Best Affirms Odyssey Re Ratings

February 16, 2007

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A” (Excellent) and the issuer credit ratings of “a” of Odyssey Reinsurance Group and its members. Best also affirmed both the ICR and debt ratings for Odyssey Re Holdings Corp. The outlook for all ratings is stable.

“The ratings reflect Odyssey Re’s strong capitalization, relatively favorable operating performance and sound business position,” said Best. “Odyssey Re is a global underwriter of reinsurance and specialty insurance products and ranks within the top 20 global reinsurance groups.”

Best added that the Group’s “competitive position benefits from its diversified market presence with regard to business mix and geographic bearing. With the absence of significant catastrophe activity in 2006, through September 30, 2006 Odyssey Re reported a statutory combined ratio of 96.0 percent and a solid pretax return on revenue of 14.7 percent. In addition to sound underwriting results, an astute investment management philosophy emphasizing a total return strategy drives overall earnings.

“The ratings also recognize Odyssey Re Holdings’ proven financial flexibility, strong interest coverage measures and moderate financial leverage, as debt-to-total capital as of September 30, 2006 was 20 percent. Although Odyssey Re’s public float of common shares is somewhat constricted given Fairfax Financial Holdings’ 59.1 percent ownership, Odyssey Re has successfully utilized the capital markets to raise capital.”

However, Best noted that Odyssey Re’s “continued exposure to adverse loss reserve development from prior accident years and reporting issues [Odyssey Re Holdings twice delayed the filing of financial statements in 2006 and was cited by independent auditors as having material weaknesses in accounting for various reinsurance contracts and investments]”constitute offsetting factors.

Best said that it expects Odyssey Re Holdings to “resolve any issues pertaining to its material weaknesses by the end of 2007.” Best said it “will monitor the company’s progress. Although adverse reserve development has impacted operating margins in recent years, the overall percentage of adverse development to total loss reserves continues to moderate, as favorable loss reserve development attributed to more recent accident years has tempered the impact of adverse loss reserve development on accident years 1997-2001.”

“Market conditions” are also a cause for concern, Best indicated, namely “pricing deterioration in both property/casualty lines and emerging competitive threats. Although softening market conditions will have an effect on industry results and underwriting margins in the coming years, A.M. Best believes that Odyssey Re has successfully diversified its business and is well positioned to manage the impact of softening markets.

The FSR of A (Excellent) and the ICRs of “a” have been affirmed for Odyssey Reinsurance Group and its following members:
— Clearwater Insurance Company
— Hudson Insurance Company
— Odyssey America Reinsurance Corporation
— Hudson Specialty Insurance Company
— Newline Insurance Company Limited

The ICR of “bbb” has been affirmed for Odyssey Re Holdings Corp.

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