UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended: September 30, 2009
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 1-16535

Odyssey Re Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)


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

Odyssey Re Holdings Corp. 300 First Stamford Place Stamford, Connecticut (Address of Principal Executive Offices)		06902 (Zip Code)

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

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

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

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


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

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

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


Class		Number of Shares Outstanding at November 2, 2009

Common Stock, par value $0.01 per share		56,604,650

TABLE OF CONTENTS

ODYSSEY RE HOLDINGS CORP.

INDEX TO FORM 10-Q



PART I FINANCIAL INFORMATION

	Item 1	Financial Statements	2

		Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)	2

		Consolidated Statements of Operations and Comprehensive Income for the nine and three months ended September 30, 2009 and 2008 (unaudited)	3

		Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2009 and 2008 (unaudited)	4

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)	5

		Notes to Consolidated Financial Statements (unaudited)	6

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	76

	Item 4	Controls and Procedures	89

PART II OTHER INFORMATION

	Item 1	Legal Proceedings	90

	Item 1A	Risk Factors	90

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	90

	Item 3	Defaults Upon Senior Securities	91

	Item 4	Submission of Matters to a Vote of Security Holders	91

	Item 5	Other Information	91

	Item 6	Exhibit Index	92

		Signatures	93
Exhibit 10.34
Exhibit 10.35
Exhibit 10.36
Exhibit 10.37
Exhibit 31.1
Exhibit 31.1
Exhibit 32.1
Exhibit 32.1

PART I — FINANCIAL INFORMATION


PART I — Item 1.	*Financial Statements*

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2009 AND DECEMBER 31, 2008 (UNAUDITED)

(In thousands, except share and per share amounts)


	September 30,			December 31,
	2009			2008

ASSETS
Investments and cash:
Fixed income securities, available for sale, at fair value (amortized cost $3,497,918 and $3,429,226, respectively)	$	4,064,646		$	3,594,278
Fixed income securities, held as trading securities, at fair value (amortized cost $641,891 and $474,465, respectively)		581,338			338,209
Redeemable preferred stock, at fair value (cost $108 and $510, respectively)		108			114
Equity securities:
Common stocks, at fair value (cost $1,741,971 and $1,628,611, respectively)		2,181,297			1,555,142
Common stocks, at equity		148,673			141,473
Short-term investments, at fair value (amortized cost $183,650 and $1,202,366, respectively)		183,875			1,202,360
Cash and cash equivalents		1,523,075			755,747
Cash and cash equivalents held as collateral		24,199			82,374
Other invested assets		167,238			222,841

Total investments and cash		8,874,449			7,892,538
Accrued investment income		72,533			66,575
Premiums receivable		548,496			496,418
Reinsurance recoverable on paid losses		54,040			82,999
Reinsurance recoverable on unpaid losses		783,483			690,171
Prepaid reinsurance premiums		121,615			94,797
Funds held by reinsureds		129,527			128,543
Deferred acquisition costs		133,660			139,069
Federal and foreign income taxes receivable		—			52,096
Other assets		136,311			83,303

Total assets	$	10,854,114		$	9,726,509


LIABILITIES
Unpaid losses and loss adjustment expenses	$	5,492,935		$	5,250,484
Unearned premiums		751,998			701,955
Reinsurance balances payable		203,022			116,388
Funds held under reinsurance contracts		39,142			55,495
Debt obligations		489,371			489,278
Federal and foreign income taxes payable		54,912			—
Other liabilities		255,337			285,174

Total liabilities		7,286,717			6,898,774

Commitments and Contingencies (Note 10)

SHAREHOLDERS’ EQUITY
Preferred shares, $0.01 par value; 200,000,000 shares authorized; 2,000,000 and 2,000,000 Series A shares and 1,167,263 and 1,872,000 Series B shares issued and outstanding, respectively		32			39
Common shares, $0.01 par value; 500,000,000 shares authorized; 58,484,170 and 60,264,270 shares issued, respectively		585			603
Additional paid-in capital		519,807			614,203
Treasury shares, at cost (41,021 and 21,321 shares, respectively)		(1,514	)		(795	)
Accumulated other comprehensive income, net of deferred income taxes		679,750			82,421
Retained earnings		2,368,737			2,131,264

Total shareholders’ equity		3,567,397			2,827,735

Total liabilities and shareholders’ equity	$	10,854,114		$	9,726,509

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

(In thousands, except share and per share amounts)


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

REVENUES
Gross premiums written	$	1,697,199		$	1,800,456		$	630,891		$	656,744
Ceded premiums written		234,385			207,347			106,863			84,937

Net premiums written		1,462,814			1,593,109			524,028			571,807
Increase in unearned premiums		(18,429	)		(20,750	)		(30,132	)		(26,414	)

Net premiums earned		1,444,385			1,572,359			493,896			545,393
Net investment income		237,082			200,329			76,655			62,505
Net realized investment gains (losses):
Net realized investment gains		226,698			667,725			144,156			257,897
Other-than-temporary impairment losses		(126,706	)		(102,357	)		—			(61,154	)

Total net realized investment gains		99,992			565,368			144,156			196,743

Total revenues		1,781,459			2,338,056			714,707			804,641

EXPENSES
Losses and loss adjustment expenses		983,227			1,181,388			343,733			469,084
Acquisition costs		280,400			316,983			89,552			103,790
Other underwriting expenses		132,580			129,888			45,453			43,493
Other expense (income), net		34,263			13,192			45,514			(6,018	)
Interest expense		23,522			25,827			7,619			8,390

Total expenses		1,453,992			1,667,278			531,871			618,739

Income before income taxes		327,467			670,778			182,836			185,902

Federal and foreign income tax provision (benefit):
Current		129,742			312,112			64,918			132,169
Deferred		(49,063	)		(82,460	)		(11,530	)		(69,508	)

Total federal and foreign income tax provision		80,679			229,652			53,388			62,661

Net income		246,788			441,126			129,448			123,241
Preferred dividends		(3,959	)		(5,457	)		(1,289	)		(1,770	)
Gain on repurchase of Series B preferred shares		7,997			—			—			—

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	250,826		$	435,669		$	128,159		$	121,471

BASIC
Weighted average common shares outstanding		58,661,558			64,746,841			57,698,713			61,405,332
Basic earnings per common share	$	4.22		$	6.65		$	2.19		$	1.95

DILUTED
Weighted average common shares outstanding		59,134,006			65,222,274			58,203,293			61,859,163
Diluted earnings per common share	$	4.21		$	6.63		$	2.18		$	1.95

DIVIDENDS
Dividends declared per common share	$	0.225		$	0.200		$	0.075		$	0.075

COMPREHENSIVE INCOME
Net income	$	246,788		$	441,126		$	129,448		$	123,241
Other comprehensive income (loss), net of tax		597,329			(115,213	)		324,998			(59,334	)

Comprehensive income	$	844,117		$	325,913		$	454,446		$	63,907

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

(In thousands, except share amounts)


	Nine Months Ended
	September 30,
	2009			2008

PREFERRED SHARES (par value)
Balance, beginning of period	$	39		$	40
Preferred shares repurchased		(7	)		—

Balance, end of period		32			40

COMMON SHARES (par value)
Balance, beginning of period		603			697
Common shares repurchased and retired		(18	)		(95	)

Balance, end of period		585			602

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period		614,203			958,544
Adjustment to the beginning balance due to a change in accounting		—			11,476

Adjusted beginning balance		614,203			970,020
Common shares repurchased and retired		(72,555	)		(351,258	)
Preferred shares repurchased		(17,173	)		—
Net change due to stock option exercises and restricted share awards		(16,052	)		(10,784	)
Net effect of share-based compensation		11,217			6,907
Common shares issued		167			—

Balance, end of period		519,807			614,885

TREASURY SHARES (at cost)
Balance, beginning of period		(795	)		(6,250	)
Purchases of treasury shares		(18,001	)		(14,132	)
Reissuance of treasury shares		17,282			16,350

Balance, end of period		(1,514	)		(4,032	)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF DEFERRED INCOME TAXES
Balance, beginning of period		82,421			85,023
Unrealized appreciation (depreciation) on securities, net of reclassification adjustments		598,301			(102,849	)
Foreign currency translation adjustments		(972	)		(13,385	)
Benefit plan liabilities		—			1,021
Cumulative effect of changes in accounting		—			(1,385	)

Balance, end of period		679,750			(31,575	)

RETAINED EARNINGS
Balance, beginning of period		2,131,264			1,616,646
Adjustment to the beginning balance due to a change in accounting		—			(11,476	)

Adjusted beginning balance		2,131,264			1,605,170
Net income		246,788			441,126
Gain on repurchase of Series B preferred shares		7,997			—
Dividends to preferred shareholders		(3,959	)		(5,457	)
Dividends to common shareholders		(13,353	)		(12,839	)
Cumulative effect of changes in accounting		—			367

Balance, end of period		2,368,737			2,028,367

TOTAL SHAREHOLDERS’ EQUITY	$	3,567,397		$	2,608,287

COMMON SHARES OUTSTANDING
Balance, beginning of period		60,242,949			69,521,494
Shares issued		9,000			—
Repurchased and retired		(1,789,100	)		(9,480,756	)
Net treasury shares (acquired) reissued		(19,700	)		55,087

Balance, end of period		58,443,149			60,095,825

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

(In thousands)


	Nine Months Ended
	September 30,
	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	246,788		$	441,126
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable and funds held, net		40,536			(23,039	)
Increase in unearned premiums and prepaid reinsurance premiums, net		19,094			16,963
Increase in unpaid losses and loss adjustment expenses		92,096			208,904
Change in current and deferred federal and foreign income taxes, net		(210,203	)		53,214
Decrease (increase) in deferred acquisition costs		6,353			(1,976	)
Change in other assets and liabilities, net		(44,728	)		92,829
Net realized investment gains		(99,992	)		(565,368	)
Bond (discount) premium amortization, net		(10,537	)		8,326
Amortization of stock-based compensation		11,217			6,906

Net cash provided by operating activities		50,624			237,885

CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed income securities, available for sale		170,000			116,490
Sales of fixed income securities, available for sale		325,884			2,267,349
Purchases of fixed income securities, available for sale		(533,390	)		(1,849,648	)
Sales of equity securities		341,409			62,750
Purchases of equity securities		(518,515	)		(358,537	)
Sales of other invested assets		61,581			713,637
Purchases of other invested assets		(25,154	)		(32,795	)
Net change in cash and cash equivalents held as collateral		62,928			193,152
Net change in obligation to return borrowed securities		—			(47,853	)
Sales of trading securities		97,019			1,195
Purchases of trading securities		(226,350	)		(107,405	)
Net change in short-term investments		1,039,329			241,528

Net cash provided by investing activities		794,741			1,199,863

CASH FLOWS FROM FINANCING ACTIVITIES
Common shares repurchased and retired		(72,573	)		(354,076	)
Purchase of treasury shares		(18,001	)		(14,048	)
Repurchase of Series B preferred shares		(9,183	)		—
Dividends paid to preferred shareholders		(4,592	)		(5,756	)
Dividends paid to common shareholders		(13,353	)		(12,838	)
Proceeds from exercise of stock options		759			1,001
Excess tax benefit from stock-based compensation		638			745

Net cash used in financing activities		(116,305	)		(384,972	)

Effect of exchange rate changes on cash and cash equivalents		38,268			(22,775	)

Increase in cash and cash equivalents		767,328			1,030,001
Cash and cash equivalents, beginning of period		755,747			897,963

Cash and cash equivalents, end of period	$	1,523,075		$	1,927,964

Supplemental disclosures of cash flow information:
Interest paid	$	16,737		$	19,069

Income taxes paid	$	294,651		$	175,812

See accompanying notes to consolidated financial statements.

ODYSSEY RE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	Organization and Basis of Presentation

Odyssey Re Holdings Corp. (together with its subsidiaries, the “Company” or “OdysseyRe”) is an underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis, and an underwriter of specialty insurance, primarily in the United States and through the Lloyd’s of London marketplace. Odyssey Re Holdings Corp. was formed as a holding company and incorporated in Delaware in 2001 in conjunction with its initial public offering. Odyssey Re Holdings Corp. owns all of the common shares of Odyssey America Reinsurance Corporation (“Odyssey America”), its principal operating subsidiary, which is domiciled in the state of Connecticut. Odyssey America directly or indirectly owns all of the common shares of the following subsidiaries: Clearwater Insurance Company (“Clearwater”); Clearwater Select Insurance Company; Newline Holdings U.K. Limited; Newline Underwriting Management Limited, which owns and manages Newline Syndicate 1218, a member of Lloyd’s of London (collectively, “Newline”); Newline Insurance Company Limited (“NICL”); Hudson Insurance Company (“Hudson”); Hudson Specialty Insurance Company (“Hudson Specialty”) and Napa River Insurance Services, Inc. As of September 30, 2009, Fairfax Financial Holdings Limited (“Fairfax”), a publicly traded financial services holding company based in Canada, owned 72.5% of OdysseyRe.

On September 18, 2009, Fairfax and OdysseyRe announced that they had entered into an agreement and plan of merger (the “Merger Agreement”) pursuant to which Fairfax would promptly commence a tender offer to acquire all of the outstanding shares of common stock of OdysseyRe that Fairfax and its subsidiaries did not currently own, for $65.00 in cash per share, representing total cash consideration of approximately $1.1 billion. Pursuant to the Merger Agreement, on September 23, 2009, Fairfax commenced a tender offer for all of the outstanding shares of common stock of OdysseyRe (the “Offer”) other than shares owned by Fairfax and its subsidiaries for $65.00 in cash per share. The Board of Directors of OdysseyRe, following the unanimous recommendation of a special committee comprised solely of independent directors which had been formed to review and consider any Fairfax proposals, recommended that OdysseyRe’s minority stockholders tender their shares in the Fairfax offer and vote or consent to approve and adopt the merger agreement if it were to be submitted for their approval and adoption (see Note 15).

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions, which could differ materially from actual results that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Certain financial information and disclosures that are usually included in annual financial statements prepared in accordance with GAAP have been omitted since they are not required for interim reporting purposes. Readers should review the Company’s 2008 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies. The Company’s unaudited interim consolidated financial statements include all normal recurring adjustments that, in the Company’s opinion, are required for a fair statement of its financial position on such dates, and the results of operations and cash flows for the periods presented. Certain amounts from prior periods have been reclassified to conform to the current year’s presentations. The Company has evaluated subsequent events through November 4, 2009, the date the financial statements were issued (see Note 15). The results for the nine months ended September 30, 2009 are not necessarily indicative of the results for a full year.

In June 2009, the Financial Accounting Standards Board (“FASB’) issued an accounting standard to provide a timeline for the application of the codification project (“Codification”), which, effective July 1, 2009, eliminated the current four levels of hierarchy of authoritative accounting and reporting guidance and provides one source for authoritative accounting and reporting. The Codification does not change existing GAAP, as such affects the Company. The Codification is applicable to financial statements issued for interim and annual reporting periods ending after September 15, 2009 and, thus, was adopted by the Company in the third quarter.

ODYSSEY RE HOLDINGS CORP.

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

In April 2009, the FASB issued an accounting standard to provide additional guidance in estimating the fair value of assets and liabilities when the volume of activity has significantly decreased. The new accounting standard requires additional disclosures to discuss interim and annual significant assumptions and valuation techniques used to determine the fair value of the assets and liabilities. The accounting standard does not change the principles of fair value measurement but instead enhances it to provide further guidance on inactive markets. The Company adopted the accounting standard as of April 1, 2009. The adoption of this accounting standard did not have an impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard which provides additional guidance for the measurement of other-than-temporary impairments on debt securities classified as available-for-sale and held-to-maturity. This accounting standard requires entities to separate their other-than-temporary impairment charges on available-for-sale or held-to-maturity debt securities into credit and other components. An other-than-temporary impairment charge resulting from credit-related losses associated with an impaired debt security should be recorded to earnings, while an other-than-temporary impairment resulting from other factors (i.e., interest rates and market conditions) should be recognized in other comprehensive income. In addition, if an other-than-temporary impairment exists that is related to factors other than credit, and it is more likely than not that the Company will have to sell the security prior to recovery, the other-than-temporary impairment should be recorded in earnings. Also, this accounting standard provides additional presentation and disclosure guidance for debt and equity securities. The adoption of this accounting standard as of April 1, 2009, did not have an impact on consolidated shareholders’ equity or net income.

In April 2009, the FASB issued an accounting standard to require additional interim period disclosures regarding the fair value of financial instruments. Entities are required to disclose how the amounts in the disclosure relate to amounts in the balance sheet, the method used to determine the fair value and significant assumptions used in the valuation. The Company adopted this accounting standard as of April 1, 2009, which had no impact on the Company’s disclosures.

In June 2008, the FASB issued an accounting standard that addresses the calculation of earnings per share for entities with instruments granted in share-based payment transactions that are participating securities prior to vesting and therefore should be included in the earnings allocation in calculating earnings per share under the two-class method. This accounting standard requires entities to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. Under the Company’s restricted share plan, the grantees have non-forfeitable rights to dividends before the vesting date and, accordingly, the restricted shares are participating securities. On January 1, 2009, the Company adopted the accounting standard on a retrospective basis. The adoption of this accounting standard resulted in a reduction of diluted earnings per share to common shareholders of $0.05 and $0.01 for the nine and three months ended September 30, 2008, respectively.

In May 2008, the FASB issued an accounting standard to clarify the guidance related to convertible debt with options to settle partially or fully in cash. This accounting standard does not change the accounting for convertible debt that does not offer a cash settlement feature, nor does it apply if the conversion feature is accounted for as an embedded derivative or for convertible preferred stock. On January 1, 2009, the Company adopted the accounting standard and applied it on a retrospective basis to the Company’s convertible senior debentures issued in June 2002 (see Note 13 of the Company’s 2008 Annual Report on Form 10-K). As of May 1, 2007, all of the convertible senior debentures had been either repurchased by the Company or converted into shares of the Company’s common stock. The adoption of this accounting standard resulted in a cumulative increase, as of May 1, 2007, to additional paid-in capital and a corresponding decrease to retained earnings of $11.5 million.

In March 2008, the FASB issued an accounting standard that requires additional disclosures for derivative and hedging activities. On January 1, 2009, the Company adopted the disclosure provisions of this accounting standard.

ODYSSEY RE HOLDINGS CORP.

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


2.	Earnings Per Common Share

As discussed in Note 1 to the consolidated financial statements, on January 1, 2009 the Company adopted, on a retrospective basis, an accounting standard that resulted in the Company treating its unvested share-based payment awards as a separate class of securities for the purpose of calculating earnings per share. The following table shows the allocation of net income as calculated in accordance with the accounting standard for the nine and three months ended September 30, 2009 and 2008 (in thousands, except share and per share amounts):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income	$	246,788		$	441,126		$	129,448		$	123,241
Preferred dividends		(3,959	)		(5,457	)		(1,289	)		(1,770	)
Gain on repurchase of Series B preferred shares		7,997			—			—			—

Net income available to common shareholders	$	250,826		$	435,669		$	128,159		$	121,471

Allocation of net income for basic earnings per share:
Common shares	$	247,372		$	430,395		$	126,458		$	119,871
Participating securities		3,454			5,274			1,701			1,600

Net income available to common shareholders	$	250,826		$	435,669		$	128,159		$	121,471

Net income per common share for the nine and three months ended September 30, 2009 and 2008 as presented in the following table has been computed based upon weighted average common shares outstanding (in thousands, except share and per share amounts):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Net income to common shares — basic	$	247,372	$	430,395	$	126,458	$	119,871
Undistributed earnings allocated to share-based payments		1,340		1,779		713		489

Net income to common shares — diluted	$	248,712	$	432,174	$	127,171	$	120,360

Weighted average common shares outstanding — basic		58,661,558		64,746,841		57,698,713		61,405,332
Effect of dilutive shares:
Stock options		66,262		134,285		69,572		133,817
Restricted shares		406,186		341,148		435,008		320,014

Total effect of dilutive shares		472,448		475,433		504,580		453,831

Weighted average common shares outstanding — diluted		59,134,006		65,222,274		58,203,293		61,859,163

Net earnings per common share:
Basic	$	4.22	$	6.65	$	2.19	$	1.95
Diluted		4.21		6.63		2.18		1.95

In calculating diluted earnings per share, the Company is required to evaluate each stock option and restricted share grant to determine if it is dilutive or antidilutive in nature. For the nine and three months ended September 30, 2009, 50,226 and 197,772, respectively, existing stock options and restricted share awards outstanding were

ODYSSEY RE HOLDINGS CORP.

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

excluded from the computation of weighted average common shares for diluted earnings per common share, due to their antidilutive effect. For the nine and three months ended September 30, 2008, 331,231 and 471,364 respectively, existing stock options and restricted share awards outstanding were excluded from the computation of weighted average common shares for diluted earnings per common share, due to their antidilutive effect.

Net income per participating security for the nine and three months ended September 30, 2009 and 2008, as presented in the following table, has been computed based upon weighted average restricted shares outstanding (in thousands, except share and per share amounts):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Net income to participating securities — basic	$	3,454	$	5,274	$	1,701	$	1,600

Weighted average restricted shares outstanding — basic		822,556		793,795		778,116		821,232
Net earnings per participating security:
Basic	$	4.20	$	6.64	$	2.19	$	1.95


3.	Fair Value Measurements

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

Fair Value Hierarchy

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

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

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

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

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

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

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

ODYSSEY RE HOLDINGS CORP.

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

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

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

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

The Company’s Level 2 investments, the majority of which are in government, corporate and municipal fixed income securities, are priced using publicly traded over-the-counter prices and broker-dealer quotes. Observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads and bids are available for these investments. For determining the fair value of credit default swaps, which are classified as Level 2, the Company utilizes broker-dealer quotes that include observable credit spreads. Also included in Level 2 are inactively traded convertible corporate debentures that are valued using a pricing model that includes observable inputs such as credit spreads and discount rates in the calculation. During the nine months ended September 30, 2009, the Company transferred $47.8 million of Level 3 investments to Level 2 after determining that broker-dealer quotes were available to determine the fair value of the instruments.

The Company uses valuation techniques to establish the fair value of Level 3 investments. During the nine months ended September 30, 2009, the Company purchased $19.2 million of investments that are classified as Level 3. As of September 30, 2009, the Company held $50.7 million of investments that are classified as Level 3. These Level 3 investments are valued using a discounted cash flow model, including unobservable inputs that are supported by limited market-based activity. To verify Level 3 pricing, the Company assesses the reasonableness of the fair values by comparison to economic pricing models, by reference to movements in credit spreads and by comparing the fair values to recent transaction prices for similar assets, where available.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the period in which the reclassifications occur. The Company has determined, after carefully considering the impact of recent economic conditions and liquidity in the credit markets on the Company’s portfolio, that it should not re-classify any of its investments from Level 1 or Level 2 to Level 3. However, during the third quarter of 2009, the Company transferred its investment in Advent Capital (Holdings) PLC (“Advent”) from Level 2 to Level 3 following Advent’s delisting from the London Stock Exchange.

ODYSSEY RE HOLDINGS CORP.

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

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 (in thousands):


			Fair Value Measurements as of September 30, 2009
	Asset/Liability		Quoted Prices in		Significant
	Measured at		Active Markets		Other		Significant
	Fair Value		for Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)

Fixed income securities, available for sale:
United States government, government agencies and authorities	$	155,251	$	—	$	155,251	$	—
State, municipalities and political subdivisions		2,649,237		—		2,649,237		—
Foreign governments		859,204		—		859,204		—
Corporate		400,954		—		400,954		—

Total fixed income securities, available for sale		4,064,646		—		4,064,646		—
Fixed income securities, held as trading securities:
Foreign governments		98,023		—		98,023		—
Mortgage-related		75,585		—		58,211		17,374
Corporate		407,730		—		407,730		—

Total fixed income securities, held as trading securities		581,338		—		563,964		17,374
Redeemable preferred stock, available for sale		108		—		108		—
Common stocks, available for sale		2,181,297		2,145,820		35,477		—
Short-term investments, available for sale		183,875		160,262		23,613		—
Cash equivalents		1,401,964		1,401,964		—		—
Derivatives		21,570		—		21,570		—
Other investments		47,442		1,553		12,566		33,323

Total assets measured at fair value	$	8,482,240	$	3,709,599	$	4,721,944	$	50,697

Derivative liabilities	$	45,757	$	—	$	45,757	$	—

ODYSSEY RE HOLDINGS CORP.

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


			Fair Value Measurements as of December 31, 2008
	Asset/Liability		Quoted Prices in		Significant
	Measured at		Active Markets		Other		Significant
	Fair Value		for Identical		Observable		Unobservable
	December 31,		Assets/Liabilities		Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)

Fixed income securities, available for sale:
United States government, government agencies and authorities	$	353,709	$	—	$	353,709	$	—
State, municipalities and political subdivisions		2,278,452		—		2,278,452		—
Foreign governments		840,203		—		839,203		1,000
Corporate		121,914		—		121,914		—

Total fixed income securities, available for sale		3,594,278		—		3,593,278		1,000
Fixed income securities, held as trading securities:
Foreign governments		84,055		—		84,055		—
Mortgage-related		66,423		—		—		66,423
Corporate		187,731		—		187,731		—

Total fixed income securities, held as trading securities		338,209		—		271,786		66,423
Redeemable preferred stock, available for sale		114		7		107		—
Common stocks, available for sale		1,555,142		1,527,825		27,317		—
Short-term investments, available for sale		1,202,360		1,174,016		28,344		—
Cash equivalents		472,544		472,544		—		—
Derivatives		111,069		—		111,069		—
Other investments		27,693		1,552		26,141		—

Total assets measured at fair value	$	7,301,409	$	3,175,944	$	4,058,042	$	67,423

Derivative liabilities	$	101	$	68	$	33	$	—

The following tables provide a summary of changes in the fair value of Level 3 financial assets for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended September 30,
	2009			2008			2009		2008
	Fixed Income			Fixed Income			Other Invested		Equity
	Securities			Securities			Assets		Securities

Beginning balance	$	67,423		$	1,000		$	—	$	8,147
Total realized investment (losses) gains included in net income		(1,143	)		(66	)		—		7,827
Purchases, issuances and settlements		(1,119	)		7,019			700		(15,974	)
Transfers from Level 3 to Level 2		(47,787	)		—			—		—
Transfers from Level 2 to Level 3		—			—			32,623		—

Ending balance	$	17,374		$	7,953		$	33,323	$	—

ODYSSEY RE HOLDINGS CORP.

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


	Three Months Ended September 30,
	2009			2008			2009
	Fixed Income			Fixed Income			Other Invested
	Securities			Securities			Assets

Beginning balance	$	21,706		$	1,000		$	—
Total realized investment gains (losses) included in net income		1,445			(66	)		—
Purchases, issuances and settlements		(5,777	)		7,019			700
Transfers from Level 2 to Level 3		—			—			32,623

Ending balance	$	17,374		$	7,953		$	33,323

The following table presents realized investment gains (losses) included in net income related to Level 3 assets for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	September 30, 2009
	Nine Months Ended			Three Months Ended
	Net Realized			Net Realized
	Investment Gains			Investment
	(Losses) on			Gains on
	Fixed Income			Fixed Income
	Securities			Securities

Realized investment gains related to securities sold	$	5,148		$	1,049
Realized investment (losses) gains related to securities held		(6,291	)		396

Total net realized investment (losses) gains relating to Level 3 assets	$	(1,143	)	$	1,445


	September 30, 2008
	Nine Months Ended					Three Months Ended
	Net Realized		Net Realized			Net Realized
	Investment		Investment			Investment
	Gains on		Losses on			Losses on
	Equity		Fixed Income			Fixed Income
	Securities		Securities			Securities

Realized investment gains related to securities sold	$	7,827	$	—		$	—
Realized investment losses related to securities held		—		(66	)		(66	)

Total net realized investment gains (losses) relating to Level 3 assets	$	7,827	$	(66	)	$	(66	)

Fair Value Option

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

On January 1, 2008, the Company elected the FVO for its investment in Advent. At the time, Advent was publicly traded on a foreign stock exchange and its traded price was determined to be a better indicator of its value than its carrying value under the equity method. During the third quarter of 2009, Fairfax and certain of its subsidiaries, including the Company, purchased additional shares of Advent, bringing Fairfax’s ownership in

ODYSSEY RE HOLDINGS CORP.

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

Advent to 97.0%. The remaining 3.0% of the outstanding shares of Advent are expected to be purchased by Fairfax during the fourth quarter of 2009. As of September 30, 2009, the Company owned 22.8% of the common stock of Advent.

During the fourth quarter of 2007, the Company recognized an impairment adjustment to its investment in Advent, under the equity method of accounting, and wrote-down Advent’s value to its publicly traded fair value as of December 31, 2007. Accordingly, the Company’s election of the FVO had no effect on Advent’s carrying value or the Company’s shareholders’ equity as of January 1, 2008. Upon the election of the FVO for Advent, the Company recorded a cumulative adjustment of $2.4 million, or $1.5 million net of tax, to reclassify foreign currency unrealized gains from the foreign currency translation account (included in accumulated other comprehensive income) to retained earnings as of January 1, 2008.

As of September 30, 2009, Advent is recorded at fair value of $32.6 million in other invested assets, with related changes in fair value recognized as a realized investment gain or loss in the period in which they occur. For the nine and three months ended September 30, 2009, the change in fair value resulted in a realized investment gain of $5.9 million and $8.1 million, respectively. For the nine and three months ended September 30, 2008, the change in fair value resulted in a realized investment loss of $6.2 million and $2.6 million, respectively. Advent’s value as of September 30, 2009, calculated in accordance with the equity method of accounting, would have been $37.5 million.

The Company did not elect the FVO for any of its liabilities.


4.	Investments and Cash

A summary of the Company’s investment portfolio as of September 30, 2009, excluding common stocks, at equity, other invested assets and fixed income securities held as trading securities, is as follows (in thousands):


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Appreciation		Depreciation		Fair Value

Fixed income securities, available for sale:
United States government, government agencies and authorities	$	137,091	$	19,442	$	1,282	$	155,251
States, municipalities and political subdivisions		2,241,939		407,352		54		2,649,237
Foreign governments		802,963		56,467		226		859,204
Corporate		315,925		85,256		227		400,954

Total fixed income securities, available for sale		3,497,918		568,517		1,789		4,064,646
Redeemable preferred stock		108		—		—		108
Common stocks, at fair value		1,741,971		447,552		8,226		2,181,297
Short-term investments		183,650		225		—		183,875
Cash and cash equivalents		1,523,075		—		—		1,523,075
Cash and cash equivalents held as collateral		24,199		—		—		24,199

Total	$	6,970,921	$	1,016,294	$	10,015	$	7,977,200

Common stocks accounted for under the equity method of accounting were carried at $148.7 million as of September 30, 2009, reflecting gross unrealized appreciation of $29.8 million and no gross unrealized depreciation. Other invested assets were carried at $167.2 million as of September 30, 2009, reflecting no gross unrealized appreciation or depreciation. Fixed income securities held as trading securities were carried at fair value of

ODYSSEY RE HOLDINGS CORP.

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

$581.3 million as of September 30, 2009, with changes in fair value reflected as realized investment gains or losses in the consolidated statements of operations. Fixed income securities held as trading securities include corporate, foreign government and mortgage-related securities, with fair values of $407.7 million, $98.0 million and $75.6 million, respectively, as of September 30, 2009.

A summary of the Company’s investment portfolio as of December 31, 2008, excluding common stocks, at equity, other invested assets and fixed income securities held as trading securities, is as follows (in thousands):


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Appreciation		Depreciation		Fair Value

Fixed income securities, available for sale:
United States government, government agencies and authorities	$	303,859	$	49,850	$	—	$	353,709
States, municipalities and political subdivisions		2,209,040		93,467		24,055		2,278,452
Foreign governments		781,933		58,307		37		840,203
Corporate		134,394		1,373		13,853		121,914

Total fixed income securities, available for sale		3,429,226		202,997		37,945		3,594,278
Redeemable preferred stock, at fair value		510		—		396		114
Common stocks, at fair value		1,628,611		55,578		129,047		1,555,142
Short-term investments, at fair value		1,202,366		—		6		1,202,360
Cash and cash equivalents		755,747		—		—		755,747
Cash and cash equivalents held as collateral		82,374		—		—		82,374

Total	$	7,098,834	$	258,575	$	167,394	$	7,190,015

Common stocks accounted for under the equity method of accounting were carried at $141.5 million as of December 31, 2008, reflecting gross unrealized appreciation of $26.6 million and gross unrealized depreciation of $2.1 million. Other invested assets were carried at $222.8 million as of December 31, 2008, reflecting no gross unrealized appreciation or depreciation. Fixed income securities held as trading securities were carried at fair value of $338.2 million as of December 31, 2008, with changes in fair value reflected as realized investment gains or losses in the consolidated statements of operations. Fixed income securities held as trading securities include corporate, foreign government securities, and mortgage-related securities, with fair values of $187.7 million, $84.1 million and $66.4 million, respectively, as of December 31, 2008.

ODYSSEY RE HOLDINGS CORP.

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


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

The following table sets forth the components of net investment income for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009			2008

Interest on fixed income securities	$	184,788	$	147,038	$	62,937		$	48,733
Dividends on common stocks, at fair value		41,575		20,734		11,158			7,528
Net income of common stocks, at equity		4,222		1,088		2,687			501
Interest on cash and short-term investments		7,451		45,245		(203	)		12,324
Other invested assets		15,509		20,464		5,808			4,499

Gross investment income		253,545		234,569		82,387			73,585
Less: investment expenses		13,849		29,954		4,916			10,059
Less: interest on funds held under reinsurance contracts		2,614		4,286		816			1,021

Net investment income	$	237,082	$	200,329	$	76,655		$	62,505

The following table sets forth the components of net realized investment gains and losses for the nine months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended September 30, 2009							Nine Months Ended September 30, 2008
	Gross		Gross		Net Realized			Gross		Gross		Net Realized
	Realized		Realized		Investment			Realized		Realized		Investment
	Investment		Investment		Gains			Investment		Investment		Gains
	Gains		Losses		(Losses)			Gains		Losses		(Losses)

Fixed income securities, available for sale	$	94,416	$	22,892	$	71,524		$	121,865	$	19,181	$	102,684
Fixed income securities, held as trading securities		113,388		2,163		111,225			161		53,029		(52,868	)
Preferred stock		—		394		(394	)		—		833		(833	)
Equity securities		53,527		128,074		(74,547	)		14,311		98,422		(84,111	)
Derivative securities		23,404		97,654		(74,250	)		640,127		21,768		618,359
Other securities		117,040		50,606		66,434			67,301		85,164		(17,863	)

Total	$	401,775	$	301,783	$	99,992		$	843,765	$	278,397	$	565,368

ODYSSEY RE HOLDINGS CORP.

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

The following table sets forth the components of net realized investment gains and losses for the three months ended September 30, 2009 and 2008 (in thousands):


	Three Months Ended September 30, 2009								Three Months Ended September 30, 2008
	Gross		Gross			Net Realized			Gross			Gross			Net Realized
	Realized		Realized			Investment			Realized			Realized			Investment
	Investment		Investment			Gains			Investment			Investment			Gains
	Gains		Losses			(Losses)			Gains			Losses			(Losses)

Fixed income securities, available for sale	$	43,779	$	12,560		$	31,219		$	8,895		$	7,162		$	1,733
Fixed income securities, held as trading securities		54,565		(8,558	)		63,123			(10,362	)		43,960			(54,322	)
Preferred stock		—		—			—			—			304			(304	)
Equity securities		38,234		4,082			34,152			3,840			58,463			(54,623	)
Derivative securities		12,101		38,960			(26,859	)		344,335			(7,526	)		351,861
Other securities		47,758		5,237			42,521			2,247			49,849			(47,602	)

Total	$	196,437	$	52,281		$	144,156		$	348,955		$	152,212		$	196,743

Other-than-temporary write-downs of investments during the nine months ended September 30, 2009 included in gross realized investment losses were $123.1 million related to equity securities, $3.4 million related to fixed income securities and $0.2 million related to preferred stocks. Other-than-temporary write-downs of investments during the nine months ended September 30, 2008 included in gross realized investment losses were $94.1 million related to equity securities, $7.5 million related to fixed income securities and $0.8 million related to preferred stocks.

The Company did not incur other-than temporary impairment losses for the three months ended September 30, 2009. During the three months ended September 30, 2008, net realized investment gains were reduced by other-than-temporary impairment losses in the amount of $61.2 million, of which $2.4 million related to fixed income securities, $58.5 million related to equity securities and $0.3 million related to preferred stock.

For those fixed income securities that were determined to be other-than-temporarily impaired, the Company determined that such impairments were related to credit, requiring the recognition of an impairment charge to income, and not related to other factors (i.e., interest rates and market conditions), which would have required charges to other comprehensive income.

ODYSSEY RE HOLDINGS CORP.

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


*(b)*	*Unrealized Appreciation (Depreciation)*

The following table sets forth the changes in unrealized net appreciation (depreciation) of investments, and the related tax effect, reflected in accumulated other comprehensive income for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Fixed income securities	$	401,676		$	(60,228	)	$	215,335		$	34,342
Redeemable preferred stock		395			758			—			165
Equity securities		518,160			(98,927	)		287,721			(82,140	)
Short-term investments		231			—			232			—
Other invested assets		—			169			—			—

Increase (decrease) in unrealized net appreciation (depreciation) of investments		920,462			(158,228	)		503,288			(47,633	)
Deferred income tax (expense) benefit		(322,161	)		55,378			(176,151	)		16,671

Change in net unrealized appreciation (depreciation) of investments included in other comprehensive income (loss)	$	598,301		$	(102,850	)	$	327,137		$	(30,962	)


*(c)*	*Common Stocks, at Equity*

Common stocks, at equity, totaled $148.7 million as of September 30, 2009 and $141.5 million as of December 31, 2008. The following table sets forth the components of common stocks, at equity, as of September 30, 2009 and December 31, 2008 (in thousands):


	September 30,		December 31,
	2009		2008

TRG Holding Corporation	$	74,350	$	74,354
Fairfax Asia Limited		74,296		67,092
Other		27		27

Total common stocks, at equity	$	148,673	$	141,473

On June 4, 2009, the Company purchased additional shares of Fairfax Asia Limited (“Fairfax Asia”) at a cost of $1.0 million. For common stocks, at equity, as of September 30, 2009, the relative ownership held by the Company was 13.0% for TRG Holding Corporation (which is 100% owned by Fairfax) and 26.2% (economic) for Fairfax Asia Limited (which is 100% owned by Fairfax).


*(d)*	*Derivative Investments and Short Sales*

The Company has utilized, and may continue to utilize, credit default swaps, call options and warrants, total return swaps, interest rate options, forward currency contracts, futures contracts and short sales to manage against adverse changes in the values of assets and liabilities. These products are typically not linked to specific assets or liabilities on the consolidated balance sheets or a forecasted transaction and, therefore, do not qualify for hedge accounting.

ODYSSEY RE HOLDINGS CORP.

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

The following tables set forth the Company’s derivative positions, which are included in other invested assets or other liabilities in the consolidated balance sheets, as of September 30, 2009, and December 31, 2008, respectively (in thousands):


	September 30, 2009
	Exposure/
	Notional				Fair Value		Fair Value
	Amount		Cost		Asset		Liability

Credit default swaps	$	1,314,740	$	20,583	$	12,108	$	—
Total return swaps		677,645		—		6,181		—
Forward currency contracts		514,730		—		—		44,852
Warrants		163,116		5,318		3,281		—
Interest rate swaps		140,000		—		—		905


	December 31, 2008
	Exposure/
	Notional				Fair Value		Fair Value
	Amount		Cost		Asset		Liability

Credit default swaps	$	1,782,868	$	30,776	$	82,843	$	—
Futures contracts		791,000		—		—		68
Forward currency contracts		533,890		—		28,225		—
Warrants		163,116		5,577		1		—
Interest rate swaps		140,000		—		—		33
Call options		75,324		22		—		—

ODYSSEY RE HOLDINGS CORP.

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

The following tables summarize the effect of the hedging instruments and related hedged items on the Company’s historical financial position, results of operations and cash flows as of and for the nine and three months ended September 30, 2009 and 2008 (in millions):


	As of and for the Nine Months Ended September 30, 2009
							Effect on Pre-tax:
	Exposure/						Other		Net Realized						Net Cash
	Notional			Carrying			Comprehensive		Investment						Flow from
	Value			Value			Income		Gains			Net Equity			Disposals

Equity risk exposures:
Redeemable preferred stocks	$	0.1		$	0.1		$	0.4	$	(0.4	)	$	—		$	(1.1	)
Common stocks, at fair value		2,181.3			2,181.3			512.8		(74.5	)		438.3			(47.3	)

Total equity exposure	$	2,181.4		$	2,181.4			513.2		(74.9	)		438.3			(48.4	)

Hedging instruments:
Other invested assets:
Total return swaps	$	677.6		$	6.2			—		6.2			6.2			—

Total equity hedging instruments	$	677.6		$	6.2			—		6.2			6.2			—

Net equity impact							$	513.2	$	(68.7	)	$	444.5		$	(48.4	)

Credit risk exposures:
Fixed income securities	$	4,646.0		$	4,646.0		$	401.7	$	182.7		$	584.4		$	88.0
Derivatives:
Other invested assets		3.3			3.3			—		3.3			3.3			(0.2	)
Other liabilities		(45.8	)		(45.8	)		—		(57.2	)		(57.2	)		16.8
Cash, cash equivalents and short-term investments		1,731.1			1,731.1			—		61.1			61.1			61.1
Premiums receivable		548.5			548.5			—		(2.0	)		(2.0	)		(2.0	)
Reinsurance recoverable		1,088.7			1,088.7			—		(0.3	)		(0.3	)		—

Total credit risk exposure	$	7,971.8		$	7,971.8			401.7		187.6			589.3			163.7

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	416.5		$	4.4			—		(0.1	)		(0.1	)		12.8
Insurance		898.2			7.7			—		(26.5	)		(26.5	)		21.2

Total credit default swaps	$	1,314.7		$	12.1			—		(26.6	)		(26.6	)		34.0

Net exposure							$	401.7	$	161.0		$	562.7		$	197.7

ODYSSEY RE HOLDINGS CORP.

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


	As of and for the Nine Months Ended September 30, 2008
							Effect on Pre-tax:
	Exposure/						Other			Net Realized						Net Cash
	Notional			Carrying			Comprehensive			Investment						Flow from
	Value			Value			Loss			Gains			Net Equity			Disposals

Equity risk exposures:
Redeemable preferred stocks	$	0.4		$	0.4		$	0.8		$	(0.8	)	$	—		$	—
Common stocks, at fair value		970.3			970.3			(97.4	)		(82.1	)		(179.5	)		12.1

Total equity exposure	$	970.7		$	970.7			(96.6	)		(82.9	)		(179.5	)		12.1

Hedging instruments:
Other invested assets:
Total return swaps	$	1,034.7		$	46.6			—			280.7			280.7			237.9
Short positions		—			—			—			12.8			12.8			14.5
Call options		796.6			—			—			(1.2	)		(1.2	)		(1.5	)

Total equity hedging instruments	$	1,831.3		$	46.6			—			292.3			292.3			250.9

Net equity impact							$	(96.6	)	$	209.4		$	112.8		$	263.0

Credit risk exposures:
Fixed income securities	$	4,244.9		$	4,244.9		$	(60.2	)	$	49.8		$	(10.4	)	$	109.9
Derivatives:
Other invested assets		17.1			17.1			—			23.1			23.1			7.0
Other liabilities		(0.4	)		(0.4	)		—			(0.2	)		(0.2	)		(0.2	)
Cash, cash equivalents and short-term investments		2,306.6			2,306.6			—			(22.3	)		(22.3	)		(22.3	)
Premiums receivable		568.6			568.6			—			(0.5	)		(0.5	)		(0.5	)
Reinsurance recoverable		960.1			960.1			—			0.8			0.8			—

Total credit risk exposure	$	8,096.9		$	8,096.9			(60.2	)		50.7			(9.5	)		93.9

Hedging instruments:
Other invested assets:
Credit default swaps:
Mortgage	$	160.0		$	8.3			—			97.4			97.4			234.1
Banking		918.1			65.2			—			49.5			49.5			3.5
Insurance		1,457.1			71.8			—			169.0			169.0			191.4

Total credit default swaps	$	2,535.2		$	145.3			—			315.9			315.9			429.0

Net exposure							$	(60.2	)	$	366.6		$	306.4		$	522.9

ODYSSEY RE HOLDINGS CORP.

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


	As of and for the Three Months Ended September 30, 2009
							Effect on Pre-tax:
	Exposure/						Other		Net Realized						Net Cash
	Notional			Carrying			Comprehensive		Investment						Flow from
	Value			Value			Income		Gains			Net Equity			Disposals

Equity risk exposures:
Redeemable preferred stocks	$	0.1		$	0.1		$	—	$	—		$	—		$	—
Common stocks, at fair value		2,181.3			2,181.3			283.7		34.2			317.9			33.7

Total equity exposure	$	2,181.4		$	2,181.4			283.7		34.2			317.9			33.7

Hedging instruments:
Other invested assets:
Total return swaps	$	677.6		$	6.2			—		6.2			6.2			—

Total equity hedging instruments	$	677.6		$	6.2			—		6.2			6.2			—

Net equity impact							$	283.7	$	40.4		$	324.1		$	33.7

Credit risk exposures:
Fixed income securities	$	4,646.0		$	4,646.0		$	215.3	$	94.3		$	309.6		$	41.8
Derivatives:
Other invested assets		3.3			3.3			—		2.6			2.6			—
Other liabilities		(45.8	)		(45.8	)		—		(22.5	)		(22.5	)		(3.8	)
Cash, cash equivalents and short-term investments		1,731.1			1,731.1			—		32.7			32.7			32.7
Premiums receivable		548.5			548.5			—		(0.5	)		(0.5	)		(0.5	)
Reinsurance recoverable		1,088.7			1,088.7			—		(0.3	)		(0.3	)		—

Total credit risk exposure	$	7,971.8		$	7,971.8			215.3		106.3			321.6			70.2

Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	416.5		$	4.4			—		(4.0	)		(4.0	)		—
Insurance		898.2			7.7			—		(9.1	)		(9.1	)		—

Total credit default swaps	$	1,314.7		$	12.1			—		(13.1	)		(13.1	)		—

Net exposure							$	215.3	$	93.2		$	308.5		$	70.2

ODYSSEY RE HOLDINGS CORP.

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


	As of and for the Three Months Ended September 30, 2008
							Effect on Pre-tax:
	Exposure/						Other			Net Realized						Net Cash
	Notional			Carrying			Comprehensive			Investment						Flow from
	Value			Value			Loss			Gains			Net Equity			Disposals

Equity risk exposures:
Redeemable preferred stocks	$	0.4		$	0.4		$	0.2		$	(0.3	)	$	(0.1	)	$	—
Common stocks, at fair value		970.3			970.3			(81.1	)		(54.6	)		(135.7	)		3.9

Total equity exposure	$	970.7		$	970.7			(80.9	)		(54.9	)		(135.8	)		3.9

Hedging instruments:
Other invested assets:
Total return swaps	$	1,034.7		$	46.6			—			187.1			187.1			179.0
Call options		796.6			—			—			—			—			(0.2	)

Total equity hedging instruments	$	1,831.3		$	46.6			—			187.1			187.1			178.8

Net equity impact							$	(80.9	)	$	132.2		$	51.3		$	182.7

Credit risk exposures:
Fixed income securities	$	4,244.9		$	4,244.9		$	34.3		$	(52.6	)	$	(18.3	)	$	4.1
Derivatives:
Other invested assets		17.1			17.1			—			21.4			21.4			7.6
Other liabilities		(0.4	)		(0.4	)		—			(0.2	)		(0.2	)		(0.2	)
Cash, cash equivalents and short-term investments		2,306.6			2,306.6			—			(43.7	)		(43.7	)		(43.7	)
Premiums receivable		568.6			568.6			—			(0.2	)		—			(0.2	)
Reinsurance recoverable		960.1			960.1			—			(0.3	)		—			—

Total credit risk exposure	$	8,096.9		$	8,096.9			34.3			(75.6	)		(40.8	)		(32.4	)

Hedging instruments:
Other invested assets:
Credit default swaps:
Mortgage	$	160.0		$	8.3			—			7.2			7.2			68.7
Banking		918.1			65.2			—			29.3			29.3			3.5
Insurance		1,457.1			71.8			—			107.1			107.1			109.7

Total credit default swaps	$	2,535.2		$	145.3			—			143.6			143.6			181.9

Net exposure							$	34.3		$	68.0		$	102.8		$	149.5

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

The Company holds credit default swaps, referenced to various issuers in the banking and insurance sectors of the financial services industry worldwide, that serve as an economic hedge against declines in the fair value of investments and other corporate assets resulting from systemic financial and credit risk. Under a credit default swap,

ODYSSEY RE HOLDINGS CORP.

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

as the buyer, the Company agrees to pay to a specific counterparty, at specified periods, fixed premium amounts based on an agreed notional principal amount in exchange for protection against default by the issuers of specified referenced debt securities. The credit events, as defined by the respective credit default swap contracts, establishing the rights to recover amounts from the counterparties are comprised of ISDA-standard credit events, which are: bankruptcy, obligation acceleration, obligation default, failure to pay, repudiation/moratorium and restructuring. As of September 30, 2009 all credit default swap contracts held by the Company have been purchased from and entered into with either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as the counterparty, with positions on certain covered risks with more than one of these counterparties. The Company obtains market-derived fair values for its credit default swaps from third-party providers, principally broker-dealers. The Company assesses the reasonableness of the fair values obtained from these providers by comparison to models validated by qualified personnel, by reference to movements in credit spreads and by comparing the fair values to recent transaction prices for similar credit default swaps, where available.

The initial premium paid for each credit default swap contract is recorded as a derivative asset and is subsequently adjusted for changes in the unrealized fair value of the contract at each balance sheet date. As these contracts do not qualify for hedge accounting, changes in the unrealized fair value of the contract are recorded as net realized investment gains in the Company’s consolidated statements of operations and comprehensive income. Sales of credit default swap contracts during 2009 caused the Company to reverse through net realized investment gains any previously recorded unrealized fair value changes since the inception of the contract, and to record the actual amount based upon the final cash settlement. Derivative assets are reported gross, on a contract-by-contract basis, at fair value in other invested assets in the consolidated balance sheets. The sale, expiration or early settlement of a credit default swap will not result in a cash payment owed by the Company; rather, such an event can only result in a cash payment by a third party purchaser of the contract, or the counterparty, to the Company. Accordingly, there is no opportunity for netting of amounts owed in settlement. Cash receipts at the date of sale of the credit default swaps are recorded as cash flows from investing activities arising from net sales of assets and liabilities classified as held for trading.

The fair values of credit default swaps are subject to significant volatility, given potential differences in the perceived risk of default of the underlying issuers, movements in credit spreads and the length of time to the contracts’ maturities. The fair value of the credit default swaps may vary dramatically either up or down in short periods, and their ultimate value may therefore only be known upon their disposition. Credit default swap transactions generally settle in cash. As a result of the appreciation in the fair value of the credit default swaps, counterparties to these transactions are required to place government securities as collateral, pursuant to the swap agreements. The fair value of this collateral as of September 30, 2009 was $5.4 million; the Company has not exercised its right to sell or repledge this collateral. As the Company funds all of its obligations relating to these contracts upon initiation of the transaction, there are no requirements in these contracts for the Company to provide collateral.

The Company’s holdings of credit default swap contracts have declined significantly in 2009 relative to prior years, largely as a result of significant sales in 2008. In the latter part of 2008, the Company revised the financial objectives of its hedging program by determining not to replace its credit default swap hedge position as sales or expiries occurred, primarily based on the Company’s judgment that its exposure to elevated levels of credit risk had moderated following a marked improvement in the credit markets, but also due to (i) the significant increase in the cost of purchasing credit protection (reducing the attractiveness of the credit default swap contract as a hedging instrument), (ii) improvement in the Company’s capital and liquidity (having benefited significantly from, among other things, more than $568.9 million in gains from sales of credit default swaps realized since 2007), and (iii) the Company’s judgment that managing credit risk without the use of derivatives was, given the market environment, once again an appropriate means for mitigating the Company’s credit exposure arising from financial assets.

For the nine months ended September 30, 2009, the Company sold a portion of its credit default swaps, which contributed to the decrease in the fair value of the portfolio to $12.1 million as of September 30, 2009, from

ODYSSEY RE HOLDINGS CORP.

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

$82.8 million as of December 31, 2008. The credit default swap portfolio has an average term to expiration of 1.8 years as of September 30, 2009, a decrease from 2.5 years as of December 31, 2008.

The Company has entered into forward currency contracts to manage its foreign currency exchange rate risk on a macro basis. Under a forward currency contract, the Company and the counterparty are obligated to purchase or sell an underlying currency at a specified price and time. Forward currency contracts are recorded at fair value in other liabilities as of September 30, 2009 and other invested assets as of December 31, 2008, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

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

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

The Company has purchased equity index total return swaps as an “economic hedge” against a broad market downturn. During the fourth quarter of 2008, the Company had removed the then-existing economic hedge on its portfolio, closing all of its total return swap contracts for a gain. Since closing these positions, however, the Company has increased its holdings in equity securities through additional acquisitions. In addition, the equity markets have experienced significant appreciation in value since the end of 2008, further increasing the value of the Company’s holdings as well as the Company’s exposure to market volatility. As a result, in late September 2009, the Company initiated U.S. equity index total return swap contracts, with a notional value of $677.6 million, to protect against potential future broad market downturns. The collateral requirement related to entering the total return swaps was $40.7 million as of September 30, 2009. These total return swap transactions terminate during the third quarter of 2010. The equity index total return swaps, in the aggregate, were in a gain position as of September 30, 2009, and are recorded in other invested assets. Changes in the fair values of equity index and common stock total return swaps are recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur. As a result of the appreciation in the fair value of the total return swaps, counterparties to these transactions are required to place government securities as collateral, pursuant to the swap agreements. The fair value of this collateral as of September 30, 2009 was $2.6 million. The Company has the right to sell or repledge this collateral.

In connection with the 2008 total return swap transactions, the Company owned a series of index call options on Standard & Poor’s depository receipts (“SPDRs”) and the iShares Canadian S&P/TSX60 (XIU), the majority of which expired in 2008 and the last of which was closed out as of January 14, 2009. A call option gives the purchaser the right, but not the obligation, to purchase an underlying security at a specific price or prices at or for a certain time. The call options were recorded at fair value in other invested assets, and changes in the fair value were recorded as realized investment gains or losses in the consolidated statements of operations.

During 2008, the Company entered into Eurodollar futures contracts to manage its interest rate risk with respect to certain investments. During the first quarter of 2009, the Company closed the futures contracts. A futures contract is a variation of a forward contract, with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and trading on an organized electronic or floor trading facility. Futures contracts are entered either long or short. The Company had entered into the long position, which

ODYSSEY RE HOLDINGS CORP.

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

agrees to buy the underlying currency at the future date at the price agreed upon. As of December 31, 2008, futures contracts were recorded at fair value in other liabilities, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

The Company held short positions, primarily in equity securities, all of which were closed out during the second quarter of 2008. In connection with the short positions, the Company purchased a SPDR call option as protection against a decline in the value of the short positions. The call option was closed out on July 7, 2008. The call option was recorded at fair value in other invested assets in the consolidated balance sheets, and changes in the fair value were recorded as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.

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

The net realized investment gains or losses on disposal in the table below represent the total gains or losses from the purchase dates of the investments and have been reported in net realized investment gains in the consolidated statements of operations. The change in fair value presented below consists of two components: (i) the reversal of the gain or loss recognized in previous years on securities sold and (ii) the change in fair value resulting from mark-to-market adjustments on contracts still outstanding. The following table sets forth the total net realized investment gains and losses on derivatives and short sales for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Credit default swaps:
Net realized investment gain on disposal	$	33,960		$	428,983		$	—		$	181,926
Change in fair value		(60,543	)		(113,114	)		(13,137	)		(38,370	)

Net realized investment (loss) gain		(26,583	)		315,869			(13,137	)		143,556

Total return swaps:
Net realized investment gain on disposal		—			237,924			—			179,006
Change in fair value		6,182			42,783			6,182			8,123

Net realized investment gain		6,182			280,707			6,182			187,129

Forward currency contracts:
Net realized investment gain (loss) on disposal		18,328			7,553			(3,178	)		7,553
Change in fair value		(73,077	)		18,063			(17,849	)		14,935

Net realized investment (loss) gain		(54,749	)		25,616			(21,027	)		22,488

Warrants:
Net realized investment loss on disposal		(237	)		(590	)		—			—
Change in fair value		3,539			(1,906	)		2,578			(1,101	)

Net realized investment gain (loss)		3,302			(2,496	)		2,578			(1,101	)

Interest rate swaps:
Net realized investment loss on disposal		(1,255	)		—			(666	)		—
Change in fair value		(872	)		—			(789	)		—

Net realized investment loss		(2,127	)		—			(1,455	)		—

ODYSSEY RE HOLDINGS CORP.

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


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Futures Contracts:
Net realized investment loss on disposal		(275	)		(186	)		—			(186	)

Net realized investment loss		(275	)		(186	)		—			(186	)

Call options:
Net realized investment loss on disposal		—			(1,519	)		—			(249	)
Change in fair value		—			368			—			224

Net realized investment loss		—			(1,151	)		—			(25	)

Total derivatives:
Net realized investment gain (loss) on disposal		50,521			672,165			(3,844	)		368,050
Change in fair value		(124,771	)		(53,806	)		(23,015	)		(16,189	)

Net realized investment (loss) gain	$	(74,250	)	$	618,359		$	(26,859	)	$	351,861

Short positions:
Net realized investment gain (loss) on disposal		—			14,457			—			(15	)
Change in fair value		—			(1,635	)		—			—

Total net realized investment gain (loss)	$	—		$	12,822		$	—		$	(15	)


*(e)*	*Assets on Deposit*

The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutes and regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company utilizes trust funds in certain transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit requirements. As of September 30, 2009, restricted assets supporting these deposits and trust fund requirements totaled $1,026.9 million as depicted in the following table (in millions):


	As of September 30, 2009
	Restricted Assets Relating to:
	U.S.		Foreign
	Regulatory		Regulatory
	Requirements		Requirements		Total

Fixed income securities	$	409.4	$	531.8	$	941.2
Cash, cash equivalents and short-term investments		7.4		78.3		85.7

Total	$	416.8	$	610.1	$	1,026.9

ODYSSEY RE HOLDINGS CORP.

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


5.	Accumulated Other Comprehensive Income

The following table shows the components of the change in accumulated other comprehensive income, net of deferred income taxes, for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Beginning balance of unrealized net appreciation on securities	$	75,166		$	88,315		$	346,330		$	16,428
Ending balance of unrealized net appreciation (depreciation) on securities		673,467			(14,534	)		673,467			(14,534	)

Current period change in unrealized net appreciation (depreciation) on securities		598,301			(102,849	)		327,137			(30,962	)

Beginning balance of foreign currency translation adjustments		10,716			8,138			11,883			21,594
Adjustment to beginning balance due to a change in accounting standards (Note 3)		—			(1,531	)		—			—

Adjusted beginning balance of foreign currency translation adjustments		10,716			6,607			11,883			21,594
Ending balance of foreign currency translation adjustments		9,744			(6,778	)		9,744			(6,778	)

Current period change in foreign currency translation adjustments		(972	)		(13,385	)		(2,139	)		(28,372	)

Beginning balance of benefit plan liabilities		(3,461	)		(11,430	)		(3,461	)		(10,263	)
Adjustment to beginning balance due to a change in accounting standards		—			146			—			—

Adjusted beginning balance of benefit plan liabilities		(3,461	)		(11,284	)		(3,461	)		(10,263	)
Ending balance of benefit plan liabilities		(3,461	)		(10,263	)		(3,461	)		10,263

Current period change in benefit plan liabilities		—			1,021			—			—

Other comprehensive income (loss)	$	597,329		$	(115,213	)	$	324,998		$	(59,334	)

Beginning balance of accumulated other comprehensive income	$	82,421		$	85,023		$	354,752		$	27,759
Other comprehensive income (loss)		597,329			(115,213	)		324,998			(59,334	)
Effect of changes in accounting (Note 3)		—			(1,385	)		—			—

Change in accumulated other comprehensive income (loss)		597,329			(116,598	)		324,998			(59,334	)

Ending balance of accumulated other comprehensive income (loss)	$	679,750		$	(31,575	)	$	679,750		$	(31,575	)

ODYSSEY RE HOLDINGS CORP.

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

The components of comprehensive income for the nine and three months ended September 30, 2009 and 2008 are shown in the following table (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income	$	246,788		$	441,126		$	129,448		$	123,241

Other comprehensive income (loss), before tax:
Unrealized net appreciation (depreciation) on securities arising during the period		946,240			(175,858	)		583,511			(99,298	)
Reclassification adjustment for realized investment (losses) gains included in net income		(25,778	)		17,630			(80,223	)		51,665
Foreign currency translation adjustments		(1,495	)		(20,594	)		(3,290	)		(43,651	)
Benefit plan liabilities		—			1,571			—			—

Other comprehensive income (loss), before tax		918,967			(177,251	)		499,998			(91,284	)

Tax (provision) benefit:
Unrealized net (appreciation) depreciation on securities arising during the period		(331,183	)		61,551			(204,229	)		34,755
Reclassification adjustment for realized investment (losses) gains included in net income		9,022			(6,171	)		28,078			(18,083	)
Foreign currency translation adjustments		523			7,208			1,151			15,278
Benefit plan liabilities		—			(550	)		—			—

Total tax (provision) benefit		(321,638	)		62,038			(175,000	)		31,950

Other comprehensive income (loss), net of tax		597,329			(115,213	)		324,998			(59,334	)

Comprehensive income	$	844,117		$	325,913		$	454,446		$	63,907

ODYSSEY RE HOLDINGS CORP.

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


6.	Unpaid Losses and Loss Adjustment Expenses

The following table sets forth the activity in the liability for unpaid losses and loss adjustment expenses for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Gross unpaid losses and loss adjustment expenses, beginning of period	$	5,250,484		$	5,119,085		$	5,403,728		$	5,203,060
Less: Ceded unpaid losses and loss adjustment expenses, beginning of period		690,171			643,509			739,213			644,121

Net unpaid losses and loss adjustment expenses, beginning of period		4,560,313			4,475,576			4,664,515			4,558,939

Add: Losses and loss adjustment expenses incurred related to:
Current year		994,372			1,181,551			343,996			472,664
Prior years		(11,145	)		(163	)		(263	)		(3,580	)

Total losses and loss adjustment expenses incurred		983,227			1,181,388			343,733			469,084

Less: Paid losses and loss adjustment expenses related to:
Current year		110,223			151,607			48,394			76,744
Prior years		781,234			771,093			256,477			229,329

Total paid losses and loss adjustment expenses		891,457			922,700			304,871			306,073

Effects of exchange rate changes		57,369			(49,784	)		6,075			(37,470	)

Net unpaid losses and loss adjustment expenses, end of period		4,709,452			4,684,480			4,709,452			4,684,480
Add: Ceded unpaid losses and loss adjustment expenses, end of period		783,483			651,303			783,483			651,303

Gross unpaid losses and loss adjustment expenses, end of period	$	5,492,935		$	5,335,783		$	5,492,935		$	5,335,783

Estimates of reserves for unpaid losses and loss adjustment expenses are contingent on many events that may or may not occur in the future. These events include changes in loss estimates arising from a variety of catastrophic events, hurricanes, windstorms and floods. The eventual outcome of these events may be different from the assumptions underlying the Company’s reserve estimates. In the event that the business environment and loss trends diverge from expected trends, the Company may have to adjust its reserves accordingly, potentially resulting in adverse or favorable effects to the Company’s financial results. The Company believes that the recorded estimate represents the best estimate of unpaid losses and loss adjustment expenses based on the information available as of September 30, 2009. The estimate is reviewed on a quarterly basis and the ultimate liability may be more or less than the amounts provided, for which any adjustments will be reflected in the periods in which they become known.

Net losses and loss adjustment expenses incurred related to the current year, as reflected in the table above, were $994.4 million for the nine months ended September 30, 2009, a decrease of $187.2 million from $1,181.6 million for the nine months ended September 30, 2008. This decrease was principally attributable to a reduction in current year property catastrophe losses of $117.6 million, to $105.3 million for the nine months ended September 30, 2009, from

ODYSSEY RE HOLDINGS CORP.

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

$222.9 million for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, current year property catastrophe losses included $53.5 million related to Windstorm Klaus and $13.3 million related to Windstorm Wolfgang. For the nine months ended September 30, 2008, current year property catastrophe losses included $123.2 million related to Hurricane Ike, $35.4 million related to the China winter storm, $15.0 million related to Windstorm Emma, $11.2 million related to Hurricane Gustav and $10.7 million related to the Australia floods.

Net losses and loss adjustment expenses incurred related to prior years decreased $11.1 million for the nine months ended September 30, 2009, and decreased $0.2 million for the nine months ended September 30, 2008. The decrease in prior period losses and loss adjustment expenses for the nine months ended September 30, 2009 was attributable to reduced loss estimates due to loss emergence lower than expectations in the period on business written in EuroAsia, London Market and U.S. Insurance divisions.

Net losses and loss adjustment expenses incurred related to the current year, as reflected in the table above, were $344.0 million for the three months ended September 30, 2009, a decrease of $128.7 million from $472.7 million for the three months ended September 30, 2008. This decrease was principally attributable to a reduction in current year property catastrophe losses of $103.6 million, to $42.4 million for the three months ended September 30, 2009, from $146.0 million for the three months ended September 30, 2008. For the three months ended September 30, 2009, current year property catastrophe losses included $13.3 million related to Windstorm Wolfgang. For the three months ended September 30, 2008, current year property catastrophe losses included $123.2 million related to Hurricane Ike and $11.2 million related to Hurricane Gustav.

Net losses and loss adjustment expenses incurred related to prior years decreased $0.3 million for the three months ended September 30, 2009, and decreased $3.6 million for the three months ended September 30, 2008. The decrease in prior period losses and loss adjustment expenses for the three months ended September 30, 2008 was attributable to decreased loss estimates due to loss emergence lower than expectations in the period on business written in the EuroAsia, London Market and U.S. Insurance divisions.

Ceded unpaid losses and loss adjustment expenses were $783.5 million and $651.3 million as of September 30, 2009 and 2008, respectively. The increase in ceded unpaid losses and loss adjustment expenses was principally attributable to a $73.5 million increase in unpaid reinsurance recoverables related to property catastrophe events.

The Company uses tabular reserving for workers’ compensation indemnity reserves, which are considered to be fixed and determinable, and discounts such reserves using an interest rate of 3.5%. Losses have been discounted using the Life Table for Total Population: United States, 2004. Reserves reported at the discounted value were $114.8 million and $118.2 million as of September 30, 2009 and December 31, 2008, respectively. The amount of case reserve discount was $54.8 million and $55.6 million as of September 30, 2009 and December 31, 2008, respectively. The amount of incurred but not reported reserve discount was $21.3 million and $24.0 million as of September 30, 2009 and December 31, 2008, respectively.


7.	Asbestos and Environmental Losses and Loss Adjustment Expenses

The Company has exposure to losses from asbestos, environmental pollution and other latent injury damage claims. Net unpaid asbestos and environmental losses and loss adjustment expenses as of September 30, 2009 were $237.4 million, representing 5.0% of total net unpaid losses and loss adjustment expenses, compared to $260.3 million, or 5.7% of total net unpaid losses and loss adjustment expenses as of December 31, 2008. Exposure arises from reinsurance contracts written by Clearwater prior to 1986 under which the Company has assumed liabilities, on an indemnity or assumption basis, from ceding companies, primarily in connection with general liability insurance policies issued by such ceding companies. The Company’s estimate of its ultimate liability for these exposures includes “case basis” reserves and a provision for liabilities incurred but not reported. Case basis reserves are a combination of reserves reported to the Company by ceding companies and additional case reserves determined by the Company. The provision for liabilities incurred but not reported is established based on an annual review of the

ODYSSEY RE HOLDINGS CORP.

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

Company’s experience and external trends in reported loss and claim payments, with monitoring of emerging experience on a quarterly basis.

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

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

The Company’s reserves for asbestos and environmental-related liabilities displayed below are from business written prior to 1986. The Company’s asbestos and environmental reserve development, gross and net of reinsurance, for the nine and three months ended September 30, 2009 and 2008, is set forth in the table below (in thousands):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Asbestos
Gross unpaid losses and loss adjustment expenses, beginning of period	$	360,733	$	339,271	$	342,482	$	332,927
Add: Gross losses and loss adjustment expenses incurred		—		48,322		—		25,000
Less: Gross calendar year paid losses and loss adjustment expenses		27,258		41,326		9,007		11,660

Gross unpaid losses and loss adjustment expenses, end of period	$	333,475	$	346,267	$	333,475	$	346,267

Net unpaid losses and loss adjustment expenses, beginning of period	$	230,486	$	222,426	$	220,335	$	209,688
Add: Net losses and loss adjustment expenses incurred		—		21,000		—		15,000
Less: Net calendar year paid losses and loss adjustment expenses		18,066		27,301		7,915		8,563

Net unpaid losses and loss adjustment expenses, end of period	$	212,420	$	216,125	$	212,420	$	216,125

ODYSSEY RE HOLDINGS CORP.

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


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Environmental
Gross unpaid losses and loss adjustment expenses, beginning of period	$	34,242	$	41,984	$	29,102	$	39,817
Add: Gross losses and loss adjustment expenses incurred		—		—		—		—
Less: Gross calendar year paid losses and loss adjustment expenses		6,276		6,884		1,136		4,717

Gross unpaid losses and loss adjustment expenses, end of period	$	27,966	$	35,100	$	27,966	$	35,100

Net unpaid losses and loss adjustment expenses, beginning of period	$	29,819	$	34,485	$	26,094	$	32,534
Add: Net losses and loss adjustment expenses incurred		—		—		—		—
Less: Net calendar year paid losses and loss adjustment expenses		4,861		5,466		1,136		3,515

Net unpaid losses and loss adjustment expenses, end of period	$	24,958	$	29,019	$	24,958	$	29,019

The Company did not incur net losses and loss adjustment expenses related to asbestos or environmental claims for the nine and three months ended September 30, 2009. Net losses and loss adjustment expenses incurred for asbestos claims increased $21.0 million and $15.0 million for the nine and three months ended September 30, 2008, respectively, due to loss emergence greater than expectations in the periods. The Company did not incur net losses and loss adjustment expenses related to environmental claims for the nine and three months ended September 30, 2008.

The Company’s survival ratio for asbestos and environmental-related liabilities as of September 30, 2009 is seven years. The Company’s underlying survival ratio for asbestos-related liabilities is seven years and for environmental-related liabilities is four years. The asbestos and environmental-related liability survival ratio represents the asbestos and environmental reserves, net of reinsurance, as of September 30, 2009, divided by the average paid asbestos and environmental claims for the last three years of $35.7 million, which are net of reinsurance. Our survival ratios may fluctuate over time due to the variability of large payments and adjustments to liabilities.

ODYSSEY RE HOLDINGS CORP.

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


8.	Debt Obligations, Common Shares and Preferred Shares

Debt Obligations

The components of the Company’s debt obligations as of September 30, 2009 and December 31, 2008 were as follows (in thousands):


	September 30,		December 31,
	2009		2008

7.65% Senior Notes due 2013	$	224,823	$	224,790
6.875% Senior Notes due 2015		124,548		124,488
Series A Floating Rate Senior Debentures due 2021		50,000		50,000
Series B Floating Rate Senior Debentures due 2016		50,000		50,000
Series C Floating Rate Senior Debentures due 2021		40,000		40,000

Total debt obligations	$	489,371	$	489,278

On November 28, 2006, the Company completed the private sale of $40.0 million aggregate principal amount of floating rate senior debentures, series C, due December 15, 2021 (the “Series C Notes”). Interest on the Series C Notes accrues at a rate per annum equal to the three-month London Interbank Offer Rate (“LIBOR”), reset quarterly, plus 2.50%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The Company has the option to redeem the Series C Notes at par, plus accrued and unpaid interest, in whole or in part on any interest payment date on or after December 15, 2011. For the nine months ended September 30, 2009 and 2008, the average annual interest rate on the Series C Notes was 3.72% and 5.90%, respectively.

On February 22, 2006, the Company issued $100.0 million aggregate principal amount of floating rate senior debentures, pursuant to a private placement. The net proceeds from the offering, after fees and expenses, were $99.3 million. The debentures were sold in two tranches: $50.0 million of series A, due March 15, 2021 (the “Series A Notes”), and $50.0 million of series B, due March 15, 2016 (the “Series B Notes”). Interest on each series of debentures is due quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The interest rate on each series of debentures is equal to the three-month LIBOR, reset quarterly, plus 2.20%. The Series A Notes are callable by the Company on any interest payment date on or after March 15, 2011 at their par value, plus accrued and unpaid interest, and the Series B Notes are callable by the Company on any interest payment date on or after March 15, 2009 at their par value, plus accrued and unpaid interest. For the nine months ended September 30, 2009 and 2008, the average annual interest rate on each series of notes was 3.42% and 5.60%, respectively.

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

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

ODYSSEY RE HOLDINGS CORP.

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

As of September 30, 2009, the aggregate maturities of the Company’s debt obligations, at face value, were as follows (in thousands):


Year	Amount

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

Total	$	490,000

As of September 30, 2009 and December 31, 2008, the amortized cost of the Company’s debt obligations was $489.4 million and $489.3 million respectively, as reflected in the respective consolidated balance sheets. As of September 30, 2009 and December 31, 2008, the estimated fair value of the Company’s debt obligations was $490.2 million and $407.0 million, respectively. The estimated fair value is based on quoted market prices of the Company’s debt, where available, and for debt similar to the Company’s, and discounted cash flow calculations.

On July 13, 2007, the Company entered into a $200.0 million credit facility (the “Credit Agreement”) with Wachovia Bank National Association (“Wachovia”), Keybank National Association and a syndicate of lenders. The Credit Agreement provides for a five-year credit facility of $200.0 million, $100.0 million of which is available for direct, unsecured borrowings by the Company, and all of which is available for the issuance of secured letters of credit. The Credit Agreement contains an option that permits the Company to request an increase in the aggregate amount of the facility by an amount up to $100.0 million, to a maximum facility size of $300.0 million. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion of the proposed increase. The Credit Agreement is for working capital and other corporate purposes, including the issuance of letters of credit to support the insurance and reinsurance business of the Company. As of June 17, 2009, the Credit Agreement was amended to explicitly permit the Company to pledge collateral to secure its obligations under swap agreements, subject to certain financial limitations, in the event that such collateral is required by the counterparty or counterparties.

As of September 30, 2009, there was $56.5 million outstanding under the Credit Agreement, all of which was in support of letters of credit. Loans under the Credit Agreement bear interest at a fluctuating rate per annum equal to the higher of (a) the federal funds rate plus 0.5%, and (b) Wachovia’s publicly announced prime rate. Alternatively, at the Company’s option, loans bear interest at the LIBOR, which is the offered rate that appears on the page of the Telerate screen that displays an average British Bankers Association Interest Settlement Rate for deposits in dollars, plus 0.55%, which additional percentage may be adjusted if the Company’s debt rating changes.

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

Common Shares

The Company’s Board of Directors authorized a share repurchase program whereby the Company was authorized to repurchase shares of its common stock on the open market from time to time through December 31, 2009, up to an aggregate repurchase price of $600.0 million. Shares repurchased under the program were retired. During the nine months ended September 30, 2009, the Company repurchased and retired 1,789,100 shares of its common stock, at a cost of $72.6 million, an average repurchase price of $40.56 per share. From the inception of the program through September 30, 2009, the Company repurchased and retired 13,906,845 shares of its common stock at a total cost of $518.4 million. No purchases of common stock were made by the Company after August 13, 2009.

ODYSSEY RE HOLDINGS CORP.

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

Preferred Shares

During the first quarter of 2009, Odyssey America purchased 704,737 shares of the Company’s Series B preferred shares, with a liquidation preference of $17.2 million, for $9.2 million. As a result of the purchase of the Series B preferred shares, the Company recorded a gain of $8.0 million during the nine months ended September 30, 2009, which was reflected in the Company’s retained earnings and included in net income available to common shareholders.


9.	Segment Reporting

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

The financial results of these divisions for the nine and three months ended September 30, 2009 and 2008 are as follows (in thousands):


							London			U.S.
Nine Months Ended September 30, 2009	Americas			EuroAsia			Market			Insurance			Total

Gross premiums written	$	576,246		$	442,480		$	234,175		$	444,298		$	1,697,199
Net premiums written		563,435			417,699			181,200			300,480			1,462,814
Net premiums earned	$	588,518		$	412,328		$	185,254		$	258,285		$	1,444,385

Losses and loss adjustment expenses		382,802			314,040			108,713			177,672			983,227
Acquisition costs and other underwriting expenses		182,035			102,376			53,518			75,051			412,980

Total underwriting deductions		564,837			416,416			162,231			252,723			1,396,207

Underwriting income (loss)	$	23,681		$	(4,088	)	$	23,023		$	5,562			48,178

Net investment income														237,082
Net realized investment gains														99,992
Other expense, net														(34,263	)
Interest expense														(23,522	)

Income before income taxes													$	327,467

Underwriting ratios:
Losses and loss adjustment expenses		65.1	%		76.2	%		58.7	%		68.8	%		68.1	%
Acquisition costs and other underwriting expenses		30.9			24.8			28.9			29.1			28.6

Combined ratio		96.0	%		101.0	%		87.6	%		97.9	%		96.7	%

ODYSSEY RE HOLDINGS CORP.

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


							London			U.S.
Nine Months Ended September 30, 2008	Americas			EuroAsia			Market			Insurance			Total

Gross premiums written	$	598,957		$	491,865		$	278,463		$	431,171		$	1,800,456
Net premiums written		586,593			469,361			223,835			313,320			1,593,109
Net premiums earned	$	586,760		$	437,215		$	231,237		$	317,147		$	1,572,359

Losses and loss adjustment expenses		515,044			318,897			146,946			200,501			1,181,388
Acquisition costs and other underwriting expenses		188,448			113,930			61,966			82,527			446,871

Total underwriting deductions		703,492			432,827			208,912			283,028			1,628,259

Underwriting (loss) income	$	(116,732	)	$	4,388		$	22,325		$	34,119			(55,900	)

Net investment income														200,329
Net realized investment gains														565,368
Other expense, net														(13,192	)
Interest expense														(25,827	)

Income before income taxes													$	670,778

Underwriting ratios:
Losses and loss adjustment expenses		87.8	%		72.9	%		63.6	%		63.2	%		75.1	%
Acquisition costs and other underwriting expenses		32.1			26.1			26.8			26.0			28.5

Combined ratio		119.9	%		99.0	%		90.4	%		89.2	%		103.6	%


							London			U.S.
Three Months Ended September 30, 2009	Americas			EuroAsia			Market			Insurance			Total

Gross premiums written	$	190,561		$	151,278		$	86,300		$	202,752		$	630,891
Net premiums written		185,821			139,577			67,508			131,122			524,028
Net premiums earned	$	192,604		$	133,838		$	69,141		$	98,313		$	493,896

Losses and loss adjustment expenses		126,165			110,416			35,678			71,474			343,733
Acquisition costs and other underwriting expenses		57,862			33,659			20,232			23,252			135,005

Total underwriting deductions		184,027			144,075			55,910			94,726			478,738

Underwriting income (loss)	$	8,577		$	(10,237	)	$	13,231		$	3,587			15,158

Net investment income														76,655
Net realized investment gains														144,156
Other expense, net														(45,514	)
Interest expense														(7,619	)

Income before income taxes													$	182,836

Underwriting ratios:
Losses and loss adjustment expenses		65.5	%		82.5	%		51.6	%		72.7	%		69.6	%
Acquisition costs and other underwriting expenses		30.1			25.2			29.3			23.7			27.3

Combined ratio		95.6	%		107.7	%		80.9	%		96.4	%		96.9	%

ODYSSEY RE HOLDINGS CORP.

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


							London			U.S.
Three Months Ended September 30, 2008	Americas			EuroAsia			Market			Insurance			Total

Gross premiums written	$	234,783		$	151,409		$	98,190		$	172,362		$	656,744
Net premiums written		229,362			141,888			83,304			117,253			571,807
Net premiums earned	$	208,663		$	137,578		$	83,875		$	115,277		$	545,393

Losses and loss adjustment expenses		265,550			83,049			56,255			64,230			469,084
Acquisition costs and other underwriting expenses		64,147			36,068			19,955			27,113			147,283

Total underwriting deductions		329,697			119,117			76,210			91,343			616,367

Underwriting (loss) income	$	(121,034	)	$	18,461		$	7,665		$	23,934			(70,974	)

Net investment income														62,505
Net realized investment gains														196,743
Other income, net														6,018
Interest expense														(8,390	)

Income before income taxes													$	185,902

Underwriting ratios:
Losses and loss adjustment expenses		127.3	%		60.4	%		67.1	%		55.7	%		86.0	%
Acquisition costs and other underwriting expenses		30.7			26.2			23.8			23.5			27.0

Combined ratio		158.0	%		86.6	%		90.9	%		79.2	%		113.0	%


10.	Commitments and Contingencies

On February 8, 2007, the Company was added as a co-defendant in an amended and consolidated complaint in an existing action against the Company’s majority shareholder, Fairfax, and certain of Fairfax’s officers and directors, who include certain of the Company’s current and former directors. The amended and consolidated complaint has been filed in the United States District Court for the Southern District of New York by the lead plaintiffs, who seek to represent a class of all purchasers and acquirers of securities of Fairfax between May 21, 2003 and March 22, 2006, inclusive, and allege, among other things, that the defendants violated U.S. federal securities laws by making material misstatements or failing to disclose certain material information. The amended and consolidated complaint seeks, among other things, certification of the putative class, unspecified compensatory damages, unspecified injunctive relief, reasonable costs and attorneys’ fees and other relief. These claims are at a preliminary stage. Pursuant to the scheduling stipulations, the various defendants filed their respective motions to dismiss the amended and consolidated complaint, the lead plaintiffs filed their opposition thereto, and the defendants filed their replies to those oppositions; the motions to dismiss were argued before the Court in December 2007. The Court has not yet issued a ruling on these motions. The Company intends to vigorously defend against the allegations. At this early stage of the proceedings, it is not possible to make any determination regarding the likely outcome of this matter.

In July 2006, Fairfax, the Company’s majority shareholder, filed a lawsuit in the Superior Court, Morris County, New Jersey, seeking damages from a number of defendants who, the complaint alleges, participated in a stock market manipulation scheme involving Fairfax shares, and the complaint was subsequently amended to add additional allegations and two defendants. In January 2008, two of these defendants filed a counterclaim against Fairfax and a third party complaint against, among others, OdysseyRe and certain of its directors. Those counterclaims and third-party claims were voluntarily withdrawn in March 2008. In September 2008, the same

ODYSSEY RE HOLDINGS CORP.

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

two defendants filed an amended counterclaim and third-party complaint that again named OdysseyRe and certain directors as defendants. The complaint alleges, among other things, claims of racketeering, intentional infliction of emotional distress, tortious interference with economic advantage and other torts, and seeks unspecified compensatory and punitive damages and other relief. OdysseyRe denies the allegations and intends to vigorously defend against these claims. OdysseyRe has not yet responded to the complaint, and the timing of that response has not been set. At this early stage of the proceedings, it is not possible to make any determination regarding the likely outcome of this matter.

The Company participates in Lloyd’s through its 100% ownership of Newline, through which the Company provides 100% of the capacity for Newline Syndicate 1218 (“Syndicate 1218”). The results of Syndicate 1218 are consolidated in the financial statements of the Company. In support of Syndicate 1218’s capacity at Lloyd’s, Odyssey America has pledged securities and cash with a fair value of $228.6 million as of September 30, 2009 in a deposit trust account in favor of the Society and Council of Lloyd’s. These securities may be substituted with other securities at the discretion of the Company, subject to approval by Lloyd’s. The securities are carried at fair value and are included in investments and cash in the Company’s consolidated balance sheets. Interest earned on the securities is included in investment income. The pledge of assets in support of Syndicate 1218 provides the Company with the ability to participate in writing business through Lloyd’s, which remains an important part of the Company’s business. The pledged assets effectively secure the contingent obligations of Syndicate 1218 should it not meet its obligations. Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the pledged assets. The Company has the ability to remove funds at Lloyd’s annually, subject to certain minimum amounts required to support outstanding liabilities as determined under risk-based capital models and approved by Lloyd’s. The funds used to support outstanding liabilities are adjusted annually and the obligations of the Company to support these liabilities will continue until they are settled or the liabilities are reinsured by a third party approved by Lloyd’s. The Company expects to continue to actively operate Syndicate 1218 and support its requirements at Lloyd’s. The Company believes that Syndicate 1218 maintains sufficient liquidity and financial resources to support its ultimate liabilities and the Company does not anticipate that the pledged assets will be utilized.

As of July 14, 2000, Odyssey America agreed to guarantee the performance of all the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), a subsidiary of Fairfax, in the event CTR became insolvent and CTR was not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. The guarantee, which was entered into while Odyssey America and CTR were each 100% owned by Fairfax, was provided by Odyssey America to facilitate the transfer of renewal rights to CTR’s business, together with certain CTR employees, to Odyssey America in 2000 in order to further expand the Company’s international reinsurance business. The guarantee was terminated effective December 31, 2001. There were no amounts received from CTR under the guarantee, and the Company did not provide any direct consideration for the renewal rights to the business of CTR. CTR was dissolved and its assets and liabilities were assumed by subsidiaries of Fairfax that have the responsibility for the run-off of its liabilities. Although CTR’s liabilities were assumed by Fairfax subsidiaries, the guarantee only pertains to those liabilities attaching to the policies written by CTR. Fairfax has agreed to indemnify Odyssey America for all its obligations incurred under its guarantee. The Company’s potential exposure in connection with this agreement is estimated to be $122.3 million as of September 30, 2009. The Company believes that the financial resources of the Fairfax subsidiaries that have assumed CTR’s liabilities provide adequate protection to satisfy the obligations that are subject to this guarantee. The Company does not expect to make payments under this guarantee and does not consider its potential exposure under this guarantee to be material to its consolidated financial position.

Odyssey America agreed, as of April 1, 2002, to guarantee the payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agreement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), a subsidiary of Fairfax Asia Limited (“Fairfax Asia”), in the event Falcon becomes insolvent. Fairfax Asia is 100% owned by Fairfax, which includes a 26.2% economic interest

ODYSSEY RE HOLDINGS CORP.

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

owned by the Company. The guarantee by Odyssey America was made to assist Falcon in writing business through access to Odyssey America’s financial strength ratings and capital resources. Odyssey America is paid a fee for this guarantee of one percent of all gross premiums earned associated with the Subject Contracts on a quarterly basis. For each of the nine month periods ended September 30, 2009 and 2008, Falcon paid $0.2 million, to Odyssey America in connection with this guarantee. Odyssey America’s potential exposure in connection with this agreement is estimated to be $53.7 million, based on Falcon’s loss reserves at September 30, 2009. Falcon’s shareholders’ equity on a U.S. GAAP basis is estimated to be $56.6 million as of September 30, 2009. Fairfax has agreed to indemnify Odyssey America for any obligation under this guarantee. The Company believes that the financial resources of Falcon provide adequate protection to support its liabilities in the ordinary course of business. The Company anticipates that Falcon will meet all of its obligations in the normal course of business and does not expect to make any payments under this guarantee. The Company does not consider its potential exposure under this guarantee to be material to its consolidated financial position.

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

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


11.	Employee Benefits

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

ODYSSEY RE HOLDINGS CORP.

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

Net periodic benefit cost, before taxes, included in the Company’s consolidated statements of operations for the nine and three months ended September 30, 2009 and 2008 is comprised of the following components (in thousands):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Defined Benefit Pension Plan:
Service cost	$	3,841		$	3,993		$	1,280		$	1,331
Interest cost		2,574			2,232			858			744
Return on assets		(1,641	)		(1,650	)		(547	)		(550	)
Recognized net actuarial loss		—			388			—			129
Settlement charge		—			1,571			—			—
Net amortization and deferral		41			41			14			14

Net periodic benefit cost	$	4,815		$	6,575		$	1,605		$	1,668

Excess Benefit Plans:
Service cost	$	549		$	630		$	183		$	210
Interest cost		713			639			238			213
Recognized net actuarial loss		94			183			31			61
Recognized prior service cost		(28	)		(28	)		(9	)		(9	)

Net periodic benefit cost	$	1,328		$	1,424		$	443		$	475

Postretirement Benefit Plan:
Service cost	$	1,173		$	1,340		$	391		$	446
Interest cost		769			659			256			219
Net amortization and deferral		(131	)		(78	)		(44	)		(26	)

Net periodic benefit cost	$	1,811		$	1,921		$	603		$	639

The Company recorded a one-time pension settlement expense of $1.6 million ($1.0 million after-tax) and a corresponding increase to other comprehensive income, during the second quarter of 2008 related to the settlement of retiree benefit obligations from the defined benefit pension plan. The settlement of the retiree benefit obligations resulted in the immediate recognition of a portion of a previously unrecognized actuarial loss. The settlement of retiree benefit obligations had no effect on total shareholders’ equity. Annuities have been purchased for those individuals whose retiree benefit obligations were settled under the defined benefit pension plan. Additionally, as a result of the settlement, the Company’s retiree benefit obligations and the fair value of the plan assets decreased by $7.7 million.

During the second quarter of 2009, the Company contributed $1.0 million to the Defined Benefit Pension Plan. No contributions were made to the above plans for the nine and three months ended September 30, 2008.


12.	Stock-Based Compensation Plans

As of September 30, 2009, the Company had three stock-based compensation plans (the “Plans”): the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan (the “2002 Option Plan”), the Odyssey Re Holdings Corp. Stock Option Plan (the “2001 Option Plan”) and the Odyssey Re Holdings Corp. Restricted Share Plan (the “Restricted Share Plan”). The Plans generally allow for the issuance of grants and exercises through the use of shares purchased on the open market or otherwise acquired, newly issued shares, treasury stock, or any combination thereof. The

ODYSSEY RE HOLDINGS CORP.

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

following is the Company’s recognized expense and the resulting tax benefit related to the Plans for the nine and three months ended September 30, 2009 and 2008, respectively (in thousands):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Stock-based compensation expense	$	11,217.0	$	6,906.2	$	4,100.5	$	2,446.3
Tax benefit		3,925.9		2,417.2		1,435.1		856.2

For the nine months ended September 30, 2009 and 2008, the Company received $0.8 million and $1.0 million, respectively, in cash from employees for the exercise of stock options. For both the three months ended September 30, 2009 and 2008, the Company received $0.6 million, in cash from employees for the exercise of stock options.

As of September 30, 2009, there was less than $0.1 million of unrecognized compensation cost related to unvested options from the 2002 Option Plan, which is expected to be recognized over a remaining weighted-average vesting period of 1.0 year. The Company did not grant any stock options during the nine months ended September 30, 2009 and 2008, respectively, under the 2002 Option Plan.

As of September 30, 2009, there was $3.1 million of unrecognized compensation cost related to unvested options granted from the 2001 Option Plan, which is expected to be recognized over a remaining weighted-average vesting period of 2.3 years. The Company granted 52,496 and 59,074 stock options during the nine months ended September 30, 2009 and 2008, respectively, under the 2001 Option Plan.

As of September 30, 2009, there was $22.1 million of unrecognized compensation cost related to unvested restricted share awards from the Restricted Share Plan, which is expected to be recognized over a remaining weighted-average vesting period of 3.4 years. The Company granted 371,547 and 343,011 restricted share awards during the nine months ended September 30, 2009 and 2008, respectively, under the Restricted Share Plan.


13.	Federal and Foreign Income Taxes

The Company’s federal and foreign income tax provisions for the nine and three months ended September 30, 2009 were $80.7 million and $53.4 million, respectively, resulting in effective tax rates of 24.6% and 29.2%, respectively, as compared to the Company’s federal and foreign income tax provisions for the nine and three months ended September 30, 2008 of $229.7 million and $62.7 million of income tax expense, respectively, resulting in effective tax rates of 34.2% and 33.7%, respectively. The effective tax rates for the nine and three months ended September 30, 2009 are not necessarily indicative of the effective tax rates for the 2009 interim or annual periods.

ODYSSEY RE HOLDINGS CORP.

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

The following table reconciles federal and foreign income taxes at the statutory federal income tax rate to the Company’s tax provision for the nine and three months ended September 30, 2009 and 2008 (in thousands):


	Nine Months Ended												Three Months Ended
	September 30,												September 30,
	2009						2008						2009						2008
				% of						% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax						Pre-tax
	Amount			Income			Amount			Income			Amount			Income			Amount			Income

Income before income taxes	$	327,467					$	670,778					$	182,836					$	185,902

Income tax provision computed at the U.S. statutory tax rate on income	$	114,614			35.0	%	$	234,772			35.0	%	$	63,993			35.0	%	$	65,065			35.0	%
(Decrease) increase in income taxes resulting from:
Dividend received deduction		(6,665	)		(2.0	)		(2,922	)		(0.4	)		(1,640	)		(0.9	)		(1,123	)		(0.6	)
Tax-exempt income		(28,511	)		(8.7	)		(2,539	)		(0.4	)		(9,473	)		(5.2	)		(1,360	)		(0.7	)
Other, net		1,241			0.3			341			—			508			0.3			79			—

Total federal and foreign income tax provision	$	80,679			24.6	%	$	229,652			34.2	%	$	53,388			29.2	%	$	62,661			33.7	%


14.	Recent Accounting Pronouncements

In December 2008, the FASB issued an accounting standard to require enhanced disclosures regarding the major categories of plan assets, concentrations of risk, inputs and valuation techniques used to measure the fair value of plan assets and the effect of using unobservable inputs (Level 3 classification under the fair value accounting standard). The disclosure requirements of this standard are effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of this standard, if any, on its disclosure requirements.


15.	Subsequent Event

Pursuant to the Offer (see Note 1), which expired on October 21, 2009 at 12:00 midnight, New York City time, Fairfax acquired a total of approximately 14.3 million shares of common stock of OdysseyRe (the “Tendered Shares”). The Tendered Shares, combined with the shares previously owned by Fairfax and its subsidiaries, represented approximately 97.1% of the 58,451,922 shares of common stock of OdysseyRe outstanding. Following the purchase of the Tendered Shares, Fairfax caused a short-form merger pursuant to which Fairfax Investments USA Corp., a wholly-owned subsidiary of Fairfax, merged with and into OdysseyRe (the “Merger”).

The Merger was effected on October 28, 2009 pursuant to Section 253 of the General Corporation Law of the State of Delaware (the “DGCL”) by the execution and filing of a Certificate of Ownership and Merger with the Secretary of State of the State of Delaware. As a result of the Merger, all shares of OdysseyRe’s common stock held by the remaining minority shareholders of OdysseyRe (the “Remaining Shares”) were converted into and exchanged for the right to receive $65.00 per share in cash, without interest and subject to any applicable withholding of taxes, subject to the rights of holders of the Remaining Shares to seek appraisal of the fair market value thereof pursuant to Section 262 of the DGCL. Following the effective time of the Merger, trading of the shares of common stock of OdysseyRe was suspended on the New York Stock Exchange (“NYSE”) on October 29, 2009, and the NYSE has filed a Form 25 with the Securities and Exchange Commission to withdraw the shares from listing on the NYSE.


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

Overview

Odyssey Re Holdings Corp. (together with its subsidiaries, “OdysseyRe”) is a holding company, incorporated in the state of Delaware, which owns all of the common shares of Odyssey America Reinsurance Corporation (“Odyssey America”), its principal operating subsidiary. Odyssey America directly or indirectly owns all of the capital stock of the following companies: Clearwater Insurance Company (“Clearwater”); Clearwater Select Insurance Company; Newline Holdings U.K. Corporation Limited; Newline Underwriting Management Ltd., which manages Newline Syndicate 1218, a member of Lloyd’s of London (collectively “Newline”); Newline Insurance Company Limited (“NICL”); Hudson Insurance Company (“Hudson”); Hudson Specialty Insurance Company (“Hudson Specialty”); and Napa River Insurance Services, Inc.

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

Our gross premiums written for the nine months ended September 30, 2009 were $1,697.2 million, a decrease of $103.3 million, or 5.7%, compared to gross premiums written of $1,800.5 million for the nine months ended September 30, 2008. Our United States business accounted for 52.0% of our gross premiums written for the nine months ended September 30, 2009, compared to 48.5% for the nine months ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, our net premiums written were $1,462.8 million and $1,593.1 million, respectively. For the nine months ended September 30, 2009 and 2008, we had net income available to common shareholders of $250.8 million and $435.7 million, respectively. As of September 30, 2009, we had total assets of $10.9 billion and total shareholders’ equity of $3.6 billion.

The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio under United States generally accepted accounting principles (“GAAP”) is the sum of losses and loss adjustment expenses (“LAE”) incurred as a percentage of net premiums earned, plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percentage of net premiums earned. The combined ratio reflects only underwriting results and does not include investment results. Underwriting profitability is subject to significant fluctuations due to catastrophic events, competition, economic and social conditions, foreign currency fluctuations and other factors. Our combined ratio was 96.7% and 96.9% for the nine and three month periods ended September 30, 2009, respectively, compared to 103.6% and 113.0% for the nine and three months ended September 30, 2008, respectively.

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

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

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

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

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

Critical Accounting Estimates

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

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

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

Below is a discussion of our critical accounting estimates relating to premium estimates, reserves for unpaid losses and loss adjustment expenses, and reinsurance and retrocessions. Readers should review our 2008 Annual Report on Form 10-K for a more complete description of our significant accounting policies and accounting estimates.

Premium Estimates

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

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

The following table displays, by division, the estimates included in our consolidated financial statements as of September 30, 2009 and 2008 and June 30, 2009 and 2008 related to gross premiums written, acquisition costs, premiums receivable and unearned premium reserves (in millions):


	As of		As of		Change			Change			As of		As of		Change			Change
	September 30,		June 30,		Third			Year to			September 30,		June 30,		Third			Year to
Division	2009		2009		Quarter			Date			2008		2008		Quarter			Date

	Gross Premiums Written

Americas	$	122.7	$	139.2	$	(16.5	)	$	(39.7	)	$	179.6	$	179.3	$	0.3		$	2.1
EuroAsia		153.5		155.7		(2.2	)		27.8			161.4		172.1		(10.7	)		31.5
London Market		21.6		25.7		(4.1	)		(1.2	)		18.9		27.0		(8.1	)		(2.9	)

Total	$	297.8	$	320.6	$	(22.8	)	$	(13.1	)	$	359.9	$	378.4	$	(18.5	)	$	30.7


	Acquisition Costs

Americas	$	26.0	$	30.2	$	(4.2	)	$	(16.5	)	$	39.4	$	41.2	$	(1.8	)	$	(3.1	)
EuroAsia		41.3		43.7		(2.4	)		4.4			47.3		49.8		(2.5	)		8.4
London Market		1.8		1.6		0.2			0.1			1.5		2.4		(0.9	)		(0.6	)

Total	$	69.1	$	75.5	$	(6.4	)	$	(12.0	)	$	88.2	$	93.4	$	(5.2	)	$	4.7


	Premiums Receivable

Americas	$	96.7	$	109.0	$	(12.3	)	$	(23.2	)	$	140.2	$	138.1	$	2.1		$	5.2
EuroAsia		112.2		112.0		0.2			23.4			114.1		122.3		(8.2	)		23.1
London Market		19.8		24.1		(4.3	)		(1.3	)		17.3		24.6		(7.3	)		(2.4	)

Total	$	228.7	$	245.1	$	(16.4	)	$	(1.1	)	$	271.6	$	285.0	$	(13.4	)	$	25.9


	Unearned Premiums Reserve

Americas	$	89.3	$	95.5	$	(6.2	)	$	(26.2	)	$	120.0	$	125.1	$	(5.1	)	$	(2.9	)
EuroAsia		98.8		104.9		(6.1	)		(3.4	)		109.8		117.4		(7.6	)		12.6
London Market		3.2		10.4		(7.2	)		(3.7	)		7.9		18.2		(10.3	)		(2.1	)

Total	$	191.3	$	210.8	$	(19.5	)	$	(33.3	)	$	237.7	$	260.7	$	(23.0	)	$	7.6

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

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

may vary from actual premium reported through the life of the contract due to the reporting patterns of the ceding companies and, in some cases, movements in foreign exchange rates over the period.

Our estimates are based on contract and policy terms. Estimates are based on information typically received in the form of a bordereau, broker notifications and/or discussions with ceding companies. These estimates, by necessity, are based on assumptions regarding numerous factors. These can include premium or loss trends, which can be influenced by local conditions in a particular region, or other economic factors and legal or legislative developments that can develop over time. The risk associated with estimating the performance under our contracts with our ceding companies is the impact of events or trends that could not have been reasonably anticipated at the time the estimates were performed. Our business is diversified across ceding companies and there is no individual ceding company that represents more than 2.3% of our gross premiums written for the nine months ended September 30, 2009. As a result, we believe the risks of material changes to these estimates over time are mitigated.

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

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

Reserves for Unpaid Losses and Loss Adjustment Expenses

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

We rely on initial and subsequent claim reports received from ceding companies for reinsurance business, and the estimates advised by our claims adjusters for insurance business, to establish our estimates of unpaid losses and LAE. The type of information that we receive from ceding companies generally varies by the type of contract. Proportional, or quota share, reinsurance contracts are typically reported on a quarterly basis, providing premium and loss activity as estimated by the ceding company. Reporting for excess of loss, facultative and insurance contracts includes detailed individual claim information, including a description of the loss, confirmation of liability by the cedant or claims adjuster and the cedant’s or claims adjuster’s current estimate of the ultimate liability under the claim. Upon receipt of claim notices from cedants and insureds, we review the nature of the claim against the scope of coverage provided under the contract. Questions arise from time to time regarding the interpretation of the characteristics of a particular claim measured against the scope of contract terms and conditions. Reinsurance contracts under which we assume business generally contain specific dispute resolution provisions in the event that there is a coverage dispute with the ceding company. The resolution of any individual dispute may impact estimates of ultimate claims liabilities. Reported claims are in various stages of the settlement

process. Each claim is settled individually based on its merits, and certain claims may take several years to ultimately settle, particularly where legal action is involved. Based on an assessment of the circumstances supporting the claim, we may choose to establish additional case reserves over the amount reported by the ceding company. Aggregate case reserves established in addition to reserves reported by ceding companies were $11.6 million and $19.6 million as of September 30, 2009 and December 31, 2008, respectively. Due to potential differences in ceding company reserving and reporting practices, we perform periodic audits of our ceding companies to ensure the underwriting and claims procedures of the cedant are consistent with representations made by the cedant during the underwriting process and meet the terms of the reinsurance contract. Our estimates of ultimate loss liabilities make appropriate adjustment for inconsistencies uncovered in this audit process. We also monitor our internal processes to ensure that information received from ceding companies is processed in a timely manner.

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

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

reported to us from cedants. The provision for asbestos loss liabilities is established based on an annual review of internal and external trends in reported loss and claim payments. IBNR is determined by subtracting the total of paid loss and case reserves including ACRs from ultimate loss.

We complete comprehensive loss reserve reviews, which include a reassessment of loss development and expected loss ratio assumptions, on an annual basis. We anticipate completing this year’s annual review in the fourth quarter of 2009. The results of these reviews are reflected in the period they are completed. Quarterly, we compare actual loss emergence to expectations established by the comprehensive loss reserve review process. In the event that loss trends diverge from expected trends, we may have to adjust our reserves for losses and LAE accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results. We believe that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at September 30, 2009.

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

The ultimate settlement value of losses and LAE related to business written in prior periods for the nine months ended September 30, 2009 was below our estimates of reserves for losses and LAE as previously established at December 31, 2008 by 0.2%. There was no material change in the ultimate settlement value of losses and LAE related to business written in prior periods for the nine months ended September 30, 2008, relative to our estimates of reserves for losses and LAE as previously established at December 31, 2007. There was no material change in the ultimate settlement value of losses and LAE related to business written in prior periods for the three months ended September 30, 2009, relative to our estimates of reserves for losses and LAE as previously established at June 30, 2009. The ultimate settlement value of losses and LAE related to business written in prior periods for the three months ended September 30, 2008 was below our estimates of reserves for losses and LAE as previously established at June 30, 2008 by 0.1%. Any future impact to income of changes in losses and LAE estimates may vary considerably from historical experience. Our estimates of ultimate losses and LAE are based upon the information we have available at any given point in time and upon our assumptions derived from that information. Every one percentage point difference in the ultimate settlement value of losses and LAE compared to our estimate of reserves for losses and LAE as of September 30, 2009 will impact pre-tax income by $47.1 million.

If a change were to occur in the frequency and severity of claims underlying our September 30, 2009 unpaid losses and LAE, the approximate change in pre-tax income would be as follows (in millions):


	Decrease in
	Pre-tax
	Income

1.0% unfavorable change	$	47.1
2.5% unfavorable change		117.7
5.0% unfavorable change		235.5

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

The following table provides detail on net adverse (favorable) loss and LAE development for prior years, by division, for the nine and three months ended September 30, 2009 and 2008 (in millions):


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
Division	2009			2008			2009			2008

Americas	$	21.7		$	31.4		$	9.3		$	24.9
EuroAsia		(14.3	)		8.8			(7.4	)		(3.2	)
London Market		(10.0	)		(18.3	)		(3.3	)		(4.6	)
U.S. Insurance		(8.5	)		(22.1	)		1.1			(20.7	)

Total loss and LAE development	$	(11.1	)	$	(0.2	)	$	(0.3	)	$	(3.6	)

The Americas division reported net increases in prior period loss estimates of $21.7 million and $31.4 million for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, the net increases in prior period loss estimates were $9.3 million and $24.9 million, respectively. The increases in prior period loss estimates for the nine and three months ended September 30, 2009 were principally attributable to loss emergence greater than expectations in the period on automobile and professional liability business. The increases in prior period loss estimates for the nine and three months ended September 30, 2008 were principally attributable to loss emergence greater than expectations in the period on asbestos.

The EuroAsia division reported a net decrease in prior period loss estimates of $14.3 million for the nine months ended September 30, 2009 and a net increase in prior period loss estimates of $8.8 million for the nine months ended September 30, 2008. For the three months ended September 30, 2009 and 2008, the net decreases in prior period loss estimates were $7.4 million and $3.2 million, respectively. The decrease in prior period loss estimates for the nine months ended September 30, 2009 was principally attributable to loss emergence lower than expectations in the period on property business. The increase in prior period loss estimates for the nine months ended September 30, 2008 was principally attributable to loss emergence greater than expectations in the period on property business. The decreases in prior period loss estimates for the three months ended September 30, 2009 and 2008 were principally attributable to loss emergence lower than expectations in the period on property business.

The London Market division reported net decreases in prior period loss estimates of $10.0 million and $18.3 million for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, the net decreases in prior period loss estimates were $3.3 million and $4.6 million, respectively. The decrease in prior period loss estimates for the nine months ended September 30, 2009 was principally attributable to loss emergence lower than expectations in the period on liability business. The decrease in prior period loss estimates for the nine months ended September 30, 2008 was principally attributable to loss emergence lower than expectations in the period on property business. The decrease in prior period loss estimates for the three months ended September 30, 2009 was principally attributable to loss emergence lower than expectations in the period on liability business. The decrease in prior period loss estimates for the three months ended September 30, 2008 was principally attributable to loss emergence lower than expectations in the period on property business.

The U.S. Insurance division reported net decreases in prior period loss estimates of $8.5 million and $22.1 million for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009, the net increase in prior period loss estimates was $1.1 million, and for the three months ended September 30, 2008, the net decrease in prior period loss estimates was $20.7 million. The decrease in prior period loss estimates for the nine months ended September 30, 2009 was principally attributable to loss emergence lower than expectations in the period on miscellaneous and professional liability business. The decreases in prior period loss estimates for the nine and three months ended September 30, 2008 were principally attributable to loss emergence lower than expectations in the period on professional liability business. The increase in prior period loss estimates for the three months ended September 30, 2009 was principally attributable to loss emergence greater than expectations in the period on general liability business.

Estimates of reserves for unpaid losses and LAE are contingent upon legislative, regulatory, social, economic and legal events and trends that may or may not occur or develop in the future, thereby affecting assumptions of claim frequency and severity. Examples of emerging claim and coverage issues and trends in recent years that could affect reserve estimates include developments in tort liability law, legislative attempts at asbestos liability reform, an increase in shareholder derivative suits against corporations and their officers and directors, and increasing governmental involvement in the insurance and reinsurance industry. The eventual outcome of these events and trends may be different from the assumptions underlying our loss reserve estimates. In the event that loss trends diverge from expected trends during the period, we adjust our reserves to reflect the change in losses indicated by revised expected loss trends. On a quarterly basis, we compare actual emergence of the total value of newly reported losses to the total value of losses expected to be reported during the period and the cumulative value since the date of our last reserve review. Variation in actual loss emergence from expectations may result in a change in our estimate of losses and LAE reserves. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results. Changes in expected claim payment rates, which represent one component of losses and LAE emergence, may impact our liquidity and capital resources, as discussed below in “Liquidity and Capital Resources.”

The following table summarizes, by type of reserve and division, the unpaid losses and LAE reserves as of September 30, 2009 and December 31, 2008. Case reserves represent unpaid claim reports provided by cedants and claims adjusters plus additional reserves determined by us. IBNR is the estimate of unreported loss liabilities established by us.


	As of September 30, 2009									As of December 31, 2008
	Case						Total			Case						Total
	Reserves			IBNR			Reserves			Reserves			IBNR			Reserves
	(In millions)

Americas
Gross	$	1,372.9		$	1,323.4		$	2,696.3		$	1,429.5		$	1,335.9		$	2,765.4
Ceded		(178.9	)		(107.0	)		(285.9	)		(182.5	)		(123.0	)		(305.5	)

Net		1,194.0			1,216.4			2,410.4			1,247.0			1,212.9			2,459.9

EuroAsia
Gross		597.2			333.3			930.5			494.3			293.7			788.0
Ceded		(28.0	)		(6.5	)		(34.5	)		(2.6	)		(0.4	)		(3.0	)

Net		569.2			326.8			896.0			491.7			293.3			785.0

London Market
Gross		367.9			678.2			1,046.1			308.8			610.9			919.7
Ceded		(60.2	)		(130.0	)		(190.2	)		(54.4	)		(78.4	)		(132.8	)

Net		307.7			548.2			855.9			254.4			532.5			786.9

U.S. Insurance
Gross		245.1			575.0			820.1			200.6			576.8			777.4
Ceded		(75.5	)		(197.4	)		(272.9	)		(55.3	)		(193.6	)		(248.9	)

Net		169.6			377.6			547.2			145.3			383.2			528.5

Total
Gross		2,583.1			2,909.9			5,493.0			2,433.2			2,817.3			5,250.5
Ceded		(342.6	)		(440.9	)		(783.5	)		(294.8	)		(395.4	)		(690.2	)

Net	$	2,240.5		$	2,469.0		$	4,709.5		$	2,138.4		$	2,421.9		$	4,560.3

The provision for IBNR in unpaid losses and LAE as of September 30, 2009 was $2,469.0 million. For illustration purposes, a change in the expected loss ratio that increases the nine months ended September 30, 2009 calendar year loss ratio by 2.5 loss ratio points would increase IBNR by $36.1 million. A change in loss emergence trends that increases unpaid losses and LAE at September 30, 2009 by 2.5% would increase IBNR by $117.7 million.

We have exposure to asbestos, environmental pollution and other latent injury damage claims resulting from contracts written by Clearwater prior to 1986. Exposure arises from reinsurance contracts under which we assumed liabilities from ceding companies, on an indemnity or assumption basis, primarily in connection with general liability insurance policies issued by such ceding companies. Our estimate of our ultimate liability for these exposures includes case basis reserves and a provision for IBNR claims. The provision for asbestos loss liabilities is established based on an annual review of Company and external trends in reported loss and claim payments, with monitoring of emerging experience on a quarterly basis. We anticipate completing our annual review of asbestos and environmental liabilities in the fourth quarter of 2009.

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

We believe that these uncertainties and factors make projections of these exposures, particularly asbestos, subject to less predictability relative to non-environmental and non-asbestos exposures. Current estimates, as of September 30, 2009, of our asbestos and environmental losses and LAE reserves, net of reinsurance, are $212.4 million and $25.0 million, respectively. See Note 7 to the consolidated financial statements for additional historical information on losses and LAE reserves for these exposures.

The following table provides the gross and net asbestos and environmental losses and LAE incurred for the nine and three months ended September 30, 2009 and 2008 (in millions):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Asbestos
Gross losses and LAE incurred	$	—	$	48.3	$	—	$	25.0
Net losses and LAE incurred		—		21.0		—		15.0
Environmental
Gross losses and LAE incurred	$	—	$	—	$	—	$	—
Net losses and LAE incurred		—		—		—		—

We did not incur net losses and LAE related to asbestos claims for the nine and three months ended September 30, 2009. Net losses and LAE incurred for asbestos claims increased $21.0 million and $15.0 million for the nine and three months ended September 30, 2008, respectively. We did not incur net losses and LAE related to environmental claims for the nine and three months ended September 30, 2009 and 2008.

Reinsurance and Retrocessions

We may purchase reinsurance to increase our aggregate premium capacity, to reduce and spread the risk of loss on our insurance and reinsurance business and to limit our exposure to multiple claims arising from a single

occurrence. We are subject to accumulation risk with respect to catastrophic events involving multiple contracts. To protect against this risk, we have purchased catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographical scope of the coverage and the costs vary from year to year. Specific reinsurance protections are also placed to protect our insurance business outside of the United States.

We seek to limit our net after-tax probable maximum loss for a severe catastrophic event, defined as an occurrence with a return period of 250 years, to no more than 20% of our statutory surplus. Prior to 2009, this limit was 15% of statutory surplus. There can be no assurances that we will not incur losses greater than 20% of our statutory surplus from one or more catastrophic events due to the inherent uncertainties in (i) estimating the frequency and severity of such events, (ii) the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, (iii) the modeling techniques and the application of such techniques and (iv) the values of securities in our investment portfolio, which may lead to volatility in our statutory surplus from period to period.

When we purchase reinsurance protection, we cede to reinsurers a portion of our risks and pay premiums based upon the risk and exposure of the policies subject to the reinsurance. Although the reinsurer is liable to us for the reinsurance ceded, we retain the ultimate liability in the event the reinsurer is unable to meet its obligations at some later date.

Reinsurance recoverables are recorded as assets, based on our evaluation of the retrocessionaires’ ability to meet their obligations under the agreements. Premiums written and earned are stated net of reinsurance ceded in the consolidated statements of operations.

Direct insurance, reinsurance assumed, reinsurance ceded and net amounts for these items follow (in millions):


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Premiums Written
Direct	$	589.9	$	604.9	$	260.8	$	235.2
Add: assumed		1,107.3		1,195.6		370.1		421.4
Less: ceded		234.4		207.4		106.9		84.9

Net	$	1,462.8	$	1,593.1	$	524.0	$	571.8

Premiums Earned
Direct	$	538.8	$	584.1	$	204.8	$	215.1
Add: assumed		1,116.0		1,153.6		368.4		393.3
Less: ceded		210.4		165.3		79.3		63.0

Net	$	1,444.4	$	1,572.4	$	493.9	$	545.4

The total amount of reinsurance recoverables on paid and unpaid losses as of September 30, 2009 and December 31, 2008 was $837.5 million and $773.2 million, respectively. We have established a reserve for potentially uncollectible reinsurance recoverables based upon an evaluation of each retrocessionaire and our assessment as to the collectability of individual balances. The reserve for uncollectible recoverables was $44.8 million and $44.5 million as of September 30, 2009 and December 31, 2008, respectively, and has been netted against reinsurance recoverables on paid losses. We have also established a reserve for potentially uncollectible insurance and assumed reinsurance balances of $5.0 million and $3.0 million as of September 30, 2009 and December 31, 2008, respectively, which has been netted against premiums receivable.

Results of Operations

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Underwriting Results

Gross Premiums Written. Gross premiums written for the nine months ended September 30, 2009 decreased by $103.3 million, or 5.7%, to $1,697.2 million, compared to $1,800.5 million for the nine months ended September 30, 2008, as reflected in the following table (in millions):


	Nine Months
	Ended September 30,				Change
Division	2009		2008		$			%

Americas	$	576.2	$	599.0	$	(22.8	)		(3.8	)%
EuroAsia		442.5		491.9		(49.4	)		(10.0	)
London Market		234.2		278.4		(44.2	)		(15.9	)
U.S. Insurance		444.3		431.2		13.1			3.0

Total gross premiums written	$	1,697.2	$	1,800.5	$	(103.3	)		(5.7	)%

Total reinsurance gross premiums written for the nine months ended September 30, 2009 were $1,107.3 million, compared to $1,195.6 million for 2008, a decrease of 7.4%. Total insurance gross premiums written for the nine months ended September 30, 2009, which include our U.S. Insurance division and the insurance business underwritten by our London Market division, were $589.9 million, compared to $604.9 million for 2008, a decrease of 2.5%. U.S. Insurance division gross premiums written for the nine months ended September 30, 2009 included $10.4 million of business previously managed by and included in the results of the Americas division. For the nine months ended September 30, 2009, total reinsurance gross premiums written represented 65.2% (66.4% in 2008) of our business, while insurance represented the remaining 34.8% (33.6% in 2008) of our business.

Americas. Gross premiums written in the Americas division for the nine months ended September 30, 2009 were $576.2 million, a decrease of $22.8 million, or 3.8%, compared to $599.0 million for the nine months ended September 30, 2008. These amounts represented 34.0% of our gross premiums written for the nine months ended September 30, 2009 and 33.3% for the nine months ended September 30, 2008. Gross premiums written across each geographic region of the Americas division were as follows:


	Nine Months
	Ended September 30,				Change
	2009		2008		$			%

United States	$	438.5	$	442.0	$	(3.5	)		(0.8	)%
Latin America		109.9		124.9		(15.0	)		(12.0	)
Canada		27.8		31.9		(4.1	)		(12.9	)
Other		—		0.2		(0.2	)		(100.0	)

Total gross premiums written	$	576.2	$	599.0	$	(22.8	)		(3.8	)%


	•	United States — The decrease in gross premiums written was primarily due to a decrease in property business of $17.6 million, to $122.5 million, for the nine months ended September 30, 2009, as compared to $140.1 million for the nine months ended September 30, 2008. This was partially offset by an increase in casualty business of $10.0 million, to $223.2 million, for the nine months ended September 30, 2009, as compared to $213.2 million for the nine months ended September 30, 2008.

	•	Latin America — The decrease in gross premiums written was primarily due to a decrease in treaty pro rata business of $16.1 million, and treaty excess business of $2.4 million. These decreases were offset by an increase in facultative business of $3.6 million. Of the $15.0 million decrease, $7.9 million is attributable to movement in foreign exchange rates during 2009 compared to 2008.

	•	Canada — The decrease in gross premiums written was primarily due to the movement in the Canadian dollar exchange rate between 2009 and 2008.

EuroAsia. Gross premiums written in the EuroAsia division for the nine months ended September 30, 2009 were $442.5 million, a decrease of $49.4 million, or 10.0%, compared to $491.9 million for the nine months ended September 30, 2008. These amounts represented 26.1% of our gross premiums written for the nine months ended September 30, 2009 and 27.3% in the corresponding period of 2008. The decrease in gross premiums written is principally comprised of $49.8 million attributable to the movement in foreign exchange rates during 2009 compared to 2008, and $6.0 million due to a modification to our estimation method in June 2008. The modification to the estimating process impacted gross and net premiums written but had no effect on earned premium. Excluding the effects of the foreign exchange rate movement and the modification to the estimating process, gross premiums written would have increased by $6.4 million.

London Market. Gross premiums written in the London Market division for the nine months ended September 30, 2009 were $234.2 million, a decrease of $44.2 million, or 15.9%, compared to $278.4 million for the nine months ended September 30, 2008. These amounts represented 13.8% of our gross premiums written for the nine months ended September 30, 2009 and 15.5% for the nine months ended September 30, 2008. Gross premiums written across each unit of the London Market division were as follows:

ODYSSEY RE HOLDINGS CORP 10-Q