UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)


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

For the fiscal year ended: December 31, 2009


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 (State or Other Jurisdiction of Incorporation or Organization)		52-2301683 (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

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

8.125% Series A Preferred Stock		New York Stock Exchange
Floating Rate Series B Preferred Stock		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the shares of all classes of voting shares of the registrant held by non-affiliates of the registrant on June 30, 2009 was $825.3 million, computed upon the basis of the closing sale price of the Common Stock on that date. For purposes of this computation, shares held by directors (and shares held by entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

As of February 25, 2010, there were 56,604,650 outstanding shares of Common Stock, par value $0.01 per share, of the registrant, all of which were held by Fairfax Financial Holdings Limited and its affiliates.

ODYSSEY RE HOLDINGS CORP.

TABLE OF CONTENTS


	Page
PART I
Item 1. Business		5
Item 1A. Risk Factors		36
Item 1B. Unresolved Staff Comments		44
Item 2. Properties		44
Item 3. Legal Proceedings		44
Item 4. Submission of Matters to a Vote of Security Holders		45

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		45
Item 6. Selected Financial Data		46
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		93
Item 8. Financial Statements and Supplementary Data		96
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		174
Item 9A. Controls and Procedures		174
Item 9B. Other Information		174

PART III

Item 10. Directors, Executive Officers and Corporate Governance		175
Item 11. Executive Compensation		178
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		205
Item 13. Certain Relationships and Related Transactions, and Director Independence		206
Item 14. Principal Accountant Fees and Services		209

PART IV

Item 15. Exhibits and Financial Statement Schedules		210
EX-10.13
EX-10.15
EX-10.23
EX-21.1
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2

References in this Annual Report on Form 10-K to “OdysseyRe,” the “Company,” “we,” “us” and “our” refer to Odyssey Re Holdings Corp. and, unless the context otherwise requires or otherwise as expressly stated, its subsidiaries, including Odyssey America, Clearwater, Newline, Hudson, Hudson Specialty and Clearwater Select (as defined herein).

SAFE HARBOR DISCLOSURE

In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements contained in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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

	•		a reduction in net income if our loss reserves are insufficient;

	•		the occurrence of catastrophic events with a frequency or severity exceeding our estimates;

	•		the lowering or loss of one or more of our financial or claims-paying ratings, including those of our subsidiaries;

	•		an inability to realize our investment objectives;

	•		a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry;

	•		emerging claim and coverage issues, which could expand our obligations beyond the amount we intend to underwrite;

	•		ongoing legislative and regulatory developments that may disrupt our business or mandate changes in industry practices in a fashion that increases our costs or requires us to alter aspects of the way we conduct our business;

	•		changes in economic conditions, including interest rate, currency, equity and credit conditions that could affect our investment portfolio;

	•		a change in the requirements of one or more of our current or potential customers relating to counterparty financial strength, claims-paying ratings, or collateral requirements;

	•		actions of our competitors, including industry consolidation, and increased competition from alternative sources of risk management products, such as the capital markets;

	•		our 100% shareholder’s ability to determine the outcome of our corporate actions that require board or shareholder approval;

	•		our ability to raise additional capital if it is required;

	•		the availability of dividends from our reinsurance and insurance company subsidiaries;

	•		the loss of services of any of our key employees;

	•		our use of reinsurance brokers in contract negotiations and as cash settlement agents;

	•		the failure of our reinsurers to honor their obligations to us;

	•		the growth of our specialty insurance business and the development of our infrastructure to support this growth;

	•		operational and financial risks relating to our utilization of program managers, third-party administrators, and other vendors to support our specialty insurance operations;

	•		the passage of federal or state legislation subjecting our business to additional supervision or regulation, including additional tax regulation, in the United States or other jurisdictions in which we operate;

	•		our reliance on computer and data processing systems; and

	•		acts of war, terrorism or political unrest.

The words “believe,” “anticipate,” “estimate,” “project,” “expect,” “intend,” “will likely result,” “will seek to” or “will continue” and similar expressions or their negative or variations identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We have described some important factors that could cause our actual results to differ materially from those expressed in any forward-looking statement we make, including factors discussed below in Item 1A — “Risk Factors.” Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I


Item 1.		*Business*

The Company

OdysseyRe is a leading underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer both treaty and facultative reinsurance to property and casualty insurers and reinsurers. We also write insurance business through our offices throughout the United States and in London. Our global presence is established through 21 offices, with principal locations in the United States, London, Paris, Singapore, Toronto and Mexico City. We had gross premiums written of $2.2 billion in 2009 and our shareholders’ equity as of December 31, 2009 was $3.6 billion. For the year ended December 31, 2009, reinsurance represented 64.4% of our gross premiums written, and primary insurance represented the remainder, or 35.6%.

The United States is our largest market, generating 50.5% of our gross premiums written for the year ended December 31, 2009. Our operations are managed through four divisions: Americas, EuroAsia, London Market and U.S. Insurance. The Americas division is comprised of our reinsurance operations in the United States, Canada and Latin America. The Americas division primarily writes treaty property, general casualty, specialty casualty, surety and facultative casualty reinsurance business, primarily through professional reinsurance brokers. The EuroAsia division, headquartered in Paris, writes treaty reinsurance. Our London Market division operates through Newline Syndicate (1218) at Lloyd’s and Newline Insurance Company Limited, where the business focus is casualty insurance, and our London branch, which focuses on worldwide property and casualty reinsurance. The U.S. Insurance division writes specialty insurance in the United States, including medical professional liability, professional liability and crop business. Across our operations, 50.8% of our gross premiums written were generated from casualty business, 41.0% from property business and 8.2% from specialty classes, including marine, aviation, surety and credit.

Odyssey Re Holdings Corp. was incorporated on March 21, 2001 in the state of Delaware. In June 2001, we completed our initial public offering. On September 18, 2009, Fairfax Financial Holdings Limited (“Fairfax”), which at the time owned approximately 72.5% of our outstanding common stock, 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 proposal, recommended that OdysseyRe’s minority stockholders tender their shares to 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.

Pursuant to the Offer, 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 then outstanding. Following the purchase of the Tendered Shares, Fairfax caused a short-form merger pursuant to which Fairfax Investments USA Corp., a newly-formed, wholly-owned subsidiary of Fairfax, merged with and into OdysseyRe (the “Merger”).

The Merger was effected on October 28, 2009 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 of the remaining shares of OdysseyRe’s common stock held by the remaining minority shareholders of OdysseyRe (the “Remaining Shares”) were cancelled and, subject to appraisal rights under Delaware law, converted into the right to receive $65.00 per share in cash, without interest, and subject to any applicable withholding of taxes. As a result of the Merger, Fairfax and its subsidiaries became the owner of 100% of the outstanding shares of our common stock.

We subsequently withdrew our shares of common stock from listing on the New York Stock Exchange and terminated registration of these shares under the Securities Exchange Act of 1934.

The following is a summary of our operating subsidiaries:

	•		Odyssey America Reinsurance Corporation (“Odyssey America”), a Connecticut property and casualty reinsurance company, is a direct subsidiary of OdysseyRe and is our principal reinsurance subsidiary. Odyssey America underwrites reinsurance on a worldwide basis.

	•		Newline Holdings U.K. Limited, a direct subsidiary of Odyssey America, is a holding company with several wholly-owned operating subsidiaries, including Newline Underwriting Management Ltd., through which it manages Newline Syndicate (1218) at Lloyd’s of London, and Newline Corporate Name Limited (“NCNL”), which provides capital for and receives the distributed earnings of Newline Syndicate (1218), and Newline Insurance Company Limited (“NICL”) (collectively, “Newline”).

	•		Clearwater Insurance Company (“Clearwater”), a Delaware company, is a direct subsidiary of Odyssey America. Clearwater holds insurance licenses in 43 states.

	•		Hudson Insurance Company (“Hudson”), a Delaware company, is a direct subsidiary of Clearwater. Hudson, based in New York City, is the principal platform for our specialty insurance business and holds insurance licenses in 50 states.

	•		Hudson Specialty Insurance Company (“Hudson Specialty”), a New York company, is a direct subsidiary of Clearwater and is an eligible surplus lines insurer in 49 states.

	•		Clearwater Select Insurance Company (“Clearwater Select”), a Delaware company, is a direct subsidiary of Clearwater. Clearwater Select is licensed in 40 states.

Business Objectives

Our objective is to build shareholder value by achieving an average annual growth in shareholders’ equity of 15% over the long-term by focusing on underwriting profitability and generating superior investment returns. We intend to continue to achieve our objective through:

	•		Adhering to a strict underwriting philosophy. We emphasize disciplined underwriting over premium growth, concentrating on carefully selecting the risks we reinsure and determining the appropriate price for such risks. We seek to achieve our principal goal of attracting and retaining high quality business by centrally managing our diverse operations.

	•		Increasing our position in specialty insurance business. We intend to continue expanding our specialty insurance business by exploring underserved market segments or classes of business, while maintaining our commitment to underwriting discipline.

	•		Pursuing attractive lines of business. We seek to take advantage of opportunities to write new lines of business or expand existing classes of business, based on market conditions and expected profitability. We expect to expand our position over time in domestic and international markets by delivering high quality service and developing and maintaining knowledge of the markets that we serve.

	•		Maintaining our commitment to financial strength and security. We are committed to maintaining a strong and transparent balance sheet. We will sustain financial flexibility through maintaining prudent operating and financial leverage and investing our portfolio primarily in high quality fixed income securities and value-oriented equity securities.

	•		Achieving superior returns on invested assets. We manage our investments using a total return philosophy, seeking to maximize the economic value of our investments, as opposed to current income. We apply a long-term value-oriented philosophy to optimize the total returns on our invested assets.

Enterprise Risk Management

We seek to apply prudent risk management principles and practices throughout our company. We are engaged in continuous enhancement of our risk management framework through the identification of risks that threaten our ability to achieve certain financial and operational objectives. Our primary risk exposures emanate from underwriting, loss reserving, investing and operations. Our Chief Risk Officer, who reports directly to the Chief Executive Officer, leads a multi-disciplinary team whose tasks are to identify, measure, evaluate and manage risk. To assist with the measurement process, we have established risk tolerances for our business. Comparison of actual risk indications to established levels of tolerance are performed regularly. Results of these comparisons are reviewed with the Chief Executive Officer and others within senior management, and are periodically reported to our Board of Directors.

Overview of Reinsurance

Reinsurance is an arrangement in which the reinsurer agrees to indemnify an insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance or reinsurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on individual risks or classes of risks, and catastrophe protection from large or multiple losses. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks. Reinsurance, however, does not discharge the ceding company from its liability to policyholders. Rather, reinsurance serves to indemnify a ceding company for losses payable by the ceding company to its policyholders or cedants.

There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. With treaty reinsurance, the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties and are largely dependent on the individual underwriting decisions made by the ceding company. Accordingly, reinsurers will carefully evaluate the ceding company’s

risk management and underwriting practices in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty.

With facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance or reinsurance contract. Facultative reinsurance is negotiated separately for each contract that is reinsured and normally is purchased by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the dollar limits of their reinsurance treaties or for unusual risks.

Both treaty and facultative reinsurance can be written on either a proportional, also known as pro rata, basis or on an excess of loss basis. Under proportional reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company’s retention or the reinsurer’s attachment point.

Excess of loss reinsurance is often written in layers. A reinsurer accepts the risk just above the ceding company’s retention up to a specified amount, at which point that reinsurer or another reinsurer accepts the excess liability up to an additional specified amount, or such liability reverts to the ceding company. The reinsurer taking on the risk just above the ceding company’s retention layer is said to write working layer or low layer excess of loss reinsurance. A loss that reaches just beyond the ceding company’s retention will create a loss for the lower layer reinsurer, but not for the reinsurers on the higher layers. Loss activity in lower layer reinsurance tends to be more predictable than in higher layers.

Premiums payable by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportional risk. In contrast, premiums that the ceding company pays to the reinsurer for proportional reinsurance are proportional to the premiums that the ceding company receives, consistent with the proportional sharing of risk. In addition, in proportional reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and administrative expenses) and also may include a profit factor for producing the business.

Reinsurance may be written for insurance or reinsurance contracts covering casualty risks or property risks. In general, casualty insurance protects against financial loss arising out of an insured’s obligation for loss or damage to a third party’s property or person. Property insurance protects an insured against a financial loss arising out of the loss of property or its use caused by an insured peril or event. Property catastrophe coverage is generally “all risk” in nature and is written on an excess of loss basis, with exposure to losses from earthquake, hurricanes and other natural or man made catastrophes such as storms, floods, fire or tornados. There tends to be a greater delay in the reporting and settlement of casualty reinsurance claims as compared to property claims due to the nature of the underlying coverage and the greater potential for litigation involving casualty risks.

Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’s business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that influence insurers to purchase reinsurance: to reduce net liability on individual risks or classes of risks, to protect against catastrophic losses, to stabilize financial ratios and to obtain additional underwriting capacity.

Reinsurance can be written through professional reinsurance brokers or directly with ceding companies.

Lines of Business

Our reinsurance operations primarily consist of the following lines of business:

•

Casualty. Our casualty business includes a broad range of specialty casualty products, including professional liability, directors’ and officers’ liability, workers’ compensation and accident and health, as well as general casualty products, including general liability, and automobile liability and personal accident coverages written on both a treaty proportional and excess of loss basis as well as on a facultative basis.

	•		Property. Our property business includes reinsurance coverage to insurers for property damage or business interruption losses covered in industrial and commercial property and homeowners’ policies. This business is written on a treaty proportional and excess of loss basis. Outside the U.S., we also write property reinsurance on a facultative basis. Our most significant exposure is typically to losses from windstorms and earthquakes, although we are also exposed to losses from events as diverse as freezes, riots, floods, industrial explosions, fires, hail and a number of other loss events. Our property reinsurance treaties generally exclude certain risks such as losses resulting from acts of war, nuclear, biological and chemical contamination, radiation and environmental pollution.

	•		Marine and Aerospace. We provide reinsurance protection for marine hull, cargo, transit and offshore oil and gas operations on a proportional and non-proportional basis. We also provide specialized reinsurance protection in airline, general aviation and space insurance business, primarily on a non-proportional basis.

	•		Surety and Credit. Credit reinsurance, written primarily on a proportional basis, provides coverage to commercial credit insurers, while our surety lines relate primarily to bonds and other forms of security written by specialized surety insurers.

Our insurance operations primarily consist of the following lines of business:

	•		Medical Professional Liability. Our medical professional liability business primarily provides coverage for group and individual physicians and small and medium-sized hospital accounts.

	•		Professional Liability. Our professional liability business primarily consists of coverages for architects and engineers, directors’ and officers’ liability, fiduciary, media professional and environmental consultants.

	•		Commercial Automobile and Personal Automobile. Our specialty commercial automobile book of business consists primarily of off-duty liability for truckers as well as liability coverages for transporters and West Coast regional waste haulers. Our private passenger automobile book of business is focused in California.

	•		Specialty Liability. Our specialty liability business primarily focuses on casualty risks in the excess and surplus markets. Our target classes include mercantile, manufacturing and building/premises, with particular emphasis on commercial and consumer products, miscellaneous general liability and other niche markets. We also provide occupational benefit and liability coverages targeted to federally recognized tribes.

	•		Property and Package. Our property and package business is primarily focused on agriculture, offshore energy, and risks of restaurant franchisees, written throughout the United States.

The following table sets forth our gross premiums written, by line of business, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property excess of loss	$	414.9		18.8	%	$	393.8		17.2	%	$	351.4		15.4	%
Property proportional		282.2		12.9			335.7		14.6			319.7		14.0
Property facultative		21.8		1.0			18.2		0.8			21.8		0.9

Property reinsurance		718.9		32.7			747.7		32.6			692.9		30.3

Casualty excess of loss		276.3		12.6			231.0		10.1			255.0		11.2
Casualty proportional		166.0		7.6			236.9		10.3			290.0		12.7
Casualty facultative		57.1		2.6			72.0		3.1			82.0		3.6

Casualty reinsurance		499.4		22.8			539.9		23.5			627.0		27.5

Marine and aerospace		104.1		4.7			123.9		5.4			128.7		5.6
Surety and credit		92.1		4.2			90.7		4.0			97.3		4.3

Total reinsurance		1,414.5		64.4			1,502.2		65.5			1,545.9		67.7

Property and package		135.0		6.1			111.5		4.9			68.5		3.0
Professional liability		119.9		5.5			130.9		5.7			139.3		6.1
Specialty liability		114.0		5.2			90.9		3.9			90.3		4.0
Medical professional liability		96.9		4.4			113.9		4.9			130.2		5.7
Commercial automobile		65.6		3.0			68.2		3.0			52.4		2.3
Personal automobile		15.6		0.7			24.3		1.1			51.6		2.3

U.S. Insurance		547.0		24.9			539.7		23.5			532.3		23.4
Liability lines		227.9		10.4			248.2		10.8			201.5		8.8
Other lines		5.6		0.3			4.4		0.2			3.0		0.1

Total insurance		780.5		35.6			792.3		34.5			736.8		32.3

Total gross premiums written	$	2,195.0		100.0	%	$	2,294.5		100.0	%	$	2,282.7		100.0	%

For the year ended December 31, 2009, total reinsurance gross premiums written were $1,414.5 million, or 64.4% of our gross premiums written, and the remaining $780.5 million, or 35.6%, was insurance business. Our insurance premiums include our U.S. Insurance division and business written by Newline, which is part of our London Market division. Treaty reinsurance represents 60.8% of our total gross premiums written and 94.4% of our total reinsurance gross premiums written. Facultative reinsurance is 3.6% of our gross premiums written and 5.6% of our total reinsurance business. During 2009, 41.6% of our total reinsurance gross premiums written was proportional and 58.4% was excess of loss.

We write property catastrophe excess of loss reinsurance, covering loss or damage from unpredictable events such as hurricanes, windstorms, hailstorms, freezes or floods, which provides aggregate exposure limits and requires cedants to incur losses in specified amounts before our obligation to pay is triggered. For the year ended December 31, 2009, $305.3 million, or 13.9%, of our gross premiums written were derived from property catastrophe excess of loss reinsurance. We also write property business, which has exposure to catastrophes, on a proportional basis, in all divisions.

Treaty casualty business accounted for $442.4 million, or 20.2%, of gross premiums written for the year ended December 31, 2009, of which 37.5% was written on a proportional basis and 62.5% was written on an excess of loss basis. Our treaty casualty portfolio principally consists of specialty casualty products, including professional liability, directors’ and officers’ liability, workers’ compensation and accident and health, as well as general casualty products, including general liability and automobile liability. Treaty property business represented $697.1 million, or 31.8%, of gross premiums written for the year ended December 31, 2009,

primarily consisting of commercial property and homeowners’ coverage, of which 40.5% was written on a proportional basis and 59.5% was written on an excess of loss basis. Marine and aerospace business accounted for $104.1 million, or 4.7%, of gross premiums written for the year ended December 31, 2009, of which 30.7% was written on an excess of loss basis and 69.3% on a proportional basis. Surety and credit lines accounted for 4.2% of gross premiums written in 2009.

Facultative reinsurance accounted for $78.9 million, or 3.6%, of gross premiums written for the year ended December 31, 2009, all of which was derived from the Americas division. With respect to facultative business in the United States, we write only casualty lines of business, including general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial automobile lines; with respect to facultative business in Latin America, we write primarily property lines of business.

We operate in the London insurance market through Newline, which focuses on casualty insurance, including at Lloyd’s through our wholly-owned syndicate, Newline Syndicate (1218). Our Lloyd’s membership provides strong brand recognition, extensive broker and distribution channels, and worldwide licensing, and augments our ability to write insurance business on an excess and surplus lines basis in the United States.

We provide insurance products through our U.S. Insurance division. This business is comprised of specialty insurance business underwritten on both an admitted (licensed to write insurance in a particular state) and non-admitted (approved, but not licensed, to write insurance in a particular state) basis. Business is generated through national and regional agencies and brokers, as well as through program administrators. Each program administrator has strictly defined limitations on lines of business, premium capacity and policy limits. Many program administrators have limited geographic scope and all are limited regarding the type of business they may accept on our behalf.

In general, we target specific classes of business depending on the market conditions prevailing at any given point in time. We actively seek to grow our participation in classes experiencing improvements, and reduce or eliminate participation in those classes suffering from intense competition or poor fundamentals. Consequently, the classes of business for which we provide reinsurance are diverse in nature and the product mix within the reinsurance and insurance portfolios may change over time. From time to time, we may consider opportunistic expansion or entry into new classes of business or ventures, either through organic growth or the acquisition of other companies or books of business.

Divisions

Our business is organized across four operating divisions: the Americas, EuroAsia, London Market, and U.S. Insurance divisions. The table below illustrates gross premiums written, by division, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
Division	$		%			$		%			$		%
						(In millions)
Americas	$	745.9		34.0	%	$	776.4		33.8	%	$	834.9		36.6	%
EuroAsia		559.2		25.5			596.7		26.0			565.6		24.8
London Market		342.9		15.6			381.7		16.7			349.9		15.3
U.S. Insurance		547.0		24.9			539.7		23.5			532.3		23.3

Total gross premiums written	$	2,195.0		100.0	%	$	2,294.5		100.0	%	$	2,282.7		100.0	%

Our commitment to disciplined underwriting is evidenced by (i) the decline in gross premiums written from 2007 (5.9%) in the Americas and London Market divisions following significant market softening over the past three years, and (ii) modest but carefully cultivated growth in gross premiums written in the U.S. Insurance division, in targeted markets ripe for expansion.

Americas Division

The Americas is our largest division, accounting for $745.9 million, or 34.0%, of our gross premiums written for the year ended December 31, 2009. The Americas division is organized into three major units: the United States, Latin America and Canada. The Americas division writes treaty casualty and property reinsurance and facultative casualty reinsurance in the United States and Canada. In Latin America, we write treaty and facultative property reinsurance along with other predominantly short-tail lines. The Americas division operates through five offices: Stamford, New York City, Mexico City, Miami and Toronto, and as of December 31, 2009 had 301 employees. The Americas division’s principal client base includes small to medium-sized regional and specialty ceding companies, as well as various specialized departments of major insurance companies. The Americas division operates primarily as a broker market reinsurer. The top five brokers, Guy Carpenter & Co. Inc., Aon Benfield, Willis Re Group Holdings, Ltd., Towers Perrin Reinsurance and Risk Solutions Corporation generated 79.5% of the division’s gross premiums written. The Americas division primarily underwrites business in U.S. dollars or Canadian dollars.

The following table displays gross premiums written by each of the units within the Americas division for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
United States	$	561.7		75.3	%	$	578.0		74.5	%	$	650.2		77.9	%
Latin America		146.2		19.6			158.1		20.3			141.4		16.9
Canada		38.0		5.1			40.3		5.2			43.3		5.2

Total gross premiums written	$	745.9		100.0	%	$	776.4		100.0	%	$	834.9		100.0	%

The following table displays gross premiums written for the Americas division, by type of business, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property excess of loss	$	157.7		21.2	%	$	144.3		18.6	%	$	125.1		15.0	%
Property proportional		97.9		13.1			132.4		17.0			123.3		14.8
Property facultative		21.8		2.9			17.9		2.3			19.5		2.3

Property reinsurance		277.4		37.2			294.6		37.9			267.9		32.1

Casualty excess of loss		203.4		27.2			150.5		19.4			181.5		21.7
Casualty proportional		134.4		18.0			186.6		24.0			232.5		27.9
Casualty facultative		57.1		7.7			72.0		9.3			82.0		9.8

Casualty reinsurance		394.9		52.9			409.1		52.7			496.0		59.4

Marine, aviation and space		23.9		3.2			27.6		3.6			25.4		3.0
Surety and credit		49.7		6.7			45.1		5.8			45.6		5.5

Total gross premiums written	$	745.9		100.0	%	$	776.4		100.0	%	$	834.9		100.0	%

The unit in the United States provides treaty reinsurance of virtually all classes of non-life insurance. In addition to the specialty casualty and general casualty reinsurance lines, the unit also writes commercial and personal property as well as marine, aviation and space, accident and health, and surety lines. Facultative casualty reinsurance is also written in the United States unit, mainly for general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial automobile. The United States unit operates out of offices in Stamford and New York City. The following table displays gross premiums written, by business segment, for the United States for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008						2007
	$		%			$			%			$			%
						(In millions)
Specialty casualty	$	232.2		41.3	%	$	221.6			38.3	%	$	295.4			45.4	%
Property		163.0		29.0			172.4			29.8			148.1			22.8
Facultative		57.1		10.2			72.0			12.4			82.0			12.6
General casualty		53.7		9.6			64.9			11.2			74.6			11.5
Surety		34.2		6.1			32.4			5.6			36.4			5.6
Marine		18.4		3.3			18.8			3.2			18.3			2.8
Other		3.1		0.5			(3.1	)		(0.5	)		(4.2	)		(0.7	)

Total gross premiums written	$	561.7		100.0	%	$	579.0			100.0	%	$	650.6			100.0	%

The decline in our facultative business is due to the reclassification of $16.5 million of business previously managed by and included in the results of the Americas division that is now recorded in the results of the U.S. Insurance division. The decline in our property business reflects an increase in competitive market conditions and the non-renewal of certain business that did not meet our underwriting criteria.

The Latin America unit writes primarily treaty and facultative business throughout Latin America and the Caribbean. The business is predominantly property in nature, but also includes automobile, marine and other lines. The Latin America unit has offices in Mexico City and Miami. The Canadian unit, which is based in Toronto, writes primarily property reinsurance and also underwrites casualty, crop and surety business, all on a treaty basis.

EuroAsia Division

The EuroAsia division accounted for $559.2 million, or 25.5%, of our gross premiums written for the year ended December 31, 2009. The division primarily writes property business. The EuroAsia division operates out of four offices, with principal offices in Paris and Singapore and satellite offices in Stockholm and Tokyo, and as of December 31, 2009 had 90 employees. Business is produced primarily (70.3%) through a strong network of global and regional brokers, with the remaining 29.7% of the business written directly with ceding companies. Our top five brokers for the EuroAsia division in 2009, Aon Benfield, Guy Carpenter & Co. Inc., Willis Re Group Holdings, Ltd., Protection Reinsurance Intermediaries, and Haakon Ltd., generated 56.3% of the division’s gross premiums written in 2009. The EuroAsia division primarily underwrites business in Euros, U.S. dollars and Japanese yen.

The Paris branch office is the headquarters of the EuroAsia division and the underwriting center responsible for Europe, the Middle East and Africa, with an office in Stockholm, Sweden, covering the Nordic countries and Russia. The Paris branch writes reinsurance on a treaty basis. The primary lines of business offered are property, motor, credit and bond, marine and aerospace, liability and accident and health. The Asia Pacific Rim unit, headquartered in Singapore with an office in Tokyo, writes reinsurance on a treaty basis. The primary lines of business offered in the Asia Pacific Rim unit include property, marine, motor, liability, credit and bond coverage and accident and health.

During 2009, Europe represented 67.3% of gross premiums written for the EuroAsia division, while Asia represented 18.2% and the Middle East, Africa and the Americas comprised the remaining 14.5%.

The following table displays gross premiums written for the EuroAsia division, by type of coverage, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property	$	370.4		66.1	%	$	383.0		64.3	%	$	348.1		61.5	%
Motor		71.6		12.8			80.7		13.5			79.6		14.1
Surety and credit		42.4		7.6			45.5		7.6			51.6		9.1
Marine		29.4		5.3			37.6		6.3			36.4		6.4
Liability		23.9		4.3			30.1		5.0			28.0		5.0
Aerospace		14.9		2.7			11.5		1.9			11.8		2.1
Accident and health		6.6		1.2			8.3		1.4			10.1		1.8

Total gross premiums written	$	559.2		100.0	%	$	596.7		100.0	%	$	565.6		100.0	%

The property business, including the property component of motor business, in EuroAsia is 48.7% proportional and 51.3% excess of loss. Per risk coverages account for 50.6% of the property business, while 34.9% relates to catastrophe coverage.

The following table displays gross premiums written for the EuroAsia division, by type of business, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property excess of loss	$	193.4		34.6	%	$	187.5		31.4	%	$	160.0		28.3	%
Property proportional		183.4		32.8			201.9		33.8			195.3		34.5
Property facultative		—		—			0.2		0.1			2.2		0.4

Property		376.8		67.4			389.6		65.3			357.5		63.2

Casualty excess of loss		67.6		12.1			75.6		12.7			66.8		11.8
Casualty proportional		28.1		5.0			36.9		6.2			41.5		7.3

Casualty		95.7		17.1			112.5		18.9			108.3		19.1

Marine and aerospace		44.3		7.9			49.1		8.2			48.1		8.5
Surety and credit		42.4		7.6			45.5		7.6			51.7		9.2

Total gross premiums written	$	559.2		100.0	%	$	596.7		100.0	%	$	565.6		100.0	%

The property and casualty components of motor business have been included in the property and casualty amounts in the above table.

London Market Division

The London Market division accounted for $342.9 million, or 15.6%, of our gross written premiums for the year ended December 31, 2009. The London Market division operates through the Newline Syndicate (1218) at Lloyd’s, Newline Insurance Company Limited and the London branch of Odyssey America, and as of December 31, 2009 had 98 employees. Newline’s business focus is international casualty, motor insurance, medical professional liability and facultative reinsurance, while the London branch writes worldwide treaty reinsurance. Our underwriting platforms are run by an integrated management team with a common business approach. Business is distributed through a diverse group of brokers, with the top five brokers, Aon Benfield, Marsh Inc., Heath Lambert Ltd., Willis Re Group Holdings Ltd., and Jardine Lloyd Thompson, Ltd.,

representing 70.2% of gross premiums written. The London Market division underwrites business in British pounds, U.S. dollars, Euros, Canadian dollars and Australian dollars.

For the year ended December 31, 2009, the London branch had gross premiums written of $109.4 million, or 31.9% of the total London Market division. The London branch writes worldwide treaty reinsurance through three business units: property, marine and aerospace, and international casualty. The property unit (comprising mainly retrocessional and catastrophe excess of loss business) represents 59.1% of the total gross premiums written for the year ended December 31, 2009. Geographically, 42.6%, 29.3% and 20.7% of the branch business is located in the United Kingdom, the United States and Western Europe, respectively.

For the year ended December 31, 2009, Newline had gross premiums written of $233.5 million, or 68.1% of the total London Market division. Newline writes international casualty and motor insurance and facultative reinsurance in seven sectors: professional indemnity, directors’ and officers’ liability, commercial crime and bankers’ blanket bond, motor, satellite, medical professional liability and public and products liability. Newline’s target market is generally small to medium-sized accounts, which could be either private or public companies. The United Kingdom, Western Europe and Australia represent 32.5%, 32.5% and 16.2% of Newline’s business, respectively.

The following table displays gross premiums written for the London Market division, by type of business, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property excess of loss	$	63.8		18.6	%	$	62.1		16.3	%	$	66.3		19.0	%
Property proportional		0.9		0.3			1.4		0.3			1.1		0.3

Property reinsurance		64.7		18.9			63.5		16.6			67.4		19.3

Casualty excess of loss		5.3		1.5			4.9		1.3			6.8		1.9
Casualty proportional		3.5		1.0			13.5		3.5			16.0		4.6

Casualty reinsurance		8.8		2.5			18.4		4.8			22.8		6.5

Marine and aerospace		35.9		10.5			47.2		12.4			55.1		15.7

Total reinsurance		109.4		31.9			129.1		33.8			145.3		41.5

Liability lines		227.9		66.5			248.2		65.0			201.5		57.6
Other		5.6		1.6			4.4		1.2			3.1		0.9

Total insurance		233.5		68.1			252.6		66.2			204.6		58.5

Total gross premiums written	$	342.9		100.0	%	$	381.7		100.0	%	$	349.9		100.0	%

U.S. Insurance Division

Operating under the name “Hudson Insurance Group,” a registered trademark of the Company, the U.S. Insurance division provides underwriting capacity on an admitted and non-admitted (surplus lines) basis to specialty insurance markets nationwide. The U.S. Insurance division generated $547.0 million, or 24.9%, of our gross premiums written for the year ended December 31, 2009. The U.S. Insurance division operates principally from offices in New York, Chicago, Napa, California and Overland Park, Kansas, and as of December 31, 2009 had 232 employees.

Our medical professional liability business provides coverages principally to small and medium-sized hospitals, physicians and physician groups, and is primarily focused on 15 states throughout the United States. Medical professional liability coverage is offered exclusively on a claims-made basis (covering all claims reported to the insured during the policy period regardless of when the underlying loss occurred) and is primarily written on a surplus lines (non-admitted) basis to provide rate and form flexibility.

The Hudson Insurance Group is approved by the Risk Management Agency of the U.S. Department of Agriculture to participate in the federally-sponsored multi-peril crop insurance program made available to farmers throughout the United States. In addition, we also underwrite related insurance products, including crop hail. Crop-related gross premiums written for 2009 were $79.2 million and are included in the property and package line of business.

We underwrite primary and excess directors’ and officers’ liability insurance, principally for small and mid-cap publicly-traded companies. Coverage is written on both an admitted and a surplus lines basis, with distribution primarily through regional brokers.

Other lines of business written through our in-house specialty lines underwriters in 2009 include offshore marine and energy, environmental, personal umbrella and comprehensive personal liability insurance products.

The U.S. Insurance division also provides primary insurance coverage for a variety of risks, including commercial automobile, specialty liability, private passenger automobile and other niche markets. We manage a limited number of active program administrator relationships, with a majority of this business concentrated in our top five relationships. We look to do business with organizations that have a long and well-documented track record in their area of expertise. Strong monitoring processes are in place and our program administrators are incentivized to produce profitable insurance business rather than to merely generate volume.

The following table displays gross premiums written for the U.S. Insurance division, by type of business, for each of the three years in the period ended December 31, 2009:


	Years Ended December 31,
	2009					2008					2007
	$		%			$		%			$		%
						(In millions)
Property and package	$	135.0		24.7	%	$	111.5		20.7	%	$	68.5		12.9	%
Professional liability		119.9		21.9			130.9		24.3			139.3		26.2
Specialty liability		114.0		20.8			90.9		16.8			90.3		17.0
Medical professional liability		96.9		17.7			113.9		21.1			130.2		24.4
Commercial automobile		65.6		12.0			68.2		12.6			52.4		9.8
Personal automobile		15.6		2.9			24.3		4.5			51.6		9.7

Total gross premiums written	$	547.0		100.0	%	$	539.7		100.0	%	$	532.3		100.0	%

Contributing to the growth in gross premiums written for property and package business was our crop business, and for specialty liability, a reclassification of one program previously recorded in the Americas and now recorded in the U.S. Insurance division. Professional liability decreased primarily due to the cancellation of an environmental program. The decline in medical professional liability reflects the more competitive market conditions as well as certain client groups retaining more exposure or self insuring their own programs. Personal automobile declined primarily due to market conditions.

Retention Levels and Retrocession Arrangements

Under our underwriting guidelines, we impose maximum retentions on a per risk basis. We believe that the levels of gross capacity per property risk that are in place are sufficient to achieve our objectives in our marketplace. The following table illustrates the gross capacity, cession (reinsurance or retrocession) and net retention generally applicable under our underwriting guidelines as of December 31, 2009. Larger limits may occasionally be written subject to the approval of senior management.


	Gross		Retrocession/		Net
	Capacity		Reinsurance		Retention
			(In millions)
Treaty
Property	$	15.0	$	—	$	15.0
Casualty		7.5		—		7.5

Facultative
Property		10.0		8.0		2.0
Casualty		5.0		2.0		3.0

Insurance
Medical professional liability		16.0		15.1		0.9
Other casualty		15.0		10.5		4.5
Property		25.0		15.2		9.8
Newline		22.5		18.7		3.8

We are subject to accumulation risk with respect to catastrophic events involving multiple treaties, facultative certificates and insurance policies. To protect against this risk we buy catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographical coverages and the cost vary from year to year. In 2007, we chose not to purchase non-proportional reinsurance for our core U.S. property account other than limited and/or partial covers. In 2008 and 2009, we purchased some non-U.S. catastrophe excess of loss protection as well as some additional specific protections for our facultative property account in Latin America.

When we enter into retrocessional agreements, 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 obligation at some later date. Our objective is to purchase reinsurance from reinsurers rated “A-” or better by Standard & Poor’s Insurance Ratings Services or A.M. Best Company, Inc. (“A.M. Best”). Reinsurers with a lower rating will be considered if reinsurance security is collateralized or with senior management approval.

We purchase reinsurance to increase our aggregate premium capacity, to reduce and spread the risk of loss on insurance and reinsurance underwritten and to limit our exposure with respect to multiple claims arising from a single occurrence. We are subject to accumulation risk with respect to catastrophic events involving multiple treaties, facultative certificates and insurance policies. To protect against this risk, we may purchase catastrophe excess of loss reinsurance protection. The retention, the level of capacity purchased, the geographic scope of the coverage and the cost vary from year to year. Specific reinsurance protections are also placed to protect selected portions of our portfolio.

Our ten largest reinsurers represent 46.0% of our total reinsurance recoverables as of December 31, 2009. Amounts due from all other reinsurers are diversified, with no other individual reinsurer representing more than

$22.7 million of reinsurance recoverables as of December 31, 2009, and with the average balance per reinsurer less than $1.5 million.

The following table shows the total amount which is recoverable from each of our ten largest reinsurers for paid and unpaid losses as of December 31, 2009, the amount of collateral held, and each reinsurer’s A.M. Best rating (in millions):


	Reinsurance		% of					A.M. Best
Reinsurer	Recoverable		Total			Collateral		Rating
Lloyd’s of London	$	128.7		14.2	%	$	—		A
Federal Crop Insurance Corporation		44.0		4.8			—	NR
Underwriters Reinsurance Company (Barbados)		37.3		4.1			37.3	NR
Everest Re (Bermuda) Ltd.		36.8		4.0			—		A	+
D.E. Shaw Re Bermuda Ltd.		35.0		3.8			35.0	NR
Max Bermuda Ltd.		32.9		3.6			17.2		A	-
Swiss Reinsurance America Corporation		32.0		3.5			—		A
Arch Reinsurance Company		25.4		2.8			15.2		A
Brit Insurance Ltd.		24.4		2.7			—		A
Swiss Reinsurance Europe S.A.		22.9		2.5			—		A

Sub-total		419.4		46.0			104.7
All Other		492.6		54.0			115.5

Total	$	912.0		100.0	%	$	220.2

For additional information on our retrocession agreements, please refer to Notes 11 and 12 to the consolidated financial statements included in this Annual Report on Form 10-K.

Claims

Reinsurance claims are managed by our professional claims staff, whose responsibilities include the review of initial loss reports from ceding companies, creation of claim files, determination of whether further investigation is required, establishment and adjustment of case reserves, and payment of claims. Our claims staff recognizes that fair interpretation of our reinsurance agreements and timely payment of covered claims is a valuable service to clients and enhances our reputation. In addition to claims assessment, processing and payment, in the ordinary course of business our claims staff conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected ceding companies, which we believe benefits all parties to the reinsurance arrangement. In certain instances, a claims audit may be performed prior to assuming reinsurance business.

A dedicated claims unit manages the claims related to asbestos-related illness and environmental impairment liabilities, due to the significantly greater uncertainty involving these exposures. This unit performs audits of cedants with significant asbestos and environmental exposure to assess our potential liabilities. This unit also monitors developments within the insurance industry that may have a potential impact on our reserves.

For insurance claims relating to some London Market division insurance business and professional liability business written by the U.S. Insurance division, we employ a professional claims staff to confirm coverage, investigate and administer all other aspects of the adjusting process from inception to the final resolution. Other insurance claims are generally handled by third party administrators, typically specialists in a defined business, who have limited authority and are subject to continuous oversight and review by our internal professional claims staff.

Reserves for Unpaid Losses and Loss Adjustment Expenses

We establish reserves to recognize our insurance and reinsurance obligations for unpaid losses and loss adjustment expenses (“LAE”), which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred on or before the

balance sheet date, including events which have not yet been reported to us. Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss by the insured to us or to the ceding company, the reporting of the loss by the ceding company to the reinsurer, the ceding company’s payment of that loss and subsequent payments to the ceding company by the reinsurer.

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 estimate of losses and LAE. The types of information we receive from ceding companies generally vary by the type of contract. Proportional contracts are generally reported on at least a quarterly basis, providing premium and loss activity as estimated by the ceding company. Our experienced accounting staff has the primary responsibility for managing the handling of information received on these types of contracts. Our claims staff may also assist in the analysis, depending on the size or type of individual loss reported on proportional contracts. Reporting for facultative, treaty excess of loss and insurance contracts includes detailed individual claim information, including the description of injury, confirmation of liability by the cedant or claims adjuster, and the cedant’s or claims adjuster’s current estimate of liability. Our experienced claims staff has the responsibility for managing and analyzing the individual claim information. Based on the claims staff’s evaluation of a cedant’s reported claim, we may choose to establish additional case reserves over that reported by the ceding company. Due to potential differences in ceding company reserving and reporting practices, our accounting, claims and internal audit departments perform reviews on ceding carriers to ensure that their underwriting and claims procedures meet our standards.

We also establish reserves to provide for incurred but not reported (“IBNR”) claims and the estimated expenses of settling claims, including legal and other fees, and the general expenses of administering the claims adjustment process, known as loss adjustment expenses. We periodically revise such reserves to adjust for changes in the expected loss development pattern over time.

We rely on the underwriting and claim information provided by ceding companies for reinsurance business, and the estimates advised by our claims adjusters for insurance business, to compile our analysis of losses and LAE. This data is aggregated by geographic region and type of business to facilitate analysis. We calculate incurred but not reported loss and LAE reserves using generally accepted actuarial reserving techniques to project the ultimate liability for losses and LAE. IBNR includes a provision for losses incurred but not yet reported to us as well as anticipated additional emergence on claims already reported by the ceding companies or claimants. The actuarial techniques for projecting loss and LAE reserves rely on historical paid and case reserve loss emergence patterns and insurance and reinsurance pricing and claim cost 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.

Estimates of reserves for unpaid losses and LAE are contingent upon legislative, regulatory, social, economic and legal events that may or may not occur in the future, thereby affecting assumptions of claim frequency and severity. These events include losses arising from a variety of catastrophic events, such as hurricanes, windstorms and floods. The eventual outcome of these events may be different from the assumptions underlying our reserve estimates. In the event that loss trends diverge from expected trends, we adjust our reserves to reflect the actual emergence that is experienced during the period. On a quarterly basis, we compare actual loss emergence in the quarter and cumulatively since the implementation of the last reserve review to the expectation of reported loss for the period. Variation in actual loss emergence from expectations may result in a change in loss and LAE reserve. 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 loss and LAE emergence, may also impact our liquidity and capital resources, as discussed in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The reserving process is complex and the inherent uncertainties of estimating reserves for unpaid losses and LAE are significant, due primarily to the longer-term nature of most reinsurance business, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. As a result, actual losses and LAE may deviate, perhaps substantially, from estimates of reserves reflected in our consolidated financial statements. During the loss settlement period, which can be

many years in duration, additional facts regarding individual claims and trends usually become known. As these become apparent, it usually becomes necessary to refine and adjust the reserves upward or downward, and even then, the ultimate net liability may be less than or greater than the revised estimates.

We have exposure to asbestos, environmental pollution and other latent injury damage claims on contracts written prior to 1986. Included in our reserves are amounts related to asbestos-related illnesses and environmental impairment, which, net of related reinsurance recoverables, totaled $265.5 million and $260.3 million as of December 31, 2009 and 2008, respectively. The majority of our asbestos and environmental related liabilities arise from contracts written by Clearwater before 1986 that were underwritten as standard general liability coverages where the contracts contained terms which, for us and the industry overall, have been interpreted by the courts to provide coverage for asbestos and environmental exposures not contemplated by the original pricing or reserving of the covers. Our estimate of our ultimate liability for these exposures includes case basis reserves and a provision for liabilities incurred but not yet reported. Case basis reserves are a combination of reserves reported to us by ceding companies and additional case reserves determined by our dedicated asbestos and environmental claims unit. We rely on an annual analysis of Company and industry loss emergence trends to estimate the loss and LAE reserve for this exposure, including projections based on historical loss emergence and loss completion factors supplied from other company and industry sources, 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.

We believe these uncertainties and factors make projections of these exposures, particularly asbestos, subject to less predictability relative to non-asbestos and non-environmental exposures. See Note 10 to the consolidated financial statements for additional historical information on unpaid losses and LAE for these exposures.

In the event that loss trends diverge from expected trends, we may have to adjust our reserves for unpaid 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. Management believes that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at December 31, 2009. Due to the uncertainty involving estimates of ultimate loss and LAE, management does not attempt to produce a range around its best estimate of unpaid losses and LAE.

Historical Loss Reserve Trends

We have recognized significant increases to estimates for prior years’ recorded loss liabilities. Net income was adversely impacted in the calendar years where reserve estimates relating to prior years were increased. It is not possible to assure that adverse development on prior years’ losses will not occur in the future. If adverse development does occur in future years, it may have a material adverse impact on net income.

The “Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table” that follows presents the development of balance sheet net loss and LAE reserves for calendar years 1999 through 2009. The upper half of the table shows the cumulative amounts paid, net of reinsurance, during successive years related to the opening reserve. For example, with respect to the reserves for unpaid losses and LAE of $1,831 million as of December 31, 1999, by the end of 2009, $2,361 million had actually been paid in settlement of those reserves. In addition, as reflected in the lower section of the table, the original reserve of $1,831 million was re-estimated to be $3,094 million as of December 31, 2009. This change from the original

estimate would normally result from a combination of a number of factors, including losses being settled for different amounts than originally estimated. The original estimates will also be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity patterns. The net deficiency or redundancy depicted in the table, for any particular calendar year, shows the aggregate change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective columns. For example, the cumulative deficiency of $1,263 million, which has been reflected in our consolidated financial statements as of December 31, 2009, related to December 31, 1999 reserves for unpaid losses and LAE of $1,831 million, represents the cumulative amount by which net reserves for 1999 have developed unfavorably from 2000 through 2009.

Each amount other than the original reserves in the table below includes the effects of all changes in amounts for prior periods. For example, if a loss settled in 2002 for $150,000 was first reserved in 1999 at $100,000 and remained unchanged until settlement, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative net deficiency in each of the years in the period 1999 through 2001 shown in the following table. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future development based on this table.

Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table
Presented Net of Reinsurance With Supplemental Gross Data


	1999			2000			2001			2002			2003			2004			2005			2006			2007			2008			2009
																(In millions)
Reserves for unpaid losses and LAE	$	1,831		$	1,667		$	1,674		$	1,864		$	2,372		$	3,172		$	3,911		$	4,403		$	4,475		$	4,560		$	4,666
Paid (cumulative) as of:
One year later		609			596			616			602			632			914			787			1,111			1,016			1,024
Two years later		1,042			1,010			985			999			1,213			1,298			1,614			1,808			1,646
Three years later		1,333			1,276			1,296			1,424			1,456			1,835			2,161			2,273
Four years later		1,506			1,553			1,602			1,563			1,898			2,220			2,521
Five years later		1,718			1,802			1,666			1,932			2,206			2,489
Six years later		1,901			1,827			1,968			2,188			2,426
Seven years later		1,904			2,061			2,173			2,374
Eight years later		2,102			2,224			2,327
Nine years later		2,248			2,352
Ten years later		2,361
Liability re-estimated as of:
One year later		1,846			1,690			1,760			1,993			2,561			3,345			4,051			4,444			4,465			4,549
Two years later		1,862			1,787			1,935			2,240			2,828			3,537			4,144			4,481			4,498
Three years later		1,951			2,018			2,194			2,573			3,050			3,736			4,221			4,564
Four years later		2,144			2,280			2,514			2,828			3,294			3,837			4,320
Five years later		2,332			2,581			2,726			3,077			3,414			3,950
Six years later		2,572			2,750			2,973			3,202			3,534
Seven years later		2,702			2,969			3,078			3,325
Eight years later		2,893			3,069			3,192
Nine years later		2,985			3,182
Ten years later		3,094
Cumulative redundancy/ (deficiency)	$	(1,263	)	$	(1,515	)	$	(1,518	)	$	(1,461	)	$	(1,162	)	$	(778	)	$	(409	)	$	(161	)	$	(23	)	$	11

Gross liability — end of year	$	2,570		$	2,566		$	2,720		$	2,872		$	3,400		$	4,225		$	5,118		$	5,142		$	5,119		$	5,250		$	5,507
Reinsurance recoverables		739			899			1,046			1,008			1,028			1,053			1,207			739			644			690			841

Net liability — end of year		1,831			1,667			1,674			1,864			2,372			3,172			3,911			4,403			4,475			4,560			4,666

Gross re-estimated liability at December 31, 2009		4,459			4,691			4,853			4,876			4,888			5,241			5,649			5,357			5,198			5,308
Re-estimated recoverables at December 31, 2009		1,365			1,509			1,661			1,551			1,354			1,291			1,329			793			700			759

Net re-estimated liability at December 31, 2009		3,094			3,182			3,192			3,325			3,534			3,950			4,320			4,564			4,498			4,549

Gross cumulative redundancy/(deficiency)	$	(1,889	)	$	(2,125	)	$	(2,133	)	$	(2,004	)	$	(1,488	)	$	(1,016	)	$	(531	)	$	(215	)	$	(79	)	$	(58	)

The cumulative redundancy in 2008 reserves for unpaid losses and LAE for the year ended December 31, 2009 was $11 million. The cumulative deficiencies in 2007 and 2006 reserves for unpaid losses and LAE as of December 31, 2009 were $23 million and $161 million, respectively. The cumulative deficiencies in 2007 and 2006 reserves for unpaid losses and LAE as of December 31, 2009 principally resulted from increased reserves for U.S. casualty business, including asbestos and environmental pollution liabilities associated with contracts generally written prior to 1986. These contracts contained terms that, for us and the industry overall, have been interpreted by the courts to provide coverage for exposures that were not contemplated by the original pricing or reserving of the covers. In addition, increased loss estimates for U.S. casualty business written in the late 1990s and early 2000s contributed to the cumulative deficiency in 2007 and 2006 reserves for unpaid losses and LAE. The U.S. casualty classes of business include general liability, professional liability and excess workers’ compensation. In recent calendar years, we experienced loss emergence, resulting from a combination of higher

claim frequency and severity that was greater than our expectations, which were previously established based on a review of prior years’ loss trends for this 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 competitive conditions in the industry at that time. These competitive conditions resulted in pricing pressure and relatively broader coverage terms, thereby affecting the ability of standard actuarial techniques to generate reliable estimates of ultimate loss. Professional liability was impacted by the increase in frequency and severity of claims relating to bankruptcies and other financial and management improprieties in the late 1990s and early 2000s.

We believe that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at December 31, 2009. 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.

The following table is derived from the “Ten Year Analysis of Consolidated Losses and Loss Adjustment Expense Reserve Development Table” above. It summarizes the effect of re-estimating prior year loss reserves, net of reinsurance, on pre-tax income for the latest ten calendar years through December 31, 2009. Each column represents the calendar year development by each accident year. For example, in calendar year 2009, the impact of re-estimates of prior year loss reserves increased pre-tax income by $11.3 million.


	Development in Calendar Year
	2000			2001			2002			2003			2004			2005			2006			2007			2008			2009
													(In millions)
Accident Year Contributing to Loss Reserve Development
1999 and Prior	$	(15.9	)	$	(16.6	)	$	(88.9	)	$	(192.5	)	$	(187.9	)	$	(240.8	)	$	(129.9	)	$	(190.9	)	$	(92.2	)	$	(108.5	)
2000					(6.5	)		(9.0	)		(38.0	)		(74.6	)		(59.3	)		(39.8	)		(27.5	)		(7.3	)		(4.3	)
2001								12.4			56.0			2.5			(19.0	)		(42.4	)		(29.4	)		(5.6	)		(1.6	)
2002											46.6			12.2			(13.8	)		(42.3	)		(1.7	)		(20.0	)		(8.2	)
2003														57.8			66.7			32.4			5.2			5.0			2.2
2004																	93.5			29.6			45.2			19.2			7.8
2005																				52.5			106.4			23.5			13.3
2006																							52.2			40.0			16.4
2007																										47.5			49.5
2008																													44.7

Total Calendar Year Effect on Pre-tax Income Resulting from Reserve Re-estimation	$	(15.9	)	$	(23.1	)	$	(85.5	)	$	(127.9	)	$	(190.0	)	$	(172.7	)	$	(139.9	)	$	(40.5	)	$	10.1		$	11.3

The significant increase in reserves on accident years 1999 and prior for calendar year 2009 related considerably to increased reserves for asbestos liabilities.

The significant increase in reserves on accident years 2000 through 2002 for recent calendar years related principally to casualty reinsurance written in the United States in the late 1990s and early 2000s. These years experienced a proliferation of claims relating to bankruptcies and corporate improprieties. This resulted in an increase in the frequency and severity of claims in professional liability lines. Additionally, general liability and excess workers’ compensation classes of business in this period reflected increasing competitive conditions. These factors have impacted our ability to estimate losses and LAE for these exposures in recent calendar years.

Improvements in competitive conditions and the economic environment beginning in 2001 have resulted in a generally downward trend on re-estimated reserves for accident years 2003 through 2008. Initial loss estimates for these more recent accident years did not fully anticipate the improvements in competitive and economic conditions achieved since the early 2000s.

The following table summarizes our provision for unpaid losses and LAE for each of three years in the period ended December 31, 2009 (in millions):


	2009			2008			2007
Gross unpaid losses and LAE, beginning of year	$	5,250.5		$	5,119.1		$	5,142.1
Less: ceded unpaid losses and LAE, beginning of year		690.2			643.5			739.0

Net unpaid losses and LAE, beginning of year		4,560.3			4,475.6			4,403.1

Add: losses and LAE incurred related to:
Current year		1,313.3			1,518.8			1,367.9
Prior years		(11.3	)		(10.1	)		40.5

Total losses and LAE incurred		1,302.0			1,508.7			1,408.4

Less: Paid losses and LAE related to:
Current year		230.6			264.8			251.4
Prior years		1,024.2			1,016.0			1,111.1

Total paid losses and LAE		1,254.8			1,280.8			1,362.5

Effects of exchange rate changes		58.8			(143.2	)		26.6

Net unpaid losses and LAE, end of year		4,666.3			4,560.3			4,475.6
Add: ceded unpaid losses and LAE, end of year		841.5			690.2			643.5

Gross unpaid losses and LAE, end of year	$	5,507.8		$	5,250.5		$	5,119.1

The above amounts reflect tabular reserving for workers’ compensation indemnity reserves that are considered fixed and determinable. We discount such reserves using an interest rate of 3.5% and standard mortality assumptions. The amount of loss reserve discount as of December 31, 2009, 2008 and 2007 was $76.2 million, $79.6 million and $89.4 million, respectively.

Gross and net development for asbestos and environmental reserves on business written prior to 1986 for each of the three years in the period ended December 31, 2009 are provided in the following table (in millions):


	2009		2008		2007
Asbestos
Gross unpaid losses and LAE, beginning of year	$	360.7	$	339.3	$	308.7
Add: Gross losses and LAE incurred		69.4		73.8		86.0
Less: Gross calendar year paid losses and LAE		43.4		52.4		55.4


Gross unpaid losses and LAE, end of year	$	386.7	$	360.7	$	339.3


Net unpaid losses and LAE, beginning of year	$	230.5	$	222.4	$	189.0
Add: Net losses and LAE incurred		40.0		41.0		63.0
Less: Net calendar year paid losses and LAE		28.9		32.9		29.6

Net unpaid losses and LAE, end of year	$	241.6	$	230.5	$	222.4


Environmental

Gross unpaid losses and LAE, beginning of year	$	34.2	$	42.0	$	35.9
Add: Gross losses and LAE incurred		0.9		2.6		14.2
Less: Gross calendar year paid losses and LAE		8.0		10.4		8.1

Gross unpaid losses and LAE, end of year	$	27.1	$	34.2	$	42.0


	2009		2008		2007
Environmental
Net unpaid losses and LAE, beginning of year	$	29.8	$	34.5	$	26.7
Add: Net losses and LAE incurred		0.6		4.1		14.5
Less: Net calendar year paid losses and LAE		6.5		8.8		6.7

Net unpaid losses and LAE, end of year	$	23.9	$	29.8	$	34.5

Net losses and LAE incurred for asbestos claims increased $40.0 million, $41.0 million and $63.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Net losses and LAE incurred for environmental claims increased $0.6 million, $4.1 million and $14.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Our survival ratio for asbestos and environmental-related liabilities as of December 31, 2009 is seven years. Our underlying survival ratio for asbestos-related liabilities is eight years and for environmental-related liabilities is three years. The asbestos and environmental related liability survival ratio represents the asbestos and environmental reserves, net of reinsurance, on December 31, 2009, divided by the average paid asbestos and environmental claims for the last three years of $37.8 million, which is net of reinsurance. Our survival ratios may fluctuate over time due to the variability of large payments and adjustments to liabilities.

Investments

As of December 31, 2009, we held cash and investments totaling $8.7 billion, with a net unrealized gain of $828.2 million, before taxes. Our overall strategy is to maximize the total return of the investment portfolio, while prudently preserving invested capital and providing sufficient liquidity for the payment of claims, other policy obligations and general expenses.

Our investment guidelines stress prudent investment of capital with an eye on quality while seeking to maximize returns by focusing on market liquidity, diversification of risk and a long-term, value-oriented strategy. We seek to invest in securities that we believe are selling below their intrinsic value, in order to protect capital from loss and generate above-average total returns.

No attempt is made to forecast the economy, the future level of interest rates or the stock market. Equity investments are selected under the belief that the purchase prices are less than the intrinsic values. As a result, downside protection is provided by the margin of safety resulting from the difference between the purchase price and the intrinsic value. Fixed income securities are selected on the basis of yield spreads over Treasury bonds, subject to stringent credit analysis. Securities meeting these criteria may not be readily available, in which case Treasury bonds are emphasized. Notwithstanding the foregoing, our investments are subject to market risks and fluctuations, as well as to risks inherent in particular securities.

As part of our review and monitoring process, we regularly test the impact of a simultaneous substantial reduction in common stock, preferred stock and bond prices on our capital to ensure that capital adequacy will be maintained at all times.

The investment portfolio is structured to provide a sufficient level of liquidity. The following table shows the aggregate amounts of investments in fixed income securities, equity securities, cash and cash equivalents, short-term investments and other invested assets comprising our portfolio of invested assets.


	At December 31,
	2009					2008
	$		%			$		%
			(In millions)
Fixed income securities, available for sale, at fair value	$	4,374.0		50.1	%	$	3,594.3		45.6	%
Fixed income securities, held as trading securities, at fair value		532.7		6.1			338.2		4.3
Redeemable preferred stock, at fair value		0.1		—			0.1		—
Convertible preferred stock, held as trading securities, at fair value		82.5		0.9			—		—
Equity securities, at fair value		2,071.0		23.7			1,555.1		19.7
Equity securities, at equity		158.5		1.8			141.5		1.8
Cash, cash equivalents and short-term investments		1,305.0		15.0			1,958.1		24.8
Other invested assets		146.7		1.7			222.8		2.8
Cash and cash equivalents held as collateral		56.7		0.7			82.4		1.0

Total cash and invested assets	$	8,727.2		100.0	%	$	7,892.5		100.0	%

As of December 31, 2009, 61.9% of our fixed income securities were rated “AAA,” as measured by Standard & Poor’s, and had an average yield to maturity, based on fair values, of 5.3% before investment expenses. As of December 31, 2009 the duration of our fixed income securities was 10.8 years. Including short-term investments, cash and cash equivalents, the duration was 8.5 years.

Market Sensitive Instruments. Our investment portfolio includes investments that are subject to changes in market values, such as changes in interest rates. The aggregate hypothetical unrealized loss generated from an immediate adverse parallel shift in the treasury yield curve of 100 or 200 basis points would result in a decrease in fair value of $406.6 million and $808.3 million, respectively, on a fixed income portfolio valued at $4.9 billion as of December 31, 2009. The foregoing reflects the use of an immediate time horizon, since this presents the worst-case scenario. Credit spreads are assumed to remain constant in these hypothetical examples.

The following table summarizes the fair value of our investments (other than common stocks at equity and other invested assets) at the dates indicated (in millions):


	At December 31,
Type of Investment	2009		2008
United States government, government agencies and authorities	$	141.0	$	353.7
States, municipalities and political subdivisions		3,087.6		2,278.5
Foreign governments		796.6		840.2
All other corporate		348.8		121.9

Total fixed income securities, available for sale		4,374.0		3,594.3
Fixed income securities, held for trading		532.7		338.2
Redeemable preferred stock, at fair value		0.1		0.1
Convertible preferred stock, held as trading securities		82.5		—
Common stocks, at fair value		2,071.0		1,555.1
Short-term investments, at fair value		125.1		1,202.4
Short-term investments, held as trading securities		238.4		—
Cash and cash equivalents		941.4		755.7
Cash and cash equivalents held as collateral		56.7		82.4

Total	$	8,421.9	$	7,528.2

The following table summarizes the fair value by contractual maturities of our fixed income securities at the dates indicated (in millions):


	At December 31,
	2009				2008
	Available		Held for		Available		Held for
	for Sale		Trading		for Sale		Trading
Due in less than one year	$	24.0	$	99.2	$	218.3	$	—
Due after one through five years		501.2		204.9		369.3		164.1
Due after five through ten years		279.6		52.6		465.4		23.0
Due after ten years		3,569.2		176.0		2,541.3		151.1

Total	$	4,374.0	$	532.7	$	3,594.3	$	338.2

The contractual maturities reflected above may differ from the actual maturities due to the existence of call or put features. As of December 31, 2009 and 2008, approximately 53.0% and 55.8% respectively, of the fixed income securities shown above had a call feature which, at the issuer’s option, allowed the issuer to repurchase the securities on one or more dates prior to their maturity. For the years ended December 31, 2009 and 2008, 3.2% and 3.5%, respectively, of the fixed income securities shown above, had put features which, if exercised at our option, would require the issuer to repurchase the investments on one or more dates prior to their maturity. For the investments shown above, if the call feature or put feature is exercised, the actual maturities will be shorter than the contractual maturities shown above. In the case of securities that are subject to early call by the issuer, the actual maturities will be the same as the contractual maturities shown above if the issuer does not exercise its call feature. In the case of securities containing put features, the actual maturities will be the same as the contractual maturities shown above if we elect not to exercise our put option, but to hold the securities to their final maturity dates.

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

Under a credit default swap, as the buyer, we agree to pay to a specific counterparty, at specified periods, fixed premium amounts based on an agreed notional principal amount in exchange for protection against default by the issuers of specified referenced debt securities. The credit events, as defined by the respective credit default swap contracts, establishing the rights to recover amounts from the counterparties are comprised of ISDA-standard credit events, which are: bankruptcy, obligation acceleration, obligation default, failure to pay, repudiation/moratorium and restructuring. As of December 31, 2009, all credit default swap contracts held by us have been purchased from and entered into with either Citibank, N.A., Deutsche Bank AG or Barclays Bank PLC as the counterparty, with positions on certain covered risks with more than one of these counterparties.

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

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

The total cost of the credit default swaps was $20.6 million and $30.8 million as of December 31, 2009 and 2008, respectively, and the fair value was $10.0 million and $82.8 million, as of December 31, 2009 and 2008, respectively. The notional amount of the credit default swaps was $1.3 billion and $1.8 billion as of December 31, 2009 and 2008, respectively. The credit default swaps had net realized investment losses of $28.7 million and net realized investment gains of $350.7 million for the years ended December 31, 2009, and 2008, respectively. The fair values of credit default swaps may be subject to significant volatility given potential differences in the perceived risk of default of the underlying issuers, movements in credit spreads and the length of time to the contracts’ maturities. The fair value of the credit default swaps may vary dramatically either up or down in short periods, and their ultimate value may therefore only be known upon their disposition. Credit default swap transactions generally settle in cash. As we fund all of our obligations relating to these contracts upon initiation of the transaction, there are no requirements in these contracts for us to provide collateral.

Quality of Debt Securities in Portfolio. The following table summarizes the composition of the fair value of our fixed income securities portfolio at the dates indicated by rating as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) or Moody’s Investors Service (“Moody’s”), using the higher of these ratings for any security where there is a split rating.


	At December 31,
Rating	2009			2008
AAA/Aaa		61.9	%		81.9	%
AA/Aa2		8.0			7.7
A/A2		14.4			2.0
BBB/Baa2		5.2			—
BB/Ba2		2.9			0.4
B/B2		1.8			2.6
CCC/Caa or lower or not rated		5.8			5.4

Total		100.0	%		100.0	%

As of December 31, 2009, 10.5% of our fixed income securities were rated BB/Ba2 or lower, compared to 8.4% as of December 31, 2008.

Ratings

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

These ratings are used by insurers, reinsurers and intermediaries as an important means of assessing the financial strength and quality of reinsurers and insurers. The financial strength ratings of our principal operating subsidiaries are as follows:


	A.M. Best	Standard & Poor’s	Moody’s
Odyssey America	“A” (Excellent)	“A-” (Strong)	“A3” (Good)
Hudson	“A” (Excellent)	Not Rated	Not Rated
Hudson Specialty	“A” (Excellent)	“A-” (Strong)	Not Rated

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

Marketing

We provide property and casualty reinsurance capacity in the United States market primarily through brokers, and in international markets through brokers and directly to insurers and reinsurers. We focus our marketing on potential clients and brokers that have the ability and expertise to provide the detailed and accurate underwriting information we need to properly evaluate each piece of business. Further, we seek relationships with new clients that will further diversify our existing book of business without sacrificing our underwriting discipline.

We believe that the willingness of a primary insurer or reinsurer to use a specific reinsurer is not based solely on pricing. Other factors include the client’s perception of the reinsurer’s financial security, its claims-paying ability ratings, its ability to design customized products to serve the client’s needs, the quality of its overall service, and its commitment to provide the client with reinsurance capacity. We believe we have developed a reputation with our clients for prompt response on underwriting submissions and timely claims payments. Additionally, we believe our level of capital and surplus demonstrates our strong financial position and intent to continue providing reinsurance capacity.

The reinsurance broker market consists of several significant national and international brokers and a number of smaller specialized brokers. Brokers do not have the authority to bind us with respect to reinsurance agreements, nor do we commit in advance to accept any portion of the business that brokers submit. Brokerage fees generally are paid by reinsurers and are included as an underwriting expense in the consolidated financial statements. Our five largest reinsurance brokers accounted for an aggregate of 68.6% of our reinsurance gross premiums written in 2009.

Direct distribution is an important channel for us in the markets served by the Latin America unit of the Americas division and by the EuroAsia division. Direct placement of reinsurance enables us to access clients who prefer to place their reinsurance directly with their reinsurers based upon the reinsurer’s in-depth understanding of the ceding company’s needs.

Our primary insurance business generated through the U.S. Insurance division is written principally through national and regional agencies and brokers, as well as through general agency relationships. Newline’s primary market business is written through agency and direct distribution channels.

The following table shows our gross premiums written, with distribution sources for our reinsurance business, for the year ended December 31, 2009 (in millions):


	For the Year Ended
	December 31, 2009
	$		%
Aon Benfield	$	438.5		20.0	%
Guy Carpenter & Company		309.8		14.1
Willis Re Group Holdings, Ltd.		175.3		8.0
Towers Perrin Reinsurance		26.7		1.2
Protection Reinsurance Intermediaries AG		20.6		0.9
Other brokers		226.3		10.3

Total brokers		1,197.2		54.5
Direct		217.3		9.9

Total reinsurance		1,414.5		64.4
U.S. Insurance		547.0		24.9
Newline		233.5		10.7

Total	$	2,195.0		100.0	%

Competition

The global reinsurance and insurance business is highly competitive and cyclical by product and market, resulting in fluctuations in overall financial results. Competition in the types of reinsurance and insurance business that OdysseyRe underwrites is based on many factors, including supply of capital and underwriting capacity and demand for reinsurance and insurance, the perceived overall financial strength of the reinsurer or insurer, (A.M. Best, Standard & Poor’s and Moody’s ratings) the jurisdictions where the reinsurer or insurer is licensed, accredited or authorized, capacity and coverages offered, premiums charged, specific terms and conditions offered, services offered, speed of claims payment, and reputation and experience in lines of business underwritten. These competitive factors are generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

OdysseyRe’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain primary insurance companies, and domestic and European underwriting syndicates. United States insurance companies that are licensed to underwrite insurance are also licensed to underwrite reinsurance, making the commercial access into the reinsurance business relatively uncomplicated. In addition, Bermuda reinsurers that initially specialized in catastrophe reinsurance are now broadening their product offerings, and the potential for securitization of reinsurance insurance risks through capital markets provides additional sources of potential reinsurance and insurance capacity and competition.

Employees

As of December 31, 2009, we had 721 employees. We believe our relationship with our employees is satisfactory.

Regulatory Matters

We are subject to regulation under the insurance statutes, including insurance holding company statutes, of various jurisdictions, including Connecticut, the domiciliary state of Odyssey America; Delaware, the domiciliary state of Clearwater, Hudson and Clearwater Select; New York, the domiciliary state of Hudson Specialty; California, where Hudson is deemed to be “commercially domiciled”; and the United Kingdom, the domiciliary jurisdiction of Newline. Newline Syndicate (1218) is also subject to regulation by the Society and

Council of Lloyd’s. In addition, we are subject to regulation by the insurance regulators of other states and foreign jurisdictions in which we or our operating subsidiaries do business.

Regulation of Reinsurers and Insurers

General

The terms and conditions of reinsurance agreements with respect to rates or policy terms generally are not subject to regulation by any governmental authority. This contrasts with primary insurance policies and agreements issued by primary insurers such as Hudson, the rates and policy terms of which are generally regulated closely by state insurance departments. As a practical matter, however, the rates charged by primary insurers influence the rates that can be charged by reinsurers.

Our reinsurance operations are subject primarily to regulation and supervision that relates to licensing requirements of reinsurers, the standards of solvency that reinsurers must meet and maintain, the nature of and limitations on investments, restrictions on the size of risks that may be reinsured, the amount of security deposits necessary to secure the faithful performance of a reinsurer’s insurance obligations, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers, the form and content of any financial statements that reinsurers must file with state insurance regulators and the level of minimal reserves necessary to cover unearned premiums, losses and other purposes. In general, these regulations are designed to protect ceding insurers and, ultimately, their policyholders, rather than shareholders. We believe that we and our subsidiaries are in material compliance with all applicable laws and regulations pertaining to our business and operations.

Insurance Holding Company Regulation

State insurance holding company statutes provide a regulatory apparatus which is designed to protect the financial condition of domestic insurers operating within a holding company system. All holding company statutes require disclosure and, in some instances, prior approval, of significant transactions between the domestic insurer and an affiliate. Such transactions typically include service arrangements, sales, purchases, exchanges, loans and extensions of credit, reinsurance agreements, and investments between an insurance company and its affiliates, in some cases involving certain aggregate percentages of a company’s admitted assets or policyholders’ surplus, or dividends that exceed certain percentages. State regulators also require prior notice or regulatory approval of any acquisition of control of an insurer or its holding company.

Under the Connecticut, Delaware, New York and California Insurance laws and regulations, no person, corporation or other entity may acquire control of us or our operating subsidiaries unless such person, corporation or entity has obtained the prior approval of the applicable state or states for the acquisition. For the purposes of the state insurance holding company laws and regulations, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of that company. To obtain the approval of any acquisition of control, any prospective acquirer must file an application with the relevant insurance commissioner(s). This application requires the acquirer to disclose its background, financial condition, the financial condition of its affiliates, the source and amount of funds by which it will effect the acquisition, the criteria used in determining the nature and amount of consideration to be paid for the acquisition, proposed changes in the management and operations of the insurance company and any other related matters.

The United Kingdom Financial Services Authority also requires an insurance company or reinsurance company that carries on business through a permanent establishment in the United Kingdom, but which is incorporated outside the United Kingdom, to notify it of any person becoming or ceasing to be a controller or of a controller becoming or ceasing to be a parent undertaking. Any company or individual that holds 10% or more of the shares in the insurance company or reinsurance company or its parent undertaking, or is able to exercise significant influence over the management of the insurance company or reinsurance company or its parent undertaking through such shareholding, or is entitled to exercise or control the exercise of 10% or more of the voting power at any general meeting of the insurance company or reinsurance company or of its parent undertaking, or is able to exercise significant influence over the management of the insurance company or reinsurance company or its parent undertaking as a result of its voting power is a “controller.” As the 100% owner of our common shares, Fairfax and certain of its subsidiaries, and Odyssey Re Holdings Corp. itself, are

each deemed to be a “controller” of Odyssey America, which is authorized to carry on reinsurance business in the United Kingdom through the London branch. Other than our subsidiaries in the London Market division, none of our other insurance or reinsurance subsidiaries is authorized to carry on business in the United Kingdom.

Under the bylaws made by Lloyd’s pursuant to the Lloyd’s Act of 1982, the prior written approval of the Franchise Board established by the Council of Lloyd’s is required of anyone proposing to become a “controller” of any Lloyd’s Managing Agent. Any company or individual that holds 10% or more of the shares in the managing agent company or its parent undertaking, or is able to exercise significant influence over the management of the managing agent or its parent undertaking through such shareholding, or is entitled to exercise or control the exercise of 10% or more of the voting power at any general meeting of the Lloyd’s Managing Agent or its parent undertaking, or exercise significant influence over its management or that of its parent undertaking as a result of voting power is a “controller.” As the 100% owner of our common shares, Fairfax and certain of its subsidiaries, and Odyssey Re Holdings Corp. itself, are each deemed to be a “controller” of the United Kingdom Lloyd’s Managing Agent subsidiary, Newline Underwriting Management Limited.

Dividends

Because our operations are conducted at the subsidiary level, we are dependent upon dividends from our subsidiaries to meet our debt and other obligations. The payment of dividends to us by our operating subsidiaries is subject to limitations imposed by law in Connecticut, Delaware, New York, California and the United Kingdom.

Under the Connecticut and Delaware Insurance Codes, before a Connecticut or Delaware domiciled insurer, as the case may be, may pay any dividend it must have given notice within five days following the declaration thereof and 10 days prior to the payment thereof to the Connecticut or Delaware Insurance Commissioners, as the case may be. During this 10-day period, the Connecticut or Delaware Insurance Commissioner, as the case may be, may, by order, limit or disallow the payment of ordinary dividends if he or she finds the insurer to be presently or potentially in financial distress. Under Connecticut and Delaware Insurance Regulations, the Insurance Commissioner may issue an order suspending or limiting the declaration or payment of dividends by an insurer if he or she determines that the continued operation of the insurer may be hazardous to its policyholders. A Connecticut domiciled insurer may only pay dividends out of “earned surplus,” defined as the insurer’s “unassigned funds surplus” reduced by 25% of unrealized appreciation in value or revaluation of assets or unrealized profits on investments, as defined in such insurer’s annual statutory financial statement. A Delaware domiciled insurer may only pay cash dividends from the portion of its available and accumulated surplus funds derived from realized net operating profits and realized investment gains. Additionally, a Connecticut or Delaware domiciled insurer may not pay any “extraordinary” dividend or distribution until (i) 30 days after the insurance commissioner has received notice of a declaration of the dividend or distribution and has not within that period disapproved the payment or (ii) the insurance commissioner has approved the payment within the 30-day period. Under the Connecticut insurance laws, an “extraordinary” dividend of a property and casualty insurer is a dividend for which the amount, together with all other dividends and distributions made in the preceding 12 months, exceeds the greater of (i) 10% of the insurer’s surplus with respect to policyholders as of the end of the prior calendar year or (ii) the insurer’s net income for the prior calendar year (not including pro rata distributions of any class of the insurer’s own securities). The Connecticut Insurance Department has stated that the preceding 12-month period ends the month prior to the month in which the insurer seeks to pay the dividend. Under the Delaware and California insurance laws, an “extraordinary” dividend of a property and casualty insurer is a dividend for which the amount, together with all other dividends and distributions made in the preceding 12 months, exceeds the greater of (i) 10% of an insurer’s surplus with respect to policyholders, as of the end of the prior calendar year or (ii) the insurer’s statutory net income, not including realized investment gains, for the prior calendar year. Under these definitions, the maximum amount that will be available for the payment of dividends by Odyssey America during the year ending December 31, 2010 without requiring prior approval of regulatory authorities is $351.3 million.

New York law provides that an insurer domiciled in New York must obtain the prior approval of the state insurance commissioner for the declaration or payment of any dividend that, together with dividends declared or paid in the preceding 12 months, exceeds the lesser of (i) 10% of policyholders’ surplus, as shown by its last statement on file with the New York Insurance Department and (ii) adjusted net investment income (which does

not include realized gains or losses) for the preceding 12-month period. Adjusted net investment income includes a carryforward of undistributed net investment income for two years. Such declaration or payment is further limited by earned surplus, as determined in accordance with statutory accounting practices prescribed or permitted in New York. Under New York law, an insurer domiciled in New York may not pay dividends to shareholders except out of “earned surplus,” which in this case is defined as “the portion of the surplus that represents the net earnings, gains or profits, after the deduction of all losses, that have not been distributed to the shareholders as dividends or transferred to stated capital or capital surplus or applied to other purposes permitted by law but does not include unrealized appreciation of assets.”

United Kingdom law prohibits any United Kingdom company, including the Newline companies, from declaring dividends to shareholders unless such company has “profits available for distribution,” which, in summary, are accumulated realized profits less accumulated realized losses. The determination of whether a company has profits available for distribution must be made by reference to accounts that comply with the requirements of the Companies Act 1985 or, subsequent to April 6, 2008, the Companies Act 2006. While there are no statutory restrictions imposed by the United Kingdom insurance regulatory laws upon an insurer’s ability to declare dividends, insurance regulators in the United Kingdom strictly control the maintenance of each insurance company’s solvency margin within their jurisdiction and may restrict an insurer from declaring a dividend beyond a level that the regulators determine would adversely affect an insurer’s solvency requirements. It is common practice in the United Kingdom to notify regulators in advance of any significant dividend payment.

Credit for Reinsurance and Licensing

A primary insurer ordinarily will enter into a reinsurance agreement only if it can obtain credit for the reinsurance ceded on its statutory financial statements. In general, credit for reinsurance is allowed in the following circumstances: (i) if the reinsurer is licensed in the state in which the primary insurer is domiciled or, in some instances, in certain states in which the primary insurer is licensed; (ii) if the reinsurer is an “accredited” or otherwise approved reinsurer in the state in which the primary insurer is domiciled or, in some instances, in certain states in which the primary insurer is licensed; (iii) in some instances, if the reinsurer (a) is domiciled in a state that is deemed to have substantially similar credit for reinsurance standards as the state in which the primary insurer is domiciled and (b) meets certain financial requirements; or (iv) if none of the above apply, to the extent that the reinsurance obligations of the reinsurer are collateralized appropriately, typically through the posting of a letter of credit for the benefit of the primary insurer or the deposit of assets into a trust fund established for the benefit of the primary insurer. Therefore, as a result of the requirements relating to the provision of credit for reinsurance, we are indirectly subject to certain regulatory requirements imposed by jurisdictions in which ceding companies are licensed.

Investment Limitations

State insurance laws contain rules governing the types and amounts of investments that are permissible for domiciled insurers. These rules are designed to ensure the safety and liquidity of an insurer’s investment portfolio. Investments in excess of statutory guidelines do not constitute “admitted assets” (i.e., assets permitted by insurance laws to be included in a domestic insurer’s statutory financial statements) unless special approval is obtained from the regulatory authority. Non-admitted assets are not considered for the purposes of various financial ratios and tests, including those governing solvency and the ability to write premiums. An insurer may hold an investment authorized under more than one provision of the insurance laws under the provision of its choice (except as otherwise expressly provided by law).

Liquidation of Insurers

The liquidation of insurance companies, including reinsurers, is generally conducted pursuant to state insurance law. In the event of the liquidation of one of our operating insurance subsidiaries, liquidation proceedings would be conducted by the insurance regulator of the state in which the subsidiary is domiciled, as the domestic receiver of its properties, assets and business. Liquidators located in other states (known as ancillary liquidators) in which we conduct business may have jurisdiction over assets or properties located in such states under certain circumstances. Under Connecticut, Delaware and New York law, all creditors of our operating insurance subsidiaries, including but not limited to reinsureds under their reinsurance agreements,

would be entitled to payment of their allowed claims in full from the assets of the operating subsidiaries before we, as a shareholder of our operating subsidiaries, would be entitled to receive any distribution.

Some states have adopted and others are considering legislative proposals that would authorize the establishment of an interstate compact concerning various aspects of insurer insolvency proceedings, including interstate governance of receiverships and guaranty funds.

Risk-Based Capital Requirements

The National Association of Insurance Commissioners (“NAIC”), an organization of insurance regulators from all 50 states of the U.S., the District of Columbia, and the five U.S. territories, is a forum for the development of uniform insurance policy in the U.S. when uniformity is deemed appropriate. In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. Connecticut, Delaware and New York have each adopted risk-based capital legislation for property and casualty insurance and reinsurance companies that is substantially the same as the NAIC risk-based capital requirement. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss development and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) declines in asset values arising from investment risks. Insurers having less statutory surplus than required by the risk-based capital calculation will be subject to varying degrees of company or regulatory action, ranging in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control, depending on the level of capital inadequacy. The surplus levels (as calculated for statutory annual statement purposes) of each of our operating insurance companies are above the risk-based capital thresholds that would require either company or regulatory action.

Guaranty Funds and Shared Markets

Our operating subsidiaries that write primary insurance are required to be members of guaranty associations in each state in which they are admitted to write business. These associations are organized to pay covered claims (as defined and limited by various guaranty association statutes) under insurance policies issued by primary insurance companies that have been judicially declared insolvent. These state guaranty funds make assessments against member insurers to obtain the funds necessary to pay association covered claims. New York has a pre-assessment guaranty fund, which makes assessments prior to the occurrence of an insolvency, in contrast with other states, which make assessments after an insolvency takes place. In addition, primary insurers are required to participate in mandatory property and casualty shared market mechanisms or pooling arrangements that provide various coverages to individuals or other entities that are otherwise unable to purchase such coverage in the commercial insurance marketplace. Our operating subsidiaries’ participation in such shared markets or pooling mechanisms is generally proportionate to the amount of direct premiums written in respect of primary insurance for the type of coverage written by the applicable pooling mechanism.

Legislative and Regulatory Proposals

From time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry that could have an effect on reinsurers. Among the proposals that in the past have been or are at present being considered is the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers. In addition, there are a variety of proposals being considered by various state legislatures. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

Government intervention in the insurance and reinsurance markets, both in the U.S. and worldwide, continues to evolve. Federal and state legislators and regulators have considered numerous statutory and regulatory initiatives. While we cannot predict the exact nature, timing, or scope of other such proposals, if adopted they could adversely affect our business by:

	•		providing government supported insurance and reinsurance capacity in markets and to consumers that we target;

	•		requiring our participation in new or expanded pools and guaranty associations;

	•		increased regulation of the terms of insurance and reinsurance policies; or

	•		disproportionately benefiting the companies of one country or jurisdiction over those of another.

Terrorism Risk Insurance Act of 2002

The Terrorism Risk Insurance Act of 2002 (“TRIA”) established a program under which the U.S. federal government will share with the insurance industry the risk of loss from certain acts of international terrorism. With the enactment on December 22, 2005 of the Terrorism Risk Insurance Extension Act of 2005, TRIA was modified and extended through December 31, 2007. On December 26, 2007, TRIA was further modified and extended through 2014. Notably, “act of terrorism” was redefined to eliminate the distinction between foreign and domestic terrorism. The TRIA program is applicable to most commercial property and casualty lines of business (with the notable exception of reinsurance), and participation by insurers writing such lines is mandatory. Under TRIA, all applicable terrorism exclusions contained in policies in force on November 26, 2002 were voided. For policies in force on or after November 26, 2002, insurers are required to make available coverage for losses arising from acts of terrorism as defined by TRIA on terms and in amounts which may not differ materially from other policy coverages.

Under TRIA, the federal government will reimburse insurers for 85% of covered losses above a defined insurer deductible. The deductible for each participating insurer is based on a percentage of the combined direct earned premiums in the preceding calendar year of the insurer, defined to include its subsidiaries and affiliates. In 2010, the deductible is equal to 20% of the insurer’s combined direct earned premiums for 2009. Further, the 2005 amendments to TRIA established a per event trigger for federal participation in aggregate insured losses of $100 million for losses occurring in 2007 and subsequent years. Under certain circumstances, the federal government may require insurers to levy premium surcharges on policyholders to recoup for the federal government its reimbursements paid.

While the provisions of TRIA and the purchase of certain terrorism reinsurance coverage mitigate the net loss exposure in our insurance operations in the event of a large-scale terrorist attack, our effective deductible is significant. Further, our exposure to losses from terrorist acts is not limited to TRIA events since some state insurance regulators do not permit terrorism exclusions for various coverages or causes of loss.

Primary insurance companies providing commercial property and casualty insurance in the U.S., such as Hudson and Hudson Specialty, are required to participate in the TRIA program. Because TRIA generally does not purport to govern the obligations of reinsurers, Odyssey America does not anticipate any reimbursements of terrorism losses, whether incurred in the United States or elsewhere, from that U.S. Federal program. Accordingly, we continue to carefully monitor our concentrations of terrorism exposure around the world.

Our Website

Our internet address is www.odysseyre.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act, are accessible free of charge through our website as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC. Our Code of Business Conduct, Code of Ethics for Senior Financial Officers, Corporate Governance Guidelines and the charters for our Audit and Compensation Committees are also available on our website. In addition, you may obtain, free of charge, copies of any of the above reports or documents upon request to the Secretary of OdysseyRe.

Our annual, quarterly and current reports are accessible to view or copy at the SEC’s Public Reference room at 100 F Street, NE, Washington, DC 20549, by calling 1-800-SEC-0330, or on the SEC’s website at www.sec.gov.

Item 1A. Risk Factors

Factors that could cause our actual results to differ materially from those described in the forward-looking statements contained in this Annual Report on Form 10-K and other documents we file with the SEC include the risks described below. You should also refer to the other information in this Annual Report on Form 10-K, including the consolidated financial statements and accompanying notes thereto.

Risks Relating to Our Business

Our actual claims may exceed our claim reserves, causing us to incur losses we did not anticipate.

Our success is dependent upon our ability to assess accurately the risks associated with the businesses that we reinsure or insure. If we fail to accurately assess the risks we assume, we may fail to establish appropriate premium rates and our reserves may be inadequate to cover our losses, which could have a material adverse effect on our financial condition or reduce our net income.

As of December 31, 2009, we had net unpaid losses and loss adjustment expenses of $4,666.3 million. We incurred decreases in losses and loss adjustment expenses related to prior years of $11.3 million and $10.1 million for the years ended December 31, 2009 and 2008, respectively. We incurred increases in losses and loss adjustment expenses related to prior years of $40.5 million, $139.9 million and $172.7 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Reinsurance and insurance claim reserves represent estimates, involving actuarial and statistical projections at a given point in time, of our expectations of the ultimate settlement and administration costs of claims incurred. The process of establishing loss reserves is complex and imprecise because it is subject to variables that are influenced by significant judgmental factors. We utilize both proprietary and commercially available actuarial models as well as our historical and industry loss development patterns to assist in the establishment of appropriate claim reserves. In contrast to casualty losses, which frequently can be determined only through lengthy and unpredictable litigation, non-casualty property losses tend to be reported promptly and usually are settled within a shorter period of time. Nevertheless, for both casualty and property losses, actual claims and claim expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our consolidated financial statements.

In addition, because we, like other reinsurers, do not separately evaluate each of the individual risks assumed under our reinsurance treaties, we are largely dependent on the original underwriting decisions made by ceding companies. We are subject to the risk that the ceding companies may not have adequately evaluated the risks to be reinsured and that the premiums ceded may not adequately compensate us for the risks we assume. If our claim reserves are determined to be inadequate, we will be required to increase claim reserves with a corresponding reduction in our net income in the period in which the deficiency is recognized. It is possible that claims in respect of events that have occurred could exceed our claim reserves and have a material adverse effect on our results of operations in a particular period or our financial condition.

Even though most insurance contracts have policy limits, the nature of property and casualty insurance and reinsurance is that losses can exceed policy limits for a variety of reasons and could significantly exceed the premiums received on the underlying policies.

Unpredictable natural and man-made catastrophic events could cause unanticipated losses and reduce our net income.

Catastrophes can be caused by various events, including natural events such as hurricanes, windstorms, earthquakes, hailstorms, severe winter weather and fires, and unnatural events such as acts of war, terrorist attacks, explosions and riots. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the

event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, windstorms and earthquakes may produce significant damage in large, heavily populated areas. Most of our past catastrophe-related claims have resulted from severe storms. Catastrophes can cause losses in a variety of property and casualty lines for which we provide insurance or reinsurance.

Insurance companies are not permitted to reserve for a catastrophe unless it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect upon our results of operations and financial condition. It is possible that our models have not adequately captured some catastrophe risks or other risks. We believe it is impossible to completely eliminate our exposure to unforeseen or unpredictable events.

We incurred net losses and loss adjustment expenses related to current year catastrophes of $131.1 million, $264.7 million, $105.9 million, $34.9 million and $537.9 million for the years ended December 31, 2009, 2008, 2007, 2006 and 2005, respectively.

If we are unable to maintain favorable financial strength ratings, certain existing business may be subject to termination, and it may be more difficult for us to write new business.

Rating agencies assess and rate the claims-paying ability of reinsurers and insurers based upon criteria established by the rating agencies. Periodically the rating agencies evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. The claims-paying ability ratings assigned by rating agencies to reinsurance or insurance companies represent independent opinions of financial strength and ability to meet policyholder obligations, and are not directed toward the protection of investors. Ratings by rating agencies are not ratings of securities or recommendations to buy, hold or sell any security. In the event our companies were to be downgraded by any or all of the rating agencies, some of our business would be subject to provisions which could cause, among other things, early termination of contracts, or a requirement to post collateral at the direction of our counterparty. We cannot precisely estimate the amount of premium that would be at risk to such a development, or the amount of additional collateral that might be required to maintain existing business, as these amounts would depend on the particular facts and circumstances at the time, including the degree of the downgrade, the time elapsed on the impacted in-force policies, and the effects of any related catastrophic event on the industry generally. We cannot assure you that our premiums would not decline, or that our profitability would not be affected, perhaps materially, following a ratings downgrade.

The financial strength ratings of each of our principal operating subsidiaries are:


	A.M. Best	Standard & Poor’s	Moody’s
Odyssey America	“A” (Excellent)	“A-” (Strong)	“A3” (Good)
Hudson	“A” (Excellent)	Not Rated	Not Rated
Hudson Specialty	“A” (Excellent)	“A-” (Strong)	Not Rated

The ratings by these agencies of our principal operating subsidiaries may be based on a variety of factors, many of which are outside of our control, including, but not limited to, the financial condition of Fairfax and its other subsidiaries and affiliates, the financial condition or actions of parties from which we have obtained reinsurance, and factors relating to the sectors in which we or they conduct business, and the statutory surplus of our operating subsidiaries, which is adversely affected by underwriting losses and dividends paid by them to us. A downgrade of any of the debt or other ratings of Fairfax, or of any of Fairfax’s other subsidiaries or affiliates, or a deterioration in the financial markets’ view of any of these entities, could have a negative impact on our ratings.

If we are unable to realize our investment objectives, our business, financial condition or results of operations may be adversely affected.

Investment returns are an important part of our overall profitability, and our operating results depend in part on the performance of our investment portfolio. Accordingly, fluctuations in the fixed income or equity markets could impair our profitability, financial condition or cash flows. We derive our investment income from interest and dividends, together with realized investment gains or losses primarily arising from the sale of investments and the mark-to-market adjustments to our derivative and trading securities. The portion derived from realized

investment gains generally fluctuates from year to year. For the years ended December 31, 2009, 2008 and 2007, net realized investment gains accounted for 36.9%, 73.1% and 62.1%, respectively, of our total investment income (including realized investment gains and losses). Realized investment gains are typically a less predictable source of income than interest and dividends, particularly in the short term. From time to time, we invest in derivative securities, which may be subject to significant mark-to-market accounting adjustments from period to period. These securities may subject our statement of operations and balance sheet to significant volatility. In recent years, significant percentages of our net realized gains from investments have been from credit default swaps and total return swaps, which we entered into as an economic hedge against systemic and financial credit risk and a broad market downturn. We significantly reduced our credit default swap portfolio in 2008, and we closed out our entire total return swap portfolio during the fourth quarter of 2008, in each case recognizing significant realized gains. A significant percentage of the proceeds from the sales of these derivative positions has been reinvested in state and municipal tax preferenced bonds, common stocks, and other securities of various U.S. and foreign entities. In late September 2009, we re-initiated U.S. equity index total return swap contracts, which as of December 31, 2009 have a notional value of $818.4 million, to protect against potential future broad market downturns. As a result of these changes, and notwithstanding the re-initiation of a U.S. equity total return swap position in September 2009, our investment portfolio is exposed, to a significantly larger degree than in periods prior to 2008, to declines in the world financial markets, particularly the equity markets, and to increased volatility.

The return on our portfolio and the risks associated with our investments are also affected by our asset mix, which can change materially depending on market conditions. Investments in cash or short-term investments generally produce a lower return than other investments. As of December 31, 2009, 15.0%, or $1.3 billion, of our invested assets was held in cash, cash equivalents and short-term investments, pending our identifying suitable opportunities for reinvestment in line with our long-term value-oriented investment philosophy.

The volatility of our claims submissions may force us to liquidate securities, which may cause us to incur realized investment losses. If we structure our investments improperly relative to our liabilities, we may be forced to liquidate investments prior to maturity at a significant loss to cover such liabilities. Realized investment losses resulting from an other-than-temporary decline in value could significantly decrease our assets, thereby affecting our ability to conduct business.

The ability to achieve our investment objectives is affected by general economic conditions that are beyond our control. General economic conditions can adversely affect the markets for interest-rate-sensitive securities, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the value of fixed income securities. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. General economic conditions, stock market conditions and many other factors can also adversely affect the equities markets and, consequently, the value of the equity securities we own. In addition, defaults by issuers and counterparties who fail to pay or perform on their obligations could reduce our investment income and realized investment gains, or result in investment losses. We may not be able to realize our investment objectives, which could reduce our net income significantly and adversely affect our business, financial condition or results of operations.

Certain business practices of the insurance industry have become the subject of investigations by government authorities and the subject of class action litigation.

In recent years, the insurance industry has been the subject of a number of investigations, and increasing litigation and regulatory activity by various insurance, governmental and enforcement authorities, concerning certain practices within the industry. In past years we received inquiries and informational requests regarding these matters from insurance departments in certain states in which our insurance subsidiaries operate. We cannot predict at this time the effect that current or future investigations, litigation and regulatory activity will have on the insurance or reinsurance industry or our business. Our involvement in any investigations and related lawsuits would cause us to incur legal costs and, if we were found to have violated any laws, we could be required to pay fines and damages, perhaps in material amounts. In addition, we could be materially adversely affected by the negative publicity for the insurance industry related to these proceedings, and by any new industry-wide regulations or practices that may result from these proceedings. It is possible that these investigations or related regulatory developments will mandate changes in industry practices in a fashion that

increases our costs of doing business or requires us to alter aspects of the manner in which we conduct our business.

We operate in a highly competitive environment which could make it more difficult for us to attract and retain business.

The reinsurance industry is highly competitive. We compete, and will continue to compete, with major United States and non-United States reinsurers and certain underwriting syndicates and insurers, some of which have greater financial, marketing and management resources than we do. In addition, we may not be aware of other companies that may be planning to enter the reinsurance market or existing reinsurers that may be planning to raise additional capital. Competition in the types of reinsurance business that we underwrite is based on many factors, including premiums charged and other terms and conditions offered, services provided, financial ratings assigned by independent rating agencies, speed of claims payment, reputation, perceived financial strength and the experience of the reinsurer in the line of reinsurance to be written. Increased competition could cause us and other reinsurance providers to charge lower premium rates and obtain less favorable policy terms, which could adversely affect our ability to generate revenue and grow our business.

We also are aware that other financial institutions, such as banks, are now able to offer services similar to our own. In addition, in recent years we have seen the creation of alternative products from capital market participants that are intended to compete with reinsurance products. We are unable to predict the extent to which these new, proposed or potential initiatives may affect the demand for our products or the risks that may be available for us to consider underwriting.

Our primary insurance is a business segment that is growing, and the primary insurance business is also highly competitive. Primary insurers compete on the basis of factors including selling effort, product, price, service and financial strength. We seek primary insurance pricing that will result in adequate returns on the capital allocated to our primary insurance business. Our business plans for these business units could be adversely impacted by the loss of primary insurance business to competitors offering competitive insurance products at lower prices. This competition could affect our ability to attract and retain business.

Emerging claim and coverage issues could adversely affect our business.

Unanticipated developments in the law as well as changes in social and environmental conditions could result in unexpected claims for coverage under our insurance and reinsurance contracts. These developments and changes may adversely affect us, perhaps materially. For example, we could be subject to developments that impose additional coverage obligations on us beyond our underwriting intent, or to increases in the number or size of claims to which we are subject. With respect to our casualty businesses, these legal, social and environmental changes may not become apparent until some time after their occurrence. Our exposure to these uncertainties could be exacerbated by the increased willingness of some market participants to dispute insurance and reinsurance contract and policy wordings.

The full effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. As a result, the full extent of our liability under our coverages, and in particular our casualty insurance policies and reinsurance contracts, may not be known for many years after a policy or contract is issued. Our exposure to this uncertainty will grow as our “long-tail” casualty businesses grow, because in these lines of business claims can typically be made for many years, making them more susceptible to these trends than in the property insurance business, which is more typically “short-tail.” In addition, we could be adversely affected by the growing trend of plaintiffs targeting participants in the property-liability insurance industry in purported class action litigation relating to claim handling and other practices.

If our current and potential customers change their requirements with respect to financial strength, claims paying ratings or counterparty collateral requirements, our profitability could be adversely affected.

Insureds, insurers and insurance and reinsurance intermediaries use financial ratings as an important means of assessing the financial strength and quality of insurers and reinsurers. In addition, the rating of a company purchasing reinsurance may be affected by the rating of its reinsurer. For these reasons, credit committees of insurance and reinsurance companies regularly review and in some cases revise their requirements with respect to the insurers and reinsurers from whom they purchase insurance and reinsurance.

If our current or potential customers were to raise their minimum required financial strength or claims paying ratings above the ratings held by us or our insurance and reinsurance subsidiaries, or if they were to materially increase their collateral requirements, the demand for our products could be reduced, our premiums could decline, and our profitability could be adversely affected.

Consolidation in the insurance industry could lead to lower margins for us and less demand for our reinsurance products.

Historically, during certain periods of the business cycle, insurance industry participants have consolidated to enhance their market power. These entities may try to use their market power to negotiate price reductions for our products and services. If competitive pressures compel us to reduce our prices, our operating margins would decrease. As the insurance industry consolidates, competition for customers becomes more intense and the importance of acquiring and properly servicing each customer becomes greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. In addition, insurance companies that merge may be able to spread their risks across a consolidated, larger capital base so that they require less reinsurance.

A change in demand for reinsurance and insurance could lead to reduced premium rates and less favorable contract terms, which could reduce our net income.

Historically, we have experienced fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. Demand for reinsurance is influenced significantly by underwriting results of primary insurers and prevailing general economic conditions. In addition, the larger insurers created by the consolidation discussed above may require less reinsurance. The supply of reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return being realized in the reinsurance industry. It is possible that premium rates or other terms and conditions of trade could vary in the future, that the present level of demand will not continue or that the present level of supply of reinsurance could increase as a result of capital provided by recent or future market entrants or by existing reinsurers.

Fairfax, which controls our corporate actions, may have interests that are different from the interests of holders of our preferred shares and debt securities.

As of December 31, 2009, Fairfax beneficially owned, itself and through wholly-owned subsidiaries, 100.0% of our outstanding common shares. Consequently, Fairfax can determine the outcome of our corporate actions requiring board approval, such as:

	•		appointing officers and electing members of our Board of Directors;

	•		adopting amendments to our charter documents; and

	•		approving a merger or consolidation, liquidation or sale of all or substantially all of our assets.

In addition, Fairfax has provided us, and continues to provide us, with certain services for which it receives customary compensation. Through various subsidiaries, Fairfax engages in the business of underwriting insurance as well as other financial services; from time to time, we may engage in transactions with those other businesses in the ordinary course of business under market terms and conditions. All of our directors other than Andrew Barnard are directors or officers of Fairfax or certain of its subsidiaries. Conflicts of interest could arise between us and Fairfax or one of its other subsidiaries, and any conflict of interest may be resolved in a manner that does not favor us.

We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.

Our capital requirements depend on many factors, including our ability to write business, and rating agency capital requirements. To the extent that our existing capital is insufficient to meet these requirements, we may need to raise additional funds through financings. Any financing, if available at all, may be on terms that are not favorable to us. If our need for capital arises because of significant losses, the occurrence of these losses may

make it more difficult for us to raise the necessary capital. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition would be adversely affected.

We are a holding company and are dependent on dividends and other payments from our operating subsidiaries, which are subject to dividend restrictions.

We are a holding company, and our principal source of funds is cash dividends and other permitted payments from our operating subsidiaries, principally Odyssey America. If we are unable to receive dividends from our operating subsidiaries, or if they are able to pay only limited amounts, we may be unable to pay dividends on our preferred shares or make payments on our indebtedness. The payment of dividends by our operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of Connecticut, Delaware, New York and the United Kingdom. See “Regulatory Matters — Regulation of Reinsurers and Insurers — Dividends.”

Our business could be adversely affected by the loss of one or more key employees.

We are substantially dependent on a small number of key employees, in particular Andrew Barnard, Brian Young, Michael Wacek and R. Scott Donovan. We believe that the experience and reputations in the reinsurance industry of Messrs. Barnard, Young, Wacek and Donovan are important factors in our ability to attract new business. We have entered into employment agreements with Messrs. Barnard, Young, Wacek and Donovan. Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key employees and to attract and retain additional qualified personnel in the future. The loss of the services of Messrs. Barnard, Young, Wacek or Donovan, or any other key employee, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations. We do not currently maintain key employee insurance with respect to any of our employees.

Our business is primarily dependent upon a limited number of unaffiliated reinsurance brokers and the loss of business provided by them could adversely affect our business.

We market our reinsurance products worldwide primarily through reinsurance brokers, as well as directly to our customers. Five reinsurance brokerage firms accounted for 68.6% of our reinsurance gross premiums written for the year ended December 31, 2009. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on us.

Our reliance on payments through reinsurance brokers exposes us to credit risk.

In accordance with industry practice, we frequently pay amounts owing in respect of claims under our policies to reinsurance brokers, for payment over to the ceding insurers. In the event that a broker fails to make such a payment, depending on the jurisdiction, we might remain liable to the ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the ceding insurer pays premiums for such policies to reinsurance brokers for payment over to us, such premiums will be deemed to have been paid and the ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received such premiums.

Consequently, in connection with the settlement of reinsurance balances, we assume a degree of credit risk associated with brokers around the world.

We may be adversely affected by foreign currency fluctuations.

Our reporting currency is the U.S. dollar. A portion of our insurance and reinsurance business is written in currencies other than the U.S. dollar. Moreover, we maintain a portion of our investments in currencies other than the U.S. dollar. We may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could adversely affect our net income and shareholders’ equity. While we do generally seek to hedge certain components of our exposure to foreign currency fluctuations through the use of derivatives, there can be no assurance that we will not be adversely affected by changes in the value of the U.S. dollar relative to other currencies.

We may not be able to alleviate risk successfully through retrocessional arrangements and we are subject to credit risks with respect to our retrocessionaires.

Where deemed appropriate, from time to time we attempt to limit portions of our risk of loss through retrocessional arrangements, reinsurance agreements with other reinsurers referred to as retrocessionaires. The availability and cost of retrocessional protection is subject to market conditions, which are beyond our control. As a result, we may not be able to successfully alleviate risk through retrocessional arrangements. In addition, we are subject to credit risk with respect to our retrocessions because the ceding of risk to retrocessionaires does not relieve us of our liability to the companies we reinsured.

We also purchase reinsurance coverage to insure against a portion of our risk on certain policies we write directly. We expect that limiting our insurance risks through reinsurance will continue to be important to us. Reinsurance does not affect our direct liability to our policyholders on the business we write. A reinsurer’s insolvency or inability or unwillingness to make timely payments under the terms of its reinsurance agreements with us could have a material adverse effect on us. In addition, we cannot be assured that reinsurance will remain available to us to the same extent and on the same terms as are currently available.

The growth of our primary insurance business, which is regulated more comprehensively than reinsurance, increases our exposure to adverse political, judicial and legal developments.

Hudson, which is licensed to write insurance in 50 states, the District of Columbia and certain U.S. territories on an admitted basis, is subject to extensive regulation under state statutes that delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation generally is designed to protect policyholders rather than investors, and relates to such matters as: rate setting; limitations on dividends and transactions with affiliates; solvency standards which must be met and maintained; the licensing of insurers and their agents; the examination of the affairs of insurance companies, which includes periodic market conduct examinations by the regulatory authorities; annual and other reports, prepared on a statutory accounting basis; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. We could be required to allocate considerable time and resources to comply with these requirements, and could be adversely affected if a regulatory authority believed we had failed to comply with applicable law or regulation. We plan to grow Hudson Insurance Group’s business and, accordingly, expect our regulatory burden, particularly with respect to Hudson, to increase.

Our utilization of program managers and other third parties to support our business exposes us to operational and financial risks.

Our primary insurance operations rely on program managers, and other agents and brokers participating in our programs, to produce and service a substantial portion of our business in this segment. In these arrangements, we typically grant the program manager the right to bind us to newly issued insurance policies, subject to underwriting guidelines we provide and other contractual restrictions and obligations. Should our managers issue policies that contravene these guidelines, restrictions or obligations, we could nonetheless be deemed liable for such policies. Although we would intend to resist claims that exceed or expand on our underwriting intention, it is possible that we would not prevail in such an action, or that our program managers would be unable to substantially indemnify us for their contractual breach. We also rely on our managers, or other third parties we retain, to collect premiums and to pay valid claims. This exposes us to their credit and operational risk, without necessarily relieving us of our obligations to potential insureds. We could also be exposed to potential liabilities relating to the claims practices of the third party administrators we have retained to manage claims activity that we expect to arise in our program operations. Although we have implemented monitoring and other oversight protocols, we cannot be assured that these measures will be sufficient to alleviate all of these exposures.

We are also subject to the risk that our successful program managers will not renew their programs with us. Our contracts are generally for defined terms of as little as one year, and either party can cancel the contract in a relatively short period of time. We cannot be assured that we will retain the programs that produce profitable business or that our insureds will renew with us. Failure to retain or replace these producers may impair our ability to execute our growth strategy, and our financial results could be adversely affected.

Our business could be adversely affected as a result of political, regulatory, economic or other influences in the insurance and reinsurance industries.

The insurance industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the practices and operation of insurance and reinsurance organizations. Federal and state legislatures have periodically considered programs to reform or amend the United States insurance system at both the federal and state level. Recently, the insurance and reinsurance regulatory framework has been subject to increased scrutiny in many jurisdictions, including the United States and various states in the United States.

Changes in current insurance regulation may include increased governmental involvement in the insurance industry or may otherwise change the business and economic environment in which insurance industry participants operate. In the United States, for example, the states of Hawaii and Florida have implemented arrangements whereby property insurance in catastrophe prone areas is provided through state-sponsored entities. The California Earthquake Authority, the first privately financed, publicly operated residential earthquake insurance pool, provides earthquake insurance to California homeowners.

Such changes could cause us to make unplanned modifications of products or services, or may result in delays, cancellations or non-renewals of sales of products and services by insurers or reinsurers. Insurance industry participants may respond to changes by reducing their investments or postponing investment decisions, including investments in our products and services. We cannot predict the future impact of changing law or regulation on our operations; any changes could have a material adverse effect on us or the insurance industry in general.

Increasingly, governmental authorities in both the U.S. and worldwide appear to be interested in the potential risks posed by the reinsurance industry as a whole, and to commercial and financial systems in general. While we cannot predict the exact nature, timing or scope of possible governmental initiatives, we believe it is likely there will be increased regulatory intervention in our industry in the future.

For example, we could be adversely affected by governmental or regulatory proposals that:

	•		provide insurance and reinsurance capacity in markets and to consumers that we target;

	•		require our participation in industry pools and guaranty associations;

	•		mandate the terms of insurance and reinsurance policies; or

	•		disproportionately benefit the companies of one country or jurisdiction over those of another.

Our computer and data processing systems may fail or be perceived to be insecure, which could adversely affect our business and damage our customer relationships.

Our business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. We rely on these systems to perform actuarial and other modeling functions necessary for writing business, as well as to process and make claim payments. We have a highly trained staff that is committed to the continual development and maintenance of these systems. However, the failure of these systems could interrupt our operations or materially impact our ability to rapidly evaluate and commit to new business opportunities. If sustained or repeated, a system failure could result in the loss of existing or potential business relationships, or compromise our ability to pay claims in a timely manner. This could result in a material adverse effect on our business results.

In addition, a security breach of our computer systems could damage our reputation or result in liability. We retain confidential information regarding our business dealings in our computer systems, including, in some cases, confidential personal information regarding our insureds. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Any well-publicized compromise of security could deter people from conducting transactions that involve transmitting confidential information to our systems. Therefore, it is critical that these facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite the implementation of security measures, including our implementation of a data security program specific to confidential personal information, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors,

attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate offices are located in 101,420 total square feet of leased space in Stamford, Connecticut. Our other locations occupy a total of 137,408 square feet, all of which are leased. The Americas division principally operates out of offices in New York, Stamford, Mexico City, Miami, and Toronto; the EuroAsia division operates out of offices in Paris, Singapore, Stockholm and Tokyo; the London Market division operates out of offices in London; and the U.S. Insurance division operates principally out of offices in New York, Chicago, Napa, California and Overland Park, Kansas.

We lease our corporate offices in Stamford, Connecticut, under a lease expiring in October 2022. Upon signing the lease in September 2004, we received a construction allowance of $3.1 million. We have three renewal options on the current premises that could extend the lease through September 2032, if all renewal options are exercised.

Item 3. Legal Proceedings

On February 8, 2007, we were added as a co-defendant in an amended and consolidated complaint in an existing action against our then-majority (now 100%) shareholder, Fairfax, and certain of Fairfax’s officers and directors, who include certain of our 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. In November 2009, the Court granted a motion by the lead plaintiffs to withdraw as lead plaintiffs, and allowed other prospective lead plaintiffs 60 days to file motions seeking appointment as replacement lead plaintiff. Two entities filed such motions and subsequently asked the Court to appoint them as co-lead plaintiffs. These motions remain pending. We intend 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, our then-majority (now 100%) shareholder, filed a lawsuit in the Superior Court, Morris County, New Jersey, seeking damages from a number of defendants who, the complaint alleges, participated in a stock market manipulation scheme involving Fairfax shares, and the complaint was subsequently amended to add additional allegations and two defendants. In January 2008, two of these defendants filed a counterclaim against Fairfax and a third-party complaint against, among others, OdysseyRe and certain of our directors. Those counterclaims and third-party claims were voluntarily withdrawn in March 2008. In September 2008, the same two defendants filed an amended counterclaim 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.

On September 7, 2005, we announced that we had been advised by Fairfax, our then-majority (now 100%) shareholder, that Fairfax had received a subpoena from the SEC requesting documents regarding any nontraditional insurance and reinsurance transactions entered into or offered by Fairfax and any of its affiliates, which included OdysseyRe. On June 25, 2009, we announced that Fairfax had been informed by the New York Regional Office of the SEC that its investigation as to Fairfax had been completed, and that it did not intend to recommend any enforcement action by the SEC.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of 2009.

PART II


Item 5.		*Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities*

Market Information and Holders of Common Shares

The principal United States market on which our common shares were traded is the NYSE. Following the completion of the Offer by Fairfax and the effective time of the Merger, trading of the common shares of OdysseyRe was suspended on the NYSE on October 29, 2009, and we subsequently withdrew the common shares from listing on the NYSE and terminated registration of the shares under the Securities Exchange Act of 1934.

Quarterly high and low sales prices per share of our common shares, as reported by the NYSE composite for each quarter in the years ended December 31, 2009 and 2008, are as follows:


Quarter Ended	High		Low
December 31, 2009*	$	65.50	$	64.71
September 30, 2009		64.85		39.03
June 30, 2009		42.78		37.09
March 31, 2009		54.56		35.75

December 31, 2008	$	52.20	$	31.55
September 30, 2008		47.99		35.32
June 30, 2008		38.07		35.10
March 31, 2008		39.52		34.77


*		The common shares of OdysseyRe were suspended from trading on the NYSE on October 29, 2009 and were subsequently de-listed.

Fairfax owns 100.0% of our outstanding common shares through its subsidiaries: TIG Insurance Group (44.2%), TIG Insurance Company (8.3%), ORH Holdings Inc. (10.9%), Fairfax Inc. (27.9%) and United States Fire Insurance Company (8.7%).

Dividends

In each of the first three quarters of 2009, we paid a dividend of $0.075 per common share, resulting in an aggregate annual dividend of $0.225 per common share, totaling $13.4 million. The dividends were paid on March 31, 2009, June 30, 2009 and September 30, 2009. No common stock dividend was declared or paid during the fourth quarter of 2009. On March 28, 2008 and June 27, 2008, we paid dividends of $0.0625 per common share, and on September 26, 2008 and December 30, 2008 we paid dividends of $0.075 per common share.

These common share dividends resulted in an aggregate annual dividend of $0.275 per common share in 2008, totaling $17.4 million. Our common shares are no longer publicly traded (see Item 1 “Business — the Company”).

Issuer Purchases of Equity Securities

Our Company’s Board of Directors authorized a share repurchase program whereby we were authorized to repurchase shares of our 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. From inception of the program through October 21, 2009, we purchased and retired 13,906,845 shares of our common stock at a total cost of $518.4 million.

During the year ended December 31, 2009, Odyssey America purchased 704,737 shares of our Series B preferred stock, with a liquidation preference of $17.2 million, for $9.2 million. As a result of the purchase of the Series B preferred shares, we recorded a gain of $8.0 million during the year ended December 31, 2009, which was recorded in retained earnings and included in net income available to common shareholders. During the year ended December 31, 2008, Odyssey America purchased 128,000 shares of our Series B preferred stock, with a liquidation preference of $3.1 million, for $1.7 million. As a result of the purchase of the Series B preferred shares, we recorded a gain of $1.4 million during the year ended December 31, 2008, which was recorded in retained earnings and included in net income available to common shareholders.

Item 6. Selected Financial Data

The following selected financial data is derived from our audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto that are included in this Annual Report on Form 10-K. Financial information in the table reflects the results of operations and financial position of OdysseyRe.

We encourage you to read the consolidated financial statements included in this Annual Report on Form 10-K because they contain our complete consolidated financial statements for the years ended December 31, 2009, 2008 and 2007. The results of operations for the year ended December 31, 2009 are not necessarily indicative of future results.


	Years Ended December 31,
	2009			2008			2007			2006			2005
				(In thousands, except share and per share data)
GAAP Consolidated Statements of Operations Data:
Gross premiums written	$	2,195,035		$	2,294,542		$	2,282,682		$	2,335,742		$	2,626,920
Net premiums written		1,893,813			2,030,821			2,089,443			2,160,935			2,301,669
Net premiums earned	$	1,927,412		$	2,076,364		$	2,120,537		$	2,225,826		$	2,276,820
Net investment income		317,894			255,199			329,422			487,119			220,092

Net realized investment gains		185,951			692,259			539,136			189,129			59,866

Total revenues		2,431,257			3,023,822			2,989,095			2,902,074			2,556,778

Losses and loss adjustment expenses		1,301,996			1,508,725			1,408,364			1,484,197			2,061,611
Acquisition costs		375,259			418,005			437,257			464,148			470,152
Other underwriting expenses		185,688			175,013			178,555			153,476			146,030
Other expense, net		44,416			60,419			14,006			21,120			27,014
Interest expense		31,040			34,180			37,665			37,515			29,991
Loss on early extinguishment of debt		—			—			—			2,403			3,822

Total expenses		1,938,399			2,196,342			2,075,847			2,162,859			2,738,620

Income (loss) before income taxes		492,858			827,480			913,248			739,215			(181,842	)
Federal and foreign income tax provision (benefit)		120,544			278,472			317,673			231,309			(66,120	)

Net income (loss)		372,314			549,008			595,575			507,906			(115,722	)
Preferred dividends		(5,233	)		(7,380	)		(8,345	)		(8,257	)		(1,944	)
Gain on purchase of Series B preferred shares		7,997			1,456			—			—			—

Net income (loss) available to common shareholders	$	375,078		$	543,084		$	587,230		$	499,649		$	(117,666	)

BASIC
Weighted average common shares outstanding		N/A			63,384,032			70,443,600			68,975,743			65,058,327

Basic earnings (loss) per common share		N/A		$	8.46		$	8.26		$	7.17		$	(1.79	)

DILUTED
Weighted average common shares outstanding		N/A			63,870,337			71,387,255			72,299,050			65,058,327

Diluted earnings (loss) per common share(1)(2)(3)		N/A		$	8.43		$	8.19		$	6.89		$	(1.79	)

Dividends per common share	$	0.225		$	0.275		$	0.250		$	0.125		$	0.125

GAAP Underwriting Ratios:
Losses and loss adjustment expense ratio		67.6	%		72.7	%		66.4	%		66.7	%		90.5	%
Underwriting expense ratio		29.1			28.5			29.1			27.7			27.1

Combined ratio		96.7	%		101.2	%		95.5	%		94.4	%		117.6	%


	As of December 31,
	2009		2008		2007		2006		2005
	(In thousands)
GAAP Consolidated Balance Sheet Data:
Total investments and cash	$	8,727,153	$	7,892,538	$	7,779,444	$	7,066,088	$	5,970,319
Total assets		10,785,440		9,726,509		9,501,001		8,953,712		8,646,612
Unpaid losses and loss adjustment expenses		5,507,766		5,250,484		5,119,085		5,142,159		5,117,708
Debt obligations		489,402		489,278		489,154		512,504		469,155
Total shareholders’ equity		3,555,234		2,827,735		2,654,700		2,083,579		1,639,455


(1)		The Financial Accounting Standards Board (“FASB”) issued an accounting standard which requires that the dilutive effect of contingently convertible debt securities, with a market price threshold, should be included in diluted earnings per share. The terms of our formerly outstanding convertible senior debentures, which were issued in June 2002, (see Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K) meet the criteria defined in this accounting standard, and accordingly, the effect of conversion of our convertible senior debentures to common shares has been assumed when calculating our diluted earnings per share for the years ended December 31, 2005 through 2007. The convertible senior debentures were converted into common shares in 2007, and none of the debentures remain issued and outstanding. See Notes 2(l) and 5 to our consolidated financial statements included in this Annual Report on Form 10-K.

(2)		Inclusion of restricted common shares, stock options and the effect of the conversion of our convertible senior debentures to common shares would have an anti-dilutive effect on the 2005 diluted loss per common share (i.e., the diluted loss per common share would be less than the basic loss per common share). Accordingly, such common shares were excluded from the calculations of the 2005 diluted loss per common share.

(3)		Prior to our 100% ownership by Fairfax (see Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K), we calculated earnings per share using the two-class method. We treated unvested share-based payment awards that had non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in the calculation. Under our former restricted share plan, the grantees had non-forfeitable rights to dividends before the vesting date and, accordingly, the restricted shares were considered participating securities. As noted above, in the fourth quarter of 2009 Fairfax attained 100% ownership of OdysseyRe; accordingly we have not presented earnings per common share for the year ended December 31, 2009.


Item 7.		*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Overview

Odyssey Re Holdings Corp. (together with its subsidiaries, “OdysseyRe”) is a holding company, incorporated in the state of Delaware, which owns all of the common shares of Odyssey America Reinsurance Corporation (“Odyssey America”), its principal operating subsidiary. Odyssey America directly or indirectly owns all of the capital stock of the following companies: Clearwater Insurance Company (“Clearwater”); Clearwater Select Insurance Company; Newline Holdings U.K. Limited, Newline Underwriting Management Ltd., which manages Newline Syndicate (1218), a member of Lloyd’s of London, and Newline Insurance Company Limited (“NICL”) (collectively “Newline”); Hudson Insurance Company (“Hudson”); Hudson Specialty Insurance Company (“Hudson Specialty”); and Napa River Insurance Services, Inc. As of December 31, 2009, 100% of the common stock of OdysseyRe is owned by Fairfax Financial Holdings Limited (“Fairfax”) and its subsidiaries (see Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K).

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

Our gross premiums written for the year ended December 31, 2009 were $2,195.0 million, a decrease of $99.5 million, or 4.3%, compared to gross premiums written of $2,294.5 million for the year ended December 31, 2008. Our United States business accounted for 50.5% of our gross premiums written for the year ended December 31, 2009, compared to 48.8% for the year ended December 31, 2008. For the years ended December 31, 2009 and 2008, our net premiums written were $1,893.8 million and $2,030.8 million, respectively. For the years ended December 31, 2009 and 2008, we had net income available to common shareholders of $375.1 million and $543.1 million, respectively. As of December 31, 2009, we had total assets of $10.8 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, computed when using amounts reported in financial statements prepared under United States generally accepted accounting principles (“GAAP”), is the sum of losses and loss adjustment expenses (“LAE”) incurred as a percentage of net premiums earned, plus underwriting expenses, which include acquisition costs and other underwriting expenses, as a percentage of net premiums earned. The combined ratio reflects only underwriting results and does not include investment results. Underwriting profitability is subject to significant fluctuations due to catastrophic events, competition, economic and social conditions, foreign currency fluctuations and other factors. Our combined ratio was 96.7% for the year ended December 31, 2009, compared to 101.2% for the year ended December 31, 2008.

We are exposed to losses arising from a variety of catastrophic events, such as hurricanes, windstorms and floods. The loss estimates for these events represent our best estimates based on the most recent information available. We use various approaches in estimating our losses, including a detailed review of exposed contracts and information from ceding companies and claims adjusters. As additional information becomes available, including information from ceding companies and claims adjusters, actual losses may exceed our estimated losses, potentially resulting in adverse effects to our financial results. The extraordinary nature of these losses, including potential legal and regulatory implications, creates substantial uncertainty and complexity in estimating these losses. Considerable time may elapse before the adequacy of our estimates can be determined. For the years ended December 31, 2009, 2008 and 2007, current year catastrophe events were $131.1 million, $264.7 million and $105.9 million, 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 Syndicate (1218), our London branch office, and NICL, our London-based insurance company. The London Market division writes insurance and reinsurance business worldwide, principally through brokers.

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

Critical Accounting Estimates

The consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with GAAP and include the accounts of Odyssey Re Holdings Corp. and its subsidiaries.

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

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

Premium Estimates

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

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

The following table displays, by division, the estimates included in our consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007 related to gross premiums written, acquisition costs, premiums receivable and unearned premium reserves (in millions):


							Change For the Year Ended
	As of December 31,						December 31,
Division	2009		2008		2007		2009			2008			2007
	Gross Premiums Written
Americas	$	111.5	$	162.4	$	177.5	$	(50.9	)	$	(15.1	)	$	(41.0	)
EuroAsia		135.9		125.7		129.9		10.2			(4.2	)		(2.2	)
London Market		21.9		22.8		21.8		(0.9	)		1.0			(16.7	)

Total	$	269.3	$	310.9	$	329.2	$	(41.6	)	$	(18.3	)	$	(59.9	)


	Acquisition Costs
Americas	$	26.0	$	42.5	$	42.5	$	(16.5	)	$	—		$	(6.9	)
EuroAsia		35.2		36.9		38.9		(1.7	)		(2.0	)		(1.7	)
London Market		1.9		1.7		2.1		0.2			(0.4	)		(0.9	)

Total	$	63.1	$	81.1	$	83.5	$	(18.0	)	$	(2.4	)	$	(9.5	)


	Premiums Receivable
Americas	$	85.5	$	119.9	$	135.0	$	(34.4	)	$	(15.1	)	$	(34.1	)
EuroAsia		100.7		88.8		91.0		11.9			(2.2	)		(0.5	)
London Market		20.0		21.1		19.7		(1.1	)		1.4			(15.8	)

Total	$	206.2	$	229.8	$	245.7	$	(23.6	)	$	(15.9	)	$	(50.4	)


	Unearned Premiums Reserves
Americas	$	83.6	$	115.5	$	122.9	$	(31.9	)	$	(7.4	)	$	(16.2	)
EuroAsia		93.1		102.2		97.2		(9.1	)		5.0			(3.6	)
London Market		3.3		6.9		10.0		(3.6	)		(3.1	)		(3.1	)

Total	$	180.0	$	224.6	$	230.1	$	(44.6	)	$	(5.5	)	$	(22.9	)

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.

In any specific financial period, the original estimated premium for a specific contract may vary from actual premium reported through the life of the contract by up to 15% due to the reporting patterns of the ceding

companies and, in some cases, movements in foreign exchange rates over the period. However, historically, the final reported premium compared to the original estimated premium has deviated by insignificant amounts.

Our estimates are based on contract and policy terms. Estimates are based on information typically received in the form of a bordereau, broker notifications and/or discussions with ceding companies. These estimates, by necessity, are based on assumptions regarding numerous factors. These can include premium or loss trends, which can be influenced by local conditions in a particular region, or other economic factors and legal or legislative developments that can develop over time. The risk associated with estimating the performance under our contracts with our ceding companies is the impact of events or trends that could not have been reasonably anticipated at the time the estimates were performed. Our business is diversified across ceding companies and there is no individual ceding company that represents more than 2.2% of our gross premiums written in 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.

Deferred Acquisition Costs

Acquisition costs consist of commissions and brokerage expenses incurred on insurance and reinsurance business written. These costs are deferred and amortized over the period in which the related premiums are earned, which is generally one year. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums, which considers anticipated losses and LAE and estimated remaining costs of servicing the business, all based on our historical experience. The realizable value of our deferred acquisition costs is determined without consideration of investment income. The estimates are continually reviewed by us and any adjustments are made in the accounting period in which an adjustment is considered necessary.

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.

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 $14.5 million and $19.6 million as of December 31, 2009 and 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 completed 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 December 31, 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 values of losses and LAE related to business written in prior periods for the years ended December 31, 2009 and 2008 were, in each year, 0.2% below our estimates of reserves for losses and LAE as previously established at December 31, 2008 and 2007. For the year ended December 31, 2007, the ultimate settlement value of losses and LAE related to business written in prior periods exceeded our estimates of reserves for losses and LAE as previously established at December 31, 2006 by 0.9%. Any future impact to income from changes in losses and LAE estimates may vary considerably from historical experience. Our estimates of ultimate losses and LAE are based upon the information we have available at any given point in time and upon our assumptions derived from that information. Every one percentage point difference in the ultimate settlement value of losses and LAE compared to our estimate of reserves for losses and LAE as of December 31, 2009 will impact pre-tax income by $46.7 million.

If a change were to occur in the frequency and severity of claims underlying our December 31, 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	$	46.7
2.5% unfavorable change		116.7
5.0% unfavorable change		233.3

Historically, our actual results have varied considerably in certain instances from our estimates of losses and LAE because historical loss emergence trends have not been indicative of future emergence for certain segments of our business. In this period, we experienced loss emergence, resulting from a combination of claim frequency and severity of losses, greater than expectations that were established based on a review of prior years’ loss emergence trends, particularly for business written in the late 1990s and early 2000s. General liability and excess workers’ compensation classes of business during these years were adversely impacted by the highly

competitive conditions in the industry at that time. These competitive conditions resulted in price pressure and relatively broader coverage terms, thereby affecting the ability of standard actuarial techniques to generate reliable estimates of ultimate loss. Similarly, directors’ and officers’ professional liability lines were impacted by the increase in frequency and severity of claims resulting from an increase in shareholder lawsuits against corporations and their officers and directors, corporate bankruptcies and other financial and management improprieties in the late 1990s and early 2000s.

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


Division	2009			2008			2007
Americas	$	70.1		$	66.6		$	143.1
EuroAsia		(22.8	)		(2.4	)		(6.9	)
London Market		(23.3	)		(40.0	)		(57.0	)
U.S. Insurance		(35.3	)		(34.3	)		(38.7	)

Total loss and LAE development	$	(11.3	)	$	(10.1	)	$	40.5

The Americas division reported net increases in prior period loss estimates of $70.1 million, $66.6 million and $143.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. The increase in prior period loss estimates for the years ended December 31, 2009 and 2008 were principally attributable to loss emergence greater than expectations in the period on asbestos. The increase in prior period loss estimates for the year ended December 31, 2007 was principally due to loss emergence greater than expectations in the period on U.S. casualty business, including asbestos, and included $21.2 million related to settlement of litigation during the period.

The EuroAsia division reported net decreases in prior period loss estimates of $22.8 million, $2.4 million and $6.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. The decrease in prior period loss estimates for the year ended December 31, 2009 was principally attributable to loss emergence lower than expectations in the period on property business. The decrease in prior period loss estimates for the year ended December 31, 2008 was principally attributable to loss emergence lower than expectations in the period on credit business, partially offset by loss emergence greater than expectations in the period on miscellaneous property lines of business. The reduction in prior period loss estimates for the year ended December 31, 2007 was principally attributable to favorable loss emergence on credit and miscellaneous property lines of business, partially offset by increased loss estimates on motor and liability exposures in the period.

The London Market division reported net decreases in prior period loss estimates of $23.3 million, $40.0 million and $57.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The decrease in prior period loss estimates for the year ended December 31, 2009 was principally attributable to loss emergence lower than expectations in the period on liability business. The reduction in prior period loss estimates for the year ended December 31, 2008 was principally attributable to loss emergence lower than expectations in the period on professional liability and miscellaneous property lines of business. The reduction in prior period loss estimates for the year ended December 31, 2007 was principally attributable to favorable loss emergence on liability, property catastrophe and other miscellaneous property lines of business in the period.

The U.S. Insurance division reported net decreases in prior period loss estimates of $35.3 million, $34.3 million and $38.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The reductions in prior period loss estimates for the years ended December 31, 2009, 2008 and 2007 were principally due to loss emergence lower than expectations on professional liability business in each period.

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 December 31, 2009 and 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 December 31,
	2009									2008
	Case						Total			Case						Total
	Reserves			IBNR			Reserves			Reserves			IBNR			Reserves
							(In millions)
Americas
Gross	$	1,369.2		$	1,356.6		$	2,725.8		$	1,429.5		$	1,335.9		$	2,765.4
Ceded		(178.4	)		(120.2	)		(298.6	)		(182.5	)		(123.0	)		(305.5	)

Net		1,190.8			1,236.4			2,427.2			1,247.0			1,212.9			2,459.9


EuroAsia
Gross		589.8			320.7			910.5			494.3			293.7			788.0
Ceded		(33.0	)		(2.6	)		(35.6	)		(2.6	)		(0.4	)		(3.0	)

Net		556.8			318.1			874.9			491.7			293.3			785.0


London Market
Gross		387.6			707.2			1,094.8			308.8			610.9			919.7
Ceded		(67.1	)		(183.2	)		(250.3	)		(54.4	)		(78.4	)		(132.8	)

Net		320.5			524.0			844.5			254.4			532.5			786.9


U.S. Insurance
Gross		255.2			521.5			776.7			200.6			576.8			777.4
Ceded		(81.9	)		(175.1	)		(257.0	)		(55.3	)		(193.6	)		(248.9	)

Net		173.3			346.4			519.7			145.3			383.2			528.5


Total
Gross		2,601.8			2,906.0			5,507.8			2,433.2			2,817.3			5,250.5
Ceded		(360.4	)		(481.1	)		(841.5	)		(294.8	)		(395.4	)		(690.2	)

Net	$	2,241.4		$	2,424.9		$	4,666.3		$	2,138.4		$	2,421.9		$	4,560.3

The provision for IBNR in unpaid losses and LAE as of December 31, 2009 was $2,424.9 million. For illustration purposes, a change in the expected loss ratio that increases the year ended December 31, 2009 calendar year loss ratio by 2.5 loss ratio points would increase IBNR by $48.2 million. A change in loss

emergence trends that increases unpaid losses and LAE at December 31, 2009 by 2.5% would increase IBNR by $116.7 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 the ultimate liability for these exposures includes case basis reserves and a provision for IBNR claims. The provision for asbestos loss liabilities is established based on an annual review of Company and external trends in reported loss and claim payments, with monitoring of emerging experience on a quarterly basis.

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 December 31, 2009, of our asbestos and environmental losses and LAE reserves, net of reinsurance, are $241.6 million and $23.9 million, respectively. See Note 10 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 each of the three years in the period ended December 31, 2009 (in millions):


	2009		2008		2007
Asbestos
Gross losses and LAE incurred	$	69.4	$	73.8	$	86.0
Net losses and LAE incurred		40.0		41.0		63.0

Environmental
Gross losses and LAE incurred	$	0.9	$	2.6	$	14.2
Net losses and LAE incurred		0.6		4.1		14.5

The following table provides gross asbestos and environmental outstanding claim information with respect to business written prior to 1986, as of December 31, 2009 and 2008 (in millions):


	As of December 31,
	2009									2008
			Aggregate		% of Total			Average				Aggregate		% of Total			Average
			Case		Case			Case				Case		Case			Case
	Count		Reserves		Reserves			Reserves		Count		Reserves		Reserves			Reserves
Asbestos
By Claim
Largest 10 claims		10	$	21.4		10.1	%	$	2.1		10	$	23.8		11.6	%	$	2.4
All other claims, with case reserves		1,734		189.9		89.9			0.1		1,662		181.0		88.4			0.1

Total		1,744	$	211.3		100.0	%	$	0.1		1,672	$	204.8		100.0	%	$	0.1

By Insured
Largest 10 insureds		10	$	80.2		38.0	%	$	8.0		10	$	75.5		36.9	%	$	7.6
All other insureds		305		131.1		62.0			0.4		291		129.3		63.1			0.4

Total		315	$	211.3		100.0	%	$	0.7		301	$	204.8		100.0	%	$	0.7

Environmental
By Claim
Largest 10 claims		10	$	5.4		29.3	%	$	0.5		10	$	6.4		30.6	%	$	0.6
All other claims, with case reserves		519		13.0		70.7			—		546		14.5		69.4			—

Total		529	$	18.4		100.0	%	$	—		556	$	20.9		100.0	%	$	—

By Insured
Largest 10 insureds		10	$	9.4		51.1	%	$	0.9		10	$	9.6		45.9	%	$	1.0
All other insureds		241		9.0		48.9			—		271		11.3		54.1			—

Total		251	$	18.4		100.0	%	$	0.1		281	$	20.9		100.0	%	$	0.1

The number of asbestos claims, with case reserves, as of December 31, 2009 was 1,744, amounting to $211.3 million in gross case losses and LAE reserves. The largest 10 reported claims accounted for 10.1% of the gross case reserves, with an average reserve of $2.1 million. The number of asbestos claims, with case reserves, as of December 31, 2008 was 1,672, amounting to $204.8 million in gross case losses and LAE reserves. The largest 10 reported claims accounted for 11.6% of the gross case reserves, with an average reserve of $2.4 million. Gross case reserves increased in 2009, as newly reported claims and additional reported reserves on existing claims were greater than claim payments in the year. The asbestos open claim count increased by 72, or 4.3%, during calendar year 2009. Based on an aggregation of claims by insured, our 10 largest insured involvements accounted for 38.0% of our gross case reserves as of December 31, 2009, compared to 36.9% as of December 31, 2008. Net losses and LAE incurred for the year ended December 31, 2009 for asbestos claims were increased by $40.0 million, principally attributable to the annual review of this exposure.

The number of environmental claims, with case reserves, as of December 31, 2009 was 529, amounting to $18.4 million in gross case losses and LAE reserves. The largest 10 reported claims accounted for 29.3% of the gross case reserves, with an average case reserve of $0.5 million. The number of environmental claims, with case reserves, as of December 31, 2008 was 556, amounting to $20.9 million in gross case losses and LAE reserves. The largest 10 reported claims accounted for 30.6% of the gross case reserves, with an average case reserve of $0.6 million. Overall gross case reserves decreased in 2009, as newly reported claims and additional reported reserves on existing claims were less than claim payments in the year. The environmental open claim count decreased by 27, or 4.9%, during calendar year 2009. Based on an aggregation of claims by insured, our 10 largest insured involvements accounted for 51.1% of our gross case reserves as of December 31, 2009, compared to 45.9% as of December 31, 2008. Net losses and LAE incurred for the year ended December 31, 2009 for environmental claims were increased by $0.6 million, principally attributable to the annual review of this exposure.

In the event that loss trends diverge from expected trends, we may have to adjust our reserves for asbestos and environmental exposures accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects on our financial results. Due to the uncertainty involving estimates of ultimate asbestos and environmental exposures, management does not attempt to produce a range around its best estimate of loss.

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):


	Year Ended December 31,
	2009		2008		2007
Premiums Written
Direct	$	780.5	$	792.3	$	736.8
Add: assumed		1,414.5		1,502.2		1,545.9
Less: ceded		301.2		263.7		193.3

Net	$	1,893.8	$	2,030.8	$	2,089.4


Premiums Earned
Direct	$	741.1	$	773.1	$	738.1
Add: assumed		1,472.1		1,525.5		1,566.4
Less: ceded		285.8		222.2		184.0

Net	$	1,927.4	$	2,076.4	$	2,120.5

The total amount of reinsurance recoverables on paid and unpaid losses as of December 31, 2009 and 2008 was $912.0 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 $41.9 million and $44.5 million as of December 31, 2009 and 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 $5.5 million and $3.0 million as of December 31, 2009 and 2008, respectively, which has been netted against premiums receivable.

In accordance with the terms of certain of our reinsurance agreements, we have recorded interest expense associated with our ceded reinsurance agreements of $3.7 million, $5.3 million and $8.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Deferred Income Taxes

We record deferred income taxes as net assets or liabilities on our consolidated balance sheets to reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. As of December 31, 2009 and 2008, a net deferred tax asset of $76.8 million and $290.2 million, respectively, was recorded. In recording this deferred tax asset, we have made estimates and judgments that future taxable income will be sufficient to realize the value of the net deferred tax asset. Accordingly, deferred tax assets have not been reduced by a valuation allowance, as management believes it is more likely than not that the deferred tax assets will be realized.

Investments

We have categorized our 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). To verify Level 3 pricing, we assess 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 generally reported as transfers in or out of the Level 3 category as of the beginning of the period in which the reclassifications occur. We have determined, after carefully considering the impact of recent economic conditions and liquidity in the credit markets on our portfolio, that we should not re-classify any of our investments from Level 1 or Level 2 to Level 3. However, during the third quarter of 2009, we transferred our investment in Advent Capital (Holdings) PLC (“Advent”) from Level 2 to Level 3, following Advent’s delisting from the London Stock Exchange.

We are responsible for determining the fair value of our 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 our investment portfolio, we use quoted prices and other information from independent pricing sources in determining fair values.

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

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

impairment of an investment, but rather a temporary decline in value. In addition, we consider our ability and intent to hold the security to recovery when evaluating possible impairments.

Decisions regarding other-than-temporary impairments require an evaluation of facts and circumstances at a specific time. Should the facts and circumstances change such that an other-than-temporary impairment is considered appropriate, we will recognize the impairment, by reducing the cost, amortized cost or carrying value of the investment to its fair value, and recording the loss in our consolidated statements of operations. Upon the disposition of a security where an other-than-temporary impairment has been taken, we will record a gain or loss based on the adjusted cost or carrying value of the investment.

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

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Underwriting Results

Gross Premiums Written. Gross premiums written for the year ended December 31, 2009 decreased by $99.5 million, or 4.3%, to $2,195.0 million, compared to $2,294.5 million for the year ended December 31, 2008, as reflected in the following table (in millions):


	Year Ended
	December 31,				Change
Division	2009		2008		$			%
Americas	$	745.9	$	776.4	$	(30.5	)		(3.9)	%
EuroAsia		559.2		596.7		(37.5	)		(6.3	)
London Market		342.9		381.7		(38.8	)		(10.2	)
U.S. Insurance		547.0		539.7		7.3			1.4

Total gross premiums written	$	2,195.0	$	2,294.5	$	(99.5	)		(4.3)	%

Total reinsurance gross premiums written for the year ended December 31, 2009 were $1,414.5 million, compared to $1,502.2 million for 2008, a decrease of 5.8%. Total insurance gross premiums written for the year ended December 31, 2009, which include our U.S. Insurance division and the insurance business underwritten by our London Market division, were $780.5 million, compared to $792.3 million for 2008, a decrease of 1.5%. U.S. Insurance division gross premiums written for the year ended December 31, 2009 included $16.5 million of business previously managed by and included in the results of the Americas division. For the year ended December 31, 2009, total reinsurance gross premiums written represented 64.4% (65.5% in 2008) of our business, while insurance represented the remaining 35.6% (34.5% in 2008) of our business.

Americas. Gross premiums written in the Americas division for the year ended December 31, 2009 were $745.9 million, a decrease of $30.5 million, or 3.9%, compared to $776.4 million for the year ended December 31, 2008. These amounts represented 34.0% of our gross premiums written for the year ended December 31, 2009 and 33.8% in 2008. Gross premiums written across each geographic region of the Americas division were as follows (in millions):


	Year Ended
	December 31,				Change
	2009		2008		$			%
United States	$	561.7	$	578.0	$	(16.3	)		(2.8)	%
Latin America		146.2		158.1		(11.9	)		(7.5	)
Canada		38.0		40.3		(2.3	)		(5.7	)

Total gross premiums written	$	745.9	$	776.4	$	(30.5	)		(3.9)	%

	•		United States — The decrease in gross premiums written was primarily due to a decrease in facultative business of $14.9 million, to $57.1 million, for the year ended December 31, 2009, as compared to $72.0 million for the year ended December 31, 2008.

	•		Latin America — The decrease in gross premiums written was primarily due to decreases in treaty pro rata business and excess business of $12.7 million and $3.1 million, respectively, offset by an increase in facultative business of $3.9 million. Of the $11.9 million net decrease, $7.8 million was attributable to movement in foreign exchange rates during 2009 while the remainder related to decreased volume resulting from share reductions and non-renewal of business not meeting our underwriting standards.

	•		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 year ended December 31, 2009 were $559.2 million, a decrease of $37.5 million, or 6.3%, compared to $596.7 million for the year ended December 31, 2008. These amounts represented 25.5% of our gross premiums written for the year ended December 31, 2009 and 26.0% in the corresponding period of 2008. The decrease in gross premiums written during 2009 compared to 2008 is principally comprised of $50.3 million attributable to the movement in foreign exchange rates, and $5.9 million due to a modification to our estimation method in June 2008, offset by reinstatement premiums of $16.2 million, primarily for Windstorm Klaus and Windstorm Wolfgang. 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 $18.7 million.

London Market. Gross premiums written in the London Market division for the year ended December 31, 2009 were $342.9 million, a decrease of $38.8 million, or 10.2%, compared to $381.7 million for the year ended December 31, 2008. These amounts represented 15.6% of our gross premiums written for the year ended December 31, 2009 and 16.7% in 2008. Gross premiums written across each unit of the London Market division were as follows (in millions):


	Year Ended
	December 31,				Change
	2009		2008		$			%
London branch	$	109.4	$	129.1	$	(19.7	)		(15.3)	%
Newline		233.5		252.6		(19.1	)		(7.6	)

Total gross premiums written	$	342.9	$	381.7	$	(38.8	)		(10.2)	%

The decrease in gross premiums written by the London branch was primarily attributable to marine and aviation business, which decreased by $11.3 million, or 23.9%, and casualty business, which decreased by $9.6 million, or 52.2%, due to the non-renewal of business not meeting our underwriting standards.

The decrease in gross premiums written by Newline was primarily attributable to timing of the placement of a number of medical professional liability contracts with a value of $20.0 million.

U.S. Insurance. Gross premiums written in the U.S. Insurance division for the year ended December 31, 2009 were $547.0 million, an increase of $7.3 million, or 1.4%, compared to $539.7 million for the year ended December 31, 2008. These amounts represented 24.9% of our gross premiums written for the year ended December 31, 2009 and 23.5% in 2008. Gross premiums written by line of business were as follows (in millions):


	Year Ended
	December 31,				Change
	2009		2008		$			%
Property and package	$	135.0	$	111.5	$	23.5			21.1	%
Professional liability		119.9		130.9		(11.0	)		(8.4	)
Specialty liability		114.0		90.9		23.1			25.4
Medical professional liability		96.9		113.9		(17.0	)		(14.9	)
Commercial automobile		65.6		68.2		(2.6	)		(3.8	)
Personal automobile		15.6		24.3		(8.7	)		(35.8	)

Total gross premiums written	$	547.0	$	539.7	$	7.3			1.4	%

Gross premiums written related to property and package and specialty liability increased for the year ended December 31, 2009 compared to the year ended December 31, 2008 as a result of an increase in crop business and the reclassification of a program to the U.S. Insurance division from the Americas division, where it was previously managed and its results were previously recorded. The increases were offset by a reduction in gross premiums written resulting from a loss of an environmental program in professional liability and competitive market conditions affecting medical professional liability and automobile lines of business.

Ceded Premiums Written. Ceded premiums written for the year ended December 31, 2009 increased by $37.5 million, or 14.2%, to $301.2 million (13.7% of gross premiums written), from $263.7 million (11.5% of gross premiums written) for the year ended December 31, 2008. The increase in ceded premiums written was primarily related to an increase in reinsurance purchased for our professional and medical professional liability business in the U.S. Insurance division.

Net Premiums Written. Net premiums written for the year ended December 31, 2009 decreased by $137.0 million, or 6.7%, to $1,893.8 million, compared to $2,030.8 million for the year ended December 31, 2008. Net premiums written represent gross premiums written less ceded premiums written. Net premiums written decreased over 2008 at a higher rate than gross premiums written, reflecting an increase in ceded premiums written during 2009.


	Year Ended
	December 31,				Change
Division	2009		2008		$			%
			(In millions)
Americas	$	731.2	$	760.7	$	(29.5	)		(3.9	)%
EuroAsia		533.0		569.3		(36.3	)		(6.4	)
London Market		254.5		306.5		(52.0	)		(17.0	)
U.S. Insurance		375.1		394.3		(19.2	)		(4.9	)

Total net premiums written	$	1,893.8	$	2,030.8	$	(137.0	)		(6.7	)%

Americas. Net premiums written in the Americas division for the year ended December 31, 2009 were $731.2 million, compared to $760.7 million for the 2008 period, a decrease of 3.9%. These amounts represented 38.6% of our net premiums written for the year ended December 31, 2009 and 37.5% for the year ended December 31, 2008. The net retention ratio, which represents net premiums written as a percentage of gross premiums written, was 98.0% for each of the years ended December 31, 2009 and 2008.

The decrease in net premiums written in the Americas division was consistent with the 3.9% decrease in gross premiums written.

EuroAsia. Net premiums written in the EuroAsia division for the year ended December 31, 2009 were $533.0 million, compared to $569.3 million for 2008, a decrease of 6.4%. These amounts represented 28.2% of our net premiums written for the year ended December 31, 2009 and 28.0% for the year ended December 31, 2008. The net retention ratio was 95.3% for the year ended December 31, 2009, compared to 95.4% for the year ended December 31, 2008.

The decrease in net premiums written was consistent with the decrease in gross premiums written, which was primarily due to movements in foreign exchange rates and a modification to our estimation method during 2008, offset by an increase in reinstatement premiums.

London Market. Net premiums written in the London Market division for the year ended December 31, 2009 were $254.5 million, compared to $306.5 million for 2008, a decrease of 17.0%. These amounts represented 13.4% of our net premiums written for the year ended December 31, 2009 and 15.1% for the year ended December 31, 2008. The net retention ratio was 74.2% for the year ended December 31, 2009, compared to 80.3% for the year ended December 31, 2008.

The decrease in net premiums written consisted of a decrease in gross premiums written of $38.8 million, coupled with an increase in ceded premiums written of $13.2 million due to increased reinsurance purchases and higher reinsurance costs on casualty insurance business.

U.S. Insurance. Net premiums written in the U.S. Insurance division for the year ended December 31, 2009 were $375.1 million, compared to $394.3 million for the year ended December 31, 2008, a decrease of 4.9%. These amounts represented 19.8% of our net premiums written for the year ended December 31, 2009 and 19.4% for the year ended December 31, 2008. The net retention ratio was 68.6% for the year ended December 31, 2009, compared to 73.1% for the year ended December 31, 2008.

The decrease in net premiums written was due to a lower retention rate, primarily due to an increase in quota share reinsurance purchased for our medical professional liability business.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 decreased by $149.0 million, or 7.2%, to $1,927.4 million, from $2,076.4 million for the year ended December 31, 2008. Net premiums earned decreased by $5.0 million, or 0.6%, in the Americas division, $23.8 million, or 4.2%, in the EuroAsia division, $63.0 million, or 20.0%, in the London Market division and $57.2 million, or 13.8%, in the U.S. Insurance division.

Losses and Loss Adjustment Expenses. Net losses and LAE incurred decreased $206.7 million, or 13.7%, to $1,302.0 million for the year ended December 31, 2009, from $1,508.7 million for the year ended December 31, 2008, as follows (in millions):


	Year Ended
	December 31,				Change
	2009		2008		$			%
Gross losses and LAE incurred	$	1,603.9	$	1,736.0	$	(132.1	)		(7.6)	%
Less: ceded losses and LAE incurred		301.9		227.3		74.6			32.8

Net losses and LAE incurred	$	1,302.0	$	1,508.7	$	(206.7	)		(13.7)	%

The decrease in net losses and LAE incurred was principally related to a decrease in current year property catastrophe losses of $133.6 million, to $131.1 million for the year ended December 31, 2009, from $264.7 million for the year ended December 31, 2008. Losses and LAE for the year ended December 31, 2009 included a decrease in prior period losses of $11.3 million, attributable to reduced 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. Losses and LAE for the year ended December 31, 2008 included a decrease in prior period losses of $10.1 million.

Ceded losses and LAE incurred increased $74.6 million, or 32.8%, to $301.9 million for the year ended December 31, 2009, from $227.3 million for the year ended December 31, 2008. This increase was principally attributable to increased loss cessions related to business in the London Market division.

The loss and LAE ratio for the years ended December 31, 2009 and 2008 and the percentage point change for each of our divisions and in total are as follows:


	Year Ended						Percentage
	December 31,						Point
Division	2009			2008			Change
Americas		70.8	%		82.8	%		(12.0	)
EuroAsia		72.4			70.1			2.3
London Market		56.0			59.9			(3.9	)
U.S. Insurance		61.4			66.8			(5.4	)

Total loss and LAE ratio		67.6	%		72.7	%		(5.1	)

The following tables reflect total losses and LAE as reported for each division and include the impact of catastrophe losses and prior period reserve development, expressed as a percentage of net premiums earned (“NPE”), for the years ended December 31, 2009 and 2008 (in millions):


*Year Ended December 31, 2009*
	Americas						EuroAsia						London Market						U.S. Insurance						Total
				% of						% of						% of						% of						% of
	$			NPE			$			NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	548.7			70.8	%	$	392.7			72.4	%	$	140.8			56.0	%	$	219.8			61.4	%	$	1,302.0			67.6	%

Catastrophe losses:
2009 events:
Windstorm Klaus		—			—			53.5			9.8			—			—			—			—			53.5			2.8
Windstorm Wolfgang		—			—			16.2			3.0			—			—			—			—			16.2			0.8
Turkey floods		0.3			—			10.1			1.9			—			—			—			—			10.4			0.5
Central Europe flood		—			—			8.4			1.5			—			—			—			—			8.4			0.4
France hailstorm		—			—			7.9			1.5			—			—			—			—			7.9			0.4
Typhoon Ketsana		—			—			5.5			1.0			—			—			—			—			5.5			0.3
Other 2009 events		21.3			2.7			6.9			1.3			1.0			0.4			—			—			29.2			1.6

Total 2009 events		21.6			2.7			108.5			20.0			1.0			0.4			—			—			131.1			6.8
Prior period events		(0.3	)		—			(4.8	)		(0.9	)		4.0			1.6			0.9			0.3			(0.2	)		—

Total catastrophe losses	$	21.3			2.7	%	$	103.7			19.1	%	$	5.0			2.0	%	$	0.9			0.3	%	$	130.9			6.8	%

Prior period loss development including prior period catastrophe losses	$	70.1			9.1	%	$	(22.8	)		(4.2	)%	$	(23.3	)		(9.3	)%	$	(35.3	)		(9.9	)%	$	(11.3	)		(0.6	)%

Year Ended December 31, 2008


	Americas						EuroAsia						London Market						U.S. Insurance						Total
				% of						% of						% of						% of						% of
	$			NPE			$			NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	645.5			82.8	%	$	397.2			70.1	%	$	188.6			59.9	%	$	277.4			66.8	%	$	1,508.7			72.7	%


Catastrophe losses:
2008 events:
Hurricane Ike		93.9			12.0			0.7			0.1			23.1			7.3			26.1			6.2			143.8			7.0
China winter storm		—			—			45.9			8.2			—			—			—			—			45.9			2.2
Windstorm Emma		—			—			19.1			3.4			—			—			—			—			19.1			0.9
Hurricane Gustav		9.3			1.2			—			—			0.5			0.2			1.5			0.4			11.3			0.5
Australia floods		8.2			1.1			2.9			0.5			—			—			—			—			11.1			0.5
China earthquake		—			—			5.1			0.9			—			—			—			—			5.1			0.2
Other 2008 events		17.9			2.3			7.6			1.3			2.9			0.9			—			—			28.4			1.4

Total 2008 events		129.3			16.6			81.3			14.4			26.5			8.4			27.6			6.6			264.7			12.7
Prior period events:
Hurricanes Katrina, Rita and Wilma — 2005		(6.8	)		(0.9	)		—			—			3.6			1.1			—			—			(3.2	)		(0.2	)
Other prior period events		(5.0	)		(0.6	)		(2.2	)		(0.4	)		(6.7	)		(2.1	)		—			—			(13.9	)		(0.6	)

Total catastrophe losses	$	117.5			15.1	%	$	79.1			14.0	%	$	23.4			7.4	%	$	27.6			6.6	%	$	247.6			11.9	%

Prior period loss development including prior period catastrophe losses	$	66.6			8.5	%	$	(2.4	)		(0.4	)%	$	(40.0	)		(12.7	)%	$	(34.3	)		(8.3	)%	$	(10.1	)		(0.5	)%

Americas Division — Losses and LAE decreased $96.8 million, or 15.0%, to $548.7 million for the year ended December 31, 2009, from $645.5 million for the year ended December 31, 2008. This resulted in a loss and LAE ratio of 70.8% for the year ended December 31, 2009, compared to 82.8% for the year ended December 31, 2008. This decrease in losses and LAE was principally attributable to a decrease in current year property catastrophe losses of $107.7 million, to $21.6 million for the year ended December 31, 2009, from $129.3 million for the year ended December 31, 2008. Losses and LAE for the year ended December 31, 2009 included an increase in prior period losses of $70.1 million, principally due to loss emergence greater than expectations in the period on asbestos. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $129.3 million, with $93.9 million for Hurricane Ike, $9.3 million for Hurricane Gustav, $8.2 million for the Australia floods, and an increase in prior period losses of $66.6 million, principally attributable to loss emergence greater than expectations in the period on asbestos.

EuroAsia Division — Losses and LAE decreased $4.5 million, or 1.1%, to $392.7 million for the year ended December 31, 2009, from $397.2 million for the year ended December 31, 2008. This resulted in a loss and LAE ratio of 72.4% for the year ended December 31, 2009, compared to 70.1% for the year ended December 31, 2008. This decrease in losses and LAE was principally due to a decrease in loss exposure associated with a decline in net premiums earned of $23.8 million, to $542.7 million for the year ended December 31, 2009, from $566.5 million for the year ended December 31, 2008. Losses and LAE for the year ended December 31, 2009 included current year property catastrophe losses of $108.5 million, with $53.5 million for Windstorm Klaus, $16.2 million for Windstorm Wolfgang, $10.1 million for Turkey floods, $8.4 million for the Central Europe flood, $7.9 million for the France hailstorm, and a decrease in prior period losses of $22.8 million, principally due to loss emergence lower than expectations in the period on property business. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $81.3 million, with $45.9 million for the China winter storm, $19.1 million for Windstorm Emma, $5.1 million for the China earthquake, and a decrease in prior period losses of $2.4 million, principally attributable to loss emergence lower than expectations in the period on credit business, partially offset by loss emergence greater than expectations in the period on miscellaneous property lines of business.

London Market Division — Losses and LAE decreased $47.8 million, or 25.3%, to $140.8 million for the year ended December 31, 2009, from $188.6 million for the year ended December 31, 2008. This resulted in a

loss and LAE ratio of 56.0% for the year ended December 31, 2009, compared to 59.9% for the year ended December 31, 2008. This decrease in losses and LAE was principally due to a decrease in loss exposure associated with a decline in net premiums earned of $63.0 million, to $251.6 million for the year ended December 31, 2009, from $314.6 million for the year ended December 31, 2008. Losses and LAE for the year ended December 31, 2009 included current year property catastrophe losses of $1.0 million and a decrease in prior period losses of $23.3 million, principally attributable to loss emergence lower than expectations in the period on liability business. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $26.5 million, with $23.1 million for Hurricane Ike, and reflected a decrease in prior period losses of $40.0 million, principally due to loss emergence lower than expectations in the period on professional liability and miscellaneous property lines of business.

U.S. Insurance Division — Losses and LAE decreased $57.6 million, or 20.8%, to $219.8 million for the year ended December 31, 2009, from $277.4 million for the year ended December 31, 2008. This resulted in a loss and LAE ratio of 61.4% for the year ended December 31, 2009, compared to 66.8% for the year ended December 31, 2008. This decrease in losses and LAE was principally due to a decrease in current year property catastrophe losses and a decline in loss exposure associated with a decline in net premiums earned of $57.2 million, to $358.0 million for the year ended December 31, 2009, from $415.2 million for the year ended December 31, 2008. Losses and LAE for the year ended December 31, 2009 included a decrease in prior period losses of $35.3 million, principally attributable to loss emergence lower than expectations in the period on professional liability business. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $27.6 million, with $26.1 million for Hurricane Ike and a reduction in prior period losses of $34.3 million, principally due to loss emergence lower than expectations in the period on professional liability business.

Acquisition Costs. Acquisition costs for the year ended December 31, 2009 were $375.3 million, a decrease of $42.7 million or 10.2%, compared to $418.0 million for the year ended December 31, 2008. The resulting acquisition expense ratio, expressed as a percentage of net premiums earned, was 19.5% for the year ended December 31, 2009, compared to 20.1% for the year ended December 31, 2008, a decrease of 0.6 points. The Americas, EuroAsia and U.S. Insurance divisions’ acquisition expense ratios decreased by 0.7 points, 0.9 points and 2.0 points, respectively, for the year ended December 31, 2009 compared to the corresponding period in 2008. The London Market division’s acquisition expense ratio increased by 0.5 point compared to the corresponding period in 2008. The reduction of 2.0 points in the U.S. Insurance division’s net acquisition expense ratio is principally related to writing more direct business from internal sources at lower commission rates, and the additional ceded commission received from reinsurers who participate in our medical professional liability reinsurance program.

Other Underwriting Expenses. Other underwriting expenses for the year ended December 31, 2009 were $185.7 million, compared to $175.0 million for the year ended December 31, 2008. The other underwriting expense ratio, expressed as a percentage of net premiums earned, was 9.6% for the year ended December 31, 2009, compared to 8.4% for the corresponding period in 2008. The increase in the other underwriting expense ratio was principally attributable to a decrease in net premiums earned of $149.0 million, combined with an increase in other underwriting expenses of $10.7 million, primarily relating to businesses acquired during the second half of 2008 by our U.S. Insurance division.

The following table reflects the acquisition and other underwriting expenses, expressed as a percentage of net premiums earned, for the years ended December 31, 2009 and 2008 for each of our divisions:


	Year Ended						Percentage
	December 31,						Point
Division	2009			2008			Change
Americas		31.7	%		32.5	%		(0.8	)
EuroAsia		25.0			26.0			(1.0	)
London Market		28.4			26.0			2.4
U.S. Insurance		30.1			26.7			3.4

Total acquisition costs and other underwriting expense ratio		29.1	%		28.5	%		0.6

The GAAP combined ratio is the sum of losses and LAE 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% for the year ended December 31, 2009, compared to 101.2% for the year ended December 31, 2008. The following table reflects the combined ratio for the years ended December 31, 2009 and 2008 for each of our divisions:


	Year Ended						Percentage
	December 31,						Point
Division	2009			2008			Change
Americas		102.5	%		115.3	%		(12.8	)
EuroAsia		97.4			96.1			1.3
London Market		84.4			85.9			(1.5	)
U.S. Insurance		91.5			93.5			(2.0	)

Total combined ratio		96.7	%		101.2	%		(4.5	)

Investment Results

Net Investment Income. Net investment income for the year ended December 31, 2009 increased by $62.7 million, or 24.6%, to $317.9 million, from $255.2 million for the year ended December 31, 2008. Net investment income was comprised of gross investment income of $346.4 million less investment expenses of $28.5 million for the year ended December 31, 2009, compared to gross investment income of $295.5 million less investment expenses of $40.3 million for the year ended December 31, 2008. The increase in net investment income for the year ended December 31, 2009 was primarily attributable to the following:

	•		investment income from fixed income securities was $253.1 million for the year ended December 31, 2009, an increase of $56.0 million, or 28.4%, compared to the year ended December 31, 2008;

	•		an increase of $27.7 million, or 81.2%, in net investment income from equity investments for the year ended December 31, 2009, compared to the year ended December 31, 2008. Net income of common stocks, at equity, increased by $7.0 million, along with an increase in dividends on common stocks of $20.7 million;

	•		an increase in net investment income from other invested assets of $11.3 million for the year ended December 31, 2009 compared to the year ended December 31, 2008;

	•		a decrease in investment expenses of $11.8 million for the year ended December 31, 2009, compared to 2008, which was primarily due to the expense related to total return swaps that were closed out during the fourth quarter of 2008; offset by:

	•		a decrease in net investment income from short-term investments and cash of $44.1 million, or 83.3%, for the year ended December 31, 2009, compared to the year ended December 31, 2008.

Our total effective annualized yield on average invested assets, net of expense but before the impact of interest expense from funds held balances, was 4.0% and 3.3% for the years ended December 31, 2009 and 2008, respectively. The total effective annualized yield on average invested assets is calculated by dividing annual income by the annual average invested assets (computed using average amortized cost for fixed income securities and average carrying value for all other securities).

Interest expense on funds held, which is included in investment expenses, of $3.7 million for the year ended December 31, 2009, represents a decrease of $1.6 million, or 30.2%, from $5.3 million for the year ended December 31, 2008. The decrease was primarily attributable to ceded paid losses reducing the funds held balance.

Net Realized Investment Gains. Net realized investment gains of $186.0 million for the year ended December 31, 2009 decreased by $506.3 million, from net realized investment gains of $692.3 million for the year ended December 31, 2008. The decrease in net realized investment gains was principally due to the following:

	•		a decrease in net realized investment gains on derivative securities of $1,070.3 million, primarily attributable to a decrease of $567.0 million on total return swaps, a decrease of $379.4 million on credit default swaps, with decreased holdings in the current period, and a decrease of $126.6 million on forward currency contracts;

	•		a decrease in net mark-to-market realized investment gains of $12.8 million on short positions, which were closed out during the second quarter of 2008; partially offset by:

	•		an increase in net realized investment gains on fixed income securities of $64.4 million;

	•		an increase in foreign exchange realized investment gains on short-term investments, cash and cash equivalents of $153.9 million resulting from the weakening of the U.S. dollar compared to foreign currencies;

	•		increased realized investment gains on other invested assets of $14.0 million;

	•		increased realized investment gains on preferred stock of $7.9 million; and

	•		increased net realized investment gains on equity securities of $336.6 million, which include other-than-temporary write-downs of equity securities of $123.4 million during the year ended December 31, 2009, compared to $339.0 million in realized investment losses for the year ended December 31, 2008.

During the year ended December 31, 2009, net realized investment gains were reduced by other-than-temporary impairment losses in the amount of $127.0 million, relating to equity securities of $123.4 million, fixed income securities of $3.4 million and preferred stock of $0.2 million. During the year ended December 31, 2008, net realized investment gains were reduced by other-than-temporary impairment losses in the amount of $358.7 million, relating to fixed income securities of $18.9 million, equity securities of $339.0 million and preferred stock of $0.8 million. Other-than-temporary impairments reflect situations where the fair value was below the cost of the securities, and the ability of the security to recover its value could not be reasonably determined.

Other Results, Principally Holding Company and Income Taxes

Other Expenses, Net. Other expense, net, for the year ended December 31, 2009 was $44.4 million as compared to $60.4 million for the year ended December 31, 2008. The other expense is principally comprised of foreign currency exchange gains and losses and the operating expenses of our holding company, including audit related fees, corporate-related legal fees, consulting fees and compensation expense. The $16.0 million decrease for the year ended December 31, 2009 compared to 2008 was primarily related to $41.6 million of foreign exchange related adjustments, offset by (i) $15.9 million of stock-based compensation and restricted equity value rights and (ii) $5.8 million related to the tender offer by Fairfax.

Interest Expense. We incurred interest expense related to our debt obligations of $31.0 million and $34.2 million for the years ended December 31, 2009 and 2008, respectively. The lower amount of interest expense in 2009 primarily resulted from the decrease in interest rates on our Series A, B and C floating rate Senior Notes.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the year ended December 31, 2009 decreased by $158.0 million, to $120.5 million, compared to $278.5 million for the year ended December 31, 2008, resulting from a combination of (i) decreased pre-tax income and (ii) a shift in our fixed income portfolio to tax-exempt municipal securities and equity securities eligible for dividends-received deductions. Our effective tax rates were 24.5% and 33.7% for the years ended December 31, 2009 and 2008, respectively.

Preferred Dividends and Purchases. We recorded preferred dividends related to our Series A and Series B non-cumulative perpetual preferred shares of $5.2 million and $7.4 million for the years ended December 31,

2009 and 2008, respectively. During the first quarter of 2009, Odyssey America purchased 704,737 shares of our Series B preferred stock, with a liquidation preference of $17.2 million, for $9.2 million. The purchase of the Series B preferred shares resulted in an increase in net income attributable to common shareholders of $8.0 million for the year ended December 31, 2009, compared to $1.5 million for the year ended December 31, 2008.

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Underwriting Results

Gross Premiums Written. Gross premiums written for the year ended December 31, 2008 increased by $11.8 million, or 0.5%, to $2,294.5 million, compared to $2,282.7 million for the year ended December 31, 2007, as reflected in the following table (in millions):


	Year Ended
	December 31,				Change
Division	2008		2007		$			%
Americas	$	776.4	$	834.9	$	(58.5	)		(7.0)	%
EuroAsia		596.7		565.6		31.1			5.5
London Market		381.7		349.9		31.8			9.1
U.S. Insurance		539.7		532.3		7.4			1.4

Total gross premiums written	$	2,294.5	$	2,282.7	$	11.8			0.5	%

Total reinsurance gross premiums written for the year ended December 31, 2008 were $1,502.2 million, compared to $1,545.9 million for 2007, a decrease of 2.8%. Total insurance gross premiums written for the year ended December 31, 2008, which include our U.S. Insurance division, our Lloyd’s syndicate and NICL, were $792.3 million, compared to $736.8 million for 2007, an increase of 7.5%. For the year ended December 31, 2008, total reinsurance gross premiums written represented 65.5% (67.7% in 2007) of our business, and insurance represented the remaining 34.5% (32.3% in 2007) of our business.

Americas. Gross premiums written in the Americas division for the year ended December 31, 2008 were $776.4 million, a decrease of $58.5 million, or 7.0%, compared to $834.9 million for the year ended December 31, 2007. These amounts represent 33.8% of our gross premiums written for the year ended December 31, 2008 and 36.6% for the year ended December 31, 2007. Gross premiums written across each geographic region of the Americas were as follows (in millions):


	Year Ended
	December 31,				Change
	2008		2007		$			%
United States	$	578.0	$	650.2	$	(72.2	)		(11.1)	%
Latin America		158.1		141.4		16.7			11.8
Canada		40.3		43.3		(3.0	)		(6.9	)

Total gross premiums written	$	776.4	$	834.9	$	(58.5	)		(7.0)	%

	•		United States —Property business increased by $24.4 million, or 16.4%, to $172.4 million in 2008 from $148.1 million in 2007. Treaty and facultative casualty business decreased by $93.5 million, or 20.7%, to $358.5 million in 2008 from $452.0 million in 2007 due to an increase in competitive market conditions and the non-renewal of certain business that did not meet our underwriting criteria.

	•		Latin America — The increase in gross premiums written is comprised of treaty pro rata business of $15.4 million and treaty excess business of $2.9 million, offset by a decrease in property facultative business of $1.6 million.

•

Canada — The decrease in gross premiums written was primarily due to the movement in the Canadian dollar exchange rate between 2008 and 2007.

EuroAsia. Gross premiums written in the EuroAsia division for the year ended December 31, 2008 were $596.7 million, an increase of $31.1 million, or 5.5%, compared to $565.6 million for the year ended December 31, 2007. These amounts represent 26.0% of our gross premiums written for the year ended December 31, 2008 and 24.8% in 2007. The increase in gross premiums written was comprised of: (i) $42.4 million attributable to the movement in foreign exchange rates during 2008 compared to 2007; and (ii) a modification to the estimating process during 2008, which contributed $6.2 million to the increase over 2007. The modification to the estimating process impacted gross and net premiums written, but had no effect on earned premiums. Excluding the effects of foreign exchange rate movements and the modification to the estimating process, gross premiums would have decreased $17.5 million.

London Market. Gross premiums written in the London Market division for the year ended December 31, 2008 were $381.7 million, an increase of $31.8 million, or 9.1%, compared to $349.9 million for the year ended December 31, 2007. These amounts represent 16.7% of our gross premiums written for the year ended December 31, 2008 and 15.3% in 2007. Gross premiums written across each unit of the London Market division were as follows (in millions):


	Year Ended
	December 31,				Change
	2008		2007		$			%
London branch	$	129.1	$	145.3	$	(16.2	)		(11.1)	%
Newline		252.6		204.6		48.0			23.5

Total gross premiums written	$	381.7	$	349.9	$	31.8			9.1	%

The decrease in gross premiums written by the London branch was primarily attributable to decreases in marine and aviation business of $7.9 million, casualty business of $4.4 million and property business of $3.9 million.

The increase in gross premiums written by Newline was primarily attributable to medical professional liability and motor business.

U.S. Insurance. Gross premiums written in the U.S. Insurance division for the year ended December 31, 2008 were $539.7 million, an increase of $7.4 million, or 1.4%, compared to $532.3 million for the year ended December 31, 2007. These amounts represent 23.5% of our gross premiums written for the year ended December 31, 2008 and 23.3% for the year ended December 31, 2007. Lines of business that experienced the greatest change in gross premiums written or were significant to the U.S. Insurance division for the year ended December 31, 2008 were as follows (in millions):


	Year Ended
	December 31,				Change
	2008		2007		$			%
Professional liability	$	130.9	$	139.3	$	(8.4	)		(6.0)	%
Medical professional liability		113.9		130.2		(16.3	)		(12.5	)
Property and package		111.5		68.5		43.0			62.8
Specialty liability		90.9		90.3		0.6			0.7
Commercial automobile		68.2		52.4		15.8			30.2
Personal automobile		24.3		51.6		(27.3	)		(52.9	)

Total gross premiums written	$	539.7	$	532.3	$	7.4			1.4	%

Gross premiums written increased for the year ended December 31, 2008 compared to the year ended December 31, 2007 as a result of increases in crop business and offshore energy business, which are included in property and package, and new programs in the logging and transportation industries, which are included in

commercial automobile. This increase in gross premiums written was partially offset by a decrease in our personal automobile business due to market conditions, a decrease in our medical professional liability business due to certain client groups retaining more exposure by self-insuring their own programs, as well as more competitive market conditions in 2008 and a decrease in our professional liability business.

Ceded Premiums Written. Ceded premiums written for the year ended December 31, 2008 increased by $70.4 million, or 36.4%, to $263.7 million (11.5% of gross premiums written), from $193.3 million (8.5% of gross premiums written) for the year ended December 31, 2007. The increase in ceded premiums written was primarily related to (i) an increase in the London Market division of $31.0 million related to cessions associated with a new program incepting in 2008, (ii) the U.S. Insurance division of $37.0 million related to cessions associated with a new program incepting in 2008, and (iii) increased cessions on the crop program due to growth in the business and medical professional liability business due to an increase in quota share reinsurance ceded.

Net Premiums Written. Net premiums written for the year ended December 31, 2008 decreased by $58.6 million, or 2.8%, to $2,030.8 million, from $2,089.4 million for the year ended December 31, 2007. Net premiums written represent gross premiums written less ceded premiums written. Net premiums written decreased over 2007 at a higher rate than gross premiums written, reflecting an increase in ceded premiums written during 2008.


	Year Ended
	December 31,				Change
Division	2008		2007		$			%
	(In millions)
Americas	$	760.7	$	817.8	$	(57.1	)		(7.0)	%
EuroAsia		569.3		542.1		27.2			5.0
London Market		306.5		305.6		0.9			0.3
U.S. Insurance		394.3		423.9		(29.6	)		(7.0	)

Total net premiums written	$	2,030.8	$	2,089.4	$	(58.6	)		(2.8)	%

Americas. Net premiums written in the Americas division for the year ended December 31, 2008 were $760.7 million, compared to $817.8 million for the 2007 period, a decrease of $57.1 million, or 7.0%. These amounts represented 37.5% of our net premiums written for the year ended December 31, 2008 and 39.1% for the year ended December 31, 2007. The net retention ratio, which represents net premiums written as a percent of gross premiums written, was 98.0% for both of the years ended December 31, 2008 and 2007.

The decrease in net premiums written in the Americas division is consistent with the 7.0% decrease in gross premiums written.

EuroAsia. Net premiums written in the EuroAsia division for the year ended December 31, 2008 were $569.3 million, compared to $542.1 million for 2007, an increase of 5.0%. These amounts represented 28.0% of our net premiums written for the year ended December 31, 2008 and 25.9% for the year ended December 31, 2007. The net retention ratio for the year ended December 31, 2008 was 95.4%, compared to 95.8% for the year ended December 31, 2007.

The increase in net premiums written is consistent with the increase in gross premiums written, which was impacted by the foreign exchange rate movement and the modification to the estimating process discussed in the gross premiums written analysis.

London Market. Net premiums written in the London Market division for the year ended December 31, 2008 were $306.5 million, compared to $305.6 million for the year ended December 31, 2007, an increase of 0.3%. These amounts represented 15.1% of our net premiums written for the year ended December 31, 2008 and 14.6% for the year ended December 31, 2007. The net retention ratio was 80.3% for the year ended December 31, 2008, compared to 87.3% for the year ended December 31, 2007.

The increase in net premiums written consisted of an increase in gross premiums written of $31.8 million, offset by an increase in ceded premiums written of $31.0 million. The increase in ceded premiums written was

primarily related to a change in the retention level for excess of loss contracts of Newline Syndicate (1218) and an increase in cessions associated with a new program incepting in 2008.

U.S. Insurance. Net premiums written in the U.S. Insurance division for the year ended December 31, 2008 were $394.3 million, compared to $423.9 million for the year ended December 31, 2007, a decrease of 7.0%. These amounts represented 19.4% of our net premiums written for the year ended December 31, 2008 and 20.3% for the year ended December 31, 2007. The net retention ratio was 73.1% for the year ended December 31, 2008, compared to 79.6% for the year ended December 31, 2007.

The decrease in net premiums written consisted of an increase in gross premiums written of $7.4 million, offset by an increase in ceded premiums written of $37.0 million. The increase in ceded premiums written was attributable to cessions associated with a new program incepting in 2008 and increased cessions on the crop program and medical professional liability business due to an increase in quota share reinsurance ceded.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 decreased by $44.1 million, or 2.1%, to $2,076.4 million, from $2,120.5 million for the year ended December 31, 2007. Net premiums earned decreased in the Americas division by $61.8 million, or 7.3%, and in the U.S. Insurance division of $13.5 million, or 3.2%, offset by an increase in the EuroAsia division of $23.4 million, or 4.3% and in the London Market division by $7.8 million, or 2.5%.

Losses and Loss Adjustment Expenses. Net losses and LAE increased $100.3 million, or 7.1%, to $1,508.7 million for the year ended December 31, 2008, from $1,408.4 million for the year ended December 31, 2007, as follows (in millions):


	Year Ended
	December 31,				Change
	2008		2007		$		%
Gross losses and LAE incurred	$	1,736.0	$	1,514.3	$	221.7		14.6	%
Less: ceded losses and LAE incurred		227.3		105.9		121.4		114.6

Net losses and LAE incurred	$	1,508.7	$	1,408.4	$	100.3		7.1	%

The increase in net losses and LAE incurred of $100.3 million was principally related to an increase in current year catastrophe events of $158.8 million, to $264.7 million for the year ended December 31, 2008, from $105.9 million for the year ended December 31, 2007. This increase was partially offset by a decrease in prior period losses of $50.6 million, to a decrease of $10.1 million for the year ended December 31, 2008, from an increase of $40.5 million for the year ended December 31, 2007. Losses and LAE for the year ended December 31, 2008 included $143.8 million attributable to Hurricane Ike, $45.9 million related to the China winter storm, $19.1 million related to Windstorm Emma, $11.3 million related to Hurricane Gustav and a decrease in prior period losses of $10.1 million, principally attributable to decreased loss estimates due to loss emergence lower than expectations in the period in the EuroAsia, London Market and U.S. Insurance divisions, partially offset by increased loss estimates due to loss emergence greater than expectations in the period in the Americas division. Losses and LAE for the year ended December 31, 2007 included $38.5 million for Windstorm Kyrill, $12.3 million for Cyclone Gonu, $10.0 million for the Mexico flood in Tabasco and an increase in prior period losses of $40.5 million, predominantly attributable to increased loss estimates due to loss emergence greater than expectations in the period in the Americas division, partially offset by reduced loss estimates due to loss emergence lower than expectations in the period in the EuroAsia, London Market and U.S. Insurance divisions.

Ceded losses and LAE incurred for the year ended December 31, 2008 increased by $121.4 million, or 114.6%, to $227.3 million, from $105.9 million for the year ended December 31, 2007. This increase was principally related to loss cessions on Hurricane Ike and increased loss cessions related to our crop business.

The loss and LAE ratio for the years ended December 31, 2008 and 2007 and the percentage point change for each of our divisions and in total are as follows:


	Year Ended						Percentage
	December 31,						Point
Division	2008			2007			Change
Americas		82.8	%		78.6	%		4.2
EuroAsia		70.1			64.2			5.9
London Market		59.9			49.0			10.9
U.S. Insurance		66.8			57.8			9.0

Total loss and LAE ratio		72.7	%		66.4	%		6.3

Year Ended December 31, 2008


	Americas						EuroAsia						London Market						U.S. Insurance						Total
				% of						% of						% of						% of						% of
	$			NPE			$			NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	645.5			82.8	%	$	397.2			70.1	%	$	188.6			59.9	%	$	277.4			66.8	%	$	1,508.7			72.7	%

Catastrophe losses:
2008 events:
Hurricane Ike		93.9			12.0			0.7			0.1			23.1			7.3			26.1			6.2			143.8			7.0
China winter storm		—			—			45.9			8.2			—			—			—			—			45.9			2.2
Windstorm Emma		—			—			19.1			3.4			—			—			—			—			19.1			0.9
Hurricane Gustav		9.3			1.2			—			—			0.5			0.2			1.5			0.4			11.3			0.5
Australia floods		8.2			1.1			2.9			0.5			—			—			—			—			11.1			0.5
China earthquake		—			—			5.1			0.9			—			—			—			—			5.1			0.2
Other 2008 events		17.9			2.3			7.6			1.3			2.9			0.9			—			—			28.4			1.4

Total 2008 events		129.3			16.6			81.3			14.4			26.5			8.4			27.6			6.6			264.7			12.7
Prior period events:
Hurricanes Katrina, Rita and Wilma — 2005		(6.8	)		(0.9	)		—			—			3.6			1.1			—			—			(3.2	)		(0.2	)
Other prior period events		(5.0	)		(0.6	)		(2.2	)		(0.4	)		(6.7	)		(2.1	)		—			—			(13.9	)		(0.6	)

Total catastrophe losses	$	117.5			15.1	%	$	79.1			14.0	%	$	23.4			7.4	%	$	27.6			6.6	%	$	247.6			11.9	%

Prior period loss development including prior period catastrophe losses	$	66.6			8.5	%	$	(2.4	)		(0.4	)%	$	(40.0	)		(12.7	)%	$	(34.3	)		(8.3	)%	$	(10.1	)		(0.5	)%

Year Ended December 31, 2007


	Americas					EuroAsia						London Market						U.S. Insurance						Total
			% of						% of						% of						% of						% of
	$		NPE			$			NPE			$			NPE			$			NPE			$			NPE
Total losses and LAE	$	661.5		78.6	%	$	348.6			64.2	%	$	150.4			49.0	%	$	247.9			57.8	%	$	1,408.4			66.4	%

Catastrophe losses:
2007 events:
Windstorm Kyrill		—		—			26.8			5.0			11.7			3.8			—			—			38.5			1.8
Cyclone Gonu, Oman		—		—			12.3			2.3			—			—			—			—			12.3			0.6
Mexico flood in Tabasco		10.0		1.2			—			—			—			—			—			—			10.0			0.5
Jakarta floods		—		—			5.6			1.0			—			—			—			—			5.6			0.3
UK floods		—		—			—			—			5.1			1.7			—			—			5.1			0.2
Peru earthquake		5.0		0.6			—			—			—			—			—			—			5.0			0.2
Other 2007 events		17.0		2.0			8.7			1.6			3.7			1.2			—			—			29.4			1.4

Total 2007 events		32.0		3.8			53.4			9.9			20.5			6.7			—			—			105.9			5.0
Prior period events:
Hurricanes Katrina, Rita and Wilma — 2005		6.6		0.8			—			—			(1.4	)		(0.5	)		(0.1	)		—			5.1			0.2
Other prior period events		5.1		0.6			(3.1	)		(0.6	)		(6.2	)		(2.0	)		—			—			(4.2	)		(0.2	)

Total catastrophe losses	$	43.7		5.2	%	$	50.3			9.3	%	$	12.9			4.2	%	$	(0.1	)		—	%	$	106.8			5.0	%

Prior period loss development including prior period catastrophe losses	$	143.1		17.0	%	$	(6.9	)		(1.3	)%	$	(57.0	)		(18.6	)%	$	(38.7	)		(9.0	)%	$	40.5			1.9	%

Americas Division — Losses and LAE decreased $16.0 million, or 2.4%, to $645.5 million for the year ended December 31, 2008, from $661.5 million for the year ended December 31, 2007. This resulted in a loss and LAE ratio of 82.8% for the year ended December 31, 2008, compared to 78.6% for the year ended December 31, 2007. This decrease in losses and LAE was principally due to a decrease in prior period losses of $76.5 million, to $66.6 million for the year ended December 31, 2008, from $143.1 million for the year ended December 31, 2007, and a decrease in loss exposure associated with a decrease in net premiums earned of $61.8 million. These decreases were partially offset by an increase in current year catastrophe events of $97.3 million, to $129.3 million for the year ended December 31, 2008, from $32.0 million for the year ended December 31, 2007. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $129.3 million, with $93.9 million for Hurricane Ike, $9.3 million for Hurricane Gustav, $8.2 million for Australia floods and an increase in prior period losses of $66.6 million, principally attributable to loss emergence greater than expectations in the period on asbestos. Losses and LAE for the year ended December 31, 2007 included current year property catastrophe losses of $32.0 million, with $10.0 million for the Mexico flood in Tabasco and an increase in prior period losses of $143.1 million, which included $11.7 million for increased loss estimates on prior period catastrophe events, principally attributable to Hurricanes Katrina and Wilma, $77.4 million for increased asbestos and environmental loss estimates, principally attributable to the annual review of these exposures, and $21.2 million related to settlement of litigation in the period, with the remainder principally due to loss emergence greater than expectations in the period on U.S. casualty business.

EuroAsia Division — Losses and LAE increased $48.6 million, or 13.9%, to $397.2 million for the year ended December 31, 2008, from $348.6 million for the year ended December 31, 2007. This resulted in a loss and LAE ratio of 70.1% for the year ended December 31, 2008, compared to 64.2% for the year ended December 31, 2007. This increase in losses and LAE was principally due to an increase in current year catastrophe events of $27.9 million, to $81.3 million for the year ended December 31, 2008, from $53.4 million for the year ended December 31, 2007, and an increase in loss exposure associated with an increase in net premiums earned of $23.4 million. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $81.3 million, with $45.9 million for the China winter storm, $19.1 million for Windstorm Emma, $5.1 million for the China earthquake and a decrease in prior period losses of $2.4 million, principally attributable to loss emergence lower than expectations in the period on credit business, partially offset by loss emergence greater than expectations in the period on miscellaneous property lines of business.

Losses and LAE for the year ended December 31, 2007 included current year property catastrophe losses of $53.4 million, with $26.8 million for Windstorm Kyrill, $12.3 million for Cyclone Gonu, $5.6 million for the Jakarta floods and a reduction in prior period losses of $6.9 million, principally attributable to favorable loss emergence on credit and miscellaneous property lines of business, partially offset by increased loss estimates on motor and liability exposures.

London Market Division — Losses and LAE increased $38.2 million, or 25.4%, to $188.6 million for the year ended December 31, 2008, from $150.4 million for the year ended December 31, 2007. This resulted in a loss and LAE ratio of 59.9% for the year ended December 31, 2008, compared to 49.0% for the year ended December 31, 2007. This increase in losses and LAE was principally due to an increase in prior period losses of $17.0 million, to a decrease of $40.0 million for the year ended December 31, 2008, from a decrease of $57.0 million for the year ended December 31, 2007, and an increase in current year property catastrophe events. Current year property catastrophe events increased $6.0 million, to $26.5 million for the year ended December 31, 2008, from $20.5 million for the year ended December 31, 2007. Losses and LAE for the year ended December 31, 2008 included current year property catastrophe losses of $26.5 million, with $23.1 million attributable to Hurricane Ike and reflected a decrease in prior period losses of $40.0 million, principally due to loss emergence lower than expectations in the period on professional liability and miscellaneous property lines of business. Losses and LAE for the year ended December 31, 2007 included current year property catastrophe losses of $20.5 million, with $11.7 million for Windstorm Kyrill, $5.1 million for floods in the United Kingdom and reflected a reduction in prior period losses of $57.0 million, principally due to favorable loss emergence on liability, property catastrophe and other miscellaneous property lines of business in the period.

U.S. Insurance Division — Losses and LAE increased $29.5 million, or 11.9%, to $277.4 million for the year ended December 31, 2008, from $247.9 million for the year ended December 31, 2007. This resulted in a loss and LAE ratio of 66.8% for the year ended December 31, 2008, compared to 57.8% for the year ended December 31, 2007. This increase in losses and LAE for the year ended December 31, 2008 was related to current year catastrophe losses of $27.6 million, with $26.1 million attributable to Hurricane Ike. For the years ended December 31, 2008 and 2007, prior period losses decreased by $34.3 million and $38.7 million, respectively, principally due to loss emergence lower than expectations on professional liability business in each period.

Acquisition Costs. Acquisition costs for the year ended December 31, 2008 were $418.0 million, a decrease of $19.3 million or 4.4%, compared to $437.3 million for the year ended December 31, 2007. The resulting acquisition expense ratio, expressed as a percentage of net premiums earned, was 20.1% for the year ended December 31, 2008, compared to 20.6% for the year ended December 31, 2007, a decrease of 0.5 points. The Americas divisions’ acquisition ratios increased by 0.2 points, while the EuroAsia, London Market and U.S. Insurance divisions’ acquisition ratios decreased by 1.6, 0.1 and 0.5 points, respectively.

Other Underwriting Expenses. Other underwriting expenses for the year ended December 31, 2008 were $175.0 million, compared to $178.6 million for the year ended December 31, 2007. The other underwriting expense ratio, expressed as a percentage of net premiums earned, was 8.4% for both of the years ended December 31, 2008 and December 31, 2007.

The following table reflects the acquisition and other underwriting expenses, expressed as a percentage of net premiums earned, for the years ended December 31, 2008 and 2007, for each of our divisions:


	Year Ended						Percentage
	December 31,						Point
Division	2008			2007			Change
Americas		32.5	%		32.1	%		0.4
EuroAsia		26.0			27.5			(1.5	)
London Market		26.0			26.3			(0.3	)
U.S. Insurance		26.7			26.8			(0.1	)

Total acquisition costs and other underwriting expense ratio		28.5	%		29.1	%		(0.6	)

The GAAP combined ratio is the sum of losses and LAE 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 101.2% for the year ended December 31, 2008, compared to 95.5% for the year ended December 31, 2007. The following table reflects the combined ratio for the years ended December 31, 2008 and 2007 for each of our divisions:


	Year Ended						Percentage
	December 31,						Point
Division	2008			2007			Change
Americas		115.3	%		110.7	%		4.6
EuroAsia		96.1			91.7			4.4
London Market		85.9			75.3			10.6
U.S. Insurance		93.5			84.6			8.9

Total combined ratio		101.2	%		95.5	%		5.7

Investment Results

Net Investment Income. Net investment income for the year ended December 31, 2008 decreased by $74.2 million, or 22.5%, to $255.2 million, from $329.4 million for the year ended December 31, 2007. Net investment income is comprised of gross investment income of $295.5 million less investment expenses of $40.3 million for the year ended December 31, 2008, compared to gross investment income of $368.1 million less investment expenses of $38.7 million for the year ended December 31, 2007. The decrease in net investment income for the year ended December 31, 2008 is primarily attributable to the following:

	•		investment income from fixed income securities was $197.1 million for the year ended December 31, 2008, a decrease of $8.8 million, or 4.3%, compared to the corresponding period in 2007. An increase in the average amortized cost of our fixed income securities for the year ended December 31, 2008, compared to the corresponding period in 2007, was offset by a decrease in the investment yield, resulting in a decrease in investment income;

	•		a decrease of $3.3 million, or 8.8%, in net investment income from equity investments for the year ended December 31, 2008, compared to the corresponding period in 2007. Net income of common stocks, at equity, decreased by $12.8 million, partially due to the sale of shares of Hub International Limited (“Hub”) in June 2007, offset by an increase in dividends on common stocks of $9.5 million;

	•		a decrease in net investment income from short-term investments and cash of $26.9 million, or 33.7%, for the year ended December 31, 2008, compared to the corresponding period in 2007, which is representative of a decrease in short-term interest rates during the period; and

	•		a decrease in net investment income from other invested assets of $33.5 million, or 74.7%, for the year ended December 31, 2008, compared to the corresponding period in 2007, which primarily reflects a decrease in investment income from hedge funds and private equity funds accounted for under the equity method.

Our total effective annualized yield on average invested assets, net of expense but before the impact of interest expense from funds held balance, was 3.3% and 4.5% for the years ended December 31, 2008 and 2007, respectively.

Interest expense on funds held, which is included in investment expenses, of $5.3 million for the year ended December 31, 2008, represents a decrease of $2.7 million, or 33.8%, from $8.0 million for the year ended December 31, 2007. The decrease was primarily attributable to ceded paid losses reducing the funds held balance.

Net Realized Investment Gains. Net realized investment gains of $692.3 million for the year ended December 31, 2008 increased by $153.2 million, from $539.1 million for the year ended December 31, 2007. The increase in net realized investment gains is principally due to the following:

	•		an increase in net realized investment gains on derivatives of $668.0 million, primarily attributable to the net change in fair value of our credit default swaps and of our total return swaps on indexes, caused by widening credit spreads and declining equity indexes, respectively; and

	•		higher net realized investment gains on fixed income securities of $110.1 million; offset by:

	•		a decrease in foreign exchange realized investment gains on short-term investments of $134.4 million resulting from the strengthening of the U.S. dollar versus foreign currencies;

	•		a decrease in net mark-to-market realized investment gains of $47.6 million on short positions;

	•		lower net realized investment gains on equity securities of $435.1 million, which included other-than-temporary write-downs of equity securities of $339.0 million and $42.1 million for the years ended December 31, 2008 and 2007, respectively. The year ended December 31, 2007 included gains of $119.2 million related to the sale of shares of Hub;

	•		lower net realized investment gains on other securities of $7.4 million; and

	•		lower net realized investment gain on preferred stock of $0.4 million.

During the year ended December 31, 2008, net realized investment gains were reduced by other-than-temporary impairment losses of $358.7 million, comprised of fixed income securities of $18.9 million, equity securities of $339.0 million and preferred stock of $0.8 million. During the year ended December 31, 2007, net realized investment gains were reduced by other-than-temporary impairment losses in the amount of $59.8 million, comprised of fixed income securities, common and preferred stock. Other-than-temporary impairments reflect situations where the fair value was below the cost of the securities, and the ability of the security to recover its value could not be reasonably assured.

Other Results, Principally Holding Company and Income Taxes

Other Expenses, Net. Other expenses, net, for the year ended December 31, 2008, were $60.4 million, compared to $14.0 million for the year ended December 31, 2007. Other expenses are primarily comprised of operating expenses at our holding company, including audit related fees, corporate-related legal fees, consulting fees, and compensation expense and foreign currency exchange gains and losses. The increase of $46.4 million for the year ended December 31, 2008 compared to 2007 is primarily comprised of $45.8 million related to foreign exchange related adjustments.

Interest Expense. We incurred interest expense, related to our debt obligations, of $34.2 million and $37.7 million for the years ended December 31, 2008 and 2007, respectively. The lower amount of interest expense in 2008 primarily resulted from the decrease in interest rates on our Series A, B, and C floating rate senior notes.

Federal and Foreign Income Tax Provision. Our federal and foreign income tax provision for the year ended December 31, 2008 decreased by $39.2 million, to a provision of $278.5 million, compared to a provision of $317.7 million for the year ended December 31, 2007, resulting from decreased pre-tax income. Our effective tax rates were 33.7% and 34.8% for the years ended December 31, 2008 and 2007, respectively.

Preferred Dividends and Purchases. We recorded preferred dividends related to our Series A and Series B non-cumulative perpetual preferred shares of $7.4 million and $8.3 million in the years ended December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, Odyssey America purchased 128,000 shares of our Series B preferred stock, with a liquidation preference of $3.1 million, for $1.6 million. The purchase of the Series B preferred shares resulted in an increase in net income attributable to common shareholders of $1.5 million for the year ended December 31, 2008.

Liquidity and Capital Resources

Our shareholders’ equity increased by $727.5 million, or 25.7%, to $3,555.2 million as of December 31, 2009, from $2,827.7 million as of December 31, 2008, due to net income of $372.3 million, a gain on purchase of our Series B preferred shares of $8.0 million, and an increase in net unrealized appreciation on securities of $463.2 million (a component of accumulated other comprehensive income). Offsetting these increases were the repurchase of $73.8 million of our common shares, the purchase of $17.2 million of our Series B preferred shares, and dividends to our preferred and common shareholders of $18.6 million.

Odyssey Re Holdings Corp. is a holding company that does not have any significant operations or assets other than its ownership of Odyssey America, and its principal sources of funds are cash dividends and other permitted payments from its operating subsidiaries, primarily Odyssey America. If our subsidiaries are unable to make payments to the holding company, or are able to pay only limited amounts, we may be unable to pay dividends on our preferred shares or make payments on our indebtedness. The payment of dividends by our operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of Connecticut, Delaware, New York and the United Kingdom. Holding company cash, cash equivalents and short-term investments totaled $33.0 million as of December 31, 2009, compared to $23.9 million as of December 31, 2008. During the years ended December 31, 2009 and 2008, the holding company received dividends from Odyssey America of $200.0 million and $410.0 million, respectively.

Odyssey America’s liquidity requirements are principally met by cash flows from operating activities, which primarily result from collections of premiums, reinsurance recoverables and investment income, net of paid losses, acquisition costs, income taxes and underwriting and investment expenses. We seek to maintain sufficient liquidity to satisfy the timing of projected claim payments and operating expenses. The estimate, timing and ultimate amount of actual claim payments is inherently uncertain and will vary based on many factors including the frequency and severity of losses across various lines of business. Claim payments can accelerate or increase due to a variety of factors, including losses stemming from catastrophic events, which are typically paid out in a short period of time, legal settlements or emerging claim issues. We estimate claim payments, on obligations existing as of December 31, 2009 and net of associated reinsurance recoveries, of approximately $1.1 billion during 2010. The timing and certainty of associated reinsurance collections that may be due to us can add uncertainty to our liquidity position to the extent amounts are not received on a timely basis. As of December 31, 2009, our operating subsidiaries maintained cash and cash equivalents of $0.9 billion and short-term investments of $363.5 million, which is readily available for expected claim payments. In addition, our liquidity is enhanced through the collection of premiums on new business written through the year. We believe our cash resources, together with readily marketable securities, are sufficient to satisfy expected payment obligations, including any unexpected acceleration or increase in claim payments, or timing differences in collecting reinsurance recoverables.

Although the obligations of our reinsurers to make payments to us are based on specific contract provisions, these amounts only become recoverable when we make a payment of the associated loss amount, which may be several years, or in some cases decades, after the actual loss occurred. Reinsurance recoverables on unpaid losses, which represent 92.3% of our total reinsurance recoverables as of December 31, 2009, will not be due for collection until some time in the future, and over this period of time, economic conditions and the operational performance of a particular reinsurer may negatively impact its ability to meet its future obligations to us. We manage our exposure by entering into reinsurance transactions with companies that have a strong capital position and a favorable long term financial profile.

Our total reinsurance recoverable on paid losses as of December 31, 2009, net of the reserve for uncollectible reinsurance, was $70.5 million. The top ten reinsurers measured on total reinsurance recoverables represented $45.1 million, or 64.0%, of the total paid loss recoverable, of which $2.7 million is collateralized and the remaining $42.4 million is with highly rated companies. The remaining $25.4 million recoverable on paid losses is with numerous companies, and no single company has a balance greater than $4.2 million net of the reserve on uncollectible reinsurance.

Approximately $40.8 million of our total reinsurance paid recoverable is current billings, and $29.7 million is over 120 days past due. The change in the economic conditions of any of our retrocessionaires may impact their ability to meet their obligations and negatively impact our liquidity.

Cash used in operations was $3.1 million for the year ended December 31, 2009, compared to cash provided by operations of $112.1 million for the year ended December 31, 2008. The decrease in cash provided by operations of $115.2 million, or 102.7%, over the corresponding period of 2008, primarily relates to a $179.4 million extension payment made in March of 2009 for the 2008 tax year.

Total investments and cash amounted to $8.7 billion as of December 31, 2009, an increase of $834.6 million compared to December 31, 2008. Our average invested assets were $8.3 billion for the year ended December 31, 2009, compared to $7.8 billion for the year ended December 31, 2008. We anticipate that our cash and cash equivalents will continue to be reinvested on a basis consistent with our long-term, value-oriented investment philosophy. Cash, cash equivalents and short-term investments, excluding cash and cash equivalents held as collateral, represented 15.1% and 25.1% of our total investments and cash, excluding cash and cash equivalents held as collateral, as of December 31, 2009 and 2008, respectively. Total fixed income securities were $4.9 billion as of December 31, 2009, compared to $3.9 billion as of December 31, 2008. As of December 31, 2009, 61.9% of our fixed income portfolio was rated “AAA”, with 10.5% of securities rated below investment grade. The duration of our investment portfolio, including short-term investments, cash and cash equivalents, was 8.5 years.

Total investments and cash exclude amounts receivable for securities sold and amounts payable for securities purchased, representing the timing between the trade date and settlement date of securities sold and purchased. As of December 31, 2009 and 2008, we had receivables for securities sold of $77.9 million and $6.3 million, respectively, which are included in other assets, and payables for securities purchased of $45.6 million and $126.6 million, respectively, which are included in other liabilities.

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

On November 28, 2006, we completed the private sale of $40.0 million aggregate principal amount of floating rate senior debentures, series C due December 15, 2021 (the “Series C Notes”). Interest on the Series C Notes accrues at a rate per annum equal to the three-month LIBOR, reset quarterly, plus 2.50%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. We have the option to redeem the Series C Notes at par, plus accrued and unpaid interest, in whole or in part on any interest payment date on or after December 15, 2011. For the years ended December 31, 2009 and 2008, the average annual interest rate on the Series C Notes was 3.48% and 5.71%, respectively.

On February 22, 2006, we issued $100.0 million aggregate principal amount of floating rate senior debentures, pursuant to a private placement. The net proceeds from the offering, after fees and expenses, were $99.3 million. The debentures were sold in two tranches: $50.0 million of series A, due March 15, 2021 (the “Series A Notes”), and $50.0 million of series B, due March 15, 2016 (the “Series B Notes”). Interest on each series of debentures is due quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The interest rate on each series of debentures is equal to the three-month LIBOR, reset quarterly, plus 2.20%. The Series A Notes are callable by us on any interest payment date on or after March 15, 2011 at their par value, plus accrued and unpaid interest, and the Series B Notes are callable by us on any interest payment date on or after March 15, 2009 at their par value, plus accrued and unpaid interest. For the years ended December 31, 2009 and 2008, the average annual interest rate on each series of notes was 3.18% and 5.41%, respectively.

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

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

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

The amended Credit Agreement contains an option that permits us to request an increase in the aggregate amount of the facility by an amount up to $50.0 million, to a maximum facility size of $150.0 million. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion of the proposed increase. As of December 31, 2009, there was $54.9 million outstanding under the Credit Agreement, all of which was in support of secured letters of credit, which included $21.0 million in letters of credit that were cancelled effective January 15, 2010. (See Note 17 to the consolidated financial statements included in this Annual Report on Form 10-K.)

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

Our Board of Directors authorized a share repurchase program whereby we were authorized to repurchase shares of our 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. From the inception of the program through October 21, 2009, we repurchased and retired 13,906,845 shares of our common stock at a total cost of $518.4 million.

We participate in Lloyd’s through our 100% ownership of Newline Syndicate (1218), for which we provide 100% of the capacity. The results of Newline Syndicate (1218) are consolidated in our financial statements. In support of Newline Syndicate (1218)’s capacity at Lloyd’s, NCNL and Odyssey America have pledged securities and cash with a fair value of $139.1 million and $123.5 million, respectively, as of December 31, 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 our discretion, subject to approval by Lloyd’s. The securities are carried at fair value and are included in investments and cash in our consolidated balance sheets. Interest earned on the securities is included in investment income. The pledge of assets in support of Newline Syndicate (1218) provides us with the ability to participate in writing business through Lloyd’s, which remains an important part of our business. The pledged assets effectively secure the contingent obligations of Newline Syndicate (1218) should it not meet its obligations. NCNL and Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the pledged assets. We have the ability to remove funds at Lloyd’s annually, subject to certain minimum amounts required to support outstanding liabilities as determined under risk-based capital models and approved by Lloyd’s. The funds used to support outstanding liabilities are adjusted annually and our obligations to support these liabilities will continue until they are settled or the liabilities are reinsured by a third party approved by Lloyd’s. We expect to continue to actively operate Newline Syndicate (1218) and support its requirements at Lloyd’s. We believe that Newline Syndicate 1218 maintains sufficient liquidity and financial resources to support its ultimate liabilities and we do not anticipate that the pledged assets will be utilized.

On December 16, 2009, our Board of Directors declared quarterly dividends of $0.5078125 per share on our 8.125% Series A preferred shares and $0.2208788 per share on our floating rate Series B preferred shares. The total dividends of $1.5 million were paid on January 20, 2010 to Series A and Series B preferred shareholders of record on December 31, 2009.

As described in Note 6 to our consolidated financial statements included in this Annual Report on Form 10-K, as of December 31, 2009, we held $47.5 million of investments, or approximately 0.6% of net assets and

liabilities measured at fair value, that are classified as Level 3 (which are financial instruments for which the values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement and that reflect our own assumptions about the methodology and valuation techniques that a market participant would use in pricing the asset or liability). These Level 3 investments are valued using a discounted cash flow model, including unobservable inputs that are supported by limited market-based activity. During the year ended December 31, 2009, we purchased $19.9 million of investments classified as Level 3, and transferred our investment in Advent (which, at the time, had a value of $32.6 million as compared to $32.9 million as of December 31, 2009), which is classified in other invested assets, from Level 2 to Level 3. In addition, Level 3 investments with a value of $24.3 million were sold during the year ended December 31, 2009. During the year ended December 31, 2009, we 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.

Financial Strength and Credit Ratings

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

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


	A.M. Best	Standard & Poor’s	Moody’s
Odyssey America	“A” (Excellent)	“A-” (Strong)	“A3” (Good)
Hudson	“A” (Excellent)	Not Rated	Not Rated
Hudson Specialty	“A” (Excellent)	“A-” (Strong)	Not Rated

Accounting Pronouncements

Recently Adopted

A description of recently adopted accounting pronouncements is provided in Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We have off-balance sheet arrangements, including certain arrangements with affiliated companies that have financial implications. A description of these arrangements is provided in Note 16 to our consolidated financial statements included in this Annual Report on Form 10-K.

Market Sensitive Instruments

The term “market risk” refers to the risk of loss arising from adverse changes in prices. We believe that we are principally exposed to four types of market risk related to our investment operations: interest rate risk, credit

risk, equity price risk and foreign currency risk. Market sensitive instruments discussed in this section principally relate to our fixed income securities and common stocks carried at fair value which are classified as available for sale. As of December 31, 2009, our total investments and cash of $8.7 billion include $4.9 billion of fixed income securities that are subject primarily to interest rate risk and credit risk.

Interest Rate Risk

The following table displays the potential impact of fair value fluctuations on our fixed income securities portfolio as of December 31, 2009 and 2008, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. This analysis was performed on each security individually.


	As of December 31, 2009								As of December 31, 2008
	Fair Value								Fair Value
	of Fixed								of Fixed
	Income		Hypothetical			Hypothetical			Income		Hypothetical			Hypothetical
Percent Change in Interest Rates	Portfolio		$ Change			% Change			Portfolio		$ Change			% Change
						(In millions)
200 basis point rise	$	4,098.4	$	(808.3	)		(16.5)	%	$	3,276.0	$	(656.5	)		(16.7)	%
100 basis point rise		4,500.1		(406.6	)		(8.3	)		3,576.5		(356.0	)		(9.1	)
Base scenario		4,906.7		—			—			3,932.5		—			—
100 basis point decline		5,297.3		390.6			8.0			4,307.9		375.4			9.5
200 basis point decline		5,717.1		810.4			16.5			4,637.2		704.7			17.9

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

As of December 31, 2009, we had net unrealized gains of $828.2 million, before taxes, related to our total investments and cash. This net amount was comprised of gross unrealized appreciation of $876.0 million, offset by gross unrealized depreciation of $47.8 million, all of which are related to fixed income securities and common stocks.

As of December 31, 2009, we were party to floating to fixed interest rate swap contracts with a notional amount of $140.0 million. As of December 31, 2009, the fair value of these contracts is reported in other liabilities at $43 thousand. Net realized investment losses on interest rate swaps totaled $2.0 million for the year ended December 31, 2009.

During 2008, we entered into Eurodollar futures contracts to manage our interest rate risk with respect to certain investments. During the first quarter of 2009, we closed the futures contracts. A futures contract is a variation of a forward contract, with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and trading on an organized electronic or floor trading facility. Futures contracts are entered either long or short. We had entered into the long side, which agrees to buy the underlying currency at the future date at the agreed-upon price. Futures contracts had net realized investment losses of $0.3 million for the year ended December 31, 2009.

Disclosure About Limitations of Interest Rate Sensitivity Analysis

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

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

Credit Risk

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

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

Our credit risk exposure, based upon carrying value, as of December 31, 2009 and 2008 (without taking into account amounts pledged as collateral for our benefit of $220.2 million and $291.4 million as of December 31, 2009 and 2008, respectively) was comprised as follows (in millions):


	As of		As of
	December 31,		December 31,
	2009		2008
Fixed income securities	$	4,906.7	$	3,932.5
Derivatives (primarily credit default swaps)		20.0		111.0
Cash, cash equivalents and short-term investments		1,361.7		2,040.5
Premiums receivable		473.9		496.4
Recoverable from reinsurers		1,165.5		996.5

Total gross exposure	$	7,927.8	$	7,576.9

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

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


	As of December 31, 2009					As of December 31, 2008
	Fair					Fair
Issuer Credit Rating	Value		%			Value		%
AAA/Aaa	$	3,034.4		61.9	%	$	3,221.2		81.9	%
AA/Aa2		393.0		8.0			302.8		7.7
A/A2		706.5		14.4			77.8		2.0
BBB/Baa2		257.1		5.2			1.4		—
BB/Ba2		143.3		2.9			16.2		0.4
B/B2		87.5		1.8			100.3		2.6
CCC/Caa or lower or not rated		284.9		5.8			212.8		5.4

Total	$	4,906.7		100.0	%	$	3,932.5		100.0	%

As of December 31, 2009, 89.5% of our fixed income portfolio at fair value was rated investment grade (as compared to 91.6% as of December 31, 2008), with 69.9% (primarily consisting of government obligations) being rated AA/Aa2 or better (as compared to 89.6% as of December 31, 2008). As of December 31, 2009, holdings of fixed income securities in the ten issuers (excluding federal governments) to which we had the greatest exposure was $1.6 billion, which was approximately 18.2% of our total invested assets. The exposure to the largest single issuer of corporate bonds held as of December 31, 2009 was $146.3 million, which was approximately 1.7% of our total investment portfolio, or 4.1% of our total shareholders’ equity.

Our investment portfolio as of December 31, 2009 included $3.1 billion in U.S. taxable and tax exempt state and municipal bonds, most of which were purchased during 2008, and of which approximately $2.0 billion (63.8%) were fully insured by Berkshire Hathaway Assurance Corp. (“BHAC”) for the payment of interest and principal in the event of issuer default; we believe that the BHAC insurance significantly mitigates the credit risk associated with these bonds.

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

The total cost of the credit default swaps was $20.6 million and $30.8 million as of December 31, 2009 and 2008, respectively, and the fair value was $10.0 million and $82.8 million, as of December 31, 2009 and 2008, respectively. The notional amount of the credit default swaps was $1.3 billion and $1.8 billion as of December 31, 2009 and 2008, respectively. The credit default swaps had net realized investment losses of $28.7 million and net realized investment gains of $350.7 million for the year ended December 31, 2009, and 2008, respectively. The fair values of credit default swaps are subject to significant volatility given potential differences in the perceived risk of default of the underlying issuers, movements in credit spreads and the length of time to the contracts’ maturities. The fair value of the credit default swaps may vary dramatically either up or down in short periods, and their ultimate value may therefore only be known upon their disposition. Credit default swap transactions generally settle in cash. As we fund all of our obligations relating to these contracts upon initiation of the transaction, there are no requirements in these contracts for us to provide collateral.

The following tables summarize the effect of the credit default swap hedging instruments and related hedged items on our historical financial position, results of operations and cash flows as of and for the years ended December 31, 2009 and 2008 (in millions):


	As of and for the Year Ended December 31, 2009
					Effect on Pre-tax:
	Exposure /				Other		Net Realized						Net Cash
	Notional		Carrying		Comprehensive		Investment						Flow from
	Value		Value		Income		Gains			Net Equity			Disposals
Credit risk exposures:
Fixed income securities	$	4,906.7	$	4,906.7	$	237.8	$	218.6		$	456.4		$	124.4
Derivatives — other invested assets		6.9		6.9		—		2.9			2.9			(0.2	)
Cash, cash equivalents and short-term investments		1,361.7		1,361.7		—		65.9			65.9			65.9
Premiums receivable		473.9		473.9		—		(2.5	)		(2.5	)		(2.5	)
Reinsurance recoverable		1,165.5		1,165.5		—		2.6			2.6			—

Total credit risk exposure	$	7,914.7	$	7,914.7		237.8		287.5			525.3			187.6


Hedging instruments:
Other invested assets:
Credit default swaps:
Banking	$	410.6	$	3.1		—		(1.3	)		(1.3	)		12.8
Insurance		884.6		6.9		—		(27.4	)		(27.4	)		21.2

Total credit default swaps	$	1,295.2	$	10.0		—		(28.7	)		(28.7	)		34.0

Net equity impact					$	237.8	$	258.8		$	496.6		$	221.6


	As of and for the Year Ended December 31, 2008
					Effect on Pre-tax:
	Exposure /				Other		Net Realized						Net Cash
	Notional		Carrying		Comprehensive		Investment						Flow from
	Value		Value		Loss		Gains			Net Equity			Disposals
Credit risk exposures:
Fixed income securities	$	3,932.5	$	3,932.5	$	133.8	$	154.2		$	288.0		$	316.3
Derivatives — other invested assets		28.2		28.2		—		62.4			62.4			35.1
Cash, cash equivalents and short-term investments		2,040.5		2,040.5		—		(88.0	)		(88.0	)		(88.0	)
Premiums receivable		496.4		496.4		—		(1.5	)		(1.5	)		(1.5	)
Reinsurance recoverable		996.5		996.5		—		(0.1	)		(0.1	)		—

Total credit risk exposure	$	7,494.1	$	7,494.1		133.8		127.0			260.8			261.9


Hedging instruments:
Other invested assets:
Credit default swaps:
Mortgage	$	—	$	—		—		126.2			126.2			269.5
Banking		689.7		21.6		—		38.8			38.8			32.7
Insurance		1,093.2		61.2		—		185.7			185.7			209.9

Total credit default swaps	$	1,782.9	$	82.8		—		350.7			350.7			512.1

Net equity impact					$	133.8	$	477.7		$	611.5		$	774.0

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

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

Our holdings of credit default swap contracts have declined significantly in 2009 relative to prior years, largely as a result of significant sales in 2008. In the latter part of 2008, we revised the financial objectives of our hedging program by determining not to replace our credit default swap hedge position as sales or expiries occurred, primarily based upon our judgment that our exposure to elevated levels of credit risk had moderated, but also due to (i) the significant increase in the cost of purchasing credit protection (reducing the attractiveness of the credit default swap contract as a hedging instrument), (ii) improvement in our capital and liquidity (having benefited significantly from, among other things, $568.9 million in gains from sales of credit default swaps realized since the beginning of 2007), and (iii) our judgment that managing credit risk through means other than the use of derivatives was, given the market environment, once again appropriate for mitigating our credit exposure arising from financial assets. As a result, the effects that credit default swaps as hedging instruments may be expected to have on our future financial position, liquidity and operating results may be expected to diminish relative to the effects in recent years. We continue to evaluate the potential impact of the volatility in the U.S. credit markets on our financial statements and may, if conditions warrant, initiate new credit default swap contracts as a hedging mechanism in the future, although there can be no assurance that we will do so, in an effort to achieve our continuing objective to minimize the potential for loss of value of held assets where, in our view, an unusual or excessive exposure exists.

For the year ended December 31, 2009, we sold a portion of our credit default swaps, contributing to a decrease in the fair value of the portfolio to $10.0 million as of December 31, 2009, from $82.8 million as of December 31, 2008. The credit default swap portfolio had an average term to expiration of 1.5 years as of December 31, 2009, a decrease from 2.5 years as of December 31, 2008.

As of December 31, 2009, our holdings of financial instruments without quoted prices, or “non-traded investments,” included a collateral loan, which was fully impaired during 2005. We periodically evaluate the carrying value of non-traded investments by reviewing the borrowers’ current financial positions and the timeliness of their interest and principal payments.

Equity Price Risk

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

During much of 2008 and the immediately preceding years, we had been concerned with the valuation level of worldwide equity markets, uncertainty resulting from credit issues in the United States and global economic conditions. As protection against a decline in equity markets and as an “economic hedge” against a broad market downturn, we had held short positions effected by way of equity index-based exchange-traded securities including Standard & Poor’s depository receipts (“SPDRs”), the iShares Canadian S&P/TSX60 (XIU), U.S. listed common stocks, equity total return swaps and equity index total return swaps, referred to in the aggregate as our “equity hedges.” We had also purchased S&P 500 index call options to limit the potential loss on U.S. equity index total return swaps and SPDRs short positions, and to provide general protection against the short position in common stocks. In November 2008, following significant declines in global equity markets, we revised the financial objectives of our hedging program on the basis of our assessment that elevated risks in the global equity markets had moderated, and subsequently closed substantially all of our equity hedge positions.

During the remainder of the fourth quarter of 2008 and continuing into 2009, we increased our investments in equity securities as a result of the opportunities presented by significant declines in valuations. These additions to our portfolio, coupled with the significant appreciation in the value of the worldwide equity markets during 2009, resulted in a significant increase in the value of our equity holdings and, thus, to the exposure to increased loss potential should the equity markets again suffer a significant decline in value. We continue to manage our exposure to market price fluctuations primarily through policies designed to monitor and limit our individual issuer exposures and aggregate equity exposure. However, in late September 2009, we also initiated U.S. equity index total return swap contracts, which as of December 31, 2009 have a notional value of $818.4 million, to protect against potential future broad market downturns. The collateral requirement related to entering the total return swaps was $78.5 million as of December 31, 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 December 31, 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 of December 31, 2009 and 2008, we had aggregate equity holdings with fair value of $2.2 billion (common stocks of $2.1 billion plus preferred stock of $0.1 billion) and $1.6 billion (common stocks), respectively.

The following tables summarize the effect of equity risk hedging instruments and related hedged items on our historical financial position, results of operations and cash flows as of and for the years ended December 31, 2009 and 2008 (in millions):


	As of and for the Year Ended December 31, 2009
					Effect on Pre-tax:
													Net Cash
	Exposure /				Other		Net Realized						Flow Impact
	Notional		Carrying		Comprehensive		Investment						from
	Value		Value		Income		Gains			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	82.6	$	82.6	$	0.4	$	7.1		$	7.5		$	(1.1	)
Common stocks, at fair value		2,071.0		2,071.0		464.8		7.7			472.5			30.0

Total equity exposure	$	2,153.6	$	2,153.6		465.2		14.8			480.0			28.9


Hedging instruments:
Other invested assets:
Total return swaps	$	818.4	$	3.1		—		(30.6	)		(30.6	)		(33.7	)


Total equity hedging instruments	$	818.4	$	3.1		—		(30.6	)		(30.6	)		(33.7	)

Net equity impact					$	465.2	$	(15.8	)	$	449.4		$	(4.8	)


	As of and for the Year Ended December 31, 2008
					Effect on Pre-tax:
														Net Cash
	Exposure /				Other			Net Realized						Flow Impact
	Notional		Carrying		Comprehensive			Investment						from
	Value		Value		Loss			Gains			Net Equity			Disposals
Equity risk exposures:
Preferred stocks	$	0.1	$	0.1	$	0.5		$	(0.8	)	$	(0.3	)	$	—
Common stocks, at fair value		1,555.1		1,555.1		(153.5	)		(326.9	)		(480.4	)		12.1

Total equity exposure	$	1,555.2	$	1,555.2		(153.0	)		(327.7	)		(480.7	)		12.1


Hedging instruments:
Other invested assets:
Total return swaps	$	—	$	—		—			536.4			536.4			540.2
Short positions		—		—		—			12.8			12.8			14.5
Call options		75.3		—		—			(1.2	)		(1.2	)		(2.2	)


Total equity hedging instruments	$	75.3	$	—		—			548.0			548.0			552.5

Net equity impact					$	(153.0	)	$	220.3		$	67.3		$	564.6

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

The following table summarizes the potential impact of a 10% change in our equity and equity-related holdings (including equity hedges where appropriate) on pre-tax other comprehensive income (loss) and pre-tax net income for the years ended December 31, 2009, 2008 and 2007. Certain shortcomings are inherent in the method of analysis presented, as it is based on the assumptions that the equity and equity-related holdings had increased/decreased by 10%, with all other variables held constant, and that all the equity and equity-related instruments move according to a one-to-one correlation with global equity markets.


	Year Ended December 31,
	2009			2008			2007
	Effect on Pre-tax:
Change in global equity markets	Other Comprehensive Income (Loss)
				(In millions)
10% decrease	$	215.4		$	155.5		$	88.7
10% increase		(215.4	)		(155.5	)		(88.7	)


	Year Ended December 31,
	2009			2008		2007
	Effect on Pre-tax:
Change in global equity markets	Net Income
				(In millions)
10% decrease	$	(81.5	)	$	—	$	(68.7	)
10% increase		81.5			—		68.7

Generally, a 10% decline in the global equity markets would result in a similar decrease in the value of our equity investment holdings, resulting in decreases in our pre-tax other comprehensive income, as the majority of our equity investment holdings are classified as available for sale. Conversely, a 10% increase in global equity markets would generally result in a similar increase in the value of our equity investment holdings, resulting in increases in our pre-tax other comprehensive income. As the equity hedges held by us as of December 31, 2009 were all entered into at the end of September 2009, and as there were no other equity hedges in our portfolio during 2009 prior to September, the effects of changes in the global equity markets for the year ended December 31, 2009 were not fully offset by the effects of any hedging activities. For the year ended December 31, 2008, however, during which our hedging activities were significant, the effect of changes in global equity markets on pre-tax other comprehensive income and pre-tax income was more than offset by the effect on pre-tax net income of the equity hedges, effected primarily through positions in derivatives, and securities sold but not yet purchased.

As of December 31, 2009, our equity related holdings in the ten issuers to which we had the greatest exposure totaled $1.6 billion, which was approximately 18.1% of our total invested assets. The exposure to the largest single issuer of equity related holdings held as of December 31, 2009 was $257.0 million, which was approximately 2.9% of our total invested assets, or 7.2% of our total shareholders’ equity.

Foreign Currency Risk

Through investment in securities denominated in foreign currencies, we are exposed to foreign (i.e., non-U.S.) currency risk. Foreign currency exchange risk exists because changes in the exchange rates of the underlying foreign currencies in which our investments are denominated affect the fair values of these investments when they are converted to the U.S. dollar. As of December 31, 2009 and 2008, our total exposure to foreign-denominated securities in U.S. dollar terms was approximately $2.0 billion and $1.9 billion, or 22.6% and 23.8%, respectively, of our total investments and cash. The primary foreign currency exposures were from securities denominated in Euros, which represented 8.1% and 9.7% of our total investments and cash as of December 31, 2009 and 2008, respectively, the British pound, which represented 4.9% and 6.0% of our total investments and cash as of December 31, 2009 and 2008, respectively, and the Canadian dollar, which represented 4.0% and 3.5%, of our total investments and cash as of December 31, 2009 and 2008, respectively. As of December 31, 2009, the potential impact of a 10% decline in each of the foreign exchange rates on the

valuation of investment assets denominated in foreign currencies would result in a $197.0 million decline in the fair value of our total investments and cash, before taxes.

Through our international operations, we conduct our business in a variety of foreign (non-U.S.) currencies, with the primary exposures being Euros, British pounds, and Canadian dollars. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates to the extent that they do not offset each other resulting in a natural hedge. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial condition. We manage this risk on a macro basis by entering into forward currency contracts. As of December 31, 2009 and 2008, we were party to forward currency contracts with notional amounts of $416.3 million and $533.9 million, respectively. As of December 31, 2009 and 2008, the fair value of these contracts is reported in other liabilities and other invested assets at $39.3 million and $28.2 million, respectively. Forward currency contracts had net realized investment losses of $59.9 million and net realized investment gains of $66.7 million for the years ended December 31, 2009 and 2008, respectively.

Investment Impairment Risk

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

Decisions regarding other-than-temporary impairments require an evaluation of facts and circumstances at a specific time to determine if an other-than-temporary impairment exists. For our available-for-sale fixed income securities, additional facts are evaluated to determine if the other-than-temporary impairment is related to credit or other factors. For our available-for-sale fixed income securities, should the facts and circumstances change, such that an other-than-temporary impairment is considered appropriate, and additional factors determine that the other-than-temporary impairment is related to credit, we will recognize the impairment by reducing the cost or amortized cost of the investment to its fair value and recording the loss in our consolidated statements of operations. When it is determined that an other-than-temporary impairment for our available-for-sale fixed income securities exists that is related to other factors (e.g., interest rates and market conditions), we will recognize the impairment in other comprehensive income. For our redeemable preferred stock at fair value, should the facts and circumstances change such that an other-than-temporary impairment is considered appropriate, we will recognize the impairment by reducing the cost of the investment to its fair value and recording the loss in our consolidated statements of operations. Upon the disposition of a security where an other-than-temporary impairment has been taken, we will record a gain or loss based on the adjusted cost or carrying value of the investment.

The following tables reflect the fair value and gross unrealized depreciation of our fixed income securities and common stock investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2009 and 2008 (in millions):


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


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


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

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


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

Duration of Unrealized Loss

Less than 12 Months

Greater than 12 Months

Total

Gross

Number

Gross

Number

Gross

Number

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

December 31, 2008

Value

Depreciation

Securities

Value

Depreciation

Securities

Value

Depreciation

Securities

Fixed income securities investment grade:

ODYSSEY RE HOLDINGS CORP 10-K