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 87,645 total square feet of leased space in Stamford, Connecticut. Our other 11 locations occupy a total of approximately 46,858 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 Newline Syndicate operates out of offices in London, and the EuroAsia division operates out of offices in Paris, Singapore, Cologne, Stockholm, London 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 and includes Odyssey America and ORC results from the dates the respective companies were acquired by Fairfax. 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 following GAAP statement of operations and balance sheet data relating to the year 1997 has been derived from our unaudited financial statements and, relating to each of the years 1998 through 2001, has been derived from our annual consolidated financial statements audited by PricewaterhouseCoopers LLP, our independent accountants. Our 1997 unaudited consolidated financial statements include all adjustments which in management’s opinion are necessary for fair presentation of our financial position as of December 31, 1997 and the results of operations for the year ended December 31, 1997. Consolidated balance sheets as of December 31, 2001 and 2000, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the three years ended December 31, 2001, and related notes, appear in this Form 10-K beginning at page 46.
Based on diluted weighted average shares of our 	common stock of 57,018,497 for the year ended December 31, 	2001, 48,000,000 for the year ended December 31, 2000, 	40,162,000 for the year ended December 31, 1999 and 	38,400,000 for the years ended December 31, 1998 and 1997.
Based on 65,142,857 shares of our common stock 	outstanding at December 31, 2001, 48,000,000 shares of our 	common stock outstanding at December 31, 2000 and 1999 and 	38,400,000 shares outstanding at December 31, 1998 and 1997.
ORC’s and Hudson’s full year results 	are included in the combined statutory results for 1997 through 	2001. Odyssey America’s full year results are included in 	the combined statutory results for 1999 through 2001.
Odyssey Re Holdings Corp. was incorporated on March 21, 2001 to serve as the holding company for Odyssey America and its subsidiaries, ORC, Hudson, and Newline. On June 19, 2001, OdysseyRe sold 17,142,857 shares of its common stock in an initial public offering. In connection with this offering, we acquired all of the outstanding shares of Odyssey America from subsidiaries of Fairfax, our ultimate majority shareholder, for an aggregate consideration of $988.8 million, consisting of $233.6 million in cash, a $200.0 million term note and 48 million shares of our common stock. The 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 our historical financial information and the financial statements as of December 31, 1999, have been restated to reflect the re-capitalization as though it occurred at the beginning of the period.
Due to the improved pricing environment and our continued focus on underwriting discipline, our underwriting results, excluding the effects of the terrorist attack of September 11th (event of September 11th) and the bankruptcy filing of Enron Corporation (Enron), have significantly improved. Our combined ratio including these events, was 115.4% for the year ended December 31, 2001, an increase of 4.6 percentage points over the 110.8% combined ratio for the year ended December 31, 2000. Excluding these events, our combined ratio, for the year ended December 31, 2001 improved by 7.7 percentage points to 103.1% from the 110.8% reported for the year ended December 31, 2000. This improvement is a direct result of our underwriting actions, including improvements in pricing as well as terms and conditions, and our opportunistic expansion into better performing lines of business. Included in our underwriting results is $95.0 million related to the event of September 11th, $15.0 million related to the bankruptcy filing of Enron, and $20.6 million related to major catastrophe losses during the year. Notable catastrophe losses include the St. Louis Ice Storm, Hurricane Juliette, and Typhoon Nari.
The Americas is our largest division, accounting for $841.2 million, or 72.9%, of our gross premiums written for the year ended December 31, 2001. The Americas division writes treaty, both casualty and property, and facultative casualty reinsurance in the United States and Canada, and treaty and facultative reinsurance in South America, as well as, to a limited extent, primary business in the United States through Hudson, our insurance subsidiary. The Americas division is comprised of four units, the United States, Canada, Latin America and the London branch for business incepting prior to 2001, and six offices, located in Stamford, New York City, Mexico City, Miami, Santiago and Toronto. Gross premiums written by the United States unit for the year ended December 31, 2001 were $728.1 million, an increase of $111.4 million, or 18.1%, compared to $616.7 million for the year ended December 31, 2000. Gross premiums written by the Latin American unit for the year ended December 31, 2001 were $72.3 million, an increase of $31.7 million, or 78.1%, compared to $40.6 million for the year ended December 31, 2000. The Canadian unit had gross written premiums of $16.4 million for the year ended December 31, 2001, an increase of $2.5 million, or 18.0%, compared to $13.9 million for the year ended December 31, 2000. The increases are due mainly to increased pricing both at the insurance and reinsurance levels. The London branch unit had gross premiums written of $24.4 million for the year ended December 31, 2001, a decrease of $58.4 million compared to $82.8 million for the year ended December 31, 2000. The London branch decrease is due to the re-alignment of our business across geographic regions. Business previously written by the London branch unit is being written through the Newline Syndicate division, effective July 2000, and through the EuroAsia division effective January 2001.
The EuroAsia division was formed in 2000 as part of the realignment of our business across geographic regions. EuroAsia operates out of six offices, with principal offices in Paris and Singapore.
For the year ended December 31, 2001, the EuroAsia division had gross premiums written of $180.5 million, or 15.7% of our gross premiums written, compared to $0.4 million for the year ended December 31, 2000. For the year ended December 31, 2001, our Paris office had gross premiums written of $109.6 million, our Singapore office had gross premiums written of $36.9 million and the London office had gross premiums written of $34.0 million. The EuroAsia division premiums are geographically dispersed mainly throughout the European Union, followed by Japan, Eastern Europe, the Pacific Rim, and the Middle East.
The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The GAAP combined ratio is the addition of loss and loss adjustment expenses incurred as a percent of net premiums earned plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percent 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, 2001, which includes the effects of the event of September 11th and Enron, was 115.4%, up from 110.8% for the year ended December 31, 2000. Excluding the effects of the event of September 11th and Enron, the combined ratio for the year ended December 31, 2001 was 103.1%. The year ended December 31, 2001 was significantly impacted by the event of September 11th and Enron, as previously discussed, and the following items were affected as described below.
For the years ended December 31, 2001 and 2000, our gross premiums written were $1,153.6 million and $862.2 million, respectively. For the years ended December 31, 2001 and 2000, our net premiums written were $984.7 million and $701.3 million, respectively. For the year ended December 31, 2001, our net loss was $8.0 million, which includes a loss of $71.5 million related to the event of September 11th and Enron, compared to net income of $54.8 million for the year ended December 31, 2000. As of December 31, 2001, we had total assets of $4.6 billion and total stockholders’ equity of $820.9 million.
We derive our revenues from two principal sources: premiums from reinsurance assumed and insurance, net of premiums ceded (net premiums written); and income from investments. Net premiums written are earned (net premiums earned) as they are credited to 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 generally 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.
Our reserves for losses and loss adjustment expenses are estimates of amounts required to pay reported and unreported claims and related loss adjustment expenses. 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
Acquisition costs consist principally of commissions and brokerage expenses incurred on business written under reinsurance contracts or certificates and insurance policies. These costs are deferred and amortized over the period in which the related premiums are earned. Commission adjustments are accrued based on the underwriting profitability of the business produced. Deferred acquisition costs are limited to their estimated realizable value, which considers anticipated losses and loss adjustment expenses and estimated remaining costs of servicing the contracts or certificates, all based on our historical experience.
Net Premiums Earned. Net premiums earned for the year ended December 31, 2001 increased by $218.7 million, or 32.1%, to $900.5 million from $681.8 million for the year ended December 31, 2000. This increase was a result of the factors listed above and reflects an increase in unearned premiums of $84.1 million for the year ended December 31, 2001, as compared to an increase in unearned premiums of $19.5 million for the year ended December 31, 2000. This increase in unearned premiums is associated with the increase in net premiums written. Net premiums earned have been reduced by $10.3 million related to the event of September 11th.
Other Income, Net. Other income, net is comprised of amortization of positive and negative goodwill and other income or expense items. The total of these items for the year ended December 31, 2001 was $0.8 million income as compared to $3.8 million income for the year ended December 31, 2000.
The major component of other 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 loss and loss adjustment expense ratio, the acquisition ratio and other underwriting expense ratio, increased from 110.8% for the year ended December 31, 2000 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, 2001 from 110.8% for the year ended December 31, 2000. This improvement was due to the underwriting actions described above.
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 event of September 11th and Enron.
Ceded Premiums Written. Ceded premiums written for the year ended December 31, 2000 increased by $8.9 million, or 5.9%, to $160.8 million from $151.9 million for the year ended December 31, 1999. The increase in ceded premiums written was primarily due to the increased costs of our existing reinsurance program, and the increase in our gross volume.
Net Premiums Written. Net premiums written for the year ended December 31, 2000 increased by $198.7 million, or 39.5%, to $701.3 million from $502.6 million for the year ended December 31, 1999. Net premiums written represents gross premiums written less ceded premiums written.
Net Investment Income. Net investment income for the year ended December 31, 2000 increased by $5.4 million, or 4.5%, to $126.6 million from $121.2 million for the year ended December 31, 1999. Net investment yield was 5.0% in 1999 compared to 4.6% in 2000.
The increase in investment income before expenses is principally from interest on our fixed income securities of $7.7 million, short term investments of $4.4 million, and increase in other invested assets of $6.3 million, offset by the decrease in dividends on our equity securities of $5.3 million.
Net Realized Investment Gains. Net realized investment gains for the year ended December 31, 2000 increased by $18.8 million to $23.6 million from $4.8 million for the year ended December 31, 1999. The increase in net realized gains in 2000 was primarily from our equity portfolio, which generated net gains of $37.3 million offset by net realized losses on fixed income securities and other investments. Included in net realized investment gains for the years ended December 31, 2000 and December 31, 1999 is $11.4 million and $2.1 million, respectively, of realized losses on the other than temporary write-down of certain fixed income and equity securities.
During the fourth quarter of 2000, as of result of a downgrade of two fixed income securities, we decided to write down the value of such securities resulting in a realized loss of $11.4 million during 2000. During 1999, as a result of the fair value of two equity securities being significantly below cost for a continued period, the cost of such securities was written down to fair value resulting in a realized loss of $2.1 million during 1999.
The major component of other 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 of $2.5 million in 2000, and $1.8 million in 1999, representing the period from the date of acquisition.
of 3.8 percentage points. This was offset by the increase in the loss and LAE ratio for the Newline Syndicate division of 83.7% in 2000 compared to 63.8% in 1999.
The loss and LAE ratio for the year ended December 31, 2000 was impacted by incidental catastrophe losses of $6.9 million, contributing approximately 1.0% to the loss and LAE ratio. In addition, losses and LAE incurred were impacted by $7.3 million, or 1.1%, to the loss and LAE ratio associated with reserve strengthening on the discontinued book of business written by the Newline Syndicate division. Losses and LAE incurred for the year ended December 31, 1999 include $23.9 million for catastrophes, which contributed 4.7% to the loss and LAE ratio for the year ended December 31, 1999.
Acquisition Costs. Acquisition costs for the year ended December 31, 2000 increased by $61.8 million, or 45.2%, to $198.6 million from $136.7 million for the year ended December 31, 1999. The resulting acquisition ratio, acquisition expenses expressed as a percent of earned premium, was 29.1% for the year ended December 31, 2000 compared to 26.9% for the year ended December 31, 1999. The increase in acquisition costs in 2000 compared to 1999 reflects the inclusion of Odyssey America business for the full year of 2000 and increased volume activity for the Newline Syndicate division, as compared to the inclusion of Odyssey America business in 1999 since the date it was acquired. The increase in the acquisition ratio in 2000 compared to 1999 is the result of an increase in 2000 compared to 1999 in the amount of proportional treaty and facultative business with ceding commissions relative to the business without ceding commissions.
The increase in other underwriting expenses for 2000 compared to 1999 is attributable to the inclusion of Odyssey America for the full year of 2000 compared to the inclusion of Odyssey America in 1999 from its acquisition date of April 1999. The reduction in the expense ratio between 2000 and 1999 is primarily the result of the increase in net earned premium in 2000 compared to 1999.
Federal and Foreign Income Tax Provision. Federal and foreign income tax provision for the year ended December 31, 2000 increased by $2.3 million, or 9.6%, to $25.8 million from $23.5 million for the year ended December 31, 1999.
Net Income. Net income for the year ended December 31, 2000 decreased by $1.2 million, or 2.2%, to $54.8 million from $56.0 million for the year ended December 31, 1999.
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. The agreement has been amended as of January 31, 2002. The entire principal amount outstanding under the credit agreement is due January 31, 2005.
In connection with the business of our Newline Syndicate division, we executed a secured letter of credit in favor of Lloyd’s, as is customary for operations in the Lloyd’s market. At December 31, 2001, the letter of credit was valued at 57.5 million British sterling pounds, or $83.7 million, and was secured by a pledge of $94.6 million of our investment securities.
On September 28, 2001, our Board of Directors declared a quarterly cash dividend of $0.025 per share. The total dividend of approximately $1.6 million was paid on October 30, 2001 to all shareholders of record as of October 15, 2001. On February 14, 2002, our Board of Directors declared a quarterly cash dividend of $0.025 per share payable on or before March 29, 2002, to all stockholders of record as of March 15, 2002.
Total cash proceeds from investing activities for the year ended December 31, 2001 were $229.1 million compared to $218.8 million from investment activities for the year ended December 31, 2000. The increase in cash proceeds from investing activities is mainly due to a change in the mix of short-term investments and cash and cash equivalents. Net proceeds to OdysseyRe related to the initial public offering were $51.3 million for the year ended December 31, 2001. Cash and cash equivalents were $375.1 million and $154.5 million, at December 31, 2001 and 2000, respectively. Cash and short-term investments are maintained for liquidity purposes and represented 14.8% and 13.3% at December 31, 2001 and December 31, 2000, respectively, of total financial statement investments and cash on such dates. Total fixed income securities were $2.0 billion as of December 31, 2001. Total investments, cash and cash equivalents amounted to $2.7 billion as of
Certain shortcomings are inherent in the method of analysis presented 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 no change in individual issuer credit spreads.
We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade credit quality in the fixed income securities we purchase.
At December 31, 2001 and December 31, 2000, 97.1% and 98.4%, respectively, of our fixed income securities portfolio consisted of securities rated investment grade, with 2.9% and 1.6%, respectively, rated below investment grade.
We believe that this concentration in investment grade securities reduces our exposure to credit risk on these fixed income investments to an acceptable level.
As of December 31, 2001 and December 31, 2000, 7.2% and 5.2%, respectively, of our investment portfolio, including cash and cash equivalents, was in common stocks (unaffiliated and affiliated). Marketable equity securities, which represented approximately 5.3% and 3.4% on December 31, 2001 and 2000, respectively of our investment portfolio, including cash and cash equivalents, are exposed to equity price risk, defined as the potential for loss in market value owing to a decline in equity prices. A 10% decline in the price of each of these marketable equity securities would result in a total $14.1 million at December 31, 2001 and $8.9 million at December 31, 2000 decline in the fair value of the total investment portfolio.
Included above in securities denominated in foreign currencies are Japanese yen denominated securities, which at December 31, 2001 had a U.S. dollar equivalent market value of $23.2 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 1.7 billion Japanese yen at an average forward rate of 114.1 yen or a U.S. dollar equivalent amount of $15.3 million.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Consolidated Statements of Operations for the 	years ended December 31, 2001, 2000 and 1999
Summary of Investments - Other than 	Investments in Related Parties as of December 31, 2001
Condensed Financial Information of Registrant as 	of December 31, 2001 and for the year ended 	December 31, 2001
Supplementary Insurance Information as of 	December 31, 2001 and 2000 and for the years ended 	December 31, 2001, 2000 and 1999
Supplementary Information Concerning Property/ 	Casualty Insurance Operations as of December 31, 2001, 2000 	and 1999 and years ended December 31, 2001, 2000 and 1999
Odyssey Re Holdings Corp. (the “Company” or “OdysseyRe”) is a Delaware domiciled company which was incorporated on March 21, 2001 to serve as the holding company for its wholly-owned subsidiary Odyssey America Reinsurance Corporation (“Odyssey America”) and Odyssey America’s subsidiaries, Odyssey Reinsurance Corporation (“ORC”), TIG Re UK Holdings Corporation (“UK Holdings”), Newline Underwriting Management Limited (“Newline”) and Hudson Insurance Company (“Hudson”).
On June 19, 2001, the Company sold 17,142,857 shares of its common stock (26% of the total shares of common stock outstanding as of December 31, 2001) 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 and the financial statements as of December 31, 2000 have been restated to reflect the re-capitalization as though it occurred at the beginning of the period. 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 and stock options to various executives and employees, as further described in note 11.
On September 28, 2001, the Company’s Board of Directors declared a quarterly cash dividend of $0.025 per share. The total dividend of approximately $1.6 million was paid on October 30, 2001 to all shareholders of record as of October 15, 2001. On February 14, 2002, the Company’s Board of Directors declared a quarterly cash dividend of $0.025 per share payable on or before March 29, 2002, to all stockholders of record as of March 15, 2002.
The Company, through a review of its reinsurance contracts, has evaluated and estimated its exposure arising from the terrorist attack of September 11, 2001 (“event of September 11th”). The estimate included in the Company’s consolidated statements of operations for the year ended December 31, 2001 reflects a gross underwriting loss of $187.5 million and a net pre-tax underwriting loss of $95.0 million which is comprised of a reduction to net premiums written and earned of $10.3 million, an increase to losses and loss adjustment expenses of $75.5 million and an increase to acquisition costs of $9.2 million. The after tax loss, assuming a 35% tax rate, is $61.8 million. The Company’s estimate is based on the most recent information available; however, as additional information becomes available such estimate could be revised, potentially resulting in further adverse effects to the Company. Considerable time may elapse before the adequacy of the Company’s estimates can be determined. With respect to the ceded underwriting loss of $92.5 million, the reinsurance recoverable is with highly rated reinsurers and the Company does not foresee any potential credit risks.
The Company estimated a $15.0 million gross and net loss and loss adjustment expense incurred in relation to its exposure to the bankruptcy filing of Enron Corporation. The after-tax loss, assuming a 35% tax rate, is $9.8 million.
(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
(f) Effective June 19, 2001, the date 	of the offering, the Company, and its United States 	subsidiaries, will file a consolidated tax return. Prior to the 	offering, the Company, and its United States subsidiaries, were 	included in the federal income tax return as part of a 	consolidated tax group with Fairfax Inc., an affiliate, and its 	other eligible subsidiaries. The federal income tax provision 	was allocated to each of the companies in the consolidated 	group, pursuant to a written agreement, on the basis of each 	company’s separate return taxable income.
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.
(g) Effective January 1, 2001, the 	Company adopted Statement of Financial Accounting Standard 	(“SFAS”) 133 “Accounting for Derivative 	Instruments and Hedging Activities.” SFAS 133 requires that 	all derivative instruments be recognized as either assets or 	liabilities on the balance sheet and measured at their fair 	value. Gains or losses from changes in the derivative values are 	accounted for based on how the derivative is used and whether it 	qualifies for hedge accounting. The implementation of this 	standard has not had a material effect on the financial position 	or results of operation or cash flow of the Company.
(j) Basic earnings per share are calculated 	by dividing net income by the weighted average number of common 	shares outstanding, excluding those non-vested shares granted 	under the OdysseyRe Restricted Share Plan. Diluted earnings per 	share are calculated by dividing net income by the weighted 	average number of common shares outstanding, inclusive of those 	vested and non-vested shares granted under the OdysseyRe 	Restricted Share Plan and stock options that would be assumed to 	be exercised on the balance sheet date. Such restricted shares 	and stock options are not included in the calculation of diluted 	earnings per share, if the effect would be anti-dilutive.
guarantee that a reinsurer will meet its loss and 	other obligations. Interest generally accrues on withheld funds 	in accordance with contract terms.
On May 31, 1996, Fairfax acquired all of the common stock of ORC and its wholly-owned subsidiary for $227.9 million. The acquisition was accounted for as a purchase, and on May 31, 1996, ORC had $2,168.9 million of assets and $1,857.4 million of liabilities resulting in net assets acquired in excess of purchase price (negative goodwill) of $83.6 million at the date of acquisition. Included in other liabilities in the consolidated balance sheets is the unamortized balance of net assets acquired in excess of purchase price of $36.9 million and $45.2 million at December 31, 2001 and 2000, respectively, related to this acquisition. Amortization of net assets acquired in excess of purchase price of $8.3 million is included in other income, net for the years ended December 31, 2001, 2000 and 1999.
The composition of the fixed income securities, unaffiliated common stocks and short-term investments, which are carried at fair value, as of December 31, 2001 follows (in thousands):
The composition of the fixed income securities, unaffiliated common stocks and short-term investments, which are carried at fair value, as of December 31, 2000 follows (in thousands):
The fair value of fixed income and equity securities are based on the quoted market prices of the investments as of the close of business on December 31 of the respective years.
The amortized cost and fair value (both in thousands) of fixed income securities as of December 31, 2001, by contractual maturity, are shown below. Actual maturities may differ from maturities shown below which consider the existence of call features or put features. In the case of securities that are subject to early call by the issuer, the actual maturity used below will be shorter than the contractual maturity if the issuer exercises its call feature. Total securities subject to call represent 3% of total fair value. In the case of securities containing put features, the actual maturity will be longer than the put date maturity used below if the investor elects not to exercise its put feature but to hold the security to its final maturity date. Total securities containing the put feature represent 50% of total fair value.
The proceeds from the sales of investments were $0.4 billion, $0.8 billion and $1.4 billion for the years ended December 31, 2001, 2000 and 1999.
Fixed income securities carried at $231.0 million as of December 31, 2001 were on deposit with various state regulatory authorities to comply with insurance laws.
Odyssey America has purchased whole account stop loss retrocessional protection related to its 1994 and 1996 through 2001 results. The contracts provide loss recovery in excess of a contractual ratio of incurred losses and acquisition costs as a percentage of earned premiums.
Current federal and foreign income taxes are recoverable from Fairfax Inc. of $7.0 million as of December 31, 2001 and $8.0 million as of December 31, 2000.
The components of comprehensive income for the periods ending December 31, 2001, 2000, and 1999 are shown in the following table (in thousands):
Net income per common share has been computed in the following table based upon weighted average common shares outstanding:
The weighted average shares outstanding with respect to shares of the Company’s common stock granted under the OdysseyRe Restricted Share Plan and stock options under the OdysseyRe Stock Option Plan that would be assumed to be exercised at December 31, 2001, were excluded from the Company’s diluted earnings per share as they are anti-dilutive.
The Company maintains a qualified, noncontributory, defined benefit pension plan (the Plan) covering substantially all employees who have reached age twenty-one and who have completed one year of service. Contributions to the Plan are based on the maximum amounts that can be deducted for federal income tax purposes using actuarial cost methods and assumptions different from those used for financial reporting.
receive pension benefits. Actuarial gains and losses result when actual experience differs from that assumed or when actuarial assumptions are changed.
The following table summarizes the status of these plans (in thousands):
The Company also maintains a deferred compensation plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute up to 10% of annual compensation on a pre-
one percentage point in each year would decrease the accumulated postretirement benefit obligation and the service and interest cost components of net periodic postretirement benefit cost for 2001 by $0.5 million and $0.1 million, respectively. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 31, 2001 and 2000.
Certain employees of the Company have been granted shares of restricted common stock under the Fairfax 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 $1.7 million and $0.5 million of expense for the years ended December 31, 2001 and 2000, which represents the vested portion of the restricted stock. The Company no longer participates in this plan.
Pre-tax operating income from domestic companies was $25.0 million, $98.8 million and $84.9 million in 2001, 2000 and 1999, respectively. Pre-tax operating loss from foreign operations was $40.6 million, $18.2 million and $5.3 million in 2001, 2000 and 1999, respectively.
During 2001 and 2000, the Company has reflected a current tax expense related to taxable income for the period prior to the offering. During 1999, the Company reflected a current tax benefit resulting from the utilization of net operating tax loss carrybacks, receipt of a tax settlement from prior years and a true up of its estimate of prior year’s taxes.
The components of the federal and foreign income tax provision (benefit) follows (in thousands):
Under the previous tax sharing agreement the Company recovered federal and foreign income taxes of $4.6 million and $9.4 million in 2001 and 2000, respectively, and paid federal and foreign income tax of $27.9 million in 1999.
The Company and its subsidiaries lease office space, furniture and equipment under long-term leases expiring through the year 2010. Minimum annual rentals follow (in thousands):
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. Fairfax has agreed to indemnify ORC for any obligation under this agreement.
Through UK Holdings, Odyssey America became a limited liability participant in the Lloyd’s market in 1997. In order to continue underwriting at Lloyd’s, the Company has established a clean irrevocable letter of credit in favor of the Society and Council of Lloyd’s. At December 31, 2001, the letter of credit was valued at £57.5 million ($83.7 million) and was collateralized by $94.6 million of the Company’s investment securities at statement value. The letter of credit effectively secures the future contingent obligations of UK Holdings should 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.
Odyssey America did not pay any dividends during 2001 and during 2000 paid dividends of $85.0 million. The maximum amount of dividends which Odyssey America may pay to the Company in 2002 without prior approval is $82.0 million.
Practices and Procedures manual as the NAIC’s primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The Connecticut (Odyssey America) and Delaware (ORC and Hudson) Insurance Departments have adopted the Codification guidance, effective January 1, 2001.
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 Hudson, the Company 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.
As of December 31, 2001 such reinsurance in-force 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 2001 and 2000 follows (in millions):
The Company has not been provided with a geographic distribution of the debt service from all of its cedants. The following table summarizes the information which has been received by the Company from its cedants (in millions):
The prior years’ changes in loss estimates recognized in calendar years 2001, 2000 and 1999 on prior years’ estimates are $23.1 million, $15.9 million, and ($7.4) million, respectively. Improved loss estimates on excess casualty is primarily responsible for the decrease reflected in calendar year 1999 on year end 1998 loss estimates. Higher loss estimates on U.S. casualty program business are principally causing the increase on prior years loss estimates in calendar year 2001 and 2000.
The Company uses tabular reserving for workers’ compensation indemnity reserves and discounts such reserves using an interest rate of 3.5%. Losses have been discounted using the Life Table for Total Population: United States, 1979 - 1981. Reserves reported at present value were approximately $70.6 million and $73.7 million at December 31, 2001 and 2000, respectively. The amount of case reserve discount was $43.9 million and $25.0 million at December 31, 2001 and 2000, respectively. The amount of IBNR reserve discount was $13.2 million and $12.9 million at December 31, 2001 and 2000, respectively.
The Company’s reserves for asbestos and environmental related liabilities displayed below is from business written for accident years 1985 and prior. There is minimal exposure and no specific reported reserves in the more recent accident years. The Company’s asbestos and environmental reserve development, gross and net of reinsurance, for the years ended December 31, 2001, 2000 and 1999 is set forth in the table below (in thousands):
The Company’s survival ratio for environmental and asbestos related liabilities as of December 31, 2001 is twelve years, reflecting full utilization of remaining indemnifications. The survival ratio represents the environmental impairment and asbestos related illness reserves, net of reinsurance, on December 31, 2001 plus indemnifications divided by the average paid environmental and asbestos claims, net of reinsurance, for the last three years. The Company’s survival ratio is eight years, prior to reflecting full utilization of the indemnification. The Company’s survival ratio compares favorably with the U.S. Property and Casualty Industry average survival rate of eight years as published by A.M. Best in their report on Asbestos and Environmental claims dated May 7, 2001.
In connection with its initial public offering, OdysseyRe issued a term note to a subsidiary of Fairfax which is due between 2002 and 2004. The note accrues interest using a 3-month LIBOR plus 225 basis points rate payable quarterly on March 15th, June 15th, September 15th and December 15th. Originally, the term note was issued in an aggregate principal amount of $200.0 million, but has subsequently been partially extinguished by the proceeds of the senior notes and credit agreement and the outstanding principal amount under the term note as of December 31, 2001 was $50.0 million.
In December 2001, OdysseyRe entered into a credit agreement with Bank of America and J.P. Morgan Chase Bank. The amount of the credit was for $50.0 million payable on January 31, 2002 plus accrued interest at a rate determined by Bank of America. The credit agreement was a thirty day agreement. In accordance
OdysseyRe’s debt obligations are subject to certain covenants, none of which significantly restricts the Company’s operating activities or dividend-paying ability. At December 31, 2001, the Company is in compliance with all debt covenants.
The Company does not maintain separate balance sheet data for each of its operating segments. The business written and the experience on the Americas division includes the activities of its United States, Latin American and Canadian branch offices. For calendar year 2000 and prior, the London branch activity is included in the Americas division. EuroAsia division was formed in mid-2000 and includes business written from its Paris and Singapore branches and also includes the business written by the London branch for underwriting year 2001 and subsequent business. Newline division is the business written and experience of the Newline Syndicate at Lloyd’s. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
Odyssey Re Holdings Corp. was incorporated on 	March 21, 2001; accordingly, financial statement 	information for prior years is not presented.
The condensed financial information of the 	registrant should be read in conjunction with the Consolidated 	Financial Statements and Notes to Consolidated Financial 	Statements included elsewhere herein.