OdysseyRe’s corporate offices are located in approximately 11,759 square feet of leased office space in 140 Broadway, New York. Odyssey America’s corporate offices are located in approximately 83,457 total square feet of leased space in Stamford, Connecticut. Our other locations occupy a total of approximately 68,692 square feet, all of which are leased. The Americas division operates out of offices in New York, Stamford, Mexico City, Miami, Santiago and Toronto, the London Market division operates out of offices in London and Bristol, and the EuroAsia division operates out of offices in Paris, Singapore, Stockholm and Tokyo.
The following selected financial data should be read in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes that are included in this Form 10-K. GAAP financial information in the table reflects the results of operations and financial position of OdysseyRe. The results for the year ended December 31, 1999 reflect the results of Odyssey America from April 13, 1999, the date on which it was acquired by Fairfax.
The statutory data set forth has been derived from the statutory financial statements filed by our insurance subsidiaries with the relevant insurance departments. These statutory financial statements have been prepared in accordance with statutory accounting principles which differ from GAAP.
Based on our common stock outstanding of 65,003,963 shares as of December 31, 2002, 65,142,857 shares as of December 31, 2001, 48,000,000 shares as of December 31, 2000 and 1999 and 38,400,000 shares as of December 31, 1998.
Through our operating subsidiaries, principally Odyssey America, we are a leading United States based underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer a broad range of both treaty and facultative reinsurance to property and casualty insurers and reinsurers. Treaty reinsurance involves the reinsurance of a specific line or class of business for an insurance company pursuant to an agreement or treaty. Facultative reinsurance involves the reinsurance of a specific policy as opposed to a line or class of business. We also write specialty and non-traditional lines of reinsurance, including professional liability, marine and aerospace.
Throughout 2002, we experienced growth opportunities in a number of areas, evidenced by our increase in gross premiums written of $740.9 million, or 64.2%, to $1.9 billion for the year ended December 31, 2002 from $1.2 billion for the year ended December 31, 2001. As a result of improved market conditions, including improved pricing and industry consolidation, and a series of catastrophic events, both in the United States and globally, conditions for us have been improving and we have opportunistically expanded in certain classes of business and in each of our geographic business segments. Our non-United States operations, including Newline, accounted for 39.0% of our premium volume for 2002.
We operate our business through three divisions, the Americas, London Market and EuroAsia, which are based principally on geographic regions.
The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The GAAP combined ratio is the sum of losses and loss adjustment expenses incurred as a percentage of net premiums earned plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percentage of net premiums earned. The combined ratio reflects only underwriting results, and does not include income from investments. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions, foreign currency fluctuations and other factors. Our combined ratio for the year ended December 31, 2002, was 99.1%, a decrease of 4.0 percentage points from 103.1% for the year ended December 31, 2001, which excludes the effects of the event of September 11th and Enron. The combined ratio for the year ended December 31, 2001, including the effects of the event of September 11th and Enron was 115.4%.
For the years ended December 31, 2002 and 2001, our gross premiums written were $1.9 billion and $1.2 billion, respectively. For the years ended December 31, 2002 and 2001, our net premiums written were $1.6 billion and $984.7 million, respectively, and our net income was $208.2 million, (which included a cumulative effect of a change in accounting principle of $36.9 million) and a net loss of $8.0 million (which included a net after tax loss of $71.5 million related to the effects of the event of September 11th and Enron),
Consistent with our significant accounting policies, 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 change in these estimates is reflected in the revenue account at the end of each accounting period.
We determine our reserve for unpaid losses and loss adjustment expenses based on reports and individual case estimates received from ceding companies. We use generally accepted actuarial methodologies to determine a reserve for losses incurred but not reported (“IBNR”) on the basis of our historical experience and other estimates. We review the reserves continually and changes in estimates are reflected in the operating results of the period in which they become known. Accordingly, losses and loss adjustment expenses are charged to income in the calendar year they are incurred.
Our reserves for losses and loss adjustment expenses are estimates of amounts required to pay reported and unreported claims and related loss adjustment expenses. We believe the estimate of these reserves is a “critical accounting estimate” because changes in these reserves can materially affect net income. The estimates are based on assumptions related to the ultimate cost to settle these claims. Our reserves for losses and loss adjustment expenses are determined in accordance with sound actuarial practices. However, the inherent uncertainties of estimating reserves are greater for reinsurers than for primary insurers, due to the diversity of development patterns among different types of reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. As a result, we cannot be sure that our ultimate liability will not exceed amounts we have reserved. As of December 31, 2002, our estimate of these liabilities net of reinsurance recoverables was $1,844.6 million, and as of December 31, 2001 was $1,674.4 million.
EuroAsia division’s gross premiums written for the year ended December 31, 2002 were $258.6 million, consisting of international reinsurance business primarily derived through new market opportunities. In addition, there has been a substantial shrinkage of capacity in the European market due to catastrophe losses, competitor withdrawals, and asset impairments. Gross premiums written were $146.5 million for the year ended December 31, 2001. The increase in the EuroAsia division is comprised of increases in treaty property excess of loss of $31.5 million, proportional property of $52.9 million, casualty excess of loss of $10.9 million and all other lines of $16.8 million.
Net Premiums Written. Net premiums written for the year ended December 31, 2002 increased by $646.5 million, or 65.7%, to $1.6 billion from $984.7 million for the year ended December 31, 2001. Net premiums written represents gross premiums written less ceded premiums written.
Net Premiums Earned. Net premiums earned for the year ended December 31, 2002 increased by $532.1 million, or 59.1%, to $1.4 billion from $900.5 million for the year ended December 31, 2001. This increase was a result of the factors listed above, and reflects an increase in unearned premiums of $198.6 million for the year ended December 31, 2002, as compared to an increase in unearned premiums of $84.1 million for the year ended December 31, 2001. This increase in unearned premiums is associated with the increase in net premiums written.
Net Investment Income. Net investment income for the year ended December 31, 2002 increased by $8.4 million, or 7.3%, to $123.0 million from $114.6 million for the year ended December 31, 2001. The net investment yield was 4.3% for each of the years ended December 31, 2002 and 2001. The increase in investment income before expenses mainly results from the increase of $422.6 million in our cash and invested assets.
Net Realized Investment Gains. Net realized investment gains for the year ended December 31, 2002 increased by $122.5 million, to $135.8 million from a gain of $13.3 million for the year ended December 31,
The other expense (income), net for the year ended December 31, 2002 is primarily comprised of the operating expenses of the holding company, since goodwill is no longer amortized. The major component of other expense (income), net, in 2001 was the amortization of goodwill, which consists of the negative goodwill associated with the purchase of ORC amortized over a ten-year period at $8.3 million per year, and the amortization of positive goodwill associated with the purchase of Odyssey America amortized over a ten-year period at $2.5 million per year.
Combined Ratio. Our combined ratio, which is the sum of the losses and loss adjustment expense ratio, acquisition ratio and other underwriting expense ratio was 99.1% for the year ended December 31, 2002, a decrease of 16.3 percentage points from 115.4% for the year ended December 31, 2001. Excluding the effects of the event of September 11th and Enron, our combined ratio was 103.1% for the year ended December 31, 2001. Our combined ratio improved due to the significantly better operating conditions in the primary and reinsurance segments of the industry.
Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the year ended December 31, 2002 increased by $94.5 million to a tax provision of $86.8 million as a result of the
Gross Premiums Written. Gross premiums written for the year ended December 31, 2001 increased by $291.4 million, or 33.8%, to $1.2 billion from $862.2 million for the year ended December 31, 2000. Excluding premium adjustments related to the event of September 11th, gross premiums written for the year ended December 31, 2001 were $1.1 billion. The increase in premium volume is attributable to increases in the Americas division of $87.2 million, or 11.6 %, the London Market division of $58.1 million, or 53.9%, and the EuroAsia division of $146.1 million.
Net Investment Income. Net investment income for the year ended December 31, 2001 decreased by $12.0 million, or 9.5%, to $114.6 million from $126.6 million for the year ended December 31, 2000. As a result of the decline in interest rates during the past year combined with a decrease in investment income from
affiliates and other interest bearing assets, the net investment yield decreased to 4.3% in 2001 compared to 4.6% in 2000 and accounted for most of the decline in investment income.
Net Realized Investment Gains. Net realized investment gains for the year ended December 31, 2001 decreased by $10.3 million to $13.3 million from $23.6 million for the year ended December 31, 2000. The decrease in net realized gains in 2001 was primarily related to modest gains in our equity portfolio of $3.9 million compared to $37.3 million of net realized gains on equity securities for the year ended December 31, 2000. We realized net gains on fixed income securities of $9.4 million for the year ended December 31, 2001, compared to a net realized loss of $11.7 million for the year ended December 31, 2000.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for the year ended December 31, 2001 increased by $222.3 million, or 44.2%, to $725.8 million from $503.5 million for the year ended December 31, 2000. The losses and loss adjustment expense ratio for the year ended December 31, 2001 was 80.6% compared to 73.9% for the year ended December 31, 2000. Excluding the effects of the event of September 11th and Enron, losses and loss adjustment expenses for the year ended December 31, 2001 were $635.3 million compared to $503.5 million for the year ended December 31, 2000, an increase of $131.8 million, or 26.2%. Excluding the effects of the event of September 11th and Enron, which contributed $75.5 million and $15.0 million, respectively, the losses and loss adjustment expense ratio for the year ended December 31, 2001 was 69.7% compared to 73.9% for the year ended December 31, 2000. The improvement in the losses and loss adjustment expense ratio is the result of our underwriting initiatives and reinsurance price increases.
The major component of other expense (income), net is the amortization of goodwill which consists of the negative goodwill associated with the purchase of ORC amortized over a ten-year period at $8.3 million per year, and the amortization of positive goodwill associated with the purchase of Odyssey America amortized over a ten-year period at $2.5 million per year.
Combined Ratio. Our combined ratio, which is the sum of the losses and loss adjustment expense ratio, the acquisition ratio and other underwriting expense ratio, increased from 110.8% for the year ended December 31, 2000 compared to 115.4% for the year ended December 31, 2001. Excluding the effects of the event of September 11th and Enron, our combined ratio improved to 103.1% for the year ended December 31,
Federal and Foreign Income Tax Provision. The federal and foreign income tax provision for the year ended December 31, 2001 decreased by $33.5 million to a tax benefit of $7.7 million as compared to a tax provision of $25.8 million for the year ended December 31, 2000. The tax benefit is due to the recognition of our estimated losses due to the effects of the event of September 11th and Enron.
Our liquidity requirements are principally met on a short-term and long-term basis by cash flows from operating activities, which principally result from premiums, collections on losses recoverable and investment income, net of paid losses, acquisition costs and underwriting and investment expenses. Cash provided by operations was $214.2 million for the year ended December 31, 2002. The increase in premium collections is directly attributable to the increase in premium volume realized since the latter part of calendar year 2001, which occurred as a result of substantially improved market conditions. Each of our business segments contributed to the improvement in our operating cash flow. Cash used in operations for the year ended December 31, 2001 amounted to $49.4 million primarily due to payment of losses incurred by Odyssey America and its subsidiaries exceeding premium and investment cash flow.
In connection with the acquisition of Odyssey America and its subsidiaries, we issued a $200.0 million term note to a subsidiary of Fairfax, which was due between 2002 and 2004. The term note accrued interest using the three month London Interbank Offered Rate (LIBOR) plus 225 basis points, payable quarterly. This debt has been fully extinguished by the proceeds from the senior notes, credit agreement and Convertible Debt discussed herein.
In addition, we entered into a $50.0 million credit agreement with Bank of America N.A. and J.P. Morgan Chase Bank on December 31, 2001. The entire $50.0 million in proceeds was used to prepay part of the principal amount outstanding under the $200.0 million term note. As of December 31, 2002, the entire credit agreement has been extinguished and there is no balance outstanding.
Rating agencies assess the claims-paying ability of reinsurers and their ratings represent independent opinions of financial strength and ability to meet policyholder obligations. These ratings are used by insurers and reinsurance and insurance intermediaries as an important means of assessing the financial strength and quality of reinsurers. In addition, the rating of a company purchasing reinsurance may be adversely affected by an unfavorable rating of its reinsurer. A reduction in our financial strength ratings could limit or prevent us from writing new reinsurance or insurance policies. Our financial strength ratings as of December 31, 2002 were: A.M. Best Company: A (Excellent); and Standard & Poor’s rating services: A- (Strong).
The preceding table indicates an asymmetric market value response to equivalent basis point shifts, up and down in interest rates. This reflects significant exposure to fixed income securities containing a put feature. In total these securities represent approximately 23% and 50% of the fair market value of the total fixed income portfolio as of December 31, 2002 and December 31, 2001, respectively. The asymmetric market value response reflects our ability to put these bonds back to the issuer for early maturity in a rising interest rate environment (thereby limiting market value loss) but to hold these bonds to their much longer full maturity dates in a falling interest rate environment (thereby maximizing the full benefit of higher market values in that environment).
We have gross unrealized appreciation of $71.9 million, which is offset by gross unrealized depreciation of $38.3 million, resulting principally from the current interest rate environment. During the year ended December 31, 2002, we recognized a realized loss of $13.0 million related to the other than temporary write-down of certain fixed income and equity securities.
As of December 31, 2002 and December 31, 2001, 88.6% and 97.1%, respectively, of our fixed income securities portfolio consisted of securities rated investment grade, with 11.4% and 2.9%, respectively, rated below investment grade.
Included above in securities denominated in foreign currencies are Japanese yen denominated securities, which as of December 31, 2002 had a U.S. dollar equivalent market value of $55.0 million. We have entered into Japanese yen forward sale contracts to hedge against a fall in value of the Japanese yen denominated securities versus the U.S. dollar. The Japanese yen forward contracts are for an aggregate amount of 4.4 billion Japanese yen at an average forward rate of 120.3 yen or a U.S. dollar equivalent amount of $35.3 million.
Reinsurance for the years ended December 31, 2002, 2001 and 2000
On June 19, 2001, the Company sold 17,142,857 shares of its common stock (26% of the total shares of common stock outstanding) in an initial public offering (the “offering”). In connection with the offering, all the outstanding shares of Odyssey America were acquired by the Company from subsidiaries of Fairfax Financial Holdings Limited (“Fairfax”), the Company’s ultimate majority shareholder, for aggregate consideration of $988.8 million, consisting of $233.6 million in cash, $200.0 million in a term note and 48 million shares of the Company’s common stock. This acquisition has been accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, the consolidated financial statements of Odyssey America and its subsidiaries have become the Company’s historical financial information. The Company retained $51.3 million of the net proceeds from the offering. In connection with the offering, the Company granted restricted shares of its stock to various executives and employees, as further described in note 11.
During 2002, dividends of $0.025 per common share were declared and paid in each quarter resulting in an aggregate annual dividend of $0.10 per share, totaling approximately $6.5 million. During 2001, approximately $1.6 million in dividends were paid.
depreciation of the Company’s fixed income and equity securities, net of applicable deferred income taxes, is included in accumulated other comprehensive income. Unrealized losses that are deemed other than temporary are charged to operations. Short-term investments are carried at cost, which approximates fair value.
Common stocks of affiliates are accounted for under the equity method.
(e) The reserve for unpaid losses and loss adjustment expenses is based on reports and individual case estimates received from ceding companies. Generally accepted actuarial methodologies are utilized to determine a reserve for losses incurred but not reported on the basis of historical experience and other estimates. The reserves are reviewed continually during the year and changes in estimates are reflected in operating results currently. Accordingly, losses and loss adjustment expenses are charged to income as incurred. Reinsurance recoverables on unpaid losses and loss adjustment expenses are reported as assets. The Company uses tabular reserving for workers’ compensation liabilities that are considered fixed and determinable and discounts such reserves using an interest rate of 3.5% and standard mortality assumptions.
The reserves for losses and loss adjustment expenses are estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses. The estimates are based on assumptions related to the ultimate cost to settle such claims. The Company’s reserves for losses and loss adjustment expenses are determined in accordance with sound actuarial practices and management believes that such reserves are adequate. The inherent uncertainties of estimating reserves are greater for reinsurers than for primary insurers, due to the diversity of development patterns among different types of
reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. As a result, there can be no assurance that the ultimate liability will not exceed amounts reserved with a resulting adverse effect on the Company.
Deferred federal income taxes are provided for temporary differences between the financial statement and tax bases assets and liabilities. Such differences relate principally to deferred acquisition costs, unearned premiums and unpaid losses and loss adjustment expenses.
(i) The Company translates the financial statements of its foreign subsidiaries to United States dollars by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the average exchange rate for the year. Translation gains or losses are recorded, net of deferred income taxes, as a component of comprehensive income.
(k) The Company accounts for its stock options on the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) 25 and related interpretations, as permitted under Statement of Accounting Standard (“SFAS”) 123. Accordingly, no compensation expense has been recognized in the accompanying 2002 consolidated statement of operations with respect to stock options granted under the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan. Had compensation expense been charged to earnings in accordance with the fair value method discussed in SFAS 123, the
Effective January 1, 2002, the Company adopted SFAS 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets”, which are effective for all fiscal quarters of all fiscal years beginning after December 15, 2001.
There is no effect on the Company’s federal and foreign income taxes resulting from the implementation of these accounting pronouncements.
The composition of the fixed income securities, redeemable preferred stock, unaffiliated common stocks and short-term investments, which are carried at fair value, as of December 31, 2002 follows (in thousands):
The proceeds from the sales of investments were $2.5 billion, $0.4 billion and $0.8 billion for the years ended December 31, 2002, 2001 and 2000.
Included in gross losses for the years ended December 31, 2002 and 2000 is $13.0 million and $11.4 million, respectively, related to realized losses on the other than temporary write-down of certain fixed income and equity securities.
Fixed income securities carried at $259.9 million as of December 31, 2002 were on deposit with various regulatory authorities to comply with insurance laws.
The Company has purchased Japanese yen forward sale contracts for an amount of 4.4 billion Japanese yen at an average forward rate of 120.3 yen to provide a hedge against investments the Company owns in Japanese yen. The total United States dollar notional value is $35.3 million and the total net discount is $1.7 million. The fair value of the contracts of $(1.6) million as of December 31, 2002 is based on the difference between the actual exchange rate on the date of valuation and the net discounted notional value of the contracts. The Company believes that any fluctuations in its Japanese investments will not have a material effect on the financial statements.
The Company utilizes retrocessional agreements principally to increase aggregate premium capacity, to reduce and spread the risk of loss on insurance and reinsurance underwritten and to limit its exposure with respect to multiple claims arising from a single occurrence. There is a contingent liability with respect to reinsurance which would become an ultimate liability of the Company in the event that such reinsuring companies are unable, at some later date, to meet their obligations under the reinsurance agreements inforce. Reinsurance recoverables are recorded as assets, based on the Company’s evaluation of the retrocessionaires’ ability to meet their obligations under the retrocession agreement. Premiums written and earned are stated net
The Company paid administrative fees to Fairfax for services provided to the Company. For the years ended December 31, 2002, 2001 and 2000, $3.0 million, $2.3 million and $2.8 million, respectively, of administration fees were incurred.
In addition to the amounts in the table above, the Company has a receivable from ORC Re Ltd. of $28.5 million and $64.8 million as of December 31, 2002 and 2001, respectively, which represents transactions for certain reinsurance agreements.
Net income (loss) for the years ended December 31, 2002, 2001 and 2000 per common share has been computed in the following table based upon weighted average common shares outstanding (in thousands, except share amounts):
The 2002 diluted earnings per common share assumes that the Company’s stock options granted under the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan would not be exercised as of December 31, 2002 and does not reflect the conversion of the Company’s convertible debentures to common shares of the Company because, under the terms of the indenture under which the convertible debentures were issued, the convertible debentures were not convertible as of December 31, 2002.
The Company maintains a qualified, non-contributory, defined benefit pension plan (the Plan) covering substantially all employees who have reached age twenty-one and who have completed one year of service. Employer contributions to the Plan are in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974.
The following tables set forth the Plan’s funded status and amounts recognized in the Company’s consolidated financial statements as of December 31, 2002 and 2001.
The Company established a trust fund, included in other invested assets, in the amount of $5.9 million and $5.4 million as of December 31, 2002 and 2001, respectively, related to the non-qualified plans.
The Company also maintains a defined contribution profit sharing plan for all eligible employees. Each year, the Board of Directors may authorize payment of an amount equal to a percentage of each participant’s basic annual earnings based on the experience of the Company for that year. These amounts are credited to the employee’s account maintained by a third party, which has contracted to provide benefits under the plan. No contributions were made in 2002 and 2001.
In April 2002, the Company’s stockholders approved the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan (the “2002 Plan”). An aggregate of 1.5 million shares of the Company’s common stock may be granted under the 2002 Plan. The 2002 Plan provides for the grant of non-qualified stock options to officers, key employees and directors who are employed by, or provide services to, the Company or its subsidiaries. Pursuant to the 2002 Plan, 25% of the options granted become exercisable on each annual anniversary of the grant in each of the four years following the grant and expire 10 years from the date of grant, and shall be exercisable at the grant price. As of December 31, 2002, 446,750 stock options have been granted under the 2002 Plan at a price of $18 per share. As of December 31, 2002, there were 1,053,250 remaining stock options available to be granted.
During 2001, the Company adopted the Odyssey Re Holdings Corp. Restricted Share Plan which provides for the grant of restricted shares to directors and key employees of the Company. Shares granted under this plan generally vest in two equal installments beginning on the fifth and tenth anniversary of the date of grant. As of December 31, 2002, 552,885 shares of restricted stock were granted to key employees. At the time of grant, the market value of the shares awarded under this plan is recorded as unearned compensation and is presented as a separate component of stockholders’ equity. The unearned compensation is charged to operations over the vesting period. The amount of compensation expense incurred for the years ended December 31, 2002 and 2001, in respect to the above grant, was approximately $1.1 million and $2.0 million, respectively.
Certain employees of the Company have been granted shares of restricted common stock under the Fairfax Financial Holdings Ltd. Restricted Share Plan. The Fairfax restricted stock, which was granted from
1996 to 2000, vests over a three to ten year period. The Company has reflected $0.3 million and $1.7 million of expense for the years ended December 31, 2002 and 2001, which represents the vested portion of the restricted stock. The Company no longer participates in this plan.
Deferred federal and foreign income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Components of deferred federal and foreign income tax assets and liabilities follow (in thousands):
The Company recovered federal and foreign income taxes of $4.3 million, $4.6 million and $9.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company has a current tax payable
The amounts above are reduced by an aggregate minimum rental recovery of $2.0 million resulting from the sublease of space to other companies.
Rental expense, before sublease income, under these operating leases were $7.8 million, $7.8 million and $9.2 million in 2002, 2001 and 2000, respectively. The Company recovered $1.9 million, $2.8 million and $4.0 million in 2002, 2001 and 2000, respectively, from subleases.
ORC has agreed to allow Ranger Insurance Company (“Ranger”), a subsidiary of Fairfax, to attach an assumption of liability endorsement to its policies where required. The agreement applies to endorsements issued from July 1, 1999 to the termination of the agreement. The agreement will terminate upon Ranger receiving an A.M. Best rating of A- or better, Ranger ceasing to be under the control of Fairfax, or either party giving the other party 30 days notice. Following termination of the agreement, ORC will remain liable for any losses occurring prior to the effective date of the termination, pursuant to the terms of the endorsements. While ORC’s potential exposure in connection with these endorsements is not reasonably quantifiable at this time, we deem it to be immaterial, as Fairfax has agreed to indemnify ORC for any obligation under this agreement. The Company anticipates that Ranger will meet all of its obligations in the normal course of business, and ORC does not anticipate making any payments under this guarantee that would require ORC to utilize the indemnification from Fairfax.
investment securities at statement value. As of December 31, 2002, the trust account was valued at £31.2 million ($48.8 million). The letter of credit and the trust account effectively secures the future contingent obligations of UK Holdings should Newline, the Lloyd’s underwriting syndicate in which the Company participates, incur net losses. The Company’s contingent liability to the Society and Council of Lloyd’s is limited to the amount of the letter of credit and the trust account.
Odyssey America has agreed, as of April 1, 2002, to guarantee the prompt payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agreement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), an affiliate, in the event Falcon becomes insolvent. While Odyssey America’s potential exposure in connection with this agreement is not reasonably quantifiable at this time, we deem it to be immaterial, as Fairfax has agreed to indemnify Odyssey America for any obligation under this agreement. Falcon has agreed to pay Odyssey America one percent of all gross earned premium associated with the subject business on a quarterly basis. During 2002, Falcon has paid $0.4 million to Odyssey America related to this agreement. Odyssey America anticipates that Falcon will meet all of its obligations in the normal course of business and does not anticipate making any payments under this guarantee that will require Odyssey America to utilize the indemnification from Fairfax.
In addition, in connection with the guarantee, Falcon has granted Odyssey America the option (the “Option”) to assume a ten percent quota share reinsurance participation for a period of up to three years of all of Falcon’s liabilities under the Subject Contracts entered into by Falcon on or after the date of the exercise of the Option by Odyssey America. If the Option is exercised, the one percent fee will be cancelled during the term of the quota share reinsurance agreement.
At arbitration, Odyssey America is seeking enforcement of the retrocessional contract and the retrocessionaire is seeking recission of the same contract, alleging that Odyssey America’s refusal to assert defenses under the reinsurance agreement with the third-party insurer constitutes a breach of the duty of good faith to the retrocessionaire. In accordance with the retrocessional contract’s arbitration provisions, as of this date, the parties have appointed arbitrators, but no umpire has been appointed and, therefore, the arbitration panel has not yet been duly constituted.
Odyssey America paid dividends of $18.0 million during 2002 and did not pay any dividends during 2001. The maximum amount of dividends which Odyssey America may pay to the Company in 2003 without prior approval is $134.6 million. On December 23, 2002, OdysseyRe contributed First Capital to Odyssey America. The amount of the capital contribution was $17.8 million.
The statutory provision for potentially uncollectible reinsurance recoverables due from unauthorized companies is reduced to the extent collateral is held by ORC or Hudson. Pursuant to indemnification agreements between the Company and ORC and the Company and Hudson, OdysseyRe provides letters of credit (LOC) and/or cash in respect of uncollateralized balances due from unauthorized reinsurers. The use of such collateral provided by the Company is a permitted accounting practice approved by the Insurance Department of the State of Delaware.
The Company’s assumed financial guarantee reinsurance exposure to loss, in the event of nonperformance by the underlying insured and assuming underlying collateral proved to be of no value, was $107.0 million and $138.0 million as of December 31, 2002 and 2001, respectively. It is the responsibility of the ceding insurer to collect and maintain collateral under financial guarantee reinsurance.
As of December 31, 2002, such reinsurance inforce had a remaining maturity term of 1 to 33 years. The approximate distribution of the estimated debt service (principal and interest) of bonds, by type and unearned premiums, for 2002 and 2001 as follows (in millions):
The prior years’ changes in loss estimates recognized in calendar years 2002, 2001 and 2000 on prior years’ estimates are $66.0 million, $23.1 million, and $15.9 million, respectively. Higher loss estimates on United States casualty program business for accident years 1997 through 2000 are principally causing the increase on prior years loss estimates in calendar years 2002, 2001 and 2000.
The Company has exposure to asbestos and environmental pollution claims. Exposure arises from reinsurance contracts under which the Company has assumed liabilities, on an indemnity or assumption basis, from ceding companies primarily in connection with general liability insurance policies issued by such cedants. The Company’s estimate of its ultimate liability for such exposures includes case basis reserves and a provision
In June 2002, OdysseyRe issued $110.0 million aggregate principal amount of 4.375% convertible senior debentures (“Convertible Debt”) due 2022. The Convertible Debt is redeemable at the Company’s option beginning on June 22, 2005. Each holder of Convertible Debt may, at its option, require OdysseyRe to repurchase all or a portion of its Convertible Debt on June 22, 2005, 2007, 2009, 2012 and 2017. Under certain circumstances, each Convertible Debt holder can convert its Convertible Debt, in accordance with the terms of the indenture under which the Convertible Debt was issued, into 46.9925 shares of OdysseyRe common stock for every $1,000 principal amount of the Convertible Debt. The Convertible Debt is reflected on OdysseyRe’s balance sheet at a value of $110.0 million, the aggregate principal amount of Convertible Debt outstanding.
In December 2001, OdysseyRe issued $100.0 million aggregate principal amount of senior notes, pursuant to a private placement, due November 30, 2006. Interest accrues on the senior notes at a fixed interest rate of 7.49%, which is due semi-annually on May 31st and November 30th. The senior notes are redeemable prior to maturity at OdysseyRe’s option. Immediately following the issuance of the senior notes, OdysseyRe entered into an interest rate swap agreement, with Bank of America N.A., that effectively converted the fixed 7.49% interest rate into a variable interest rate of LIBOR plus 263 basis points, which was 4.1% as of December 31, 2002. The proceeds from the sale of the senior notes was used to prepay part of the principal amount outstanding under the $200.0 million term note. On June 26, 2002, OdysseyRe prepaid $10.0 million aggregate principal amount of senior notes. As of December 31, 2002, the aggregate principal amount of senior notes outstanding was $90.0 million and the senior notes have been reflected on the Company’s balance sheet at fair value of $96.3 million. The offsetting fair value adjustment to the swap transaction of $6.3 million has been reflected in other liabilities.
In December 2001, OdysseyRe entered into a credit agreement with Bank of America N.A. and J.P. Morgan Chase Bank. The amount of borrowing available under the credit agreement was $50.0 million, payable on January 31, 2002, plus accrued interest. The credit agreement was a thirty day agreement. In accordance with the agreement terms, on January 31, 2002, it was converted to a three year obligation with the principal due in 2005 and interest payable at a rate based upon either the rate designated by Bank of America
N.A. as its prime rate or a rate of 250 basis points over the applicable LIBOR. On June 18, 2002, this obligation was fully extinguished by proceeds from the issuance of the Convertible Debt.
Aggregate maturities of the Company’s debt obligations, at face value are as follows (in thousands):
The Company’s business is managed through three distinct divisions, Americas, London Market and EuroAsia, which are established principally based on geographic regions. Effective January 1, 2002, business underwritten by UK Holdings, which owns and manages Newline (previously the Newline division), and business underwritten for underwriting years 2001 and subsequent by Odyssey America’s London branch office, which was previously reflected as part of the EuroAsia division, have been integrated into the London Market division. For comparative purposes, the segment information presented below for the years ended December 31, 2002 and 2001 has been restated to reflect the London branch business in the London Market division. The London branch business for underwriting years 2000 and prior is included in the Americas division. Each division provides customized treaty, facultative and program reinsurance through professional reinsurance brokerage firms. The Americas division is comprised of the Company’s United States operations and its Canadian and Latin America branch offices. The United States operations write primarily treaty property, general casualty, specialty casualty, and facultative casualty reinsurance business, and write primary insurance business through Hudson. The Canadian branch mainly writes property treaty business, while the Latin American branch writes both treaty and facultative property business. The Company’s London Market division primarily writes property, marine and aerospace reinsurance business as well as casualty and financial lines primary insurance. The EuroAsia division is comprised of offices in Paris, Stockholm, Singapore and Tokyo. The EuroAsia division writes primarily treaty and facultative reinsurance property business.
Due to changes in the number of weighted average common shares outstanding during 2002 and 2001, quarterly earnings per share amounts do not add to the total for the year.
business through a 100% quota share of new and renewal business written by TIG, subject to the OdysseyRe guidelines put in place. OdysseyRe and TIG will simultaneously enter into an expense sharing agreement, whereby the costs associated with the Healthcare division will be allocated between the two companies over the ensuing years as business is transitioned to OdysseyRe. This transaction is subject to regulatory approval.
On March 4, 2003, Fairfax announced it had purchased, through a subsidiary, 4.3 million outstanding shares of OdysseyRe common stock in a private transaction, increasing its interest in OdysseyRe to approximately 80.6%. This will enable OdysseyRe to be included in the Fairfax United States consolidated tax group.
The Company issued $200.0 million of debt obligations in June 2001 in connection with the offering.
The Company contributed First Capital to Odyssey America in December, 2002. The amount of the contribution was $17.8 million.