We encourage you to read the consolidated financial statements included in this Form 10-K because they contain our complete financial statements for the periods presented. The results of operations for the year ended December 31, 2001 are not necessarily indicative of future results.
adequacy of our estimates can be determined. With respect to the ceded underwriting loss of $92.5 million, the reinsurance recoverable is with highly rated reinsurers and we do not foresee any potential credit risks.
Our results including and excluding the event of September 11th and Enron for the year ended December 31, 2001 are as follows (in thousands):
We operate our business through three divisions, the Americas, EuroAsia and Newline Syndicate, which are based principally on geographic regions.
The EuroAsia division has been successful in taking advantage of the international rate increases and creating new market opportunities.
The Newline Syndicate division is comprised of our Lloyd’s of London business, in which we participate through our 100% ownership of Newline which in turn owns and manages Syndicate 1218. Our Lloyd’s membership provides strong brand recognition, extensive broker and direct distribution channels and worldwide licensing, including the ability to write primary business on an excess and surplus basis in the United States. The Newline Syndicate writes reinsurance and insurance business worldwide through brokers, generating $131.9 million, or 11.4% of our gross premiums written for the year ended December 31, 2001. The increase in gross premium written of 22.4% compared to $107.8 million for the year ended December 31, 2000 was mainly in financial lines, international casualty, marine and aerospace.
The increase in premiums in the Americas division is comprised of an increase in treaty property business of $67.5 million, an increase in general casualty business of $9.0 million, an increase in the Latin American unit business of $31.7 million, an increase in primary insurance activities of $28.3 million and a decrease in facultative business of $10.8 million. These increases are attributable to improved pricing in general and specifically to certain classes of business that were substantially affected by poor industry fundamentals during the past few years. Premiums decreased in the London branch business by $58.4 million due to the transfer of business into Newline and treaty casualty business by $15.2 million in classes where pricing has not yet improved to a level of adequate profitability. Gross premiums written of $7.4 million related to the event of September 11th are included in the Americas division for the year ended December 31, 2001.
The EuroAsia division’s gross premiums written for the year ended December 31, 2001 were $180.5 million, compared to $0.4 million for the year ended December 31, 2000. This division was not active during the first nine months of 2000. Gross premiums written of $7.6 million related to the event of September 11th are included in the EuroAsia division for the year ended December 31, 2001.
The Newline Syndicate division’s premium increase of $24.1 million is comprised of increases in marine and aerospace business of $13.6 million and international casualty business of $14.9 million, and financial lines of $17.1 million. These increases were partially offset by a decrease in the North American casualty business of $0.3 million and the North American Binding Authority and other lines of $21.2 million. Gross premiums written of $3.5 million related to the event of September 11th are included in the Newline Syndicate division for the year ended December 31, 2001.
Ceded Premiums Written. Ceded premiums written for the year ended December 31, 2001 increased by $8.2 million, or 5.1%, to $169.0 million from $160.8 million for the year ended December 31, 2000. The increase in ceded premiums written was primarily attributable to $28.8 million of ceded premiums relating to the event of September 11th offset by higher amounts of premiums retained under our reinsurance contracts and reductions in amounts ceded to our aggregate excess of loss contracts.
Net Premiums Written. Net premiums written for the year ended December 31, 2001 increased by $283.4 million, or 40.4%, to $984.7 million from $701.3 million for the year ended December 31, 2000. Net premiums written represents gross premiums written less ceded premiums written and is directly influenced by
the items described in the preceding sections. Net premiums written for the year ended December 31, 2001 have been decreased by $10.3 million related to the event of September 11th.
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.
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 loss 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 loss 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 loss and loss adjustment expense ratio is the result of our underwriting initiatives and reinsurance price increases.
Acquisition Costs. The acquisition ratio, i.e. acquisition expenses expressed as a percent of earned premium, was 27.6% for the year ended December 31, 2001 compared to 29.1% for the year ended December 31, 2000. The 1.5% decrease is directly attributable to the increase in premiums while continuing to negotiate for lower commission and brokerage costs. Acquisition costs for the year ended December 31, 2001 increased by $49.8 million, or 25.1%, to $248.4 million from $198.6 million for the year ended December 31, 2000. Acquisition costs of $9.2 million related to the event of September 11th are included in the Americas division for the year ended December 31, 2001.
Other Underwriting Expenses. The other underwriting expense ratio, expressed as a percent of earned premiums, improved to 7.2% for the year ended December 31, 2001 compared to 7.8% for the year ended December 31, 2000. Other underwriting expenses for the year ended December 31, 2001 increased by $11.4 million, or 21.4%, to $64.7 million from $53.3 million for the year ended December 31, 2000.
Net Income. Net income for the year ended December 31, 2001 decreased by $62.8 million, or 114.6%, to a net loss of $8.0 million from a net income of $54.8 million for the year ended December 31, 2000. Excluding the effects of the event of September 11th and Enron, net income for the year ended December 31, 2001 increased by $8.8 million, or 16.1%, to $63.6 million from $54.8 million for the year ended December 31, 2000.
Gross Premiums Written. Gross premiums written for the year ended December 31, 2000 increased by $207.7 million, or 31.7%, to $862.2 million from $654.5 million for the year ended December 31, 1999. The increase was due to the inclusion in 2000 of premiums written for the full year by Odyssey America compared to the inclusion in 1999 of premiums written from the date of April 13, 1999, the date it was acquired by Fairfax, to year end. The increase in premium volume is attributable to increases in the Americas division of $141.7 million, or 23.1%, and the Newline Syndicate division of $65.6 million, or 155.1%.
The increase in premiums in the Americas division is comprised of the inclusion of $13.9 million Canadian branch business in 2000, an increase in the Latin American unit business of $24.2 million, which commenced full-time operations upon completing the start-up of its business in 1999, and an increase in primary insurance activities of $14.2 million. The remaining increase of $89.4 million in the Americas division is comprised of increases in its treaty business of $133.3 million, primarily specialty casualty, offset by decreases in its facultative casualty business of $44.0 million.
The Newline Syndicate division’s premium volume increase of $65.6 million is comprised of increases in marine and aerospace of $4.6 million and international casualty business of $4.8 million, both categories previously written by the London Branch, as well as major increases in North American casualty business of $30.4 million and financial lines of $20.6 million and $5.2 million in miscellaneous lines.
Net Premiums Earned. Net premiums earned for the year ended December 31, 2000 increased by $173.4 million, or 34.1%, to $681.8 million from $508.4 million for the year ended December 31, 1999. This increase was a result of the factors listed above, and reflects an increase in unearned premiums of $19.5 million for the year ended December 31, 2000, as compared to a decrease in unearned premiums of $5.8 million for the year ended December 31, 1999. This increase in unearned premiums is associated with the increase in net premiums written.
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, 2000 was income of $3.8 million as compared to income of $11.6 million for the year ended December 31, 1999.
The negative goodwill resulting from the acquisition of ORC was primarily related to ORC’s competitive positioning in the reinsurance market. ORC’s future as part of its former parent’s group had been in doubt for several years prior to its acquisition by Fairfax. Its position in the market had declined significantly including a substantial reduction in the business written. The negative goodwill reflects these factors and the significant investment of management time and systems changes required to strategically reposition ORC in the reinsurance market, the need to build a separate brand name and franchise value as OdysseyRe and the uncertainty of success in these efforts.
Losses and Loss Adjustment Expenses. Losses and LAE for the year ended December 31, 2000 increased by $119.6 million, or 31.2%, to $503.5 million from $383.9 million for the year ended December 31, 1999. The loss and LAE ratio for the year ended December 31, 2000 was 73.9% compared to 75.5% for the year ended December 31, 1999.
The decrease in the loss and LAE ratio in 2000, 73.9%, compared to 75.5% for 1999, is the result of a decrease in the loss and LAE ratio for the Americas division from 76.4% in 1999 to 72.6% in 2000, a decrease
Other Underwriting Expenses. Other underwriting expenses for the year ended December 31, 2000 increased by $7.5 million, or 16.3%, to $53.3 million from $45.8 million for the year ended December 31, 1999. The other underwriting expense ratio, expressed as a percent of premiums earned, was 7.8% for 2000 compared to 9.0% for 1999.
In connection with the acquisition of Odyssey America and its subsidiaries, we issued a $200.0 million term note to a subsidiary of Fairfax. We have paid interest on the term note at a rate of 225 basis points over the three month London Interbank Offered Rate (LIBOR). Under the terms of the term note, we have the right to prepay all or part of the principal amount outstanding under the term note at anytime without bonus or penalty. We have partially prepaid the principal amount outstanding under the term note and as of December 31, 2001, the principal amount outstanding was $50.0 million.
We have also issued $100.0 million aggregate principal amount of senior notes pursuant to a private placement with a fixed interest rate of 7.49%. Interest payments are due semi-annually on May 31st and November 30th starting in 2002. Immediately following the issuance of these 7.49% senior notes, we entered into an interest rate swap agreement with Bank of America N.A. This transaction has enabled us to convert the fixed 7.49% interest rate obligation to a variable interest rate of LIBOR plus 263 basis points. 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.
Pursuant to a postponement agreement, principal payments related to the term note will not commence prior to payment of all amounts owing under the credit agreement. We currently anticipate that the outstanding principal amount of $50.0 million related to the term note will be paid in 2005.
Cash used in operations for underwriting activity decreased for the year ended December 31, 2001 as compared to the year ended December 31, 2000 principally for the payment of losses which exceeded premium collections in both periods. This is a direct result of our underwriting actions in previous years which reduced premium volume. However, cash flow in the fourth quarter of 2001 was positive and despite the substantial improvements in our combined ratio, excluding the effects of the event of September 11th and Enron, we are still in a transition period until current underwriting year cash flows exceed the effects of prior years.
December 31, 2001. The fixed income securities portfolio has a weighted average of AA, security rating as measured by S&P.
Stockholders’ equity decreased by $137.0 million, or 14.3%, to $820.9 million as at December 31, 2001 from $957.9 million as of December 31, 2000, mainly as a result of the re-capitalization of OdysseyRe at the time of the initial public offering in June 2001. The decrease was attributable to the issuance of $200.0 million of debt, an $11.8 million decrease resulting from a higher unrealized loss on foreign exchange, net of deferred income taxes and a net loss of $8.0 million for the year ended December 31, 2001, which includes a loss of $71.8 million related to the event of September 11th and Enron. The decrease is partially offset by an increase of $16.8 million in unrealized appreciation, net of deferred income taxes, in our investment portfolio, and the net proceeds from the initial public offering of $51.3 million.
Our fixed income securities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, market values of fixed income securities portfolios fall and vice versa.
The table below displays the potential impact of market value fluctuations on the fixed income securities portfolio as of December 31, 2001 and December 31, 2000, 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.
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 50% and 47% of the fair market value of the total fixed income portfolio as of December 31, 2001 and December 31, 2000, 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).
Through investment in securities denominated in foreign currencies, we are exposed to foreign (non-U.S.) currency risk. Foreign currency exchange rate risk is the potential for loss in market value owing to a decline in the U.S. dollar value of these investments due to a decline in the exchange rate of the foreign currency in which these assets are denominated. As of December 31, 2001 and December 31, 2000, our total exposure to foreign denominated securities in U.S. dollar terms was approximately $268.0 million and $160.0 million, respectively, or 10.1% and 6.1%, respectively, of our investment portfolio, including cash and cash equivalents. The primary foreign currency exposure was in Canadian dollar denominated securities, which represented 7.0% and 5.8% as of December 31, 2001 and December 31, 2000, respectively, of our investment portfolio, including cash and cash equivalents. As of December 31, 2001, the potential impact of a 10% decline in each of the foreign exchange rates on the valuation of investment assets denominated in those respective foreign currencies would result in a total $27.0 million dollar decline in the fair value of the total investment portfolio.
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 142, “Goodwill and Other Intangible Assets”. SFAS 142 establishes new accounting and reporting standards for acquired goodwill and other intangible assets. It requires that an entity determine if the goodwill or other intangible asset has an indefinite or a finite useful life. Those with indefinite useful lives will not be subject to amortization and must be tested annually for impairment. In addition, in June 2001, the FASB issued SFAS 141, “Business Combinations” which requires full amortization of negative goodwill at the time the pronouncement is implemented. These statements are effective for all fiscal quarters of all fiscal years beginning after December 15, 2001. Management has determined that the goodwill of $18.3 million reflected in other assets as of December 31, 2001 has an indefinite life and is not impaired; accordingly, we will not amortize our goodwill during 2002. We have negative goodwill of $36.9 million reflected in other liabilities as of December 31, 2001, which will fully amortize at the beginning of 2002, resulting in a corresponding increase of $36.9 million to our stockholders’ equity.
Consolidated Balance Sheets as of 	December 31, 2001 and 2000
Consolidated Statements of Stockholders’ 	Equity for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the 	years ended December 31, 2001, 2000 and 1999
Reinsurance for the years ended December 31, 	2001, 2000 and 1999
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Odyssey Re Holdings Corp. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
On April 13, 1999, Fairfax purchased all of the capital stock of Odyssey America. In conjunction with the acquisition, the fair value of assets acquired was $2.6 billion and liabilities was $2.0 billion. This acquisition had no effect on the cash flow of the Company. Refer to note 5 of the notes to the consolidated financial statements. The Company issued $200.0 million in debt obligations in June 2001 in connection with the offering.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions, which could differ from actual results, that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities.
(a) All of the Company’s fixed income 	securities, which include bonds and notes; and equity 	securities, which include common stocks, are categorized as 	“available for sale”, and are recorded at their fair 	value based on quoted market prices. Unrealized appreciation or 	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 	which are deemed other than temporary are charged to operations. 	Short-term investments are carried at cost, which approximates 	fair value.
Realized investment gains or losses are 	determined on the basis of average cost. Investment income is 	recorded as earned.
Other invested assets include limited 	partnerships which are accounted for under the equity method for 	investments in which the Company owns greater than 3%; otherwise 	the cost method is used. Other invested assets also include 	benefit plan trust accounts which are carried at fair value.
Common stocks of affiliates are accounted for 	under the equity method.
The Company considers all highly liquid debt 	instruments purchased with an original maturity of three months 	or less to be cash equivalents.
(b) Premiums are earned (net of reinsurance 	ceded) over the terms of the related insurance policies and 	reinsurance contracts or certificates. Unearned premium reserves 	are established for the unexpired portion of insurance policies 	and reinsurance contracts or certificates. Such unearned premium 	reserves are computed by pro rata methods based on statistical 	data or reports received from ceding companies. Premium 	estimates are based on statistical and other data with 	subsequent adjustments recorded in the period they become known. 	Premium adjustments on deposit contracts and audit premiums are 	accrued on an estimated basis throughout the contract or policy 	term. Prepaid reinsurance premiums are reported as assets.
(c) Acquisition costs (net of acquisition 	costs ceded), consisting principally of commissions and 	brokerage expenses incurred on business written under insurance 	policies and reinsurance contracts or certificates, are deferred 	and amortized over the period in which the related premiums are 	earned. Commission adjustments are accrued based on premiums and 	losses recorded by the Company. 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 historical experience. Realizability is determined 	without consideration of investment income.
(d) The net assets acquired in excess of 	purchase price (ORC) and the purchase price in excess of net 	assets acquired (Odyssey America) are each amortized on a 	straight line basis over 10 years.
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.
(h) The Company has identified its operating 	segments to reflect the way that management monitors and 	evaluates the Company’s financial performance. The Company 	operates in three segments: Americas, EuroAsia and Newline. The 	presentation of segments for 2001, 2000 and 1999 is reflected in 	note 19.
(i) The Company translates the financial 	statements of Newline 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.
(l) Funds held under reinsurance treaties is 	an account used to record a liability arising from the 	Company’s receipt of a deposit from a reinsurer or 	withholding of a portion of the premiums due as a
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 142 establishes new accounting and reporting standards for acquired goodwill and other intangible assets. It requires that an entity determine if the goodwill or other intangible asset has an indefinite or a finite useful life. Those with indefinite useful lives will not be subject to amortization and must be tested annually for impairment. In addition, in June 2001, the FASB issued SFAS 141, “Business Combinations” which requires full amortization of negative goodwill at the time the pronouncement is implemented. These statements are effective for all fiscal quarters of all fiscal years beginning after December 15, 2001. Management has determined that the goodwill of $18.3 million reflected in other assets as of December 31, 2001 has an indefinite life and is not impaired; accordingly, the Company will not amortize its goodwill during 2002. The Company has negative goodwill of $36.9 million reflected in other liabilities as of December 31, 2001, which will fully amortize at the beginning of 2002, resulting in a corresponding increase of $36.9 million to the Company’s stockholders’ equity.
The components of net investment income for the years ended December 31, 2001, 2000 and 1999 follows (in thousands):
The components of gross and net realized investment gains (losses) for the years ended December 31, 2001, 2000 and 1999 follows (in thousands):
Included in gross losses for the years ended December 31, 2000 and 1999, is $11.4 million and $2.1 million, respectively, related to realized losses on the other than temporary write-down of certain fixed income and equity securities.
The Company purchased Japanese yen forward sale contracts for an amount of 1.7 billion Japanese yen at an average forward rate of 114.1 yen to provide a hedge against investments the Company owns in Japanese yen. The total U.S. dollar notional value is $15.3 million and the total discount is $2.4 million. The fair value of the contracts of $1.5 million at December 31, 2001 is based on the difference between the actual exchange rate on the date of valuation and the discounted notional value of the contract. The Company believes that any fluctuations in its Japanese investments will not have a material effect on the financial statements.
Common stocks, affiliated as of December 31, 2001, include the Company’s investments in TRG Holding Corporation (27.5% owned by Fairfax and its affiliates, including 13.0% owned by the Company), The HUB Group Limited (36.8% owned by Fairfax and its affiliates, including 22.6% owned by the Company) and Zenith National Insurance Corporation (42.0% owned by Fairfax and its affiliates, including 6.5% owned by the Company).
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 in force. 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 of reinsurance ceded in the consolidated statements of operations. Direct, assumed, ceded and net amounts (in thousands and inclusive of amounts in note 8) for these items follows:
The Company markets its reinsurance products worldwide primarily through reinsurance brokers as well as directly to its customers. The Company’s five largest reinsurance brokerage firms accounted for an aggregate of approximately 55%, 64% and 66% of gross premiums written for the years ended December 31, 2001, 2000, and 1999, respectively, in the Americas division. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on us.
The Company and its subsidiaries have entered into various reinsurance arrangements with their affiliates. The approximate amounts included in (deducted from) income, expense, assets and liabilities in the accompanying consolidated financial statements, with respect to reinsurance assumed and ceded follows (in thousands):
Investment management agreements have been entered into between the Company and its subsidiaries and Hamblin Watsa Investment Counsel, Ltd. (“Hamblin Watsa”), a wholly owned subsidiary of Fairfax. Pursuant to the agreements, basic and incentive fees, based upon total invested assets, are paid to Hamblin Watsa. For the years ended December 31, 2001, 2000 and 1999, $3.6 million, $2.3 million and $2.3 million, respectively, of such fees are included in investment expenses.
The Company paid administrative fees to Fairfax Inc. for services provided to the Company. For the years ended December 31, 2001, 2000 and 1999, $2.3 million, $2.8 million and $1.7 million, respectively of administration fees were incurred.
In addition to the amounts in the consolidated balance sheets are amounts receivable related to expense sharing arrangements with affiliates of $4.7 million and $0.9 million as of December 31, 2001 and 2000, respectively, and payable to affiliates of $4.3 million and $4.5 million as of December 31, 2001 and 2000, respectively.
In addition to the amounts in the table above, the Company has a receivable from ORC Re Ltd. of $64.8 million which represents transactions for certain reinsurance agreements.
Management believes that the revenues and expense related to the transactions with affiliated entities would not be materially different if such transactions were with unaffiliated entities.
The following table shows the components of the change in accumulated other comprehensive income (loss) for years ending December 31, 2001 and 2000 (in thousands):
The amortization period for unrecognized pension costs and credits, including prior service costs, if any, and actuarial gains and losses, is based on the remaining service period for those employees expected to
The following tables set forth the Plan’s funded status and amounts recognized in the Company’s consolidated financial statements as of December 31, 2001 and 2000.
following tables set forth the amounts recognized in the Company’s consolidated financial statements as of December 31, 2001 and 2000:
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 an insurance carrier, which has contracted to provide benefits under the plan. No contributions were made in 2001 and 2000.
tax basis. The Company contributes an amount equal to two-thirds of each employee’s pre-tax contribution up to the first 6% of pay. The maximum matching contribution is 4% of pay with certain government mandated restrictions on contributions to highly compensated employees. The Company contributed $0.8 million, $0.8 million and $0.3 million to this plan in 2001, 2000 and 1999, respectively.
The Company provides certain health care and life insurance (“postretirement”) benefits for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. The Company’s cost for providing postretirement benefits other than pensions is accounted for in accordance with SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The accumulated unfunded liability, included in other liabilities, is $5.3 million and $4.5 million as of December 31, 2001 and 2000, respectively. The following tables set forth the amounts recognized in the Company’s consolidated financial statements as of December 31, 2001 and 2000:
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 9.5% in 2001 and decreasing to 5% in 2010 and remaining constant thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation by $0.6 million and the service and interest cost components of net periodic postretirement benefit costs by $0.1 million for 2001. Decreasing the assumed health care cost trend rates by
During 2001, the Company adopted the OdysseyRe 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. During 2001, 554,142 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 year ended December 31, 2001 in respect to the above grants was approximately $2.0 million.
During 2001, the Company adopted the OdysseyRe Stock Option Plan which provides for the grant of stock options to directors and key employees of the Company. Under the Plan, such options will generally vest and become exercisable in two equal installments beginning on the fifth and tenth anniversary of the date of grant. In 2001, 94,274 options were issued with an exercise price of zero. These options expire between 2003 and 2011.
As a result of the initial public offering, the Company and its subsidiaries will file a consolidated tax return. Prior to the offering, Odyssey America and its U.S. subsidiaries were part of the Fairfax Inc. U.S. consolidated tax return. For financial statement purposes, taxes are computed for the Company on a separate company basis. Accordingly, for financial statement purposes, net operating loss carryovers and alternative minimum tax (“AMT”) credit carryovers are also determined and maintained on a separate company basis. Deconsolidation from the Fairfax Inc. U.S. consolidated tax group occurred upon completion of the offering, as the interest of Fairfax Inc. in the Company dropped below 80%. Under Federal tax rules, at the point of deconsolidation, the Company was allocated a $106 million net operating loss carry over resulting in a tax benefit of $37 million and a $15 million AMT credit carryover which it will take into the new consolidated tax group. The net impact on the deferred tax asset is an increase of $22 million, which has been recorded as additional paid in capital at June 19, 2001, the date of the completion of the offering. As of December 31, 2001, the Company has a net operating loss carryforward of $186.3 million, with $27.4 million expiring in 2013, $90.1 million expiring in 2020 and $68.8 million expiring in 2022.
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 follows (in thousands):
During 2000, the Company sold fixed income securities with a discounted tax basis. Such sale resulted in a potential tax liability of $45.9 million payable to Fairfax. This tax liability was forgiven by Fairfax and has been reflected as a capital contribution in 2000.
Rental expense, before sublease income, under these operating leases was $7.8 million, $9.2 million and $11.7 million in 2001, 2000 and 1999, respectively. The Company recovered $2.8 million, $4.0 million and $3.4 million in 2001, 2000 and 1999, respectively, from subleases.
Odyssey America has agreed, as of July 14, 2000, to guarantee the performance of all of the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), an affiliate, in the event CTR becomes insolvent and CTR is not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. This guarantee was entered into as part of the redeployment of CTR’s business to Odyssey America. Fairfax has agreed to indemnify Odyssey America for all obligations under this guarantee. Odyssey America anticipates that CTR will meet all of its obligations in the normal course of business and does not anticipate making any payments under this guarantee. Odyssey America terminated the guarantee effective December 31, 2001, but remains ultimately liable for contracts entered into by CTR prior to the termination date.
The Company has been named as defendant in various litigations in the ordinary course of business. In management’s opinion, the outcome of these suits, individually or collectively, is not likely to result in judgments which would be material to the financial condition or results of operations or cash flow of the Company.
Odyssey America is subject to state regulatory restrictions which limit the maximum amount of dividends payable. Odyssey America must obtain approval of the Insurance Commissioner of the State of Connecticut in order to pay in any 12-month period, “extraordinary” dividends which are defined as the greater of 10% of statutory capital and surplus as of the prior year end or net income for such prior year. Connecticut law further provides that (i) Odyssey America must report to the Connecticut Commissioner, for informational purposes, all dividends and other distributions within five business days after the declaration thereof and at least ten days prior to payment and (ii) Odyssey America may not pay any dividend or distribution in excess of its earned surplus, as reflected in its most recent statutory annual statement on file with the Connecticut Commissioner, without such Commissioner’s approval.
The following is the consolidated statutory basis net (loss) income and policyholders’ surplus of Odyssey America and its subsidiaries, for the years ended and as of December 31, 2001, 2000 and 1999 (in thousands):
In 1998, the National Association of Insurance Commissioners (“NAIC”) adopted the Codification of Statutory Accounting Principles (“the Codification”) guidance, which will replace the current Accounting
Activity in the liability for unpaid losses and loss adjustment expenses follows (in thousands):
In December 2001, OdysseyRe issued $100.0 million aggregate principal amount of senior notes due November 30, 2006. Interest accrues on the senior notes at a rate of 7.49% which is due semi-annually on May 31st and November 30th. The senior notes are redeemable prior to maturity at the discretion of OdysseyRe. Simultaneously with the issuance of this debt, OdysseyRe entered into a swap transaction which effectively converted the fixed 7.49% interest rate into a variable rate of 4.63% as of December 31, 2001.
with the agreement terms, on January 31, 2002 it was converted to a three year obligation with the principal payment due in 2005.
Pursuant to a postponement agreement, principal payments related to the term note will not commence prior to payment of all amounts owing under the credit agreement. The Company currently anticipates that the term note principal payment of $50.0 million will be paid in 2005.
Aggregate maturities of the Company’s debt obligations commencing in 2005 are (in thousands):
The Company’s business is managed through three distinct divisions, the Americas, EuroAsia and Newline Syndicate which are established principally based on geographic regions. Each division provides customized treaty, facultative and program reinsurance through professional reinsurance brokerage firms. The Americas division is comprised of the Company’s U.S. operations and its Canadian and Latin America branch offices. The U.S. operations write primarily treaty property, general casualty, specialty casualty, primary insurance through Hudson, and facultative casualty business. Through its Canadian and Latin American branches, treaty property business is written. The EuroAsia division, which was formed in late 2000, is comprised of offices in Paris, Cologne, Stockholm, Singapore and Tokyo. The EuroAsia division writes primarily treaty and facultative property business. The Company’s wholly owned syndicate, Newline, operates on the Lloyd’s insurance exchange and is operated as a separate division. Newline writes primarily casualty business and financial lines. The financial results of these divisions for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
Due to changes in the number of weighted average common shares outstanding during 2001, quarterly earnings per share amounts do not add to the total for the year.
Investment in Odyssey America is reflected on the 	equity method.