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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, 2006
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission File Number: 1-16535
 
Odyssey Re Holdings Corp.
(Exact Name of Registrant as Specified in its Charter)
     
Delaware   52-2301683
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
 
Odyssey Re Holdings Corp.
300 First Stamford Place
Stamford, Connecticut
(Address of principal executive offices)
  06902
(Zip Code)
Registrant’s telephone number, including area code: (203) 977-8000
 
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common Stock, par value $0.01 per share
  New York Stock Exchange
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 o         No þ
         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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer  o
  Accelerated filer  þ   Non-accelerated filer  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, 2006 was $343.3 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 March 7, 2007, there were 70,992,738 outstanding shares of Common Stock, par value $0.01 per share, of the registrant.
Documents Incorporated by Reference
         Portions of the registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors at the annual meeting of the shareholders of the registrant scheduled to be held on or about April 25, 2007 are incorporated by reference in Part III of this Form 10-K.
 
 


 

ODYSSEY RE HOLDINGS CORP.
TABLE OF CONTENTS
             
        Page
         
 PART I
 
   Business     5  
   Risk Factors     36  
   Unresolved Staff Comments     47  
   Properties     47  
   Legal Proceedings     47  
   Submission of Matters to a Vote of Security Holders     48  
 
 PART II
 
   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     49  
   Selected Financial Data     50  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     53  
   Quantitative and Qualitative Disclosures About Market Risk     100  
   Financial Statements and Supplementary Data     101  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosures     178  
   Controls and Procedures     178  
   Other Information     180  
 
 PART III
 
   Directors and Executive Officers of the Registrant     180  
   Executive Compensation     181  
   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters     181  
   Certain Relationships and Related Transactions     181  
   Principal Accountant Fees and Services     181  
   Exhibits and Financial Statement Schedules     181  
 EX-10.32
 EX-21.1
 EX-23
 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).

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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 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 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 of our financial or claims-paying ratings, including those of our subsidiaries;
 
  •  uncertainty related to estimated losses from recent catastrophes, including Hurricanes Katrina, Rita and Wilma;
 
  •  an inability to realize our investment objectives;
 
  •  the risk that the current governmental investigations or related proceedings involving the Company might impact us adversely;
 
  •  the risk that ongoing regulatory developments will 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;
 
  •  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;
 
  •  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;
 
  •  risks relating to our controlling shareholder’s ability to determine the outcome of our corporate actions requiring board or shareholder approval;
 
  •  risks relating to our ability to raise additional capital if it is required;
 
  •  risks related to covenants in our debt agreements;
 
  •  our inability to access our subsidiaries’ cash;
 
  •  loss of services of any of our key employees;
 
  •  risks related to our use of reinsurance brokers;
 
  •  changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio;
 
  •  failure of our reinsurers to honor their obligations to us;

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  •  risks associated with 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;
 
  •  risks related to our computer and data processing systems; and
 
  •  acts of war, terrorism or political unrest.
      The words “believe,” “anticipate,” “project,” “expect,” “intend,” “will likely result,” “will seek to” or “will continue” and similar expressions identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We have described some important factors that could cause our actual results to differ materially from our expectations in this Annual Report on Form 10-K, 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.

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Item 1. Business
The Company
      OdysseyRe is a leading United States based 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, primarily focused on liability lines, in the United States and London. Our global presence is established through 14 offices, with principal locations in the United States, London, Paris, Singapore and Latin America. We had gross premiums written of $2.3 billion in 2006 and our shareholders’ equity as of December 31, 2006 was $2.1 billion. For the year ended December 31, 2006, reinsurance represented 69.5% of our gross premiums written, and primary insurance represented the remaining 30.5%.
      The United States is our largest market, generating 54.2% of our gross premiums written for the year ended December 31, 2006, with the remaining 45.8% comprised of international business. 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 primarily treaty and facultative property 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 malpractice, professional liability and non-standard personal auto. Across our operations, 57.4% of our gross premiums written were generated from casualty business, 31.8% from property business and 10.8% from specialty classes, including marine and aviation and 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. Prior to our initial public offering, we were wholly owned by Fairfax Financial Holdings Limited (“Fairfax”), a publicly traded Canadian financial services company. As of December 31, 2006, Fairfax owned 59.6% of our common shares.
      Following is a summary of our principal operating subsidiaries:
  •  Odyssey America Reinsurance Corporation (“Odyssey America”), a Connecticut property and casualty reinsurance company, is a direct subsidiary of the Company and is our principal reinsurance subsidiary. Odyssey America underwrites reinsurance on a worldwide basis.
 
  •  Odyssey UK Holdings Corp. (“UK Holdings”), a subsidiary of Odyssey America, is a holding company with several wholly-owned operating subsidiaries, including Newline Underwriting Management Ltd., through which it owns and manages Newline Syndicate 1218 at Lloyd’s and Newline Insurance Company Limited (collectively, “Newline”).
 
  •  Clearwater Insurance Company (“Clearwater”), a Delaware company, is a direct subsidiary of Odyssey America. Clearwater holds active 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 active insurance licenses in 49 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 41 states.
 
  •  Clearwater Select Insurance Company (“Clearwater Select”), a Delaware company, is a direct subsidiary of Clearwater. Clearwater Select operates as an additional primary insurer in the Hudson group of companies and is widely licensed throughout the United States.

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Business Strategy
      Our objective is to build shareholder value by achieving an average annual growth in book value per common share of 15% over the long-term by focusing on underwriting profitability and generating superior investment returns. Our compounded annual growth in book value per common share from December 31, 2001, the year we became publicly traded, to December 31, 2006 was 18.2%. 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 objective 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 emphasizing underserved market segments or classes of business.
 
  •  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 through maintaining a local presence in 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 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 consistent with the risk profile of the assets.
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.
      There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In 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.
      In 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. Facultative reinsurance 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

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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 cause 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 auto 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. Property reinsurance contracts are generally “all risk” in nature. 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.

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  •  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 and the surety line relates 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 Malpractice. Our medical malpractice business primarily provides coverage for group and individual physicians and small and medium sized hospital accounts. We offer commercial general liability in conjunction with medical malpractice coverage.
 
  •  Professional Liability. Our professional liability business primarily consists of architects, engineers, environmental consultants and media professionals, as well as coverage for directors’ and officers’ liability.
 
  •  Non-Standard Personal and Commercial Automobile. Our non-standard private passenger automobile book is primarily focused on California, Florida and to a lesser extent, New York. Our specialty commercial automobile book consists primarily of off-duty liability for truckers, short-term automobile rentals and West Coast regional waste haulers.
 
  •  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 coverages targeted to federally recognized tribes.
 
  •  Property and Package. Our property and package business is primarily focused on New York commercial property. Also included are risks of restaurant franchisees written throughout the United States.

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      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, 2006:
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
    (In millions)    
Property excess of loss
  $ 313.9       13.4 %   $ 355.1       13.5 %   $ 302.7       11.4 %
Property proportional
    361.9       15.5       438.7       16.7       386.8       14.6  
Property facultative
    16.9       0.7       27.3       1.0       65.0       2.5  
                                     
 
Property reinsurance
    692.7       29.6       821.1       31.2       754.5       28.5  
                                     
Casualty excess of loss
    316.7       13.6       287.8       11.0       299.2       11.3  
Casualty proportional
    273.1       11.7       404.1       15.4       557.2       21.0  
Casualty facultative
    94.1       4.0       105.1       4.0       101.1       3.8  
                                     
 
Casualty reinsurance
    683.9       29.3       797.0       30.4       957.5       36.1  
                                     
Marine and aerospace
    144.4       6.2       141.8       5.4       138.3       5.2  
Surety and credit
    101.9       4.4       104.5       4.0       106.3       4.0  
Miscellaneous
    0.7             (0.8 )           12.2       0.5  
                                     
 
Total reinsurance
    1,623.6       69.5       1,863.6       71.0       1,968.8       74.3  
                                     
Medical malpractice
    152.8       6.6       150.6       5.7       137.6       5.2  
Professional liability
    131.0       5.6       114.2       4.4       65.1       2.5  
Personal auto
    77.7       3.3       103.6       3.9       92.7       3.5  
Specialty liability
    81.8       3.5       90.5       3.5       50.5       1.9  
Commercial auto
    35.6       1.5       32.4       1.2       15.2       0.6  
Property and package
    30.7       1.3       29.7       1.1       30.8       1.1  
                                     
 
U.S. insurance
    509.6       21.8       521.0       19.8       391.9       14.8  
                                     
Liability lines — Newline
    198.9       8.5       234.9       8.9       254.3       9.6  
Other lines — Newline
    3.6       0.2       7.4       0.3       10.9       0.4  
                                     
 
Total insurance
    712.1       30.5       763.3       29.0       657.1       24.8  
                                     
Other
                            24.9       0.9  
                                     
 
Total gross premiums written
  $ 2,335.7       100.0 %   $ 2,626.9       100.0 %   $ 2,650.8       100.0 %
                                     
      For the year ended December 31, 2006, total reinsurance gross premiums written were $1,623.6 million, or 69.5% of our gross premiums written, and the remaining $712.1 million, or 30.5%, was insurance business. Our insurance premiums include our U.S. Insurance division and business written in our Lloyd’s syndicate, which is part of our London Market division. Treaty reinsurance represents 64.8% of our total gross premiums written and 93.2% of our total reinsurance gross premiums written. Facultative reinsurance is 4.7% of our gross premiums written and 6.8% of our total reinsurance business. During 2006, 51.1% of our total reinsurance gross premiums written was proportional and 48.9% 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, 2006, $245.9 million, or 10.5%, 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 North America and Latin America. In addition, the EuroAsia division writes largely property business, with exposure to catastrophes, primarily in Europe, Japan, the Pacific Rim and the Middle East.

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      Treaty casualty business accounted for $589.8 million, or 25.3%, of gross premiums written for the year ended December 31, 2006, of which 46.3% was written on a proportional basis and 53.7% 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 auto liability. Treaty property business represented $675.8 million, or 28.9%, of gross premiums written for the year ended December 31, 2006, primarily consisting of commercial property and homeowners’ coverage, of which 53.6% was written on a proportional basis and 46.4% was written on an excess of loss basis. Marine and aerospace business accounted for $144.4 million, or 6.2%, of gross premiums written for the year ended December 31, 2006, of which 30.4% was written on an excess of loss basis and 69.6% on a proportional basis. Surety, credit and other miscellaneous reinsurance lines accounted for 4.4% of gross premiums written in 2006.
      Facultative reinsurance accounted for $111.0 million, or 4.7%, of gross premiums written for the year ended December 31, 2006, with 97.0% derived from the Americas division and 3.0% from the EuroAsia division. With respect to facultative business in the United States, we write only casualty reinsurance, including general liability, umbrella liability, directors’ and officers’ liability, professional liability and commercial auto lines; with respect to facultative business in Latin America and EuroAsia, we write primarily property reinsurance.
      We operate at Lloyd’s through our wholly owned syndicate, Newline, which is focused on casualty insurance. Our Lloyd’s membership provides strong brand recognition, extensive broker and distribution channels, 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 and non-admitted 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. We underwrite medical malpractice insurance primarily on a non-admitted basis. Coverage is written on a claims-made basis, providing a wide range of limits and retentions.
      As a general matter, 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.
      We currently expect our gross premiums written to decline by as much as 5% for the year ended December 31, 2007 as compared to 2006. This primarily reflects a reduction in the amount of reinsurance business we will write in 2007 on a proportional basis in certain classes of business, particularly for catastrophe exposed property business in the United States. Where appropriate, we intend to migrate proportional business to an excess of loss basis, which has the effect of reducing written premiums attributable to the coverage. We believe this more effectively allocates our capital resources in line with the underlying characteristics of the business. Proportional business represented 51.1% of our reinsurance gross premiums written for the year ended December 31, 2006, compared to 56.5% in 2005. While pricing generally remains adequate across the casualty market, we expect a decline in casualty classes of business, reflecting continued lower levels of reinsurance purchased by our customers and increased competition in certain specialty classes.

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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, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
Americas
  $ 924.2       39.6 %   $ 1,130.5       43.1 %   $ 1,257.5       47.4 %
EuroAsia
    561.2       24.0       543.8       20.7       553.7       20.9  
London Market
    340.7       14.6       431.6       16.4       447.7       16.9  
U.S. Insurance
    509.6       21.8       521.0       19.8       391.9       14.8  
                                     
 
Total gross premiums written
  $ 2,335.7       100.0 %   $ 2,626.9       100.0 %   $ 2,650.8       100.0 %
                                     
Americas Division
      The Americas is our largest division, accounting for $924.2 million, or 39.6%, of our gross premiums written for the year ended December 31, 2006. The Americas division is organized into three major units: the United States, Latin America and Canada. The Americas division writes treaty, casualty and property, 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 currently has 313 employees and operates through six offices: Stamford, New York City, Mexico City, Miami, Santiago and Toronto. 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. Business is generated mainly through brokers.
      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, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
United States
  $ 756.4       81.8 %   $ 929.9       82.3 %   $ 1,047.8       83.3 %
Latin America
    134.9       14.6       148.6       13.1       161.4       12.8  
Canada
    32.0       3.5       50.4       4.5       46.0       3.7  
Other
    0.9       0.1       1.6       0.1       2.3       0.2  
                                     
 
Total gross premiums written
  $ 924.2       100.0 %   $ 1,130.5       100.0 %   $ 1,257.5       100.0 %
                                     
      The United States unit 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 and aerospace, 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 auto. The United States unit operates out of offices in Stamford

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and New York City. The following table displays gross premiums written, by business segment, for the United States for each of the last three years in the period ended December 31, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
Specialty casualty
  $ 320.9       42.4 %   $ 339.6       36.5 %   $ 397.0       37.9 %
Property
    192.3       25.4       252.1       27.1       210.8       20.1  
Facultative
    94.1       12.4       104.9       11.3       100.0       9.5  
General casualty
    89.0       11.8       103.0       11.1       110.5       10.5  
Alternative risk
    (3.9 )     (0.5 )     54.8       5.9       67.9       6.5  
Surety
    39.3       5.2       47.4       5.1       43.6       4.2  
Marine
    25.2       3.3       25.4       2.7       24.0       2.3  
Other
    2.1       0.3       4.7       0.5       2.8       0.3  
Specialty accounts
    (2.6 )     (0.3 )     (2.0 )     (0.2 )     91.2       8.7  
                                     
 
Total gross premiums written
  $ 756.4       100.0 %   $ 929.9       100.0 %   $ 1,047.8       100.0 %
                                     
      The Latin America unit writes primarily treaty and facultative business throughout Latin America and the Caribbean. The business is predominantly commercial property in nature, and also includes auto, marine and other lines. The Latin America unit has its principal office in Mexico City, with satellite offices in Miami and Santiago. The Canadian unit, which is based in Toronto, writes primarily property, crop hail and auto coverage.
      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, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
    (In millions)
Property excess of loss
  $ 122.7       13.3 %   $ 135.7       12.0 %   $ 109.7       8.7 %
Property proportional
    158.1       17.1       227.4       20.1       188.3       15.0  
Property facultative
    13.7       1.5       24.1       2.2       60.5       4.8  
                                     
 
Property reinsurance
    294.5       31.9       387.2       34.3       358.5       28.5  
                                     
Casualty excess of loss
    231.1       25.0       203.4       18.0       224.6       17.9  
Casualty proportional
    221.2       23.9       345.8       30.6       479.7       38.1  
Casualty facultative
    94.1       10.2       105.2       9.3       101.1       8.0  
                                     
 
Casualty reinsurance
    546.4       59.1       654.4       57.9       805.4       64.0  
                                     
Marine and aerospace
    36.2       3.9       37.5       3.3       33.6       2.7  
Surety and credit
    46.4       5.0       52.2       4.6       47.8       3.8  
Miscellaneous lines
    0.7       0.1       (0.8 )     (0.1 )     12.2       1.0  
                                     
 
Total gross premiums written
  $ 924.2       100.0 %   $ 1,130.5       100.0 %   $ 1,257.5       100.0 %
                                     
EuroAsia Division
      The EuroAsia division accounted for $561.2 million, or 24.0%, of our gross premiums written for the year ended December 31, 2006. The division primarily writes property business and short tail treaty business. The EuroAsia division, which currently has 91 employees, operates out of four offices, with principal offices in Paris and Singapore and satellite offices in Stockholm and Tokyo. Business is produced through a strong network of global and regional brokers. The EuroAsia division underwrites through brokers for 65.5% of the business and

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34.5% directly. Our top five brokers for the EuroAsia division in 2006, Aon Corporation, Benfield Group, Ltd, Guy Carpenter & Co., Inc., Willis Re Group Holdings, Ltd. and Groupe Walbaum-IAR, generated 48.8% of the division’s business in 2006.
      The Paris branch office is the headquarters of the EuroAsia division and the underwriting center in charge of Europe, the Middle East and Africa, with an office in Stockholm, Sweden, covering the Nordic countries and Russia. The Paris branch writes primarily property, motor, credit and bond, accident and health, marine and aerospace and liability business. The Asia Pacific Rim unit, headquartered in Singapore with an office in Tokyo, writes reinsurance on both a treaty and facultative basis. The primary lines of business offered in the Asia Pacific Rim unit include property, marine, motor, accident and health, credit and bond coverages, and liability business. During 2006, Europe represented 67.5% of gross premiums written while Asia represented 19.4% and the Middle East, Africa and America comprised the remaining 13.1%.
      The following table displays gross premiums written for the EuroAsia division, by type of coverage, for each of the last three years in the period ended December 31, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
Property
  $ 341.0       60.8 %   $ 326.0       60.0 %   $ 304.2       55.0 %
Motor
    85.0       15.1       88.4       16.3       79.6       14.4  
Surety and credit
    55.5       9.9       52.3       9.6       58.5       10.6  
Marine
    33.3       5.9       28.5       5.2       29.4       5.3  
Liability
    23.5       4.2       22.7       4.2       20.8       3.7  
Aerospace
    12.6       2.3       14.4       2.6       12.5       2.2  
Accident and health
    10.3       1.8       11.5       2.1       23.8       4.3  
Other
                            24.9       4.5  
                                     
 
Total gross premiums written
  $ 561.2       100.0 %   $ 543.8       100.0 %   $ 553.7       100.0 %
                                     
      The property business, including the property component of motor business, in EuroAsia is 58.1% proportional, 41.0% excess of loss and 0.9% facultative. Per risk coverages account for 54.6% of the property business, while 25.1% 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, 2006. Gross premiums written for the year ended December 31, 2004 included $24.9 million attributable to the consolidation of First Capital Insurance Limited

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(“First Capital”), which writes business in Singapore. In the fourth quarter of 2004, our economic interest in First Capital declined to less than 50%, and First Capital is no longer consolidated in our financial statements.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
Property excess of loss
  $ 143.7       25.6 %   $ 140.0       25.8 %   $ 126.8       22.9 %
Property proportional
    203.8       36.3       203.1       37.3       191.6       34.6  
Property facultative
    3.2       0.6       3.3       0.6       4.5       0.8  
                                     
 
Property
    350.7       62.5       346.4       63.7       322.9       58.3  
                                     
Casualty excess of loss
    70.4       12.5       66.9       12.3       51.6       9.3  
Casualty proportional
    38.7       6.9       35.0       6.5       54.0       9.8  
                                     
 
Casualty
    109.1       19.4       101.9       18.8       105.6       19.1  
                                     
Marine and aerospace
    45.9       8.2       43.2       7.9       41.8       7.5  
Surety and credit
    55.5       9.9       52.3       9.6       58.5       10.6  
Other
                            24.9       4.5  
                                     
 
Total gross premiums written
  $ 561.2       100.0 %   $ 543.8       100.0 %   $ 553.7       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 $340.7 million, or 14.6%, of our gross written premiums for the year ended December 31, 2006. The London Market division, with 76 employees in our London office, currently operates through Newline Syndicate (1218) at Lloyd’s, Newline Insurance Company Limited (these two entities are referred to collectively as “Newline”) and the London branch. Newline’s business focus is international casualty insurance, 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 representing 48.9% of gross premiums written. Our top London Market division brokers include Aon Corporation, Marsh Inc., Integro Insurance Brokers, Ltd., Willis Re Group Holdings, Ltd., and Jardine, Lloyd, Thompson.
      For the year ended December 31, 2006, the London branch had gross premiums written of $138.2 million, or 40.6% 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 34.3% of the total gross premiums written for the year ended December 31, 2006. Geographically, 85.5% of the branch business is located in the United Kingdom, Western Europe and the United States.
      For the year ended December 31, 2006, Newline had gross premiums written of $202.5 million, or 59.4% of the total London Market division. Newline writes international casualty insurance in five sectors: professional indemnity, directors’ and officers’ liability, crime, financial institution professional indemnity and liability. Newline’s target market is generally small to medium sized accounts which could be either private or public companies. The United Kingdom, Australia and Western Europe represent 79.7% of Newline’s business.

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      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, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
    (In millions)
Property excess of loss
  $ 47.5       13.9 %   $ 79.4       18.4 %   $ 66.2       14.9 %
Property proportional
                8.3       1.9       6.9       1.5  
                                     
 
Property reinsurance
    47.5       13.9       87.7       20.3       73.1       16.4  
                                     
Casualty excess of loss
    15.2       4.5       17.5       4.1       22.9       5.2  
Casualty proportional
    13.2       3.9       23.1       5.4       23.5       5.2  
                                     
 
Casualty reinsurance
    28.4       8.4       40.6       9.5       46.4       10.4  
                                     
Marine and aerospace
    62.3       18.3       61.0       14.1       63.0       14.0  
                                     
 
Total reinsurance
    138.2       40.6       189.3       43.9       182.5       40.8  
Liability lines — Newline
    198.9       58.4       234.9       54.4       254.3       56.8  
Other — Newline
    3.6       1.0       7.4       1.7       10.9       2.4  
                                     
 
Total gross premiums written
  $ 340.7       100.0 %   $ 431.6       100.0 %   $ 447.7       100.0 %
                                     
U.S. Insurance Division
      Trademarked as “Hudson Insurance Group,” the U.S. Insurance division provides underwriting capacity on an admitted and non-admitted basis to medical malpractice and specialty insurance markets nationwide. The U.S. Insurance division generated $509.6 million, or 21.8%, of our gross premiums written for the year ended December 31, 2006. The U.S. Insurance division employs 130 people and operates from offices in New York, Chicago and Napa. Approximately 71.0% of the division’s business is written in 10 states/territories, with the top five states/territories representing 54.6% of the division’s total premiums.
      Our medical malpractice business provides coverage principally to small and medium sized hospitals, physicians and physician groups, and is primarily focused on 12 states throughout the United States. Coverage is generally offered on a claims-made basis and is written on a surplus lines basis to provide rate and form flexibility. This business is distributed primarily through regional brokers.
      In addition, the U.S. Insurance division provides primary coverage for a variety of risks, including non-standard personal auto, commercial auto, specialty liability and other niche markets. We manage a limited number of active program administrator relationships, with a majority of our business concentrated in our top ten relationships. We perform extensive due diligence on all new and existing program administrators and 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.

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      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, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
            (In millions)        
Medical malpractice
  $ 152.8       30.0 %   $ 150.6       28.9 %   $ 137.7       35.0 %
Professional liability
    131.0       25.7       114.2       21.9       65.0       16.6  
Personal auto
    77.7       15.2       103.6       19.9       92.7       23.7  
Specialty liability
    81.8       16.1       90.5       17.4       50.5       12.9  
Commercial auto
    35.6       7.0       32.4       6.2       15.2       3.9  
Property and package
    30.7       6.0       29.7       5.7       30.8       7.9  
                                     
 
Total gross premiums written
  $ 509.6       100.0 %   $ 521.0       100.0 %   $ 391.9       100.0 %
                                     
      The following table provides additional detail regarding our medical malpractice business for each of the three years in the period ended December 31, 2006.
                                                   
    Years Ended December 31,
     
    2006   2005   2004
             
    $   %   $   %   $   %
                         
    (In millions)
Physician groups and clinics
  $ 41.9       27.4 %   $ 50.3       33.4 %   $ 68.3       49.6 %
Select markets
    31.6       20.7       41.4       27.5       23.4       17.0  
Hospitals
    46.1       30.2       32.8       21.8       21.9       15.9  
Individual physicians
    24.0       15.7       20.4       13.5       15.7       11.4  
Other healthcare providers
    9.2       6.0       5.7       3.8       8.4       6.1  
                                     
 
Medical malpractice gross premiums written
  $ 152.8       100.0 %   $ 150.6       100.0 %   $ 137.7       100.0 %
                                     
Retention Levels and Retrocession Arrangements
      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 objective of attracting business in the international markets. The following table illustrates the current gross capacity, cession (reinsurance retrocession) and net retention generally applicable under our underwriting guidelines. Larger limits may 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
    5.0       1.6       3.4  
 
Casualty
    10.0       8.0       2.0  
Insurance
                       
 
Medical malpractice
    11.0       10.1       0.9  
 
Other casualty
    10.0       7.0       3.0  
 
Property
    10.0       8.0       2.0  
 
Newline
    19.6       14.7       4.9  

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      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 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 catastrophe excess of loss reinsurance protection available for losses in the United States for 2005 was exhausted by Hurricanes Katrina, Rita and Wilma during the year ended December 31, 2005.
      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 ten largest reinsurers represent 49.6% of our total reinsurance recoverables as of December 31, 2006. Amounts due from all other reinsurers are diversified, with no other individual reinsurer representing more than $15.4 million of reinsurance recoverables as of December 31, 2006, and the average balance is less than $3.0 million. There were no significant catastrophes during 2006. Our reinsurance recoverables attributable to losses from Hurricanes Katrina, Rita and Wilma were $11.5 million as of December 31, 2006, a decrease from $223.7 million as of December 31, 2005.
      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, 2006, the amount of collateral held, and each reinsurer’s A.M. Best rating (in millions).
                                   
    Reinsurance   Percent of       A.M. Best
Reinsurer   Recoverable   Total   Collateral   Rating
                 
Underwriters Reinsurance Company (Barbados) Incorporated
  $ 120.1       15.0%     $ 120.1       NR  
Lloyd’s
    63.3       7.9       0.4       A  
Federal Insurance Company
    38.5       4.8             A++  
Hannover Ruckversicherungs AG
    33.9       4.3       0.4       A  
Partner Reinsurance Company of the US
    29.0       3.6       0.9       A+  
Ace Property and Casualty Insurance
    24.9       3.1       0.2       A+  
Transatlantic Reinsurance Company
    24.6       3.1       0.1       A+  
Arch Reinsurance Company
    20.5       2.6       17.8       A-  
Swiss Reinsurance America Corp. 
    21.8       2.7       0.2       A+  
GE Frankona Reinsurance Ltd. 
    19.6       2.5       0.1       A  
                         
 
Sub-total
    396.2       49.6       140.2          
 
All Other
    402.6       50.4       98.0          
                         
 
Total
  $ 798.8       100.0%     $ 238.2          
                         
      For additional information on our retrocession agreements, please refer to Notes 11 and 12 to the consolidated financial statements included in this report.
Claims
      Reinsurance claims are managed by our professional claims staff, whose responsibilities include the review of initial loss reports, creation of claim files, determination of whether further investigation is required, establishment and adjustment of case reserves, and payment of claims. Claims staff recognize that fair interpretation of our reinsurance agreements and timely payment of covered claims is a valuable service to clients

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and enhances our reputation. In addition to claims assessment, processing and payment, 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. Claims audits are conducted in the ordinary course of business. 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 our medical malpractice 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 the inception to the final resolution of insurance claims. Insurance claims relating to our specialty insurance business conducted through program administrators are generally handled by third party administrators, typically specialists in 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 liabilities 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 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 loss information received from ceding companies 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 have 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. Cedant reporting for facultative and treaty excess of loss contracts includes detailed individual claim information, including the description of injury, confirmation of cedant liability, and the cedant’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 the claim, we may choose to establish additional case reserves over that reported by the ceding company. Due to potential differences in ceding company 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 claims and the estimated expenses of settling claims (“IBNR”), 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 the ceding companies 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.

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      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 claims frequency and severity. 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 which is known during the period. On a quarterly basis, we compare actual 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 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 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 such reserves 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 policies written prior to the mid 1980s. Included in our reserves are amounts related to asbestos-related illnesses and environmental impairment, which, net of related reinsurance recoverable, totaled $215.7 million and $132.8 million as of December 31, 2006 and 2005, respectively. The majority of our asbestos and environmental related liabilities arise from contracts entered into 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.
      Estimation of ultimate liabilities is unusually difficult due to several significant issues relating to asbestos and environmental exposures. Among the issues are: (a) the long period between exposure and manifestation of an injury; (b) difficulty in identifying the sources of asbestos or environmental contamination; (c) difficulty in allocating responsibility or liability for asbestos or environmental damage; (d) difficulty in determining whether coverage exists; (e) changes in underlying laws and judicial interpretation of those laws; and (f) uncertainty regarding the identity and number of insureds with potential asbestos or environmental exposure.
      Several additional factors have emerged in recent years regarding asbestos exposure that further compound the difficulty in estimating ultimate losses for this exposure. These factors include: (a) continued growth in the number of claims filed due to a more aggressive plaintiffs’ bar; (b) an increase in claims involving defendants formerly regarded as peripheral; (c) growth in the use of bankruptcy filings by companies as a result of asbestos liabilities, which companies in some cases attempt to resolve asbestos liabilities in a manner that is prejudicial to insurers; (d) the concentration of claims in states with laws or jury pools particularly favorable to plaintiffs; and (e) the potential that states or the federal government may enact legislation regarding asbestos litigation reform.
      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 loss and LAE reserves for these exposures.

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      In the event that loss trends diverge from expected trends, we may have to adjust our reserves for loss and LAE accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse effects to our financial results. Management believes that the recorded estimates represent the best estimate of unpaid losses and LAE based on the information available at December 31, 2006. Due to the uncertainty involving estimates of ultimate loss and LAE, including asbestos and environmental exposures, management does not attempt to produce a range around its best estimate of loss.
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 Net Losses and Loss Adjustment Expense Reserve Development Table” that follows presents the development of balance sheet loss and LAE reserves for calendar years 1996 through 2006. The upper half of the table shows the cumulative amounts paid during successive years related to the opening reserve. For example, with respect to the net loss and LAE reserve of $1,992 million as of December 31, 1996, by the end of 2006, $1,741 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 $1,992 million was re-estimated to be $2,243 million as of December 31, 2006. 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 net deficiency of $251 million, which has been reflected in our consolidated financial statements as of December 31, 2006, related to December 31, 1996 net loss and LAE reserves of $1,992 million, represents the cumulative amount by which net reserves for 1996 have developed unfavorably from 1997 through 2006.
      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 1999 for $150,000 was first reserved in 1996 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 1996 through 1998 shown in the following table. Conditions and trends that have affected development of liability in the past may not

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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
                                                                                           
    1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006
                                             
    (In millions)
Reserves for unpaid losses and LAE
  $ 1,992     $ 2,134     $ 1,988     $ 1,831     $ 1,667     $ 1,674     $ 1,864     $ 2,372     $ 3,172     $ 3,911     $ 4,403  
Paid (cumulative) as of:
                                                                                       
 
One year later
    457       546       594       609       596       616       602       632       914       787          
 
Two years later
    837       994       1,055       1,042       1,010       985       999       1,213       1,298                  
 
Three years later
    1,142       1,342       1,353       1,333       1,276       1,296       1,424       1,456                          
 
Four years later
    1,349       1,518       1,546       1,506       1,553       1,602       1,563                                  
 
Five years later
    1,475       1,649       1,675       1,718       1,802       1,666                                          
 
Six years later
    1,586       1,756       1,828       1,901       1,827                                                  
 
Seven years later
    1,680       1,848       1,941       1,904                                                          
 
Eight years later
    1,758       1,928       1,896                                                                  
 
Nine years later
    1,820       1,861                                                                          
 
Ten years later
    1,741                                                                                  
Liability re-estimated as of:
                                                                                       
 
One year later
    2,107       2,113       2,034       1,846       1,690       1,760       1,993       2,561       3,345       4,051          
 
Two years later
    2,121       2,151       2,043       1,862       1,787       1,935       2,240       2,828       3,537                  
 
Three years later
    2,105       2,131       2,044       1,951       2,018       2,194       2,573       3,050                          
 
Four years later
    2,074       2,128       2,104       2,144       2,280       2,514       2,828                                  
 
Five years later
    2,066       2,169       2,246       2,332       2,581       2,726                                          
 
Six years later
    2,085       2,237       2,345       2,572       2,750                                                  
 
Seven years later
    2,098       2,284       2,475       2,702                                                          
 
Eight years later
    2,133       2,372       2,571                                                                  
 
Nine years later
    2,213       2,443                                                                          
 
Ten years later
    2,243                                                                                  
 
Cumulative redundancy/(deficiency)
  $ (251 )   $ (309 )   $ (583 )   $ (871 )   $ (1,083 )   $ (1,052 )   $ (964 )   $ (678 )   $ (365 )   $ (140 )        
                                                                   
Gross liability — end of year
  $ 2,647     $ 2,894     $ 2,692     $ 2,570     $ 2,566     $ 2,720     $ 2,872     $ 3,400     $ 4,225     $ 5,118     $ 5,142  
Reinsurance recoverables
    655       760       704       739       899       1,046       1,008       1,028       1,053       1,207       739  
                                                                   
Net liability — end of year
    1,992       2,134       1,988       1,831       1,667       1,674       1,864       2,372       3,172       3,911       4,403  
                                                                   
Gross re-estimated liability at December 31, 2006
    3,220       3,464       3,712       3,952       4,129       4,256       4,252       4,273       4,709       5,296          
Re-estimated recoverables at December 31, 2006
    977       1,021       1,141       1,250       1,379       1,530       1,424       1,223       1,172       1,245          
                                                                   
Net re-estimated liability at December 31, 2006
    2,243       2,443       2,571       2,702       2,750       2,726       2,828       3,050       3,537       4,051          
                                                                   
Gross cumulative deficiency
  $ (573 )   $ (570 )   $ (1,020 )   $ (1,382 )   $ (1,563 )   $ (1,536 )   $ (1,380 )   $ (873 )   $ (484 )   $ (178 )        
                                                                   
      The incurred loss and LAE liability re-estimate for the year ended December 31, 2006 includes a $140 million provision for an increase in loss and LAE on prior years. Through December 31, 2006, the cumulative increases in estimates of loss on outstanding loss liabilities held at year end 2004, 2003 and 2002 were $365 million, $678 million and $964 million, respectively. These cumulative increases in loss estimates are principally attributable to U.S. casualty business written in the late 1990s through early 2000s. The U.S. casualty classes of business include general liability, professional liability and excess workers’ compensation. Economic uncertainty, competitive conditions and the proliferation of claims relating to bankruptcies and other financial and management improprieties in the United States during this period contribute to the difficulty in estimating losses for these years.

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      For calendar years 2002 through 2006, we experienced claim frequency and severity greater than expectations established based on a review of the prior years’ loss trends, for business written in the period 1997 through 2001. 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, 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 through early 2000s.
      The liability re-estimate reported for year end 1996 losses and LAE at December 31, 2006 principally results from increased reserves for asbestos liabilities and other latent injury damage claims associated with United States casualty 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.
      We believe that the recorded estimates represent the best estimate of unpaid losses and LAE based on the information available at December 31, 2006. In the event that loss trends diverge from expected trends, we may have to adjust our reserves for loss and LAE accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse effects to our financial results.
      The following table is derived from the “Ten Year Analysis of Consolidated Net 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, 2006. Each column represents the calendar year development by each accident year. For example, in calendar year 2006, the impact of re-estimates of prior year loss reserves reduced pre-tax income by $139.9 million.
                                                                                   
    Development in Calendar Year
     
    1997   1998   1999   2000   2001   2002   2003   2004   2005   2006
                                         
                    (In millions)                
Accident Year Contributing to Loss Reserve Development
                                                                               
 
1996 and Prior
  $ (114.9 )   $ (14.2 )   $ 16.0     $ 30.4     $ 7.4     $ (19.9 )   $ (12.5 )   $ (35.5 )   $ (79.5 )   $ (30.7 )
 
1997
            35.6       (54.3 )     (11.0 )     (5.0 )     (22.0 )     (55.0 )     (10.8 )     (8.7 )     (40.8 )
 
1998
                    (7.4 )     (29.6 )     (4.0 )     (19.0 )     (74.0 )     (52.1 )     (41.8 )     (24.5 )
 
1999
                            (5.7 )     (15.0 )     (28.0 )     (51.0 )     (89.5 )     (110.8 )     (33.9 )
 
2000
                                    (6.5 )     (9.0 )     (38.0 )     (74.6 )     (59.3 )     (39.8 )
 
2001
                                            12.4       56.0       2.5       (19.0 )     (42.4 )
 
2002
                                                    46.6       12.2       (13.8 )     (42.3 )
 
2003
                                                            57.8       66.7       32.4  
 
2004
                                                                    93.5       29.6  
 
2005
                                                                            52.5  
                                                             
 
Total Calendar Year Effect on Pre-tax Income Resulting from Reserve Re-estimation
  $ (114.9 )   $ 21.4     $ (45.7 )   $ (15.9 )   $ (23.1 )   $ (85.5 )   $ (127.9 )   $ (190.0 )   $ (172.7 )   $ (139.9 )
                                                             
      The significant increases in reserves on accident years 1997 through 2002 relate 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 loss and LAE for this exposure, particularly in the 2002 through 2006 calendar year period.
      Improvements in competitive conditions and economic environment beginning in 2001 have resulted in a generally downward trend on re-estimated reserves for accident years 2003 through 2005. Initial loss estimates for these more recent accident years did not fully anticipate the improvements in competitive and economic conditions achieved since the late 1990s through the early 2000s.

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      The following table summarizes our provision for unpaid losses and LAE for the years ended December 31, 2006, 2005 and 2004 (in millions):
                           
    2006   2005   2004
             
Gross unpaid losses and LAE, beginning of year
  $ 5,117.7     $ 4,224.6     $ 3,399.5  
Less: ceded unpaid losses and LAE, beginning of year
    1,206.8       1,052.8       1,028.1  
                   
Net unpaid losses and LAE, beginning of year
    3,910.9       3,171.8       2,371.4  
                   
Add: Acquisition and disposition of net unpaid losses and LAE
                77.1  
                   
Add: Losses and LAE incurred related to:
                       
 
Current year
    1,344.3       1,888.9       1,441.1  
 
Prior years
    139.9       172.7       190.0  
                   
Total losses and LAE incurred
    1,484.2       2,061.6       1,631.1  
                   
Less: Paid losses and LAE related to:
                       
 
Current year
    251.3       380.7       300.3  
 
Prior years
    787.3       913.7       632.4  
                   
Total paid losses and LAE
    1,038.6       1,294.4       932.7  
                   
Effects of exchange rate changes
    46.6       (28.1 )     24.9  
                   
Net unpaid losses and LAE, end of year
    4,403.1       3,910.9       3,171.8  
Add: ceded unpaid losses and LAE, end of year
    739.0       1,206.8       1,052.8  
                   
Gross unpaid losses and LAE, end of year
  $ 5,142.1     $ 5,117.7     $ 4,224.6  
                   
      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, 2006, 2005 and 2004 was $95.1 million, $90.3 million and $76.7 million, respectively.

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      Gross and net development for asbestos and environmental reserves for the last three calendar years are provided in the following table (in millions):
                         
    2006   2005   2004
             
Asbestos
                       
Gross unpaid losses and LAE, beginning of year
  $ 274.7     $ 242.2     $ 216.1  
Add: Gross losses and LAE incurred
    62.4       54.2       54.2  
Less: Gross calendar year paid losses and LAE
    28.4       21.7       28.1  
                   
Gross unpaid losses and LAE, end of year
  $ 308.7     $ 274.7     $ 242.2  
                   
Net unpaid losses and LAE, beginning of year
  $ 119.3     $ 82.7     $ 52.7  
Add: Net losses and LAE incurred
    27.1       41.2       30.0  
Less: Net calendar year paid losses and LAE
    (42.6 )     4.6        
                   
Net unpaid losses and LAE, end of year
  $ 189.0     $ 119.3     $ 82.7  
                   
Environmental
                       
Gross unpaid losses and LAE, beginning of year
  $ 40.4     $ 29.9     $ 33.3  
Add: Gross losses and LAE incurred
    (0.6 )     9.7       2.8  
Less: Gross calendar year paid losses and LAE
    3.9       (0.8 )     6.2  
                   
Gross unpaid losses and LAE, end of year
  $ 35.9     $ 40.4     $ 29.9  
                   
Net unpaid losses and LAE, beginning of year
  $ 13.5     $ 16.3     $ 37.4  
Add: Net losses and LAE incurred
    (2.2 )     (0.9 )     (21.1 )
Less: Net calendar year paid losses and LAE
    (15.4 )     1.9        
                   
Net unpaid losses and LAE, end of year
  $ 26.7     $ 13.5     $ 16.3  
                   
      Net losses and loss adjustment expenses incurred for asbestos claims increased $27.1 million for the year ended December 31, 2006. Included in this increase is a net reserve increase of $40.6 million, a $17.3 million benefit resulting from the amortization of the deferred gain related to the 1995 Stop Loss Agreement and a loss of $3.8 million related to the commutation of this agreement. Also as a result of this commutation, net reserves were increased by $49.9 million and net paid losses were decreased by $63.4 million.
      Net losses and loss adjustment expenses incurred for environmental claims decreased $2.2 million for the year ended December 31, 2006. Included in this reduction is a net reserve decrease of $0.3 million, a $3.1 million benefit resulting from the amortization of the deferred gain related to the 1995 Stop Loss Agreement and a loss of $1.2 million related to the commutation of this agreement. Also as a result of this commutation, net reserves were increased by $17.3 million and net paid losses were decreased by $19.2 million.
      Our survival ratio for asbestos and environmental-related liabilities as of December 31, 2006 is 11 years. Our underlying survival ratio for asbestos-related liabilities is 11 years and for environmental-related liabilities is 18 years. The survival ratio represents the asbestos and environmental reserves, net of reinsurance, on December 31, 2006, divided by the average paid asbestos and environmental claims for the last three years of $19.3 million, which is net of reinsurance (see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reinsurance and Retrocessions”).
Investments
      As of December 31, 2006, we held cash and investments totaling $7.1 billion, with a net unrealized gain of $36.0 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 and other policy obligations.

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      Our investment guidelines stress preservation of capital, 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, long term total returns.
      No attempt is made to forecast the economy, the future level of interest rates or the stock market. Equities are selected on the basis of selling prices which are at a discount to their estimated intrinsic values. Downside protection is obtained by seeking a margin of safety in terms of a sound financial position. 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 high level of liquidity. The table below shows the aggregate amounts of investments in fixed income securities, equity securities, cash and cash equivalents and other invested assets comprising our portfolio of invested assets.
                                 
    At December 31,
     
    2006   2005
         
    $   % of Total   $   % of Total
                 
    (In millions)
Fixed income securities, at fair value
  $ 3,501.6       49.6 %   $ 2,594.9       43.5 %
Equity securities, at fair value
    607.6       8.6       601.7       10.1  
Equity securities, at equity
    245.4       3.5       567.0       9.5  
Cash, cash equivalents and short-term investments
    2,304.1       32.6       1,727.9       28.9  
Other invested assets
    165.2       2.3       238.1       4.0  
Cash collateral for borrowed securities
    242.2       3.4       240.7       4.0  
                         
Total cash and invested assets
  $ 7,066.1       100.0 %   $ 5,970.3       100.0 %
                         
      As of December 31, 2006, our fixed income securities had a dollar weighted average rating of “AA,” as measured by Standard & Poor’s, and an average yield to maturity, based on market values, of 5.1% before investment expenses. As of December 31, 2006 the duration of our fixed income securities was 7.7 years. Including short-term investments, cash and cash equivalents, the duration was 4.7 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 loss generated from an immediate adverse parallel shift in the treasury yield curve of 100 or 200 basis points would cause a decrease in total return of 7.3% and 13.6%, respectively, which equates to a decrease in market value of $255.4 million and $475.3 million, respectively, on a fixed income portfolio valued at $3.5 billion as of December 31, 2006. 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.

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      The following table summarizes the fair value of our investments (other than common stocks at equity and other invested assets) at the dates indicated.
                   
    At December 31,
     
Type of Investment   2006   2005
         
    (In millions)
United States government, government agencies and authorities
  $ 2,517.4     $ 1,568.8  
States, municipalities and political subdivisions
    181.0       184.2  
Foreign governments
    441.5       367.5  
All other corporate
    361.7       474.4  
             
 
Total fixed income securities
    3,501.6       2,594.9  
Common stocks, at fair value
    607.6       601.7  
Short-term investments
    242.3       199.5  
Cash collateral for borrowed securities
    242.1       240.7  
Cash and cash equivalents
    2,061.8       1,528.4  
             
 
Total
  $ 6,655.4     $ 5,165.2  
             
      The following table summarizes the fair value by contractual maturities of our fixed income securities at the dates indicated.
                   
    At December 31,
     
    2006   2005
         
    (In millions)
Due in less than one year
  $ 43.3     $ 165.7  
Due after one through five years
    1,080.5       295.1  
Due after five through ten years
    566.1       211.8  
Due after ten years
    1,811.7       1,922.3  
             
 
Total
  $ 3,501.6     $ 2,594.9  
             
      The contractual maturities reflected above may differ from the actual maturities due to the existence of call or put features. As of December 31, 2006 and 2005, approximately 3% and 10%, 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. As of December 31, 2006 and 2005, approximately 4% and 5%, respectively, of the fixed income securities shown above had a put feature, 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 the investor elects not to exercise its put feature, but to hold the securities to their final maturity dates.

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      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 or Moody’s, using the higher of these ratings for any security where there is a split rating.
                   
    At December 31,
     
Rating   2006   2005
         
AAA/ Aaa
    85.6 %     76.2 %
AA/ Aa2
    3.9       5.3  
BBB/ Baa2
          0.2  
BB/ Ba2
    0.3       4.8  
B/ B2
    0.4       0.9  
CCC/ Caa or lower, or not rated
    9.8       12.6  
             
 
Total
    100.0 %     100.0 %
             
      As of December 31, 2006, 10.5% of our fixed income securities were rated BB/ Ba2 or lower, compared to 18.3% as of December 31, 2005. We sold certain non investment grade securities during 2006. In addition, during 2006, we increased our holdings in investment grade fixed income securities.
Ratings
      The Company and its subsidiaries are assigned financial strength (insurance) and credit ratings from internationally recognized rating agencies, which include A.M. Best Company, Inc., Standard & Poor’s Insurance Rating Services and Moody’s Investors Service. 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 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: A.M. Best: “A” (Excellent), Standard & Poor’s: “A-” (Stable), and Moody’s: “A3” (Stable).
      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.
      Following our announcement on March 16, 2006 that the filing of our annual report on Form 10-K would be delayed in connection with the restatement of our consolidated financial statements, Standard & Poor’s placed on “CreditWatch with negative implications” our counterparty credit, senior unsecured debt and preferred stock ratings and the financial strength ratings of our principal operating subsidiaries. In addition, Moody’s revised from “stable” to “negative” the outlook for our senior debt and preferred stock and the insurance financial strength ratings of our principal operating subsidiaries. Further, A.M. Best placed “under review with negative implications” our debt ratings and the financial strength ratings of our principal operating subsidiaries. Following the March 31, 2006 filing of our Annual Report on Form 10-K, Standard & Poor’s, Moody’s and A.M. Best Company removed our ratings from “CreditWatch with negative implications,” “negative outlook” and “under review with negative implications,” respectively, and affirmed the financial strength ratings of our principal operating subsidiaries at “A-” (Strong), “A3” (Good Financial Security) and “A” (Excellent), respectively.
      On July 28, 2006, Standard & Poor’s placed several of its ratings of Fairfax and its subsidiaries on “CreditWatch with negative implications.” The ratings on CreditWatch included our “BBB-” counterparty credit ratings, and our “A-” counterparty credit and financial strength ratings of our subsidiaries. On October 25, 2006, we were removed from Standard & Poor’s “CreditWatch with negative implications.” Our “A-” counterparty credit and financial strength ratings of our subsidiaries were confirmed and placed on outlook negative. Our “BBB-” counterparty credit rating and “BB” preferred stock ratings were also confirmed and placed on outlook

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negative. On December 19, 2006, Standard & Poor’s revised its outlook on us to “stable” from “negative” and affirmed our subsidiaries’ “A-” counterparty credit and financial strength ratings, as well as our “BBB-” counterparty credit rating.
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 61.8% of our reinsurance gross premiums written in 2006.
      Direct distribution is an important channel for us in the overseas markets served by the Latin America unit of the Americas division and 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.

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      The following table shows our gross premiums written, by distribution source, for the year ended December 31, 2006 (in millions).
                   
    For the Year Ended
    December 31, 2006
     
    $   %
         
Aon Corporation
  $ 320.5       13.7 %
Guy Carpenter & Co., Inc. 
    316.4       13.5  
Willis Group
    174.7       7.5  
Benfield Group Limited
    149.0       6.4  
HRH Reinsurance Brokers, Ltd. 
    43.5       1.9  
Other brokers
    389.3       16.6  
             
 
Total brokers
    1,393.4       59.6  
Direct
    230.2       9.9  
             
 
Total reinsurance
    1,623.6       69.5  
U.S. Insurance
    509.6       21.8  
Newline
    202.5       8.7  
             
 
Total
  $ 2,335.7       100.0 %
             
Competition
      The worldwide property and casualty reinsurance business is highly competitive. Our competitors include independent reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain primary insurance companies, and domestic and European underwriting syndicates. Some of these competitors have longer operating histories, larger capital bases and greater underwriting, marketing, and administrative resources than OdysseyRe.
      Globally, the competitive marketplace of the 1990s resulted in decreasing prices and broadening contract terms. Poor financial results associated with those years, compounded by the September 11, 2001 terrorist attack, resulted in changes in management and ownership of several reinsurers, with some competitors withdrawing from key markets. Improving trends, which became apparent in 2001 and continued through 2004 for nearly all classes, began to moderate considerably for certain classes of business in 2005. Casualty lines, while still providing adequate returns, began to see more challenging market conditions in 2005 and continued to remain under pressure throughout 2006. Casualty reinsurance business is experiencing softening market conditions as insurers continue to increase retentions and begin to encounter competitive pricing pressures. Property catastrophe reinsurance rates, on the other hand, saw the pricing pressures of 2005 reverse course following the 2005 storms (Hurricanes Katrina, Rita and Wilma) as rates increased meaningfully in 2006. As property catastrophe reinsurance prices increased throughout 2006, both property insurers and reinsurers increased their retentions as a result.
      In 2006, as previously mentioned, our U.S. property reinsurance book experienced significant rate increases and improving terms and conditions. The 2005 storms caused a reevaluation of catastrophe risk pricing and monitoring across the industry, driven by the rating agencies’ increased capital requirements. With early predictions for an active Atlantic hurricane season, a supply/demand imbalance caused pricing to increase substantially and the industry to welcome an influx of new capital in the first six months of 2006. Property business impacted by the 2005 storms experienced the most significant price increases, while regions and classes of business not affected by the storms saw more moderate rate increases. The largest rate increases occurred in wind-exposed property business located in the Southeast United States and the Gulf of Mexico, as well as offshore. The influx of new capital was utilized in the peak catastrophe zones impacted most by the 2005 storms. As a result of the lack of storm activity in 2006, many market participants, both insurers and reinsurers, recorded record profits. Insurers continue to retain more business as balance sheets strengthen and reinsurance pricing remains at adequate levels. Reinsurers continue to refine their catastrophe portfolios in light of the increased

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capital requirements by the rating agencies and the revised catastrophe models. Offsetting these increased capital requirements will be the impact of the recently passed insurance reform in Florida, which will likely result in the reallocation of capital that was previously used to support Florida based exposures. The Florida reform increases the availability of reinsurance protection from the state-owned reinsurer (Florida Hurricane Catastrophe Fund) and thereby will likely reduce the amount of reinsurance purchased from the private market.
      With the large profits earned in 2006 and the resulting improvement in capital positions of industry participants, in addition to the influx of new capital, we anticipate the rate of price increases on property and property catastrophe reinsurance business to moderate and possibly even decline in 2007 on select exposures. Casualty reinsurance pricing is expected to remain disciplined, with prices moderating in select lines. We believe there are lines of business where current rates should provide acceptable returns. The competitive landscape is still evolving and the depth and breadth of market changes for the balance of 2007 remain uncertain.
      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. The potential for securitization of reinsurance and insurance risks through capital markets provides an additional source of potential competition.
      In our primary insurance business, we face competition from independent insurance companies, subsidiaries or affiliates of major worldwide companies and others, some of which have greater financial and other resources than we do. Primary insurers compete on the basis of various factors including distribution channels, product, price, service, financial strength and reputation. Throughout 2006 the specialty insurance marketplace continued to grow more competitive as more participants looked to either enter the market or increase their existing presence. We expect the competitiveness to continue throughout 2007 as results continue to be strong, balance sheets strengthen, and participants compete aggressively for business. We continue to see a positive flow of business in those states and business lines we have chosen to target.
      We also face competition from Lloyd’s syndicates, larger multi-national insurance groups, and alternative risk management programs. Pricing is a primary means of competition in the specialty insurance and reinsurance business. We are committed to maintaining our underwriting standards and as a result, our premium volume will vary based on existing market conditions.
Employees
      As of December 31, 2006, we had 610 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; and the United Kingdom, the domiciliary jurisdiction of Newline. Newline is also subject to regulation by the 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 Insurers and Reinsurers
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.

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      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 acquisitions of control of an insurer or its holding company.
      Under the Connecticut, Delaware and New York 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 Connecticut, Delaware and/or New York insurance commissioner or commissioners, as the case may be, for the acquisition. For the purposes of the Connecticut, Delaware and New York Insurance laws, 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. 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 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.” A purchaser of 10% or more of our outstanding common shares will 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 byelaws 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

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undertaking as a result of voting power is a “controller”. A purchaser of more than 10% of our outstanding common shares will be a “controller” of the United Kingdom Lloyd’s Managing Agent subsidiary, Newline.
      The requirements under the Connecticut, Delaware and New York insurance laws and the United Kingdom Financial Services Authority’s rules (and other applicable states and foreign jurisdictions), and the rules of the Council of Lloyd’s, may deter, delay or prevent certain transactions affecting the control or ownership of our common shares, including transactions that could be advantageous to our shareholders.
Dividends
      Because our operations are conducted primarily at the subsidiary level, we are dependent upon dividends from our subsidiaries to meet our debt and other obligations and to declare and pay dividends on our common shares in the future should our Board of Directors decide to do so. The payment of dividends to us by our operating subsidiaries is subject to limitations imposed by law in Connecticut, Delaware, New York 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 capital 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, the amount of which, 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 insurance laws, an “extraordinary” dividend of a property and casualty insurer is a dividend, the amount of which, 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 capital gains, for the prior calendar year. Under these definitions, the maximum amount that will be available for the payment of dividends by Odyssey America for the year ending December 31, 2007 without requiring prior approval of regulatory authorities is $561.7 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

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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 Newline, from declaring a dividend to its 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. 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: (1) 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; (2) 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; (3) 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 (4) 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.

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      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.
The National Association of Insurance Commissioners (“NAIC”) and Accreditation
      The NAIC is an organization that assists state insurance supervisory officials in achieving insurance regulatory objectives, including the maintenance and improvement of state regulation. From time to time various regulatory and legislative changes have been proposed in the insurance industry, some of which could have an effect on reinsurers. The NAIC has instituted its Financial Regulation Standards and Accreditation Program (“FRSAP”) in response to federal initiatives to regulate the business of insurance. FRSAP provides a set of standards designed to establish effective state regulation of the financial condition of insurance companies. Under FRSAP, a state must adopt certain laws and regulations, institute required regulatory practices and procedures, and have adequate personnel to enforce such items in order to become an “accredited” state. If a state is not accredited, accredited states are not able to accept certain financial examination reports of insurers prepared solely by the regulatory agency in such unaccredited state. Connecticut and Delaware are accredited under FRSAP. New York, Hudson Specialty’s state of domicile, is not accredited under FRSAP. There can be no assurance that, should New York remain unaccredited, other states that are accredited will continue to accept financial examination reports prepared solely by New York. We do not believe that the refusal by an accredited state to accept financial examination reports prepared by New York, should that occur, would have a material adverse impact on our insurance businesses.
Risk-Based Capital Requirements
      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 similar to 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: (1) underwriting, which encompasses the risk of adverse loss development and inadequate pricing; (2) declines in asset values arising from credit risk; and (3) 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, depending on the level of capital inadequacy. The surplus levels (as calculated for statutory annual statement purposes) of our operating insurance companies are above the risk-based capital thresholds that would require either company or regulatory action.
Codification of Statutory Accounting Principles
      The NAIC adopted the Codification of Statutory Accounting Principles (“Codification”) which is intended to standardize regulatory accounting and reporting for the insurance industry. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The states of Connecticut and Delaware have adopted the Codification. New York has adopted the Codification, with certain modifications to reflect provisions required by New York law or policy.
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 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 become 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

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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.
      The Fairness in Asbestos Injury Resolution Act of 2005 (“FAIR”) would have largely removed asbestos claims from the courts in favor of an administrative process that would pay awards out of a trust fund on a “no fault” basis to claimants meeting asbestos exposure and medical criteria. The proposed trust would have been funded by contributions from corporate defendants, insurers and existing bankruptcy trusts. In February 2006, the U.S. Senate effectively denied passage of FAIR. At this time, we are unable to predict what asbestos-related legislation, if any, may be proposed in the future, or the impact such legislation may have on our operations.
      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 pools and guaranty associations;
 
  •  regulating 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 has now been modified and extended through December 31, 2007. The 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 provide 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 a percentage 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 2006, the deductible is equal to 17.5% of the insurer’s combined direct earned premiums for 2005. Further, the 2005 amendments to TRIA established a per event trigger for federal participation in aggregate insured losses of $50 million for losses occurring after March 31, 2006 and before January 1, 2007, and $100 million for losses occurring in 2007. Under certain circumstances, the federal government may require

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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 our exposure 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 domestic terrorism is generally not excluded from our policies and, regardless of TRIA, some state insurance regulators do not permit terrorism exclusions for various coverages or causes of loss. Accordingly, we continue to monitor carefully our concentrations of risk.
      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. TRIA generally does not purport to govern the obligations of reinsurers, such as Odyssey America. The TRIA program is scheduled to expire at the end of 2007, and it is unclear at this time whether Congress will further extend the program beyond 2007. It is possible that the non-renewal of TRIA could adversely affect the industry, including us.
Other Industry Developments
      The New York Attorney General’s office and other governmental and regulatory bodies are investigating allegations relating to a wide range of practices in the insurance and reinsurance industry, including contingent commissions payments and allegations of price fixing, market allocation, or bid rigging. As of the date hereof, we have not been contacted by any of these parties with respect to these practices, although we have received and responded to inquiries and informational requests from several state insurance departments as part of the industry-wide review being conducted by these states. We intend to cooperate with these requests and others we may receive from governmental and regulatory bodies.
      We have undertaken to review our practices in light of the matters being reviewed by the New York Attorney General and other governmental authorities. This review is ongoing. We are actively monitoring these ongoing, industry-wide investigations. 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.
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 Securities and Exchange Commission. Our Code of Business Conduct, Code of Ethics for Senior Financial Officers, Corporate Governance Guidelines and the charters for our Audit, Compensation and Transaction Review 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 the Company.
      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 Form 10-K and other documents we file with the Securities and Exchange Commission 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.

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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, 2006, we had net unpaid losses and loss adjustment expenses of $4,403.1 million. We incurred losses and loss adjustment expenses of $1,484.2 million, $2,061.6 million and $1,631.1 million for the years ended December 31, 2006, 2005 and 2004, 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.

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If we are unable to maintain a favorable financial strength rating, 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.
      Our principal operating subsidiaries maintain a rating of “A” (Stable) from A.M. Best, an “A-” (Excellent) counterparty credit and financial strength rating from Standard & Poor’s and an “A3” (Stable) financial strength rating from Moody’s. Financial strength ratings are used by insurers and reinsurance and insurance intermediaries as an important means of assessing the financial strength and quality of reinsurers. See “Part I, Item 1 — Business-Ratings” for further detail regarding our and our subsidiaries’ ratings.
      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.
Uncertainty related to our estimated losses for Hurricanes Katrina, Rita and Wilma may materially impact our financial results.
      Our statements of operations for the year ended December 31, 2006 and 2005, respectively, include pre-tax underwriting losses of $46.4 and $436.0 million, respectively, from Hurricanes Katrina, Rita and Wilma. The loss estimate represents our best estimate based on the most recent information available. We used various approaches in estimating this loss, including a detailed review of exposed contracts and information from ceding companies. As additional information becomes available, such estimates may be revised, potentially resulting in adverse effects to our financial results. The extraordinary nature and scale of this loss, including legal and regulatory implications, adds substantial uncertainty and complexity to the estimating process. Considerable time may elapse before the adequacy of our estimates can be determined.
      Our estimates are subject to a high level of uncertainty arising out of extremely complex and unique causation and coverage issues, including the appropriate attribution of losses to flood as opposed to other perils such as wind, fire or riot and civil commotion. The underlying policies generally contain exclusions for flood damage; however, water damage caused by wind may be covered. We expect that causation and coverage issues may not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments.
      Our actual losses from Hurricanes Katrina, Rita and Wilma may vary materially from our estimates as a result of, among other things, an increase in industry insured loss estimates, the receipt of additional information from clients, the attribution of losses to coverages that for the purpose of our estimates we assumed would not be exposed, the contingent nature of business interruption exposures, and inflation in repair costs due to the limited

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availability of labor and materials, in which case our financial results could be further materially adversely affected. In addition, actual losses may increase if our reinsurers fail to meet their obligations.
      We have no retrocession protection remaining with respect to Hurricane Katrina. Should our Hurricane Katrina losses prove to be greater than currently estimated, it will have an adverse effect on our financial results.
      We cannot be sure that retrocessional coverage will be available to us on acceptable terms, or at all, in the future.
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 gains on the sale of investment assets. The portion derived from realized gains generally fluctuates from year to year. For the years ended December 31, 2006, 2005 and 2004, net realized gains accounted for 28.0%, 21.4% and 42.6%, respectively, of our total investment income (including realized gains and losses). Realized gains are typically a less predictable source of income than interest and dividends, particularly in the short term.
      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, 2006, 32.6%, or $2.3 billion, of our invested assets were held in cash 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 capital 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 and unrealized investment losses resulting from an other-than-temporary decline in value could significantly decrease our assets, thereby affecting our ability to conduct business.
      Our operating results depend in part on the performance of our investment portfolio. 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. We may not be able to realize our investment objectives, which could reduce our net income significantly.
Investigations by U.S. government authorities may adversely affect us.
      On September 7, 2005, we announced that we had been advised by Fairfax, our majority shareholder, that it had received a subpoena from the Securities and Exchange Commission (“SEC”) requesting documents regarding any non-traditional insurance and reinsurance transactions entered into or offered by Fairfax and any of its affiliates, which included OdysseyRe. The United States Attorney’s Office for the Southern District of New York is reviewing documents provided to the SEC in response to the subpoena, and is participating in the investigation into these matters. In addition, we provided information and made a presentation to the SEC and the U.S. Attorney’s office relating to the restatement of our financial results announced by us on February 9, 2006 and responded to questions with respect to transactions that were part of the restatement. We are cooperating fully in addressing our obligations under this subpoena. Fairfax, and Fairfax’s chairman and chief executive officer, V. Prem Watsa, who is also the chairman of OdysseyRe, have received subpoenas from the SEC in connection with the answer to a question on Fairfax’s February 10, 2006 investor conference call concerning the review of

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Fairfax’s finite contracts. Our independent registered public accountants and our chief financial officer prior to March 2005 have each received a subpoena relating to the above matters.
      This inquiry is ongoing, and we continue to comply with requests from the SEC and the U.S. Attorney’s office. We cannot assure you that we will not be subject to further requests or other regulatory proceedings of a similar kind. It is possible that other governmental and enforcement agencies will seek to review this information as well, or that we, or other parties with whom we interact, such as customers or shareholders, may become subject to direct requests for information or other inquiries by such agencies.
      At the present time, we cannot predict the outcome of these matters or the ultimate effect on our consolidated financial statements, which effect could be material and adverse. The financial cost to us to address these matters has been and is likely to continue to be significant. We expect that these matters will continue to require significant management attention, which could divert management’s attention away from our business. Our business, or the market price for our securities, also could be materially adversely affected by negative publicity related to this inquiry or similar proceedings, if any.
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. These practices include the payment of contingent commissions by insurance companies to insurance brokers and agents and the extent to which such compensation has been disclosed, the solicitation and provision of fictitious or inflated quotes, the alleged illegal tying of the placement of insurance business to the purchase of reinsurance, and the sale and purchase of finite reinsurance or other non-traditional or loss mitigation insurance products and the accounting treatment for those products. We have received inquiries and informational requests from insurance departments in certain states in which our insurance subsidiaries operate. We cannot predict at this time the effect that current 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, we have recently 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,

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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 one or more of 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.
      Many insurance industry participants are consolidating 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 will become more intense and the importance of acquiring and properly servicing each customer will become 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.

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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.
      General pricing across the industry and other terms and conditions have become less favorable than they have been in the recent past, the degree to which varies by class of business and region. All of these factors can reduce our profitability and we have no way to determine to what extent they will impact us in the future.
Fairfax Financial Holdings Limited owns a majority of our common shares and can determine the outcome of our corporate actions requiring board or shareholder approval.
      As of December 31, 2006, Fairfax beneficially owned, through wholly-owned subsidiaries, 59.6% of our outstanding common shares. Consequently, Fairfax can determine the outcome of our corporate actions requiring board or shareholder 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; and 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, Peter Bennett, Patrick Kenny and Paul Wolff 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.
      Fairfax has stated that it intends to retain control of us. In order to retain control, Fairfax may decide not to enter into a transaction in which our shareholders would receive consideration for their shares that is much higher than the cost of their investment in our common shares or the then current market price of our common shares. Any decision regarding the ownership of us that Fairfax may make at some future time will be in its absolute discretion.
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.

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Failure to comply with the covenants in our debt agreements could have an adverse effect on our financial condition.
      The current agreement governing our $150 million bank credit facility contains certain covenants that limit our ability to, among other things, borrow money, make particular types of investments or other restricted payments, sell assets, merge or consolidate. These agreements also require us to maintain specific financial ratios. If we fail to comply with these covenants or meet these financial ratios, the lenders under our credit facility or our noteholders could declare a default and demand immediate repayment of all amounts owed to them.
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 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 Insurers and Reinsurers — 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, R. Scott Donovan and Michael Wacek. We believe that the experience and reputations in the reinsurance industry of Messrs. Barnard, Donovan and Wacek are important factors in our ability to attract new business. We have entered into employment agreements with Messrs. Barnard, Donovan and Wacek. 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, Donovan or Wacek 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 61.8% of our reinsurance gross premiums written for the year ended December 31, 2006. 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 United States dollar. A portion of our premiums are written in currencies other than the United States dollar and a portion of our loss reserves are also in foreign currencies. Moreover, we maintain a portion of our investments in currencies other than the United States dollar. We may, from time to

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time, experience losses resulting from fluctuations in the values of foreign currencies, which could adversely affect our operating results.
We may not be able to alleviate risk successfully through retrocessional arrangements and we are subject to credit risks with respect to our retrocessionaires.
      We attempt to limit 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 purchase reinsurance coverage to insure against a portion of our risk on 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 assure you 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 49 states and the District of Columbia 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’s business and, accordingly, expect our regulatory burden 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 assure you 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 assure you that we will retain the programs that produce profitable

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business or that our insureds will renew with us. Failure to retain or replace these producers would 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 or cancellations 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 claims 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.
      Our insurance may not adequately compensate us for material losses that may occur due to disruptions in our service as a result of computer and data processing systems failure. We do not maintain redundant systems or facilities for all of our services.
      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. We may be required to

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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, 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.
We could be adversely affected if the Terrorism Risk Insurance Act of 2002 is not renewed beyond 2007, or is adversely amended.
      In response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attack, the Terrorism Risk Insurance Act of 2002, or TRIA, was enacted to ensure the availability of commercial insurance coverage for terrorist acts in the United States. This law initially established a federal assistance program through the end of 2005 to help the commercial property and casualty insurance industry cover claims related to future terrorism-related losses and required that coverage for terrorist acts be offered by insurers. Although TRIA recently has been modified and extended through 2007, it is possible that TRIA will not be renewed beyond 2007, or could be adversely amended, which could adversely affect the insurance industry if a material subsequent event occurred. Given these uncertainties, we are currently unable to determine with certainty the impact that TRIA’s amendment or non-renewal could have on us.
Risks Related to Our Common Shares
      Because our controlling shareholder intends to retain control, you may be unable to realize a gain on your investment in our common shares in connection with an acquisition bid.
      Fairfax, through its subsidiaries, TIG Insurance Group, TIG Insurance Company, ORH Holdings Inc., United States Fire Insurance Company, Fairfax Financial (US) LLC and Fairfax Inc., owned 59.6% of our outstanding common shares as of December 31, 2006. Consequently, Fairfax is in a position to determine the outcome of corporate actions requiring board or shareholder approval, including:
  •  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.
      All of our directors other than Andrew Barnard, Peter Bennett, Patrick Kenny and Paul Wolff are directors or officers of Fairfax or certain of its subsidiaries. Conflicts of interest could arise between us and Fairfax or one of its subsidiaries, and any conflict of interest may be resolved in a manner that does not favor us.
      Fairfax has stated that it intends to retain control of us. In order to retain control, Fairfax may decide not to enter into a transaction in which our shareholders would receive consideration for their shares that is much higher than the cost of their investment in our common shares or the then current market price of our common shares. Any decision regarding the ownership of us that Fairfax may make at some future time will be in its absolute discretion.
Significant fluctuation in the market price of our common shares could result in securities class action claims against us.
      Significant price and value fluctuations have occurred with respect to the securities of insurance and insurance-related companies. Our common share price is likely to be volatile in the future. In the past, following periods of downward volatility in the market price of a company’s securities, class action litigation has often been pursued against such companies. If similar litigation were pursued against us, it could result in substantial costs and a diversion of our management’s attention and resources.

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Provisions in our charter documents and Delaware law may impede attempts to replace or remove our management or inhibit a takeover, which could adversely affect the value of our common shares.
      Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent changes in our management or a change of control that a shareholder might consider favorable and may prevent you from receiving a takeover premium for your shares. These provisions include, for example,
  •  authorizing the issuance of preferred shares, the terms of which may be determined at the sole discretion of our Board of Directors;
 
  •  establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by shareholders at meetings; and
 
  •  providing that special meetings of shareholders may be called only by our Board of Directors, the chairman of our Board of Directors, our president or our secretary.
      These provisions apply even if the offer may be considered beneficial by some of our shareholders. If a change in management or a change of control is delayed or prevented, the market price of our common shares could decline.
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 139,489 square feet, all of which are leased. The Americas division operates out of offices in New York, Stamford, Mexico City, Miami, Santiago and Toronto, the EuroAsia division operates out of offices in Paris, Singapore, Stockholm and Tokyo, the London Market division operates out of offices in London and Bristol, and the U.S. Insurance division operates out of offices in New York, Chicago and Napa.
      In September 2004, we renewed the lease at our corporate offices in Stamford, Connecticut, under a lease agreement beginning upon the termination of the current lease in October 2007 and expiring in October 2022. Upon signing the lease, 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
      Odyssey America participated in providing quota share reinsurance to Gulf Insurance Company (“Gulf”) from January 1, 1996 to December 31, 2002, under which Gulf issued policies that guaranteed the residual value of automobile leases incepting during this period (“Treaties”). In March 2003, Gulf requested a payment of approximately $30.0 million, which included a “special payment” of $26.0 million, due on April 28, 2003, representing Odyssey America’s purported share of a settlement (“Settlement”) between Gulf and one of the insureds whose policies, Gulf contends, were reinsured under the Treaties. In July 2003, Gulf initiated litigation against Odyssey America, demanding payment relating to the Settlement and other amounts under the Treaties. Odyssey America answered the complaint. Among other things, Odyssey America contends that (i) Gulf breached its duty to Odyssey America of utmost good faith when it placed the Treaties by failing to disclose material information concerning the policy it issued to the insured; and (ii) the Settlement is not covered under the terms of the Treaties. Among the remedies Odyssey America seeks is rescission of the Treaties. We are vigorously asserting our claims and defending ourselves against any claims asserted by Gulf. We estimate that the amount in dispute under the Treaties that has not been recorded by us as of December 31, 2006, could range between $35 million to $40 million, after taxes. It is presently anticipated that the case will go to trial in the latter half of 2007. It is not possible to make any determination regarding the likely outcome of this matter at this time.
      In January 2004, two retrocessionaires of Odyssey America under the common control of London Reinsurance Group Inc. (together, “London Life”) filed for arbitration under a series of aggregate stop loss agreements covering the years 1994 and 1996-2001 (the “Agreements”). On March 9, 2006, the arbitration panel

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issued its decision confirming the enforceability of the Agreements and resolving in Odyssey America’s favor substantially all issues in dispute regarding Odyssey America’s administration of the Agreements. Effective May 12, 2006, Odyssey America and London Life entered into a commutation and release agreement pursuant to which all rights, obligations and liabilities for the Agreements were fully and finally settled without material effect to our net income.
      On September 7, 2005, we announced that we had been advised by Fairfax, our majority shareholder, that it had received a subpoena from the Securities and Exchange Commission (“SEC”) requesting documents regarding any non-traditional insurance and reinsurance transactions entered into or offered by Fairfax and any of its affiliates, which included OdysseyRe. The United States Attorney’s Office for the Southern District of New York is reviewing documents provided to the SEC in response to the subpoena, and is participating in the investigation into these matters. In addition, we provided information and made a presentation to the SEC and the U.S. Attorney’s office relating to the restatement of our financial results announced by us on February 9, 2006 and responded to questions with respect to transactions that were part of the restatement. We are cooperating fully in addressing our obligations under this subpoena. Fairfax, and Fairfax’s chairman and chief executive officer, V. Prem Watsa, who is also the chairman of OdysseyRe, have received subpoenas from the SEC in connection with the answer to a question on Fairfax’s February 10, 2006 investor conference call concerning the review of Fairfax’s finite contracts. Our independent registered public accountants and our chief financial officer prior to March 2005 have each received a subpoena relating to the above matters. This inquiry is ongoing, and we continue to comply with requests from the SEC and the U.S. Attorney’s office. At the present time, we cannot predict the outcome of these matters, or the ultimate effect on our consolidated financial statements, which effect could be material and adverse. No assurance can be made that we will not be subject to further requests or other regulatory proceedings of a similar kind.
      On February 8, 2007, we were added as a co-defendant in an amended complaint in an existing action against our majority 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 complaint seeks, among other things, certification of the putative class, unspecified compensatory damages, unspecified injunctive relief, reasonable costs and attorneys’ fees and other relief. 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.
      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 2006.

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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 are traded is the New York Stock Exchange (“NYSE”). As of February 9, 2007, the approximate number of holders of our common shares, including those whose common shares are held in nominee name, was 14,750. Quarterly high and low sales prices per share of our common shares, as reported by the New York Stock Exchange composite for each quarter in the years ended December 31, 2006 and 2005, are as follows:
                 
Quarter Ended   High   Low
         
December 31, 2006
  $ 38.65     $ 33.45  
September 30, 2006
    34.75       24.70  
June 30, 2006
    26.60       21.23  
March 31, 2006
    25.41       19.50  
 
December 31, 2005
  $ 26.92     $ 23.77  
September 30, 2005
    25.86       23.76  
June 30, 2005
    25.33       22.50  
March 31, 2005
    26.01       24.20  
      Fairfax owns 59.6% of our outstanding common shares, directly (0.2%) and through its subsidiaries: TIG Insurance Group (42.1%), TIG Insurance Company (5.5%), ORH Holdings Inc. (8.7%), Fairfax Inc. (2.0%) and United States Fire Insurance Company (1.1%).
Dividends
      In each of the four quarters of 2006, we declared a dividend of $0.03125 per common share, resulting in an aggregate annual dividend of $0.125 per common share, totaling $8.8 million. The dividends were paid on March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006. In each of the four quarters of 2005, we declared a dividend of $0.03125 per common share, resulting in an aggregate annual dividend of $0.125 per common share, totaling $8.3 million. The dividends were paid on March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005.
      While it is the intention of our Board of Directors to declare quarterly cash dividends, the declaration and payment of future dividends, if any, by us will be at the discretion of our Board of Directors and will depend on, among other things, our financial condition, general business conditions and legal restrictions regarding the payment of dividends by us, and other factors. On February 22, 2007, our Board of Directors announced that it had increased our quarterly dividend to $0.0625 per common share, double its previous level, and declared a dividend payable on March 30, 2007 to common shareholders of record at the close of business on March 16, 2007. The payment of dividends by us is subject to limitations imposed by laws in Connecticut, Delaware, New York and the United Kingdom. For a detailed description of these limitations, see Part I, Item 1 — “Business — Regulatory Matters — Regulation of Insurers and Reinsurers — Dividends.”
Issuer Purchases of Equity Securities
      The following table sets forth purchases made by us of our common shares during the three months ended December 31, 2006. We make open market repurchases of our common shares, from time to time as necessary, to support the grant of restricted shares and the exercise of stock options. Our stock incentive plans allow for the issuance of grants and exercises through newly issued shares, treasury stock, or a combination thereof. As of

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December 31, 2006, we had 77,668 common shares held in treasury to support such grants and exercises. We do not have a publicly announced repurchase plan for our common shares at this time.
                                 
            Total Number    
            of Shares   Maximum
            Purchased as   Number of Shares
            Part of Publicly   that may yet be
    Total Number   Average Price   Announced   Purchased Under
    of Shares   Paid Per   Plans or   the Plans or
Period   Purchased   Share   Programs   Programs
                 
October 1 — October 31, 2006
        $              
November 1 — November 30, 2006
                       
December 1 — December 31, 2006
    50,000       37.25              
                         
Total
    50,000     $ 37.25              
                         
      In June 2002, we issued $110.0 million aggregate principal amount of 4.375% convertible senior debentures due 2022 (“Convertible Notes”). On August 14, 2006, in accordance with the terms of the indenture under which the Convertible Notes were issued, the Convertible Notes became convertible, at the option of the holders, into shares of our common stock at a fixed rate of 46.9925 shares per $1,000 principal amount of Convertible Notes, which represents a conversion price of $21.28 per share. The convertibility trigger was met as a result of our common shares trading at or above $25.54 per share for a specified period of time. Pursuant to the terms of the indenture, we are permitted to satisfy our conversion obligations in stock or in cash, or in a combination thereof. To date, we have elected to satisfy all conversion obligations with common shares, and therefore, as of December 31, 2006, we had issued a total of 1,838,151 common shares to satisfy conversions up to that date. During February 2007, we issued 46,992 common shares related to $1.0 million principal amount of Convertible Notes subject to a notice of conversion received in December 2006. Subsequent to December 31, 2006, we have not received any conversion notices related to the remaining $22.5 million principal value of Convertible Notes, which could be converted into cash or 1.1 million shares of our common stock, or a combination of cash and stock, at our election. In February 2007, the Company announced that the Convertible Notes will continue to be convertible during the period from February 14, 2007 through May 13, 2007. For more information regarding the Convertible Notes, see Note 13 to the consolidated financial statements included in this Form 10-K.
Item 6. Selected Financial Data
      The following selected financial data 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 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 Form 10-K because they contain our complete consolidated financial statements for the years ended December 31, 2006, 2005, and 2004. The results of operations for the year ended December 31, 2006 are not necessarily indicative of future results.
                                           
    Years Ended December 31,
     
    2006   2005   2004   2003   2002
                     
    (In thousands, except per share data)
GAAP Consolidated Statements of Operations Data:
                                       
Gross premiums written
  $ 2,335,742     $ 2,626,920     $ 2,650,775     $ 2,552,340     $ 1,894,530  
Net premiums written
    2,160,935       2,301,669       2,361,805       2,156,079       1,643,661  
Net premiums earned
  $ 2,225,826     $ 2,276,820     $ 2,333,511     $ 1,971,924     $ 1,446,277  
Net investment income
    487,119       220,092       164,248       134,808       123,995  
Net realized investment gains
    189,129       59,866       122,024       223,537       134,708  
                               
 
Total revenues
    2,902,074       2,556,778       2,619,783       2,330,269       1,704,980  
                               

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    Years Ended December 31,
     
    2006   2005   2004   2003   2002
                     
    (In thousands, except per share data)
Losses and loss adjustment expenses
    1,484,197       2,061,611       1,631,106       1,336,047       1,006,704  
Acquisition costs
    464,148       470,152       515,856       476,520       365,025  
Other underwriting expenses
    153,476       146,030       120,765       101,308       70,269  
Other expense, net
    21,120       27,014       17,153       7,556       4,985  
Interest expense
    37,515       29,991       25,609       12,656       8,689  
Loss on early extinguishment of debt
    2,403       3,822                    
                               
 
Total expenses
    2,162,859       2,738,620       2,310,489       1,934,087       1,455,672  
                               
Income (loss) before income taxes and cumulative effect of a change in accounting principle
    739,215       (181,842 )     309,294       396,182       249,308  
Federal and foreign income tax provision (benefit)
    231,309       (66,120 )     104,093       136,900       83,878  
                               
Income (loss) before cumulative effect of a change in accounting principle
    507,906       (115,722 )     205,201       259,282       165,430  
Cumulative effect of a change in accounting principle
                            48,332  
                               
Net income (loss)
    507,906       (115,722 )     205,201       259,282       213,762  
Preferred dividends
    (8,257 )     (1,944 )                  
                               
Net income (loss) available to common shareholders
  $ 499,649     $ (117,666 )   $ 205,201     $ 259,282     $ 213,762  
                               
BASIC
Weighted average common shares outstanding
    68,975,743       65,058,327       64,361,535       64,736,830       64,744,067  
                               
Basic earnings (loss) per common share, before cumulative effect of a change in accounting principle
  $ 7.24     $ (1.81 )   $ 3.19     $ 4.01     $ 2.55  
Cumulative effect of a change in accounting principle
                            0.75  
                               
Basic earnings (loss) per common share
  $ 7.24     $ (1.81 )   $ 3.19     $ 4.01     $ 3.30  
                               
DILUTED
Weighted average common shares outstanding
    72,299,050       65,058,327       69,993,136       70,279,467       67,919,664  
                               
Diluted earnings (loss) per common share, before cumulative effect of a change in accounting principle
  $ 6.93     $ (1.81 )   $ 2.98     $ 3.73     $ 2.46  
Cumulative effect of a change in accounting principle
                            0.71  
                               
Diluted earnings (loss) per common share(1)(2)
  $ 6.93     $ (1.81 )   $ 2.98     $ 3.73     $ 3.17  
                               

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    Years Ended December 31,
     
    2006   2005   2004   2003   2002
                     
    (In thousands, except per share data)
GAAP Underwriting Ratios:
                                       
Losses and loss adjustment expense ratio
    66.7 %     90.5 %     69.9 %     67.8 %     69.6 %
Underwriting expense ratio
    27.7       27.1       27.3       29.3       30.1  
                               
Combined ratio
    94.4 %     117.6 %     97.2 %     97.1 %     99.7 %
                               
GAAP Consolidated Balance Sheet Data:
                                       
Total investments and cash
  $ 7,066,088     $ 5,970,319     $ 5,124,683     $ 4,255,062     $ 3,101,711  
Total assets
    8,953,712       8,646,612       7,555,693       6,454,919       5,316,008  
Unpaid losses and loss adjustment expenses
    5,142,159       5,117,708       4,224,624       3,399,535       2,871,552  
Debt obligations
    512,504       469,155       376,040       376,892       206,340  
Total shareholders’ equity
    2,083,579       1,639,455       1,568,236       1,356,271       1,027,001  
Book value per common share(3)(4)
  $ 27.92     $ 22.31     $ 24.22     $ 20.87     $ 15.80  
Dividends per common share(4)
    0.13       0.13       0.13       0.11       0.10  
 
(1)  The Emerging Issues Task Force (“EITF”) Issue 4-08 “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share,” which is effective for periods ending after December 15, 2004, 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 convertible senior debentures, which were issued in June 2002, (see Note 13 to our consolidated financial statements) meet the criteria defined in EITF Issue 4-08, 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 all years. See Notes 3(l) and 6 to our consolidated financial statements included in this Form 10-K.
 
(2)  Inclusion of restricted common shares, stock options and the effect of the conversion of our convertible debt to common shares would have an antidilutive effect on the 2005 diluted earnings per common share (i.e., the diluted earnings per common share would be greater than the basic earnings per common share). Accordingly, such common shares were excluded from the calculations of the 2005 diluted earnings per common share. See Notes 3(l) and 6 to our consolidated financial statements included in this Form 10-K.
 
(3)  Book value per common share, a financial measure often used by investors, is calculated using common shareholders’ equity, a non-GAAP financial measure, which represents total shareholders’ equity, a GAAP financial measure, reduced by the equity attributable to our preferred stock, which was issued during 2005. The common shareholders’ equity is divided by our common shares outstanding at each respective year end to derive book value per common share as reflected in the following table (in millions, except share amounts).
                                         
    At December 31,
     
    2006   2005   2004   2003   2002
                     
Total shareholders’ equity
  $ 2,083.6     $ 1,639.5     $ 1,568.2     $ 1,356.3     $ 1,027.0  
Less: equity related to preferred stock
    97.5       97.5                    
                               
Total common shareholders’ equity
  $ 1,986.1     $ 1,542.0     $ 1,568.2     $ 1,356.3     $ 1,027.0  
                               
Common shares outstanding
    71,140,948       69,127,532       64,754,978       64,996,166       65,003,963  
                               
Book value per common share
  $ 27.92     $ 22.31     $ 24.22     $ 20.87     $ 15.80  
                               
 
(4)  Based on our common shares outstanding of: 71,140,948 as of December 31, 2006; 69,127,532 as of December 31, 2005; 64,754,978 as of December 31, 2004; 64,996,166 as of December 31, 2003; and 65,003,963 as of December 31, 2002.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
      Odyssey Re Holdings Corp. is a holding company, incorporated in the state of Delaware, which owns all of the common shares of Odyssey America Reinsurance Corporation, its principal operating subsidiary. Odyssey America directly or indirectly owns all of the capital stock of the following companies: Clearwater Insurance Company; Clearwater Select Insurance Company; Odyssey UK Holdings Corporation; Newline Underwriting Management Ltd., which owns and manages Newline Syndicate 1218, a member of Lloyd’s of London; Newline Insurance Company Limited; Hudson Insurance Company; Hudson Specialty Insurance Company; and Napa River Insurance Services, Inc.
      We are a leading United States based underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis. We offer a broad range of both treaty and facultative reinsurance to property and casualty insurers and reinsurers. We also write insurance in the United States and through the Lloyd’s marketplace.
      Our gross premiums written for the year ended December 31, 2006 were $2,335.7 million, a decrease of $291.2 million, or 11.1%, compared to gross premiums written for the year ended December 31, 2005 of $2,626.9 million. Gross premiums written included reinstatement premiums related to catastrophe events of $5.4 million and $70.4 million for the years ended December 31, 2006 and 2005, respectively. Our business outside of the United States accounted for 45.8% of our gross premiums written for the year ended December 31, 2006, compared to 44.8% for the year ended December 31, 2005. For the years ended December 31, 2006 and 2005, our net premiums written were $2,160.9 million and $2,301.7 million, respectively. For the year ended December 31, 2006, we had net income available to common shareholders of $499.6 million and for the year ended December 31, 2005, we had a net loss available to common shareholders of $117.7 million. As of December 31, 2006, we had total assets of $8.9 billion and total shareholders’ equity of $2.1 billion.
      The property and casualty reinsurance and insurance industries use the combined ratio as a measure of underwriting profitability. The GAAP combined ratio is the sum of losses and loss adjustment expenses (“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 94.4% for the year ended December 31, 2006, compared to 117.6% for the year ended December 31, 2005.
      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. As additional information becomes available, including information from ceding companies, 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, 2006, 2005 and 2004, current year catastrophe events were $34.9 million, $537.9 million and $138.8 million, respectively.
      For the year ended December 31, 2005, the total current year catastrophe losses of $537.9 million include net losses and LAE of $445.9 million, which is after reinsurance of $241.1 million, related to Hurricanes Katrina, Rita and Wilma, which occurred during the third and fourth quarters of 2005. In addition to the net losses and LAE, we assumed $9.9 million in net reinstatement premiums received, resulting in an underwriting loss of $436.0 million related to these three hurricanes. In addition, for the year ended December 31, 2005, we incurred losses of $25.6 million related to Windstorm Erwin. For the year ended December 31, 2006, the loss estimates for Hurricanes Katrina, Rita and Wilma were increased by $49.4 million (11.1% of 2005 estimate) attributable to unexpected loss emergence on marine and Florida proportional property accounts. This increase was partially

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offset by reduced loss estimates on other prior period property catastrophes due to favorable emergence during the year.
      For the year ended December 31, 2004, the total current year catastrophe losses of $138.8 million include net losses and LAE of $93.4 million, which is after reinsurance of $77.8 million, related to Hurricanes Charley, Frances, Ivan and Jeanne (the “2004 Florida Hurricanes”). In addition to the net losses and LAE, we ceded $4.0 million in net reinstatement premiums paid, resulting in an underwriting loss of $97.4 million from these storms. As a result of the uncertainty and complexity in estimating losses from the 2004 Florida Hurricanes, we incurred additional underwriting losses of $3.1 million and $12.6 million, net of applicable reinstatement premiums, for the years ended December 31, 2006 and 2005, 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 Central and South America.
      The EuroAsia division consists of our international reinsurance business, which is geographically dispersed, mainly throughout the European Union, followed by Japan, Eastern Europe, the Pacific Rim, and the Middle East.
      The London Market division is comprised of our Lloyd’s of London business, in which we participate through our 100% ownership of Newline, our London branch office and our recently formed London-based casualty insurer Newline Insurance Company Limited. 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 malpractice, professional liability and non-standard personal auto.
Restatement of Consolidated Financial Statements
      On March 31, 2006, we restated our consolidated financial statements as of and for the years ended December 31, 2000 through 2004, as well as our unaudited financial information as of and for the nine months ended September 30, 2005, to correct for accounting errors associated with certain reinsurance contracts entered into by us between 1998 and 2004. On August 28, 2006, we restated our unaudited financial information as of March 31, 2006 and December 31, 2005 and for the three months ended March 31, 2006 and 2005, to correct for accounting errors associated with certain investments held by us, and on October 16, 2006 we filed an Annual Report on Form 10-K/ A to reflect the impact of this restatement on our consolidated financial statements as of and for the years ended December 31, 2001 through 2005. The total cumulative impact of these restatements through December 31, 2005 was to decrease shareholders’ equity by $19.6 million, after tax. The aggregate net effect of the restatements for the year ended December 31, 2005 was to increase net loss available to common shareholders by $17.3 million, and for the year ended December 31, 2004 was to increase net income available to common shareholders by $18.3 million. The effects of the restatements are reflected in this Management’s Discussion and Analysis and our consolidated financial statements and accompanying notes included in this Form 10-K.
Critical Accounting Estimates
      The consolidated financial statements and related notes included in Item 8 of this Form 10-K, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Odyssey Re Holdings Corp. and its subsidiaries. For a discussion of our significant accounting policies, see Note 3 to our consolidated financial statements.
      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

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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 quarterly. These reviews include the estimate of reinsurance premiums and premium related amounts, establishing deferred acquisition costs, an evaluation of the adequacy of reserves for unpaid losses and LAE, review of our reinsurance and retrocession agreements, an analysis of the recoverability of deferred income tax assets and an evaluation of the investment portfolio 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.

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      The following table displays, by division, the estimates included in our consolidated financial statements as of and for the years ended December 31, 2006, 2005 and 2004 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   2006   2005   2004   2006   2005   2004
                         
    Gross Premiums Written
Americas
  $ 218.5     $ 278.9     $ 274.1     $ (60.4 )   $ 4.8     $ 3.4  
EuroAsia
    132.1       122.9       115.6       9.2       7.3       39.6  
London Market
    38.5       73.0       61.2       (34.5 )     11.8       5.6  
                                     
Total
  $ 389.1     $ 474.8     $ 450.9     $ (85.7 )   $ 23.9     $ 48.6  
                                     
 
    Acquisition Costs
Americas
  $ 49.4     $ 60.0     $ 68.2     $ (10.6 )   $ (8.2 )   $ (28.1 )
EuroAsia
    40.6       36.5       34.5       4.1       2.0       10.9  
London Market
    3.0       6.6       8.9       (3.6 )     (2.3 )     (4.0 )
                                     
Total
  $ 93.0     $ 103.1     $ 111.6     $ (10.1 )   $ (8.5 )   $ (21.2 )
                                     
 
    Premiums Receivable
Americas
  $ 169.1     $ 218.9     $ 205.9     $ (49.8 )   $ 13.0     $ 11.5  
EuroAsia
    91.5       86.4       81.1       5.1       5.3       28.7  
London Market
    35.5       66.4       52.3       (30.9 )     14.1       6.7  
                                     
Total
  $ 296.1     $ 371.7     $ 339.3     $ (75.6 )   $ 32.4     $ 46.9  
                                     
 
    Unearned Premium Reserves
Americas
  $ 139.1     $ 172.4     $ 162.7     $ (33.3 )   $ 9.7     $ (4.9 )
EuroAsia
    100.8       96.6       97.3       4.2       (0.7 )     41.6  
London Market
    13.1       22.2       13.6       (9.1 )     8.6       (5.3 )
                                     
Total
  $ 253.0     $ 291.2     $ 273.6     $ (38.2 )   $ 17.6     $ 31.4  
                                     
      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.

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      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 10% 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 smaller 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 which 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 which represents more than 2.4% of our gross premiums written in 2006. As a result, we believe the risks of material changes 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 which 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.
      Management 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 insurance and reinsurance 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 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 and ACR reserves. 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.

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      We rely on initial and subsequent claims reports received from ceding companies to establish our estimates of losses and LAE. The types of information that we receive from ceding companies generally vary by the type of contract. Proportional, or quota share, contracts are typically reported on a quarterly basis, providing premium and loss activity as estimated by the ceding company. Reporting for excess of loss and facultative contracts includes detailed individual claim information, including a description of the loss, confirmation of liability by the cedant and the cedant’s current estimate of the ultimate liability under the claim. Upon receipt of claim notices from cedants, 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 $17.2 million and $17.3 million as of December 31, 2006 and December 31, 2005, 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. This data primarily consists of loss amounts reported by the ceding companies, loss payments made by ceding companies, and premiums written and earned reported by the ceding companies or estimated by us. Underwriting and claim information provided by our ceding companies is aggregated by the year in which each treaty 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, 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 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 the ceding company for every treaty.

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Consequently, actuarial methods utilizing this information generally cannot be relied upon by us in our loss reserve estimation process. As a result, for much or 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 analysis of internally developed pricing trends across reserve cells, to premium earned on that business. Adjustment 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 reserve reviews, which include a reassessment of loss development and expected loss ratio assumptions, on an annual basis. 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 effects to our financial results. We believe that the recorded estimates represent the best estimate of unpaid losses and LAE based on the information available at December 31, 2006.
      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.
      We reported net adverse development for prior years of $139.9 million, $172.7 million, and $190.0 million for the years ended December 31, 2006, 2005, and 2004, respectively. The increases in prior year loss estimates for these periods were due to a reevaluation of loss reserve assumptions principally related to United States casualty business written in 2001 and prior. Our actual loss emergence reported in 2006, 2005, and 2004 for United States casualty business written prior to 2002 was considerably greater than expectations, which were based on historical loss emergence information available prior to 2006, 2005, and 2004, respectively. Upon consideration of this new loss emergence information received during 2006, 2005, and 2004, we revised the loss development assumptions used in our Untied States casualty business loss reserving analyses and increased ultimate loss, which had the effect of increasing our loss reserves for this business.
      The ultimate settlement value of loss and LAE related to business written in prior periods, for the years ended December 31, 2006, 2005, and 2004, exceeded our estimates of reserves for losses and LAE as previously established at December 31, 2005, 2004, and 2003 by 3.6%, 5.4%, and 8.0%, respectively. Any future impact to income of changes in losses and LAE estimates may vary considerably from historical experience. Our estimates of ultimate loss exposures are based upon the information we have available at any give point in time and our assumptions based upon that information. Every 1% point difference in the ultimate settlement value of loss exposures compared to our estimate of reserves for losses and loss adjustment expenses as of December 31, 2006 will impact pre-tax income by $44.0 million.

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      If a change were to occur in the frequency and severity of claims underlying our December 31, 2006 unpaid losses and loss adjustment expenses, the approximate change in pre-tax income would be as follows (in millions):
         
    Decrease in
    Pre-tax
    Income
     
2.50% unfavorable change
  $ 110.1  
5.00% unfavorable change
    220.2  
7.50% unfavorable change
    330.2  
      Historically, our actual results have varied considerably in certain instances from our estimates of losses and LAE because historical loss emergence trends have not been indicative of future emergence for certain segments of our business. In recent years, we experienced loss emergence, resulting from a combination of higher claim frequency and severity as reported by our cedants, greater than expectations that were established based on a review of prior years’ loss emergence trends, particularly for business written in the period 1997 through 2001. 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 1990s through early 2000s.
      The following table provides detail on net adverse (favorable) loss and LAE development for prior years, by division, for the years ended December 31, 2006, 2005, and 2004 (in millions):
                           
    2006   2005   2004
             
Americas
  $ 212.7     $ 213.2     $ 184.8  
EuroAsia
    (9.0 )     (8.7 )     6.6  
London Market
    (24.8 )     (22.8 )     (0.2 )
U.S. Insurance
    (39.0 )     (9.0 )     (1.2 )
                   
 
Total loss and LAE development
  $ 139.9     $ 172.7     $ 190.0  
                   
      The Americas division reported net adverse loss development for prior years of $212.7 million, $213.2 million, and $184.8 million for the years ended December 31, 2006, 2005, and 2004, respectively. For the year ended December 31, 2006, the increase in prior year loss estimates includes a $43.0 million increase in loss estimates for property catastrophes, principally due to unexpected marine loss emergence on Hurricane Rita and the triggering of industry loss warranty contracts written by us for Hurricane Wilma due to unexpected deterioration in industry-wide Wilma loss estimates as well as unexpected loss emergence on Florida proportional property contracts in the period. In addition, asbestos loss estimates were increased by $27.1 million resulting from the annual review of these liabilities. The remaining net adverse loss development on prior years of $142.6 million is principally attributable to increased loss estimates due to loss emergence greater than expectations in 2006 on U.S. casualty business written in 2001 and prior. Partially offsetting this increase is a decline in loss estimates due to loss emergence less than expectations for United States casualty business in more recent years. For the year ended December 31, 2005, the increase in prior year loss estimates includes a $5.9 million increase in the loss estimates for prior period catastrophe losses due to greater than expected loss emergence on the 2004 Florida Hurricanes, and $41.2 million for increased asbestos loss estimates resulting from the annual review of these liabilities. The remaining net adverse loss development on prior years of $166.1 million is principally attributable to loss emergence greater than expectations in 2005 on U.S. casualty business written in 2001 and prior, partially offset by a decline in loss estimates for United States casualty business in more recent years due to loss emergence less than expectations in the period. For the year ended December 31, 2004, the increase in prior year loss estimates includes a $5.7 million increase in loss estimates for prior period catastrophe losses due to greater than expected loss emergence in 2004 on the Mexico floods which occurred in 2003, and $30.0 million for increased asbestos loss estimates resulting from the annual review of these liabilities.

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The remaining net adverse loss development on prior years of $149.1 million is principally attributable to loss emergence greater than expectations in 2004 on U.S. casualty business written in 2001 and prior, partially offset by a decline in loss estimates for United States casualty business in more recent years due to emergence less than expectations in the period. The difficulty in anticipating the ultimate losses attributable to U.S. casualty business is due to calendar period emergence exceeding expectations that were established based on information available in prior years. This includes estimating the cost of known claims and, more importantly, estimating the cost of claims where no reports have yet been made. In addition, the ability to anticipate the ultimate value of losses is made difficult by the long period of time that elapses before an actual loss is known and determinable, particularly for professional liability lines where claims are often litigated to achieve settlement. In particular, competitive market conditions during the 1997 to 2001 period have resulted in unexpectedly prolonged emergence patterns as a result of: (i) an increasing level of deductibles, (ii) expanded coverage, (iii) expanded policy terms and (iv) a proliferation of corporate improprieties and bankruptcies. Losses attributable to general liability and excess workers’ compensation classes of business during the 1997 to 2001 period have also demonstrated a higher incidence of severity due to relatively broad coverage available under policy forms used during these periods. These factors have adversely impacted our ability to estimate losses and LAE in subsequent periods attributable to business written during this period.
      The EuroAsia division reported net favorable loss development for prior years of $9.0 million and $8.7 million for the years ended December 31, 2006 and 2005, respectively, and net adverse loss development of $6.6 million for the year ended December 31, 2004. For the year ended December 31, 2006, the reduction in prior year loss estimates is driven by favorable emergence on prior period catastrophe losses, marine and credit lines of business in the period. For the year ended December 31, 2005, the reduction in prior year loss estimates is principally attributable to favorable loss emergence on liability and bond exposures, partially offset by adverse development on prior year catastrophes of $7.4 million predominantly attributable to unexpected claim emergence in the period on Typhoon Songda and the Indonesian earthquake and resulting tsunami. For the year ended December 31, 2004, the increase in prior year loss estimates is principally related to emergence exceeding our expectations on bond exposures in 2004.
      The London Market division reported net favorable development for prior years of $24.8 million, $22.8 million, and $0.2 million for the years ended December 31, 2006, 2005, and 2004, respectively. For the year ended December 31, 2006, the reduction in prior year loss estimates is principally related to favorable loss emergence on satellite, accident and health, non-catastrophe property, and aviation exposures, partially offset by $3.6 million of net adverse loss development on prior period catastrophe losses in 2006. For the year ended December 31, 2005, the reduction in prior year loss estimates is principally due to favorable emergence on aviation, satellite and non-catastrophe property exposures, partially offset by $1.7 million of net adverse loss development on prior period catastrophe losses in the period.
      The U.S. Insurance division reported net favorable development for prior years of $39.0 million, $9.0 million, and $1.2 million for the years ended December 31, 2006, 2005, and 2004, respectively. For the year ended December 31, 2006, the reduction in prior year loss estimates is principally related to favorable emergence on medical malpractice business in 2006. For the year ended December 31, 2005, the reduction in prior year loss estimates is principally related to loss emergence less than expectations for medical malpractice and general liability exposures in the 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: (i) developments in tort liability law; (ii) legislative attempts at asbestos liability reform; (iii) uncertainties regarding the future scope of the Terrorism Risk Insurance Act of 2002; (iv) an increase in shareholder derivative suits against corporations and their officers and directors; and (v) increasing governmental focus on, and involvement in, the insurance and reinsurance industry generally. 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

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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 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 in “Liquidity and Capital Resources.”
      The following table summarizes, by type of reserve, the unpaid losses and LAE reserve as of December 31, 2006 and 2005. Case reserves represent unpaid claim reports provided by cedants to us plus additional reserves determined by us. IBNR is the estimate of unreported loss liabilities established by us.
                                                   
    As of December 31,
     
    2006   2005
         
    Case       Total   Case       Total
    Reserves   IBNR   Reserves   Reserves   IBNR   Reserves
                         
    (In millions)
Americas
                                               
 
Gross
  $ 1,661.5     $ 1,285.0     $ 2,946.5     $ 1,889.8     $ 1,245.2     $ 3,135.0  
 
Ceded
    (292.1 )     (135.7 )     (427.8 )     (605.5 )     (187.0 )     (792.5 )
                                     
 
Net
    1,369.4       1,149.3       2,518.7       1,284.3       1,058.2       2,342.5  
                                     
EuroAsia
                                               
 
Gross
    322.3       258.5       580.8       267.5       212.1       479.6  
 
Ceded
    (3.4 )     (1.8 )     (5.2 )     (9.7 )     (5.3 )     (15.0 )
                                     
 
Net
    318.9       256.7       575.6       257.8       206.8       464.6  
                                     
London Market
                                               
 
Gross
    395.2       649.8       1,045.0       345.6       664.3       1,009.9  
 
Ceded
    (67.4 )     (69.5 )     (136.9 )     (112.8 )     (110.6 )     (223.4 )
                                     
 
Net
    327.8       580.3       908.1       232.8       553.7       786.5  
                                     
U.S. Insurance
                                               
 
Gross
    160.6       409.2       569.8       121.6       371.6       493.2  
 
Ceded
    (48.2 )     (120.9 )     (169.1 )     (49.6 )     (126.3 )     (175.9 )
                                     
 
Net
    112.4       288.3       400.7       72.0       245.3       317.3  
                                     
Total
                                               
 
Gross
    2,539.6       2,602.5       5,142.1       2,624.5       2,493.2       5,117.7  
 
Ceded
    (411.1 )     (327.9 )     (739.0 )     (777.6 )     (429.2 )     (1,206.8 )
                                     
 
Net
  $ 2,128.5     $ 2,274.6     $ 4,403.1     $ 1,846.9     $ 2,064.0     $ 3,910.9  
                                     
      Provision for IBNR in unpaid losses and LAE at December 31, 2006 is $2,274.6 million. For illustration purposes, a change in the expected loss ratio expectations for recent treaty years that increases the year ended December 31, 2006 calendar year loss ratio by 2.5 loss ratio points would increase IBNR by $55.6 million. A change in loss emergence trends that increases unpaid losses and LAE at December 31, 2006 by 2.5% would increase IBNR by $110.1 million.
      We have exposure to asbestos, environmental pollution and other latent injury damage claims resulting from policies written prior to 1986. Exposure arises from reinsurance contracts under which we assumed liabilities, on an indemnity or assumption basis, from ceding companies, primarily in connection with general liability insurance policies issued by such ceding companies. Our estimate of our ultimate liability for such 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.

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      Estimation of ultimate asbestos and environmental liabilities is unusually difficult due to several significant issues surrounding these exposures. Among the issues are: (i) the long period between exposure and manifestation of an injury; (ii) difficulty in identifying the sources of asbestos or environmental contamination; (iii) difficulty in allocating responsibility or liability for asbestos or environmental damage; (iv) difficulty determining whether coverage exists; (v) changes in underlying laws and judicial interpretation of those laws; and (vi) uncertainty regarding the identity and number of insureds with potential asbestos or environmental exposure.
      Several additional factors have emerged in recent years regarding asbestos exposure that further compound the difficulty in estimating ultimate losses for this exposure. These factors include: (i) continued growth in the number of claims filed due to an increasingly aggressive plaintiffs’ bar; (ii) an increase in claims involving defendants formerly regarded as peripheral; (iii) growth in the use of bankruptcy filings by companies as a result of asbestos liabilities, which companies in some cases attempt to resolve asbestos liabilities in a manner that is prejudicial to insurers; (iv) concentration of claims in states with laws or jury pools particularly favorable to plaintiffs; and (v) the potential that states or the federal government may enact legislation on asbestos litigation reform.
      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, 2006, of our asbestos and environmental losses and LAE, net of reinsurance, are $189.0 million and $26.7 million, respectively. See Note 10 to the consolidated financial statements for additional historical information on losses and LAE reserves for these exposures.
      The following tables provide the historical gross and net asbestos and environmental losses and LAE incurred for the years ending December 31, 2006, 2005 and 2004 (in millions).
                         
    2006   2005   2004
             
Asbestos
                       
Gross losses and LAE incurred
  $ 62.5     $ 54.2     $ 54.2  
Net losses and LAE incurred
    27.1       41.2       30.0  
 
Environmental
                       
Gross losses and LAE incurred
  $ (0.6 )   $ 9.7     $ 2.8  
Net losses and LAE incurred
    (2.2 )     (0.9 )     (21.1 )
      The asbestos open claim count as of December 31, 2006 was 1,553, amounting to $228.5 million in gross case losses and LAE reserves. The largest 10 reported claims account for 15.2% of the gross case reserves, with an average reserve of $3.5 million. The asbestos open claim count as of December 31, 2005 was 1,532, amounting to $206.0 million in gross case losses and LAE reserves. The largest 10 reported claims account for 15.7% of the gross case reserves, with an average reserve of $3.2 million. Gross case reserves increased in 2006, as newly reported claims and additional reported reserves on existing claims more than offset case reserve reductions associated with claim payments in the year. Based on an aggregation of claims by insured, our 10 largest insured involvements account for 42.7% of our gross case reserves at December 31, 2006, compared to 47.8% at year end 2005. Based on our annual reserve study, we increased net asbestos loss reserves by $27.1 million based on the observed trends in our internal loss data as well as external loss trends.
      The environmental open claim count as of December 31, 2006 was 738, amounting to $28.9 million in gross case losses and LAE reserves. The largest 10 reported claims account for 28.0% of the gross case reserves, with an average case reserve of $0.8 million. The environmental open claim count as of December 31, 2005 was 1,373, amounting to $32.2 million in gross case losses and LAE reserves. The largest 10 reported claims account for 24.2% of the gross case reserves, with an average case reserve of $0.8 million. Overall gross case reserves decreased in 2006, 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 635, or 46%, during calendar year 2006 due to the closing of many small case reserved claims not expected to generate a payment based on the most recent information available to us. Based on an aggregation of claims by insured, our 10 largest insured involvements account for 45.7% of our gross case reserve as of December 31, 2006, compared to 45.1% as of

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December 31, 2005. Based on our annual reserve study, we decreased environmental net loss reserves by $2.2 million based on the observed trends in our internal loss data.
      The following table provides historical gross asbestos and environmental outstanding claim information for the years ended December 31, 2006 and 2005 (in millions):
                                                                   
    As of December 31,
     
    2006   2005
         
        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 open claims
    10     $ 34.7       15.2 %   $ 3.5       10     $ 32.3       15.7 %   $ 3.2  
 
All other claims
    1,543       193.8       84.8       0.1       1,522       173.7       84.3       0.1  
                                                 
 
Total
    1,553     $ 228.5       100.0 %   $ 0.1       1,532     $ 206.0       100.0 %   $ 0.1  
                                                 
By Insured
                                                               
 
Largest 10 insureds on open claims
    10     $ 97.5       42.7 %   $ 9.8       10     $ 98.4       47.8 %   $ 9.8  
 
All other insureds
    300       131.0       57.3       0.4       287       107.6       52.2       0.4  
                                                 
 
Total
    310     $ 228.5       100.0 %   $ 0.7       297     $ 206.0       100.0 %   $ 0.7  
                                                 
Environmental
                                                               
By Claim
                                                               
 
Largest 10 open claims
    10     $ 8.1       28.0 %   $ 0.8       10     $ 7.8       24.2 %   $ 0.8  
 
All other claims
    728       20.8       72.0       0.0       1,363       24.4       75.8       0.0  
                                                 
 
Total
    738     $ 28.9       100.0 %   $ 0.0       1,373     $ 32.2       100.0 %   $ 0.0  
                                                 
By Insured
                                                               
 
Largest 10 insureds on open claims
    10     $ 13.2       45.7 %   $ 1.3       10     $ 14.5       45.1 %   $ 1.5  
 
All other insureds
    375       15.7       54.3       0.0       577       17.7       54.9       0.0  
                                                 
 
Total
    385     $ 28.9       100.0 %   $ 0.1       587     $ 32.2       100.0 %   $ 0.0  
                                                 
      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 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 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 purchase 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 selected portions of our business outside of the United States. Our catastrophe excess of loss reinsurance protection available for losses in the United States for 2005 was exhausted by Hurricanes Katrina, Rita and Wilma during the year ended December 31, 2005.
      We seek to limit the probable maximum loss to a specific level for severe catastrophic events. Currently, we generally seek to limit the probable maximum loss, after tax, including the effect of reinsurance protection and applicable reinstatement premiums, to a maximum of approximately 15% of statutory surplus for a severe

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catastrophic event in any geographic zone that could be expected to occur once in every 250 years, although this can change based on market opportunities. There can be no assurances that we will not incur losses greater than 15% of our statutory surplus from one or more catastrophic events due to the inherent uncertainties in estimating the frequency and severity of such events, the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, and the modeling techniques and the application of such techniques.
      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 obligation 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, reinsurance assumed, reinsurance ceded and net amounts (in millions) for these items follow:
                           
    Year Ended December 31,
     
    2006   2005   2004
             
Premiums Written
                       
 
Direct
  $ 712.1     $ 763.3     $ 702.1  
 
Add: assumed
    1,623.6       1,863.7       1,948.7  
 
Less: ceded
    174.8       325.3       289.0  
                   
 
Net
  $ 2,160.9     $ 2,301.7     $ 2,361.8  
                   
Premiums Earned
                       
 
Direct
  $ 728.9     $ 737.2     $ 698.0  
 
Add: assumed
    1,706.6       1,873.1       1,936.4  
 
Less: ceded
    209.7       333.5       300.9  
                   
 
Net
  $ 2,225.8     $ 2,276.8     $ 2,333.5  
                   
      The total amount of reinsurance recoverables on paid and unpaid losses as of December 31, 2006 and 2005 was $798.8 million and $1,347.7 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 collectibility of individual balances. The reserve for uncollectible recoverables as of December 31, 2006 and 2005 was $42.5 million and $30.9 million, respectively, and has been netted against reinsurance recoverables on loss payments. We have also established a reserve for potentially uncollectible assumed reinsurance balances of $1.9 million and $6.3 million as of December 31, 2006 and 2005, respectively, which has been netted against premiums receivable.
      Our reinsurance protection, which covered certain amounts of our 1995 and prior unpaid losses and loss adjustment expenses (the “1995 Stop Loss Agreement”), provided by nSpire Re Limited (“nSpire Re”), a wholly-owned subsidiary of Fairfax, was commuted effective September 29, 2006, for consideration of $63.2 million. In accordance with the terms of the commutation agreement, we commuted ceded loss reserves of $71.8 million, resulting in a pre-tax commutation loss of $5.5 million, recorded in the third quarter of 2006. The 1995 Stop Loss Agreement was originally entered into with Skandia Insurance Company Ltd. (“Skandia”) in conjunction with the purchase of Clearwater in 1996. Pursuant to the agreement, we paid a premium of $60.5 million in 1995 for protection of $175.0 million in excess of Clearwater’s December 31, 1995 reserves for net unpaid losses and loss adjustment expenses and reserves for uncollectible reinsurance. In January 1999, the liabilities under the contract were assigned by Skandia to nSpire Re for $97.0 million in consideration. Following the assignment to nSpire Re, we accounted for the 1995 Stop Loss Agreement as retroactive reinsurance. Accordingly, losses ceded under the contract in excess of $97.0 million in the aggregate had been recorded as a deferred gain rather than as a benefit in the applicable periods. The deferred gain had been amortized into income

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over the estimated remaining settlement period of the underlying claims. As of December 31, 2005, we have utilized the full limit of $175.0 million under the 1995 Stop Loss Agreement. We ceded losses of $17.5 million to the 1995 Stop Loss Agreement for the years ended December 2005 and 2004, resulting in income of $11.3 million ($7.3 million after tax) and $8.7 million ($5.7 million after tax) for the years ended December 31, 2005 and 2004, respectively. There were no cessions to this agreement in 2006. We received $78.0 million in cash from nSpire Re on March 29, 2006, which reduced the outstanding recoverable. As the $78.0 million was received in advance of the payment of the underlying claims by us, it is included as an adjustment to net unpaid losses and loss adjustment expenses, which increased by $78.0 million. In connection with the receipt of this cash, for the three months ended March 31, 2006, we have recognized $19.3 million ($12.5 million after tax) of the cumulative deferred gain, an increase of $17.9 million ($11.7 million after tax) over the anticipated deferred gain amortization, as a reduction in losses and loss adjustment expenses. During the three months ended June 30, 2006, we amortized an additional $1.1 million of the deferred gain.
      For years ending December 31, 2001 and prior, we utilized whole account aggregate excess of loss retrocessional coverage (“Whole Account Excess of Loss Agreements”) to manage our exposures, including catastrophic occurrences and the potential accumulation of exposures. As further discussed below, during the second quarter of 2006, we commuted certain Whole Account Excess of Loss Agreements. In addition, Whole Account Excess of Loss Agreements were purchased covering underwriting years 2002 through 2004 though no losses were ceded to these coverages. The Whole Account Excess of Loss Agreements are broad in coverage, and include property and casualty insurance and reinsurance business written on a worldwide basis, as applicable. Classes of business excluded from coverage primarily include non-traditional business. In each calendar year, we have the ability to cede losses attributable to certain prior periods to the Whole Account Excess of Loss Agreements to the extent there are limits remaining for the period. These agreements cover business written or incepting during a defined period of time (underwriting year), which is typically twelve months, or in other cases, business earned during a defined period of time (accident year). The Whole Account Excess of Loss Agreements were purchased on an underwriting year basis for 1996 through 2004 and on an accident year basis for 1994 and 1995. Accident year agreements were also purchased to supplement the 1996 and 1997 underwriting year agreements. All of these Whole Account Excess of Loss Agreements covering prior underwriting and accident years have been commuted except for two agreements covering underwriting years 2000 and 2001. Loss cession limits on these two covers still outstanding have been fully utilized as of December 31, 2005. Each agreement provides for recoveries from the retrocessionaires, subject to a limit, in the event that the net subject business results in a composite ratio (the sum of the commission and loss ratios), or in some agreements a loss ratio, in excess of a specified attachment point. The attachment point is net of other inuring third party reinsurance. The premium paid, net of commission, by us is calculated based on a contractual fixed rate that is applied to the total premiums covered by the retrocession agreements. Each agreement includes a provision for additional premium, subject to a maximum, based on the amount of loss activity under the agreement. Reinsurance recoverables on paid and unpaid losses are fully secured by letters of credit or funds held by us.
      We have the ability to cede losses that are attributable to the covered periods to these agreements in any future period, to the extent there is remaining coverage, even in cases where the losses emerge in periods long after the period when the business was written. We have the ability to cede losses to multiple agreements in a calendar period, to the extent that the losses pertain to coverage periods with remaining limits. Our ability to cede losses in any given calendar year that are attributable to prior periods will depend on the nature of the risk which generated the loss, the time period from which the losses originate and whether there are limits remaining covering the subject period. Losses attributable to prior periods are ceded to the treaties and recorded in the period in which they are ceded. Additional premiums are generally due under an agreement if additional losses are ceded to the agreement, subject to a maximum amount. Additional premiums, if any, are determined and recorded in the period when losses are ceded. When additional premiums are due, the interest on the funds attributable to the additional premiums ceded is typically calculated based on the inception period of the contract and the cumulative interest expense is recognized in the period when additional premiums are due.
      During the second quarter of 2006, we commuted certain Whole Account Excess of Loss Agreements for total consideration of $80.6 million through the settlement of funds held under reinsurance contracts (included as a liability on our consolidated balance sheet) and the receipt of cash from the reinsurer, net of the settlement of

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outstanding commissions receivable. During the second quarter of 2006, the commutation of these contracts decreased our paid and unpaid reinsurance recoverables as of December 31, 2005 by $71.0 million. This commutation covered all outstanding Whole Account Excess of Loss Agreements applicable to underwriting and accident years 1999 and prior as well as the reinsurer’s participation on underwriting years 2000 and 2001.
      The following table shows the amount of loss and LAE attributable to each coverage period ceded to the Whole Account Excess of Loss Agreements for the years ended December 31, 2006, 2005 and 2004 (in millions):
                           
Coverage Period   2006   2005   2004
             
Prior years
  $     $ (2.3 )   $ 2.9  
2000 underwriting year
    0.2       2.4       (0.9 )
2001 underwriting year
    9.5       16.4       3.1  
                   
 
Total
  $ 9.7     $ 16.5     $ 5.1  
                   
      The maximum coverage available under the Whole Account Excess of Loss Agreements is based on a proportion of net premiums earned during each of the coverage periods, subject to a predetermined aggregate limit. The maximum coverage available will increase or decrease as premium adjustments applicable to a particular coverage period, if any, are recognized. The attachment point represents the aggregate amount of losses, and in certain cases, acquisition costs, expressed as a proportion of net premiums earned, that will be retained by us. Losses attributable to business written during a particular period in excess of the attachment point, subject to a maximum limit, are ceded to the reinsurer. The following table provides a summary of the significant terms of the Whole Account Excess of Loss Agreements that were in effect as of December 31, 2006 (in millions).
                                 
Coverage Period   Attachment Basis   Aggregate Limit   Remaining Limit   Attachment Point
                 
2000 underwriting year
    Composite ratio     $ 69.1             90.6 %
2001 underwriting year
    Composite ratio       85.4             90.4 %
      The following table provides a summary of the cumulative experience, including the income (loss) before income taxes, under each agreement since its inception. Several of these agreements were purchased by predecessor companies prior to the period in which they were included in our consolidated financial statements. As a result, amounts recorded in our consolidated statement of operations include only the amounts ceded subsequent to the date in which the covered company was included in our consolidated financial statements (in millions).
                                                 
    Ceded   Ceded   Ceded   Net       Income (Loss)
    Earned   Acquisition   Loss and   Underwriting   Interest   Before Income
Coverage Period   Premium   Costs   LAE   Income   Expense   Taxes
                         
1994 accident year
  $ 32.6     $ 9.8     $ 37.3     $ 14.5     $ 26.6     $ (12.1 )
1996 underwriting year
    41.4       11.4       71.5       41.5       16.7       24.8  
1997 accident year
    25.8             50.0       24.2       10.8       13.3  
1997 underwriting year
    42.8       11.8       65.8       34.7       13.8       20.9  
1998 accident year
    11.6             25.0       13.4       4.0       9.4  
1998 underwriting year
    17.8       3.1       30.9       16.2       4.9       11.3  
1999 underwriting year
    43.3       8.3       69.8       34.8       13.9       20.8  
2000 underwriting year
    90.6       29.6       137.4       76.4       41.8       34.6  
2001 underwriting year
    58.0       14.5       94.9       51.4       25.3       26.1  
      The Whole Account Excess of Loss Agreements provide that we may withhold a significant portion of the premium payable to the retrocessionaires in funds held accounts, which, under certain circumstances, may be set-off against the retrocessionaires’ losses and other obligations owed to us. These funds are shown as a liability in our consolidated balance sheets as funds held under reinsurance contracts. Interest on the funds held account, calculated using a contractual fixed interest rate of approximately 7.0% for those agreements with amounts ceded, is credited quarterly by us, which results in an increase in the funds held account balance and is recorded as an

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expense, reducing our investment income. Loss payments are deducted from the funds held account balance, which reduces the liability as such payments are made.
      In addition to the Whole Account Excess of Loss Agreements, we entered into a three-year aggregate excess of loss reinsurance contract protecting our United States facultative casualty business for underwriting years 1998 through 2000 (“Facultative Excess of Loss Agreement”) which indemnified us for losses in excess of an annual retention, subject to an annual limit of liability. During December 2006, we entered into a commutation and release agreement related to this contract, pursuant to which all rights, obligations and liabilities were fully and finally settled. As a result of the commutation, a pre-tax loss of $1.4 million was recognized. Additionally, reinsurance recoverables have been reduced by $16.1 million for the year ended December 31, 2006. The aggregate limit for underwriting years 1998, 1999 and 2000 was equal to 40% of our total facultative net premiums written, subject to a minimum annual dollar limit of $7.4 million, and a maximum annual dollar limit of $18.5 million. The aggregate limit of liability is $41.6 million across all years, which has been fully utilized. The retention in each year was equal to the greater of $9.3 million or 51.0% of the subject written premium income, together with amounts contributed to a loss payment account under the agreement. We maintained a loss payment account for the benefit of the reinsurer, equal to 18.5% of the subject written premium income for underwriting year 1998, and 18.9% for 1999 and 2000. A minimum interest credit is applied to the loss payment account, equal to the one year U.S. Treasury Bill yield plus 75 basis points. As of December 31, 2006, the loss payment account had a zero balance. The principal reinsurer under these agreements is Underwriters Reinsurance Company (Barbados) Inc.
      The income (loss) before income taxes reflected in our consolidated statements of operations related to our Whole Account and Facultative Excess of Loss Agreements for the years ended December 31, 2006, 2005, and 2004 is as follows (in millions):
                         
    2006   2005   2004
             
Ceded earned premium
  $ (1.7 )   $ (13.9 )   $ (6.6 )
Ceded acquisition costs
    1.5       5.3       2.7  
Ceded losses and LAE
    8.3       18.7       5.6  
                   
Net underwriting income
    8.1       10.1       1.7  
Interest expense
    (8.7 )     (18.7 )     (20.1 )
                   
Loss before income taxes
  $ (0.6 )   $ (8.6 )   $ (18.4 )
                   
      We have recorded interest expense associated with other ceded reinsurance agreements, and not reflected in the table above, of $571 thousand, $372 thousand and $18 thousand for the years ended December 31, 2006, 2005 and 2004, respectively.
      As indicated by the table above, for the years ended December 31, 2006, 2005 and 2004, we ceded $8.3 million, $18.7 million and $5.6 million, respectively, of losses and LAE, primarily to the 2001 aggregate excess of loss treaty. The increase in losses ceded to our Whole Account and Facultative Excess of Loss Agreements, for the years ended December 31, 2006, 2005 and 2004, were primarily attributable to adverse loss development on casualty business written in 2001. Losses ceded to our Whole Account and Facultative Excess of Loss Agreements represented 1.1% of our pre-tax income in 2006, 10.3% of our pre-tax loss in 2005 and 1.8% in pre-tax income in 2004.
      The reinsurance recoverables on paid and unpaid losses related to the Whole Account and Facultative Excess of Loss Agreements are $122.2 million and $251.9 million as of December 31, 2006 and 2005, respectively. Funds held under reinsurance contracts, related to these agreements, shown as a liability on our consolidated balance sheets, reflect $83.4 million and $150.7 million as of December 31, 2006 and 2005, respectively. Other collateral related to these agreements is $43.2 million and $124.8 million as of December 31, 2006 and 2005, respectively.

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     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, 2006 and 2005, a net deferred tax asset of $185.0 million and $138.8 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
      On a quarterly basis, we review our investment portfolio for declines in value, and specifically consider securities, the market values of which have declined to less than 80% of their cost or amortized cost at the time of review. Generally, a change in the market or interest rate environment does not constitute an impairment of an investment, but rather a temporary decline in value. Temporary declines in investments will be recorded as unrealized depreciation 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. In addition, we consider our ability and intent to hold the security to recovery when evaluating possible impairments. 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, 2006 Compared to Year Ended December 31, 2005
     Underwriting Results
      Gross Premiums Written. Gross premiums written for the year ended December 31, 2006 decreased by $291.2 million, or 11.1%, to $2,335.7 million compared to $2,626.9 million for the year ended December 31, 2005, as reflected in the following table (in millions):
                                 
    Year Ended    
    December 31,   Change
         
Division   2006   2005   $   %
                 
Americas
  $ 924.2     $ 1,130.5     $ (206.3 )     (18.2 )%
EuroAsia
    561.2       543.8       17.4       3.2  
London Market
    340.7       431.6       (90.9 )     (21.1 )
U.S. Insurance
    509.6       521.0       (11.4 )     (2.2 )
                         
Total gross premiums written
  $ 2,335.7     $ 2,626.9     $ (291.2 )     (11.1 )%
                         
      Total reinsurance gross premiums written for the year ended December 31, 2006 were $1,623.6 million compared to $1,863.6 million for 2005, a decrease of 12.9%. Total insurance gross premiums written for the year

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ended December 31, 2006, which includes our U.S. Insurance division and our Lloyd’s syndicate (which is part of London Market), were $712.1 million, compared to $763.3 million for 2005, a decrease of 6.7%. For the year ended December 31, 2006, total reinsurance gross premiums written represented 69.5% (71.0% in 2005) of our business and insurance represented the remaining 30.5% (29.0% in 2005) of our business.
      Gross premiums written include reinstatement premiums of $5.4 million and $70.4 million for the years ended December 31, 2006 and 2005, respectively. Reinstatement premiums in 2005 were primarily related to reinstating the coverage under property catastrophe excess of loss reinsurance contracts following Hurricanes Katrina, Rita and Wilma. The higher level of reinstatement premiums in 2005 was attributable to the significant number of full limit losses resulting from Hurricanes Katrina, Rita and Wilma in 2005. Excluding reinstatement premiums in each period, gross premiums written would be $2,330.3 million and $2,556.5 million for the years ended December 31, 2006 and 2005, respectively, representing a decrease of $226.2 million, or 8.8%.
      Americas. Gross premiums written in the Americas division for the year ended December 31, 2006 were $924.2 million, a decrease of $206.3 million, or 18.2%, as compared to $1,130.5 million for the year ended December 31, 2005. These amounts represent 39.6% of our gross premiums written for the year ended December 31, 2006 and 43.1% in 2005. These amounts include reinstatement premiums of $4.0 million and $32.0 million for the years ended December 31, 2006 and 2005, respectively, which principally relate to Hurricanes Katrina, Rita and Wilma in 2005. Excluding reinstatement premiums in each period, gross premiums written would be $920.2 million and $1,098.5 million for the years ended December 31, 2006 and 2005, respectively, representing a decrease of $178.3 million, or 16.2% over the period. Gross premiums written across each geographic region of the Americas are as follows:
  •  United States — Gross premiums written of $756.4 million for the year ended December 31, 2006 decreased $173.5 million, or 18.7%, compared to $929.9 million for the year ended December 31, 2005. The decrease in the United States is in all classes of business. Property business decreased by $59.8 million, or 23.7%, to $192.3 million in 2006 from $252.1 million in 2005 as we reduced our proportional catastrophe exposed business in certain peak zones combined with a reduction in reinstatement premiums. Alternative risk and specialty business decreased by $58.7 million as we exited or reduced our writings in these classes of business. Treaty and facultative casualty business decreased by $43.5 million, or 7.9%, to $504.0 million in 2006 from $547.5 million in 2005 due to an increase in competitive market conditions and the cancellation of certain business that did not meet our underwriting criteria. All other classes of business accounted for the remaining decrease of $11.5 million.
 
  •  Latin America — Gross premiums written of $134.9 million for the year ended December 31, 2006 decreased $13.7 million, or 9.2%, compared to $148.6 million for the year ended December 31, 2005. The decrease is principally due to a $6.3 million decrease in property proportional business and a $2.8 million decrease in property excess business. We continue to see increased competition across our Latin America operations.
 
  •  Canada — Gross premiums written of $32.0 million for the year ended December 31, 2006 decreased $18.4 million, or 36.5%, compared to $50.4 million for the year ended December 31, 2005. The reduction in gross premiums written was primarily due to the cancellation of certain automobile business by ceding companies, based on their decision to retain more business. In certain cases, this included the return of unearned premiums to the ceding company.
      EuroAsia. Gross premiums written in the EuroAsia division for the year ended December 31, 2006 were $561.2 million, an increase of $17.4 million, or 3.2%, as compared to $543.8 million for the year ended December 31, 2005. These amounts represent 24.0% of our gross premiums written for the year ended December 31, 2006 and 20.7% in 2005. These amounts include $5.2 million of reinstatement premiums for the year ended December 31, 2005 compared to $0.5 million in 2006. The overall increase is primarily attributable to increases in property, marine, credit and bonds, and liability, offset by a decrease in motor business, accident and health and aviation. Gross premiums written from property business, which represents 60.8% of EuroAsia in 2006, increased by $15.0 million, or 4.6%, for the year ended December 31, 2006 driven by increases in the European and Middle East markets. The increase in marine business of $4.8 million, or 16.8%, and all other classes of business of $4.0 million, or 5.3%, is related to increases in new and renewal business throughout

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Europe. Offsetting these increases is a decrease in motor business of $3.4 million, or 3.8%, primarily related to European and Asia business and accident and health and aerospace business of $1.2 million and $1.8 million, respectively.
      London Market. Gross premiums written in the London Market division for the year ended December 31, 2006 were $340.7 million, a decrease of $90.9 million, or 21.1%, as compared to $431.6 million for the year ended December 31, 2005. These amounts represent 14.6% of our gross premiums written for the year ended December 31, 2006 and 16.4% in 2005. These amounts include reinstatement premiums of $0.9 million and $33.2 million (all related to the London branch) for the years ended December 31, 2006 and 2005, respectively, which principally relate to Hurricanes Katrina, Rita and Wilma in 2005. Excluding reinstatement premiums in each period, gross premiums written would be $339.8 million and $398.4 million for the years ended December 31, 2006 and 2005, respectively, representing a decrease of $58.6 million, or 14.7%, over the period. Gross premiums written across each unit of the London Market division are as follows:
  •  London Branch — Gross premiums written of $138.2 million for the year ended December 31, 2006 decreased $51.1 million, or 27.0%, compared to $189.3 million for the year ended December 31, 2005. Excluding reinstatement premiums of $0.9 million in 2006 and $33.2 million in 2005, gross premiums written for the year ended December 31, 2006 were $137.3 million, a decrease of $18.8 million, or 12.0%, compared to $156.1 million for the year ended December 31, 2005. Excluding the effects of the reinstatement premium in both periods, property business decreased $12.8 million, or 21.1%, due to the non-renewal of certain proportional business. Casualty business decreased by $12.1 million, or 29.9%, in 2006 compared to 2005, primarily due to the non renewal of a large proportional directors and officers contract and a large motor quota share contract. These decreases were offset by an increase in marine and aerospace business of $6.1 million, or 11.0%, due to new business written in 2006.
 
  •  Newline — Gross premiums written of $202.5 million for the year ended December 31, 2006 decreased $39.8 million, or 16.4%, compared to $242.3 million for the year ended December 31, 2005. The decline in gross premiums written is primarily related to financial lines, in particular liability and professional indemnity, as well as the effects of currency movements during the year. This decrease reflects the more competitive market conditions where we are experiencing lower prices in certain classes or choosing to non-renew business that does not meet our underwriting criteria.
      U.S. Insurance. Gross premiums written in the U.S. Insurance division for the year ended December 31, 2006 were $509.6 million, a decrease of $11.4 million, or 2.2%, as compared to $521.0 million for the year ended December 31, 2005. These amounts represent 21.8% of our gross premiums written for the year ended December 31, 2006 and 19.8% in 2005. Gross premiums written in our specialty insurance unit decreased by $13.6 million, or 3.7%, offset by an increase in medical malpractice business of $2.2 million, or 1.5%. Gross premiums written across each line of business is as follows:
  •  Professional liability gross premiums written increased $16.8 million, or 14.7%, to $131.0 million for the year ended December 31, 2006, from $114.2 million for the year ended December 31, 2005. This primarily resulted from expansion in the environmental specialists and architects and engineers classes of business.
 
  •  Medical malpractice gross premiums written were $152.8 million for the year ended December 31, 2006, an increase of $2.2 million, or 1.5%, from $150.6 million for the year ended December 31, 2005. Medical malpractice, our largest line of business in the U.S. Insurance division, represented 30.0% of gross premiums written in U.S. Insurance for the year ended December 31, 2006.
 
  •  Our personal auto business, which primarily includes non-standard auto business written in California and Florida, decreased $25.9 million, or 25.0%, to $77.7 million for the year ended December 31, 2006 from $103.6 million for the year ended December 31, 2005.
      Ceded Premiums Written. Ceded premiums written for the year ended December 31, 2006 decreased by $150.5 million, or 46.3%, to $174.8 million (7.5% of gross premiums written) from $325.3 million (12.4% of gross premiums written) for the year ended December 31, 2005. These amounts include reinstatement premiums paid of $2.9 million and $65.7 million for the years ended December 31, 2006 and 2005, respectively. Excluding

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reinstatement premiums in each period, ceded premiums written were $171.9 million for the year ended December 31, 2006 a decrease of $87.7 million, or 33.8%, as compared to $259.6 million for the year ended December 31, 2005.
      Excluding the effect of reinstatement premiums in both 2006 and 2005, ceded premiums written decreased in all divisions. Decreases in the Americas division of $16.2 million, EuroAsia division of $10.5 million and London Market division of $11.4 million is the result of a decrease in retrocessional business purchased in 2006. The decrease in the U.S. Insurance division of $49.6 million is due to this division increasing its retentions on all classes of business and purchasing more excess of loss reinsurance compared to quota share reinsurance.
      Net Premiums Written. Net premiums written for the year ended December 31, 2006 decreased by $140.8 million, or 6.1%, to $2,160.9 million from $2,301.7 million for the year ended December 31, 2005. Net premiums written represent gross premiums written less ceded premiums written. Net premiums written decreased over 2005 at a lower rate than gross premiums written, reflecting the significant decrease in ceded premiums written in the period. Included in net premiums written are $2.5 million and $4.7 million of net reinstatement premiums received for the years ended December 31, 2006 and 2005, respectively, related to catastrophes. Excluding reinstatement premiums, net premiums written decreased by $138.6 million, or 6.0%, for the year ended December 31, 2006 over 2005.
      Net Premiums Earned. Net premiums earned for the year ended December 31, 2006 decreased by $51.0 million, or 2.2%, to $2,225.8 million, from $2,276.8 million for the year ended December 31, 2005. Net premiums earned decreased in the Americas division by $76.1 million, or 7.2%, and in the London Market division by $52.6 million, or 13.6%, offset by increases in the EuroAsia division of $15.2 million, or 2.9%, and in the U.S. Insurance division of $62.5 million, or 19.3%. Included in net premiums earned are $2.5 million and $4.7 million of net reinstatement premiums received for the years ended December 31, 2006 and 2005, respectively, related to catastrophes. Excluding reinstatement premiums, net premiums earned decreased by $48.8 million, or 2.1%, for the year ended December 31, 2006 over 2005.
      Included in net premiums earned are premiums ceded to our Whole Account and Facultative Excess of Loss Agreements. For the year ended December 31, 2006, this represented $1.7 million, a reduction of $12.2 million, or 87.8%, compared to $13.9 million for the year ended December 31, 2005.
      Losses and Loss Adjustment Expenses. Losses and LAE decreased $577.4 million, or 28.0%, to $1,484.2 million for the year ended December 31, 2006, from $2,061.6 million for the year ended December 31, 2005 as follows (in millions):
                                 
    Year Ended    
    December 31,   Change
         
    2006   2005   $   %
                 
Gross losses and LAE incurred
  $ 1,631.4     $ 2,524.1     $ (892.7 )     (35.4 )%
Less: ceded losses and LAE incurred
    147.2       462.5       (315.3 )     (68.2 )
                         
Net losses and LAE incurred
  $ 1,484.2     $ 2,061.6     $ (577.4 )     (28.0 )%
                         
      The decrease in losses and LAE was principally related to a decline in current year catastrophe events of $503.0 million, ($34.9 million for the year ended December 31, 2006 compared to $537.9 million for the year ended December 31, 2005), and a decline in net adverse loss development on prior years of $32.8 million ($139.9 million for the year ended December 31, 2006 compared to $172.7 for the year ended December 31, 2005). Losses and LAE for the year ended December 31, 2006 include net adverse loss development of $139.9 million attributable to 2005 and prior years, which reflects $42.6 million for prior year catastrophe events, principally due to an increase in loss estimates on marine business for Hurricane Rita and the triggering of industry loss warranty contracts for Hurricane Wilma due to an unexpected deterioration in industry-wide Wilma loss estimates as well as unexpected loss emergence on Florida proportional accounts in the period. In addition, asbestos loss estimates were increased by $27.1 million resulting from the annual review of these liabilities. The remaining net adverse loss development of $70.2 million is principally attributable to loss emergence greater than expectations in 2006 on U.S. casualty classes of business. For the year ended December 31, 2005, current year

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catastrophe events of $537.9 million include $445.9 million related to Hurricanes Katrina, Rita, and Wilma, and $25.6 million related to Windstorm Erwin. Losses and LAE incurred during the year ended December 31, 2005 include net adverse loss development of $172.7 million attributable to 2004 and prior years, which includes $15.0 million for prior year catastrophe events due principally to greater than expected emergence on the 2004 Florida Hurricanes in the period and $41.2 million for increased asbestos loss estimates resulting from the annual review of these liabilities. The remaining net adverse loss development of $116.5 million is principally attributable to loss emergence greater than expectations in 2005 on U.S. casualty classes of business.
      Ceded losses and LAE incurred for the year ended December 31, 2006 decreased by $315.3 million, or 68.2%, to $147.2 million, from $462.5 million for the year ended December 31, 2005. This decrease is principally attributable to a decrease of $281.6 million in property catastrophe cessions due to the decline in current year catastrophe events and a $46.8 million decrease in ceded losses related to our U.S. insurance operations ($55.6 million for the year ended December 31, 2006 compared to $102.4 million for the year ended December 31, 2005) due to increased retentions. Cessions to the Whole Account Excess of Loss Agreements for the years ended December 31, 2006 and 2005 were $9.7 million and $16.5 million, respectively. As of December 31, 2006, the aggregate limits on the Whole Account Excess of Loss Agreements have been fully utilized.
      The loss and LAE ratio for the years ended December 31, 2006 and 2005 and the percentage point change for each of our divisions and in total are as follows:
                         
    Year Ended    
    December 31,   Percentage
        Point
Division   2006   2005   Change
             
Americas
    78.5 %     112.8 %     (34.3 )
EuroAsia
    60.3       63.2       (2.9 )
London Market
    54.7       90.3       (35.6 )
U.S. Insurance
    55.8       62.0       (6.2 )
                   
Total losses and LAE ratio
    66.7 %     90.5 %     (23.8 )
                   
      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, 2006 and 2005 (in millions):
     Year Ended December 31, 2006
                                                                                 
    Americas   EuroAsia   London Market   U.S. Insurance   Total
                     
        % of       % of       % of       % of       % of
    $   NPE   $   NPE   $   NPE   $   NPE   $   NPE
                                         
Total losses and LAE
  $ 765.8       78.5 %   $ 320.4       60.3 %   $ 182.5       54.7 %   $ 215.5       55.8 %   $ 1,484.2       66.7 %
                                                             
Catastrophe Losses:
                                                                               
2006 events
    12.7       1.3       19.4       3.7       2.8       0.8                   34.9       1.6  
Hurricanes Katrina, Rita and Wilma
    35.8       3.7       0.2             12.2       3.7       1.2       0.3       49.4       2.2  
All other prior years
    7.2       0.7       (4.2 )     (0.8 )     (8.6 )     (2.6 )     (1.2 )     (0.3 )     (6.8 )     (0.3 )
                                                             
Total catastrophe losses
    55.7       5.7       15.4       2.9       6.4       1.9                   77.5       3.5  
                                                             
Prior period loss development including prior period catastrophe losses
  $ 212.7       21.8 %   $ (9.0 )     (1.7 )%   $ (24.8 )     (7.4 )%   $ (39.0 )     (10.1 )%   $ 139.9       6.3 %