swap contracts as a hedging mechanism in the future, although there can be no assurance that we will do so, in an effort to achieve our continuing objective to minimize the potential for loss of value of held assets where, in our view, an unusual or excessive exposure exists.

The credit default swaps portfolio had an average term to expiration of 1.4 years as of March 31, 2010, a decrease from 1.5 years as of December 31, 2009.

As of March 31, 2010, our holdings of financial instruments without quoted prices, or “non-traded investments,” included a collateral loan, which was fully impaired during 2005. We periodically evaluate the

carrying value of non-traded investments by reviewing the borrowers’ current financial positions and the timeliness of their interest and principal payments.

Equity Price Risk

Our investment portfolio is managed with a long term, value-oriented investment philosophy emphasizing downside protection. We have policies to limit and monitor our individual issuer exposures and aggregate equity exposure. Aggregate exposure to single issuers and total equity positions are monitored at the subsidiary level and in aggregate at the consolidated level.

During 2009, we increased our investments in equity securities as a result of the opportunities presented by significant declines in valuations. These additions to our portfolio, coupled with the significant appreciation in the value of the worldwide equity markets during 2009, resulted in a significant increase in the value of our equity holdings and, thus, to the exposure to increased loss potential should the equity markets again suffer a significant decline in value. We continue to manage our exposure to market price fluctuations primarily through policies designed to monitor and limit our individual issuer exposures and aggregate equity exposure. However, in late September 2009, we also initiated U.S. equity index total return swap contracts, which as of March 31, 2010 have a notional value of $856.1 million, to protect against potential future broad market downturns. The collateral requirement related to entering the total return swaps was $65.2 million as of March 31, 2010. These total return swap transactions terminate during the third quarter of 2010. The equity index total return swaps, in the aggregate, were in a loss position as of March 31, 2010, and are recorded in other liabilities. Changes in the fair values of equity index total return swaps are recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur. As of both March 31, 2010 and December 31, 2009, we had aggregate equity holdings with fair value of $2.2 billion (common stocks of $2.1 billion plus preferred stock of $0.1 billion).

During the first quarter of 2010, we purchased a common stock total return swap, with a total notional value of $129.9 million, as a replication of a long position in a publicly-listed common stock. The collateral requirement related to this swap, which terminates in the first quarter of 2011, was $13.0 million as of March 31, 2010. The common stock total return swap was in a loss position as of March 31, 2010, and is recorded in other liabilities. Changes in the fair values of common stock total return swaps are recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur.

The following tables summarize the effect of equity risk hedging instruments and related hedged items on our historical financial position, results of operations and cash flows as of and for the three months ended March 31, 2010 and 2009 (in millions):


	As of and for the Three Months Ended March 31, 2010
						Effect on Pre-tax:
														Net Cash
	Exposure /					Other		Net Realized						Flow Impact
	Notional		Carrying			Comprehensive		Investment						from
	Value		Value			Income		Gains			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	69.4	$	69.4		$	—	$	(13.2	)	$	(13.2	)	$	—
Common stocks, at fair value		2,076.4		2,076.4			145.7		80.4			226.1			80.8
Other		129.8		(1.5	)		—		(1.5	)		(1.5	)		—

Total equity exposure	$	2,275.6	$	2,144.3			145.7		65.7			211.4			80.8

Hedging instruments:
Other invested assets:
Total return swaps	$	856.1	$	0.3			—		(40.5	)		(40.5	)		(37.6	)

Total equity hedging instruments	$	856.1	$	0.3			—		(40.5	)		(40.5	)		(37.6	)

Net equity impact						$	145.7	$	25.2		$	170.9		$	43.2


	As of and for the Three Months Ended March 31, 2009
					Effect on Pre-tax:
														Net Cash
	Exposure /				Other			Net Realized						Flow Impact
	Notional		Carrying		Comprehensive			Investment						from
	Value		Value		Loss			Losses			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	0.1	$	0.1	$	0.2		$	(0.2	)	$	—		$	(1.1	)
Common stocks, at fair value		1,485.9		1,485.9		(243.6	)		(75.1	)		(318.7	)		3.2

Total equity exposure	$	1,486.0	$	1,486.0		(243.4	)		(75.3	)		(318.7	)		2.1

Hedging instruments:
Other invested assets:
Total return swaps	$	—	$	—		—			—			—			—

Total equity hedging instruments	$	—	$	—		—			—			—			—

Net equity impact					$	(243.4	)	$	(75.3	)	$	(318.7	)	$	2.1

In the normal course of effecting our economic hedging strategy with respect to equity risk, we expect that there may be periods where the notional value of the hedging instrument may exceed or be less than the exposure item being hedged. This situation may arise when management compensates for imperfect correlations between the hedging item and the hedge, due to the timing of opportunities related to our ability to exit and enter hedged or hedging items at attractive prices or when management desires to only partially hedge an exposure.

The following table summarizes the potential impact of a 10% change in our equity and equity-related holdings (including equity hedges where appropriate) on pre-tax other comprehensive income (loss) and pre-tax net income for the three months ended March 31, 2010 and 2009. Certain shortcomings are inherent in the method of analysis presented, as it is based on the assumptions that the equity and equity-related holdings had increased/decreased by 10%, with all other variables held constant, and that all the equity and equity-related instruments move according to a one-to-one correlation with global equity markets.


	Three Months Ended						Three Months Ended
	March 31, 2010						March 31, 2009
	Effect on Pre-tax:
	Other						Other
	Comprehensive			Net			Comprehensive			Net
Change in global equity markets	Income			Income			Loss			Income
				(In millions)
10% decrease	$	(214.6	)	$	85.6		$	(148.6	)	$	—
10% increase		214.6			(85.6	)		148.6			—

Generally, a 10% decline in the global equity markets would result in a similar decrease in the value of our equity investment holdings, resulting in decreases in our pre-tax other comprehensive income, as the majority of our equity investment holdings are classified as available for sale. Conversely, a 10% increase in global equity markets would generally result in a similar increase in the value of our equity investment holdings, resulting in increases in our pre-tax other comprehensive income. As the equity hedges held by us as of March 31, 2010 were all entered into at the end of September 2009, and as there were no other equity hedges in our portfolio during 2009 prior to September, the effects of changes in the global equity markets for the three months ended March 31, 2009 were not offset by any hedging activities.

As of March 31, 2010, our equity related holdings in the ten issuers to which we had the greatest exposure totaled $1.5 billion, which was approximately 17.4% of our total invested assets. The exposure to the largest single issuer of equity related holdings held as of March 31, 2010 was $296.5 million, which was approximately 3.4% of our total invested assets, or 8.0% of our total shareholders’ equity.

Foreign Currency Risk

Through investment in securities denominated in foreign currencies, we are exposed to foreign (i.e., non-U.S.) currency risk. Foreign currency exchange risk exists because changes in the exchange rates of the underlying foreign currencies in which our investments are denominated affect the fair values of these investments when they are converted to the U.S. dollar. As of both March 31, 2010 and December 31, 2009, our total exposure to foreign-denominated securities in U.S. dollar terms was approximately $2.0 billion, or 22.3% and 22.6%, respectively, of our total investments and cash. The primary foreign currency exposures were from securities denominated in Euros, which represented 7.4% and 8.1% of our total investments and cash as of March 31, 2010 and December 31, 2009, respectively, the British pound, which represented 4.4% and 4.9% of our total investments and cash as of March 31, 2010 and December 31, 2009, respectively, and the Canadian dollar, which represented 4.4% and 4.0%, of our total investments and cash as of March 31, 2010 and December 31, 2009, respectively. As of March 31, 2010, the potential impact of a 10% decline in each of the foreign exchange rates on the valuation of investment assets denominated in foreign currencies would result in a $197.3 million decline in the fair value of our total investments and cash, before taxes.

Through our international operations, we conduct our business in a variety of foreign (non-U.S.) currencies, with the primary exposures being Euros, British pounds, and Canadian dollars. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates to the extent that they do not offset each other resulting in a natural hedge. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial condition. We manage this risk on a macro basis by entering into forward currency contracts. As of March 31, 2010 and December 31, 2009, we were party to forward currency contracts with notional amounts of $512.0 million and $416.3 million, respectively. As of March 31, 2010 and December 31, 2009, the fair value of these contracts is reported in other liabilities at $34.8 million and $39.3 million, respectively. The collateral requirement related to the forward currency contracts was $6.6 million as of March 31, 2010. As a result in the appreciation in the fair value of some of the forward currency contracts, counterparties to these contracts are required to place government securities as collateral, pursuant to the forward currency agreements. The fair value of this collateral as of March 31, 2010 was $2.4 million. Forward currency contracts had net realized investment gains of $4.6 million and $12.0 million for the three months ended March 31, 2010 and 2009, respectively.

Investment Impairment Risk

On a quarterly basis, we review our investment portfolio for declines in value and specifically consider securities with fair values that have declined to less than 80% of their cost or amortized cost at the time of review. Declines in the fair value of investments that are determined to be temporary are recorded as unrealized depreciation, net of tax, in accumulated other comprehensive income. If we determine that a decline is “other-than-temporary,” the cost or amortized cost of the investment will be written down to the fair value and a realized investment loss will be recorded in our consolidated statements of operations.

In assessing the value of our debt and equity securities held as investments, and possible impairments of such securities, we review (i) the issuer’s current financial position and disclosures related thereto, (ii) general and specific market and industry developments, (iii) the timely payment by the issuer of its principal, interest and other obligations, (iv) the outlook and expected financial performance of the issuer, (v) current and historical valuation parameters for the issuer and similar companies, (vi) relevant forecasts, analyses and recommendations by research analysts, rating agencies and investment advisors, and (vii) other information we may consider relevant. Generally, a change in the market or interest rate environment would not, of itself, result in an impairment of an investment, but rather a temporary decline in value. In addition, we consider our ability and intent to hold the security to recovery when evaluating possible impairments.

Decisions regarding other-than-temporary impairments require an evaluation of facts and circumstances at a specific time to determine if an other-than-temporary impairment exists. For our available-for-sale fixed income securities, additional facts are evaluated to determine if the other-than-temporary impairment is related to credit or other factors. For our available-for-sale fixed income securities, should the facts and circumstances change, such that an other-than-temporary impairment is considered appropriate, and additional factors determine that the other-than-temporary impairment is related to credit, we will recognize the impairment by reducing the cost or amortized cost of the investment to its fair value and recording the loss in our consolidated

statements of operations. When it is determined that an other-than-temporary impairment for our available-for-sale fixed income securities exists that is related to other factors (e.g., interest rates and market conditions), we will recognize the impairment in other comprehensive income, unless we anticipate that we will likely sell or be required to sell such securities, or that such securities will mature, before the securities have recovered in value, in which case the loss is recorded in our consolidated statement of operations. For our redeemable preferred stock at fair value, should the facts and circumstances change such that an other-than-temporary impairment is considered appropriate, we will recognize the impairment by reducing the cost of the investment to its fair value and recording the loss in our consolidated statements of operations. Upon the disposition of a security where an other-than-temporary impairment has been taken, we will record a gain or loss based on the adjusted cost or carrying value of the investment.

Risks and uncertainties are inherent in our other-than-temporary decline in value assessment methodology. Risks and uncertainties include, but are not limited to, incorrect or overly optimistic assumptions about financial condition or liquidity, incorrect or overly optimistic assumptions about future prospects, inadequacy of any underlying collateral, unfavorable changes in economic or social conditions and unfavorable changes in interest rates.

The following tables reflect the fair value and gross unrealized depreciation of our fixed income securities and common stock investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2010 and December 31, 2009 (in millions):


	Duration of Unrealized Loss
	Less than 12 Months							Greater than 12 Months							Total
			Gross			Number				Gross			Number				Gross			Number
	Fair		Unrealized			of		Fair		Unrealized			of		Fair		Unrealized			of
	Value		Depreciation			Securities		Value		Depreciation			Securities		Value		Depreciation			Securities
March 31, 2010
Fixed income securities investment grade:
United States government, government agencies and authorities	$	51.6	$	(2.8	)		8	$	8.7	$	(2.1	)		1	$	60.3	$	(4.9	)		9
States, municipalities and political subdivisions		711.0		(5.6	)		11		1.1		(0.1	)		1		712.1		(5.7	)		12
Foreign governments		12.2		(1.0	)		1		—		—			—		12.2		(1.0	)		1

Total investment grade		774.8		(9.4	)		20		9.8		(2.2	)		2		784.6		(11.6	)		22

Fixed income securities non-investment grade, corporate		37.0		(1.1	)		2		—		—			—		37.0		(1.1	)		2

Total fixed income securities		811.8		(10.5	)		22		9.8		(2.2	)		2		821.6		(12.7	)		24
Common stocks, at fair value		46.9		(4.0	)		4		—		—			—		46.9		(4.0	)		4

Total temporarily impaired securities	$	858.7	$	(14.5	)		26	$	9.8	$	(2.2	)		2	$	868.5	$	(16.7	)		28


	Duration of Unrealized Loss
	Less than 12 Months							Greater than 12 Months							Total
			Gross			Number				Gross			Number				Gross			Number
	Fair		Unrealized			of		Fair		Unrealized			of		Fair		Unrealized			of
	Value		Depreciation			Securities		Value		Depreciation			Securities		Value		Depreciation			Securities
December 31, 2009
Fixed income securities investment grade:
United States government, government agencies and authorities	$	62.2	$	(4.3	)		9	$	—	$	—			—	$	62.2		(4.3	)		9
States, municipalities and political subdivisions		572.0		(39.3	)		6		1.0		(0.1	)		1		573.0		(39.4	)		7
Foreign governments		—		—			—		8.5		(0.1	)		1		8.5		(0.1	)		1
Corporate		4.9		(0.1	)		1		—		—			—		4.9		(0.1	)		1

Total investment grade		639.1		(43.7	)		16		9.5		(0.2	)		2		648.6		(43.9	)		18

Fixed income securities non-investment grade, corporate		41.9		—			3		—		—			—		41.9		—			3

Total fixed income securities		681.0		(43.7	)		19		9.5		(0.2	)		2		690.5		(43.9	)		21
Common stocks, at fair value		36.2		(3.9	)		7		—		—			—		36.2		(3.9	)		7

Total temporarily impaired securities	$	717.2	$	(47.6	)		26	$	9.5	$	(0.2	)		2	$	726.7	$	(47.8	)		28

We believe the gross unrealized depreciation is temporary in nature and we have not recorded a realized investment loss related to these securities. Given the size of our investment portfolio and capital position, we believe it is likely that we will not be required to sell or liquidate these securities before the fair value recovers the gross unrealized depreciation.

As an economic hedge against the potential adverse impact of changes in price levels in the economy, we purchased inflation-linked derivative contracts referenced to inflation indices in the geographic regions in which we operate. As of March 31, 2010 and December 31, 2009, we had 34 and three inflation-linked derivative contracts, respectively, outstanding, with a carrying value in the consolidated balance sheet of $55.2 million and $4.1 million, respectively, and a cost of $65.7 million and $4.0 million, respectively. The initial premium paid for inflation-linked derivative contracts is recorded as a derivative asset and subsequently adjusted for changes in the unrealized fair value of the contracts at each balance sheet date. Changes in the unrealized fair value of the contracts are recorded as realized gains or losses on investments in our consolidated statements of operations with a corresponding adjustment to the carrying value of the derivative asset. In the event of a sale, expiration or early settlement of one of our inflation-linked derivative contracts, we would receive the fair value of that contract on the date of the transaction. Our maximum potential cash loss is limited to the premiums paid to enter into the derivative contracts. Pursuant to the agreements governing the inflation-linked derivatives, counterparties to these transactions are contractually required to periodically deposit eligible collateral for the benefit of us in support of the then-current fair value of the derivative contracts. As of March 31, 2010, the fair value of this collateral was $39.1 million.

PART I — Item 4. Controls and Procedures

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

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

PART II — OTHER INFORMATION

PART II — Item 1. Legal Proceedings

On February 8, 2007, we were added as a co-defendant in an amended and consolidated complaint in an existing action against our then-majority (now 100%) shareholder, Fairfax, and certain of Fairfax’s officers and directors, who included certain of our current and former directors. The amended and consolidated complaint was filed in the United States District Court for the Southern District of New York by the lead plaintiffs, who sought to represent a class of all purchasers and acquirers of securities of Fairfax between May 21, 2003 and March 22, 2006, inclusive, and allege, among other things, that the defendants violated U.S. federal securities laws by making material misstatements or failing to disclose certain material information. The amended and consolidated complaint sought, among other things, certification of the putative class, unspecified compensatory damages, unspecified injunctive relief, reasonable costs and attorneys’ fees and other relief. Motions to dismiss were argued before the Court in December 2007. On March 29, 2010, the Court granted defendants’ motion to dismiss on the grounds that the Court lacked subject matter jurisdiction over the case. The Court also denied plaintiffs’ request to move for leave to file a second amended complaint.

In July 2006, Fairfax, our then-majority (now 100%) shareholder, filed a lawsuit in the Superior Court, Morris County, New Jersey, seeking damages from a number of defendants who, the complaint alleges, participated in a stock market manipulation scheme involving Fairfax shares, and the complaint was subsequently amended to add additional allegations and two defendants. In January 2008, two of these defendants filed a counterclaim against Fairfax and a third-party complaint against, among others, us and certain of our directors. Those counterclaims and third-party claims were voluntarily withdrawn in March 2008. In September 2008, the same two defendants filed an amended counterclaim against Fairfax, as well as third-party claims against certain Fairfax executives, us and certain of our directors, Fairfax’s outside legal counsel and PricewaterhouseCoopers. The complaint alleges, among other things, claims of racketeering, intentional infliction of emotional distress, tortious interference with economic advantage and other torts, and seeks unspecified compensatory and punitive damages and other relief. We deny the allegations and intend to vigorously defend against these claims. In September 2008, the Court granted a motion for summary judgment brought by two defendants, and dismissed Fairfax’s claims against those defendants without prejudice. We have not yet responded to the complaint, and the timing of that response has not been set. Discovery in this action is ongoing. At this early stage of the proceedings, it is not possible to make any determination regarding the likely outcome of this matter.

We and our subsidiaries are involved from time to time in ordinary litigation and arbitration proceedings as part of our business operations; in management’s opinion, the outcome of these suits, individually or collectively, is not likely to result in judgments that would be material to our financial condition or results of operations.

PART II — Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed in our 2009 Annual Report Form 10-K filed with the SEC on February 25, 2010.

PART II — Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

PART II — Item 3. Defaults Upon Senior Securities

None.

PART II — Item 4. (Removed and Reserved)

N/A

PART II — Item 5. Other Information

Effective May 1, 2010, we entered into a $300 million two-way revolving credit facility with Fairfax, Inc. (a wholly-owned subsidiary of Fairfax, and the direct and indirect holder of 100% of the common shares of the Company), under which either party may borrow up to $300.0 million from the other party. Loans under the facility are unsecured and bear interest at a rate of 7.5% per annum, payable quarterly, and the principal amount is payable on demand. Either party may terminate the facility at any time upon demand, at which time all outstanding principal and unpaid interest shall become due. On May 3, 2010, we loaned $200.0 million to Fairfax, Inc. under the facility. The foregoing summary of the two-way revolving credit facility is qualified in its entirety by reference to the text of the revolving line of credit agreement, effective as of May 1, 2010, which is filed as Exhibit 10.28 hereto.

PART II — Item 6. Exhibit Index


Number		Title of Exhibit
*10.28		Revolving Line of Credit Agreement, dated as of May 1, 2010, between Odyssey Re Holdings Corp. and Fairfax, Inc.

* 31.1		Certification of President and Chief Executive Officer pursuant to Rule 13a-15(e) or 15d-15(e), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

* 31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-15(e) or 15d-15(e), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

* 32.1		Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* 32.2		Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Risk Factors (incorporated into Part II of this Form 10-Q by reference to Item 1A — “Risk Factors” in the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2010).


*		Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Odyssey Re Holdings Corp.
Date: May 6, 2010	By:	/s/ Andrew A. Barnard
		Name:	Andrew A. Barnard
		Title:	President and Chief Executive Officer


Date: May 6, 2010	By:	/s/ Jan Christiansen
		Name:	Jan Christiansen
		Title:	Executive Vice President and Chief Financial Officer

ODYSSEY RE HOLDINGS CORP - FORM 10-Q - May 6, 2010

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