Odyssey Re Holdings Corp. Annual Report 2018

Plain-text annual report

ENDURING MOMENTUM 2018 ANNUAL REPORT 300 First Stamford Place Stamford, CT 06902 odysseygroup.com CONTENTS 02 LETTER FROM THE CEO 05 MISSION STATEMENT 06 AT A GLANCE 07 FINANCIAL HIGHLIGHTS 08 OPERATIONS OVERVIEW 11 ODYSSEY GROUP FOUNDATION 12 REINSURANCE 16 18 INSURANCE INTERNATIONAL 20 EXECUTIVE LEADERSHIP 21 FINANCIAL REPORT INSURANCE U.S. ONLY Odyssey Group ENDURING MOMENTUM Unlike billiard balls colliding chaotically after an impact, the balls in Newton’s cradle react to force in a steady, orderly fashion. The same can be said for Odyssey Group. Despite the challenging dynamics and events that occurred during 2018, Odyssey Group has weathered the market forces exceptionally well by staying true to its core values of discipline, diversification and service. Our underwriters understand that for every action, there can be an equal and opposite reaction. They know Odyssey’s enduring strength and stability were not created overnight. They have witnessed both the benefit of remaining patient and the momentum generated by our business model. As predictable as the swing of a pendulum, Odyssey Group will continue to meet clients’ (re)insurance needs around the world today, tomorrow and for many years to come. LETTER FROM THE CEO Dear Friends, Business Partners and Colleagues, Nothing frustrates momentum in the (re)insurance business more than underwriting losses. If it happens one year, ok… but two years in a row, without any meaningful correction… that’s a problem. Doubt kicks in, you become introspective, questioning your risk appetite, your people and your process. The drama in London that drew widespread attention last fall is a prime example of the second-guessing and instability that’s created by repeated underwriting losses. 02 ANNUAL REPORT 2018 Fortunately for Odyssey, 2018 was another fantastic year. Once again we bucked the market trend by delivering an underwriting profit, something we have been doing consistently for many years. In fact, over the last five years, our average combined ratio was 90.2%, and over the last ten it was 92.5%. What separates us from the pack is the continuity of our team, the consistency of our underwriting approach and our steady engagement with the market. While many around us have changed ownership, strategy or risk appetite over the last two decades, we have steadily marched forward, judiciously growing our portfolio, expanding our capabilities, enhancing our processes and improving our service. The Enduring Momentum we have created in our business is a testament to our disciplined underwriting culture, the power of our three diverse and distinctive underwriting platforms: OdysseyRe, Hudson and Newline, strong enterprise risk management and an unwavering commitment to delivering quality service. 2018 was another difficult year for our industry, and yet the Odyssey Group ran to a combined ratio of 93.6%, generating $175 million of underwriting profit. Extraordinary current year loss activity, both Cat and non-Cat, added 7 points to the combined ratio, but this was more than offset by 12 points of prior year favorable development. Strong reserving, an essential companion of disciplined underwriting, has been a hallmark of our operation, with favorable reserve development contributing to earnings in each of the last 11 years. Odyssey Group’s net income dropped from $325 million in 2017 to $224 million in 2018. While underwriting profits more than trebled year on year, our investment returns suffered from rising interest rates and falling equity markets. Our total equity was unchanged for the year at $4 billion as our income gain was offset by unrealized investment losses, foreign exchange adjustments and dividends paid to our parent, Fairfax. During 2018, gross premiums written expanded 20% to $3.3 billion, with solid growth recorded across each of our 3 platforms and in 26 of our 35 business units around the world. Over the last two years, our top line has expanded 40% from $2.4 billion to $3.3 billion, while total assets have increased $1.7 billion to $11.9 billion and float has increased by $570 million. It’s worth highlighting that our growth in assets and float the last two years occurred despite the fact that we have paid out more than $3.4 billion in claims over the same period. Paying claims promptly is our number one priority and key to our value proposition to clients. Needless to say, the last two years have been very active from a claims perspective and we’ve had plenty of opportunity to show our worth. Our underwriting success in 2017 was driven by a 91.9% combined ratio in our Hudson and Newline insurance operations. In 2018, it was our reinsurance business, OdysseyRe, that “carried the ball,” generating a market-shattering combined ratio of 89.9%. Our results over the last two years are a convincing display of the value of our portfolio diversification. We have 19 reinsurance business units in OdysseyRe spread across five regions: North America, Latin America & Caribbean, London, EMEA and AsiaPac. All but two of our business units generated underwriting profits in 2018, and the two that didn’t came close with combined ratios of 100.5% and 100.2%. Even in our U.S. Property treaty unit we managed to deliver a 94.2% combined ratio despite the impact of the California Wildfires and Hurricanes Florence and Michael. In AsiaPac, we were also able to generate an underwriting profit while absorbing significant losses from Typhoons Jebi and Trami. As our reinsurance bottom line improved significantly last year, our gross premiums written increased as well with 13 of our 19 reinsurance business units expanding in 2018. The strongest growth came from the U.S., EMEA and AsiaPac in Property, Crop, Motor, A&H and Cyber. “The Enduring Momentum we have created in our business is a testament to our disciplined underwriting culture…” 03 LETTER FROM THE CEO (continued) Newline, our London-based insurance operation, had another fantastic year in 2018 delivering a 92.1% combined ratio and solid premium growth of nearly 10%. Newline, an international casualty specialist with operating hubs in London, Cologne, Singapore and Melbourne, has delivered an underwriting profit in each of the last six years. The international casualty arena has been incredibly competitive for more than a decade, but with rates finally starting to rise in the majority of our seven business units, Newline is well-positioned for future profitable growth. Hudson, our U.S. specialty insurance arm, celebrated its 100-year anniversary in 2018. In 2017, Hudson passed the billion dollar premium threshold and in 2018, the top line propelled to $1.4 billion. Over the last two years, Hudson has expanded more than 50%! Every one of Hudson’s nine business units experienced growth in 2018, and we expect this to continue in 2019 thanks to rising rates and new business opportunities. While results deteriorated in 2018, Hudson still managed to eke out an underwriting profit with a 99.5% combined ratio. Exceptional loss activity in our Crop, Commercial Auto and Liability business units weighed on the combined ratio, but the fundamentals in these three business units are improving and we expect better results going forward. In the pages that follow, you will find an operational and financial review of the Odyssey Group, as well as separate, more detailed narratives for each of our three operating platforms. We hope you find this information helpful and I invite you to learn more by visiting odysseygroup.com, from which the OdysseyRe, Hudson and Newline websites can be accessed. Fortunately, our success in 2018 again enables us to advance our philanthropic endeavors. Our culture of giving is vital to who we are and core to our mission as a Company. Each year we donate a portion of our profits to charitable organizations, and I’m pleased to announce that we have earmarked an additional $2.5 million for the Odyssey Group Foundation and its business affiliates. Since 2007, we have pledged over $45 million, donating to more than 300 charities around the world with a particular emphasis on disaster relief, education, healthcare and cancer research. As we reflect on another outstanding year, we would like to take this opportunity to thank you, our valued clients and business partners, for your business and loyal support. We exist to serve you and recognize that our prosperity is wholly dependent on providing value in addressing your (re)insurance needs. To Prem Watsa, Andy Barnard and Paul Rivett, we are forever grateful for your leadership, guidance and unwavering support. The decentralized structure of Fairfax that you have created and the entrepreneurial culture that you have promoted have been key to our Enduring Momentum and long-term success. To my 1,016 colleagues around the world, congratulations on another great year. It’s my privilege to represent Odyssey and an honor to work with each and every one of you. There are no limits to what we can achieve if we continue to work together for the benefit of our clients, business partners and Fairfax. We are on a roll, let’s keep the momentum going! “PAYING CLAIMS PROMPTLY IS OUR NUMBER ONE PRIORITY AND KEY TO OUR VALUE PROPOSITION TO CLIENTS.” “WHAT SEPARATES US FROM THE PACK IS THE CONTINUITY OF OUR TEAM, THE CONSISTENCY OF OUR UNDERWRITING APPROACH AND OUR STEADY ENGAGEMENT WITH THE MARKET.” Brian D. Young President & Chief Executive Officer 04 ANNUAL REPORT 2018 OUR MISSION We are an underwriting company that aspires to be a world-class reinsurer and specialty insurer, providing excellent security and high-quality service to our clients. We seek to maintain a global business focus that emphasizes patient, profitable growth and ultimately supports Fairfax Financial Holdings’ goal to achieve a 15% annual return over the long term. We aim to meet this financial objective by: • Maximizing underwriting profitability and growing invested assets • Responding to clients’ needs with local resources • Delivering exceptional service to clients and colleagues alike • Expanding our global reach through product and territorial diversification • Possessing superior underwriting, claims and actuarial expertise • Adapting to changing market conditions while maintaining a consistent, disciplined underwriting approach • Investing in our employees and providing opportunities for growth within the organization to preserve our culture for the long term • Embracing Fairfax Financial Holdings’ values and guiding principles We recognize that our prosperity and good fortune are dependent on our underwriting prowess and our clients’ success; and when we succeed, those in the communities in which our employees live and work will benefit too. 05 AT A GLANCE Odyssey Group Holdings, Inc. and its subsidiaries, collectively referred to as Odyssey Group, is one of the world’s leading providers of reinsurance and specialty insurance, with total assets of $11.9 billion and $4 billion in total equity as of December 31, 2018. Reinsurance is available around the world through OdysseyRe, while specialty insurance is offered by Hudson Insurance Group in the U.S. and by Newline Group internationally. Odyssey Group Holdings, Inc. is wholly-owned by Fairfax Financial Holdings Limited, a financial services holding company with total assets of $64.4 billion and $17.4 billion in total equity as of December 31, 2018. Fairfax is traded on the Toronto Stock Exchange under the symbol FFH. Odyssey Group is rated ‘A’ (Excellent) by A.M. Best Company and ‘A-’ (Strong) by Standard & Poor’s. A (EXCELLENT) A.M. BEST A- (STRONG) STANDARD & POOR’S 06 NET INCOME: $223.8 COMBINED RATIO: 93.6% GROSS PREMIUMS WRITTEN: $3,328.6 TOTAL EQUITY: $4,015.8 STATUTORY SURPLUS: $3,297.0 U.S. $ in millions ANNUAL REPORT 2018FINANCIAL HIGHLIGHTS ODYSSEY GROUP HOLDINGS, INC. (U.S. $ in millions) Gross premiums written Net premiums written Net premiums earned Net investment income Operating income before income taxesa Net realized investment (losses) gains Income before income taxes Net income Total assets Total equity Underwriting income Combined ratio 2018 $3,328.6 2,897.8 2,755.4 209.2 364.4 (117.4 ) 247.0 223.8 11,870.1 4,015.8 175.1 93.6 % a Represents income before income taxes excluding net realized investment gains and losses. GROSS PREMIUMS WRITTEN BY DIVISION (U.S. $ in millions) North America Latin America EuroAsia London Market U.S. Insurance Total gross premiums written 2018 $881.6 112.6 620.8 309.1 1,404.5 $3,328.6 2017 $ 2,783.1 2,495.9 2,333.4 191.8 240.2 378.1 618.3 325.3 11,207.6 4,012.5 55.2 97.6 % 2017 $774.6 102.5 533.6 288.0 1,084.4 $2,783.1 2016 $2,380.7 2,100.2 2,074.1 215.1 367.2 (201.9 ) 165.3 160.9 10,182.5 3,833.2 229.5 88.9 % 2016 $654.6 104.8 460.2 244.3 916.8 $2,380.7 07 OPERATIONS OVERVIEW Odyssey Group is a globally diversified underwriter of property and casualty reinsurance and specialty insurance that operates through five Divisions: North America, Latin America, EuroAsia, London Market and U.S. Insurance. DIVERSIFICATION Diversification is a critical focus of our business strategy as it provides portfolio stability. With our global network, we are able to rapidly respond to business opportunities as they emerge around the world. We have 35 discrete business units organized along different product, territorial and distribution lines, with 19 of these focused on reinsurance and 16 dedicated to insurance markets. PROPERTY Property accounted for 27% of gross premiums written compared to 31% in 2017. Our property portfolio is heavily weighted to reinsurance where margins remain more attractive, tail risk is more limited and we can respond to changing market conditions more rapidly. Catastrophe business, which represents 31% of our property book, was impacted in 2018 by losses from the California Wildfires, Hurricane Michael and Typhoon Jebi. While we have seen improvement in rates and terms in loss-affected areas following the catastrophe events of 2017 and 2018, we will need to see further price increases globally before we consider deploying significantly more capacity. $3.3 BILLION 2018 GROSS PREMUIMS WRITTEN NORTH AMERICA 27% LATIN AMERICA EUROASIA LONDON MARKET U.S. INSURANCE 3% 19% 9% 42% GROSS PREMIUMS WRITTEN BY DIVISION AND YEAR (in millions) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 882 775 655 1,405 1,084 917 621 534 460 244 288 309 105 103 113 North America Latin America EuroAsia London Market U.S. Insurance Gross Premiums Written ($ Billions) 2016 2017 2018 $2.4 $2.8 $3.3 08 ANNUAL REPORT 2018 WRITING BUSINESS IN MORE THAN 100 TERRITORIES THROUGH A NETWORK OF 36 OFFICES LOCATED IN 13 COUNTRIES. CASUALTY Casualty represented 30% of our gross premiums written compared to 31% in 2017. Casualty insurance currently represents 72% of our total casualty portfolio. The book of business is very diverse in terms of product mix and geographic scope. While the casualty reinsurance market remains difficult, we are fortunate to have a core base of quality clients with whom we have partnered for many years. We remain attuned to new opportunities, and are an attractive partner for willing buyers due to our expertise and lead market capabilities, particularly in specialty casualty. We have more appetite for casualty insurance today because we not only have control over pricing, risk selection and claims handling, but we can use reinsurance to reduce volatility. SPECIALTY Other specialty lines, including Crop, Surety, Credit, Marine, Aerospace, Motor, Accident & Health and Affinity & Special Risks, represented 43% of gross premiums written compared to 38% in 2017. Crop, Motor and Accident & Health were significant premium drivers and we expect specialty lines will continue to be a growth area for us. The pricing environment in many specialty lines tends to be more local, and with our global reach, we have been able to respond to opportunities as they have arisen. Specialty lines are generally less volatile and capital-intensive, making further expansion attractive, especially in the face of tougher trading conditions in standard property and casualty lines. REINSURANCE Underwritten primarily through our flagship company, Odyssey Reinsurance Company, we write a global reinsurance portfolio of $1.7 billion through a branch and representative office network of 14 offices in 10 countries. In 2018 we saw growth across all regions and most product lines. Our reinsurance results were excellent despite higher than expected losses from catastrophes. We produced a net combined ratio of 89.9% in 2018, compared to 101.9% in 2017. INSURANCE Specialty insurance is underwritten in the U.S. through Hudson Insurance Group and outside the U.S. through Newline Group. Global gross premiums written generated by our insurance operations were $1.6 billion, and the net combined ratio was 98.4% in 2018, compared to 91.9% in 2017. We expect our insurance portfolio to continue to be a key driver of Odyssey’s growth and profitability. PROPERTY CASUALTY SPECIALTY 27% 30% 43% MOTOR/AUTO CROP 15% 15% SURETY & CREDIT 5% ACCIDENT & HEALTH MARINE & AVIATION 4% 4% U.S. TOTAL 67% REINSURANCE INSURANCE 25% 42% NON-U.S. TOTAL 33% REINSURANCE INSURANCE 26% 7% REINSURANCE INSURANCE 51% 49% 09 OPERATIONS OVERVIEW (continued) 2018 UNDERWRITING RESULT Odyssey Group reported a net combined ratio of 93.6% for 2018, which was 4 points lower than 2017, mostly driven by reduced Cat activity. This result was based on disciplined underwriting throughout the Group and a focus on growing only where profitable. Reserve releases in 2018 were $340 million, which reduced the combined ratio by 12.3 points, compared to 12.4 points the previous year. Favorable development was recorded in all operating Divisions. Decreases in non-Cat loss reserves represented 51% of the releases in 2018, compared to 64% in 2017. Property Cat losses for 2018 were $94 million greater than expectations, impacting the combined ratio by 3.4 points, compared to 2017 when property Cat losses were $228 million greater than expectations, impacting the combined ratio by 9.8 points. 93.6% COMBINED RATIO $175 MILLION UNDERWRITING PROFIT 90.2% FIVE-YEAR AVERAGE COMBINED RATIO UNDERWRITING PROFIT AND COMBINED RATIO HISTORY 2014 – 2018 Underwriting Profit 97.6 88.9 84.8 84.9 $1.1B 2014-2017 $974M 2018 $175M 100% 93.6 90% C o m b i n e d R a t i o 80% 70% 60% 2014 2015 2016 2017 2018 (in millions) t fi o r P g n i t i r w r e d n U $400 $350 $300 $250 $200 $150 $100 $50 $0 10 ANNUAL REPORT 2018 ODYSSEY GROUP FOUNDATION The Odyssey Group Foundation provides funding to charitable organizations active in communities in which our employees live and work, as well as those dedicated to worldwide disaster relief efforts. The Foundation’s “Good Works” encompasses cancer research and healthcare, education, human services and disaster relief, which includes help to rebuild homes, schools and hospitals and provide medical supplies, improve access to food and water, assist with community mobilization and enable economic recovery. Since its inception in 2007, the Foundation and its business affiliates have pledged over $45 million to more than 300 charities around the world. THE ODYSSEY GROUP FOUNDATION’S CONTRIBUTIONS AT WORK: Helping Those Who Need it Most Keeping Patients Safe Rebuilding Communities Preventing Hunger “WE HAVE SEEN FIRST-HAND HOW OUR CHARITABLE CONTRIBUTIONS HAVE MADE A DIFFERENCE IN CANCER RESEARCH, HEALTHCARE AND DISASTER RELIEF. WE ARE VERY PROUD TO SUPPORT THESE AND MANY OTHER CHARITABLE ORGANIZATIONS AROUND THE WORLD.” - Alane Carey, Executive Vice President of Odyssey Group and Grants Review Officer for the Foundation Providing Hope Educating the Leaders of Tomorrow 11 REINSURANCE 12 PROPERTY CASUALTY MOTOR/AUTO ACCIDENT & HEALTH SURETY & TRADE CREDIT MARINE & AVIATION AGRICULTURE NORTH AMERICA LATIN AMERICA EMEA ASIAPACIFIC LONDON 51% 16% 11% 7% 6% 5% 4% 52% 7% 23% 13% 5% PRODUCT OFFERING TREATY Property (Assumed & Retro) Casualty Surety & Trade Credit Marine & Aviation Motor/Auto Accident & Health Agriculture Terrorism Cyber Liability FACULTATIVE Casualty (U.S. and Latin America Only) Property (Latin America Only) Terrorism Energy ANNUAL REPORT 2018OdysseyRe prides itself on its consistent, long-term underwriting approach, well-defined risk appetite and commitment to providing quality service. Our reinsurance operations include a global network of 14 branch and representative offices across five regions: • North America • Latin America • Europe, Middle East and Africa (EMEA) • AsiaPacific • London Each region is comprised of talented, dedicated teams of underwriters, actuaries, auditors, claims professionals and catastrophe modelers. Reinsurance is primarily underwritten through our flagship company, Odyssey Reinsurance Company, with Odyssey Re Europe S.A. available under special circumstances as needed. In 2018, gross premiums written for reinsurance grew by 14% from 2017. All of our regions and most product lines contributed to this growth, with Accident & Health, Motor/Auto and Property as the primary drivers. Our reinsurance results were excellent despite Cat losses from the California Wildfires, Hurricane Michael and Typhoon Jebi, as well as continued deterioration from Irma. We produced a net combined ratio of 89.9% compared to 101.9% in the prior year. Our risk appetite and diversified underwriting strategy served us well, as did favorable prior year development in many lines. While market conditions remain challenging, we strive to be a credible source of guidance and market leadership. We are committed to investing in both talent and technology so that we can continue to meet our clients’ unique reinsurance needs for many years to come. OFFICE LOCATIONS STAMFORD 300 First Stamford Place Stamford, CT 06902 USA +1 203 977 8000 BEIJING +86 10 8800 3999 CHICAGO +1 312 596 0226 LONDON MEXICO CITY +52 55 5662 8660 MIAMI +1 305 722 8401 MONTREAL +1 514 228 7560 NEW YORK +1 212 978 2700 PARIS +44 020 7090 1800 +33 1 49 26 1000 SÃO PAULO +55 11 3512 6922 SINGAPORE +65 6438 3806 STOCKHOLM +46 8 598 115 00 TOKYO +81 3 3261 2570 TORONTO +1 416 862 0162 89.9% 2018 COMBINED RATIO $1.7 BILLION 2018 GROSS PREMUIMS WRITTEN 13 REINSURANCE Global Regions Brian D. Quinn Chief Executive Officer North America OdysseyRe’s North America team offers treaty and facultative reinsurance to clients in the U.S. and Canada. Treaty facilities are based in Stamford, with additional offices in Toronto and Montreal. Casualty facultative underwriters operate from New York and Chicago. $881.6 MILLION 2018 GROSS PREMIUMS WRITTEN Philippe E. Mallier Chief Executive Officer $112.6 MILLION U.S. CANADA 93% 7% PROPERTY CASUALTY ACCIDENT & HEALTH 45% 24% 11% MOTOR/AUTO 10% FACULTATIVE CASUALTY SURETY MARINE 6% 2% 2% Latin America OdysseyRe provides treaty and facultative reinsurance to clients located in all countries throughout Latin America and the Caribbean. Underwriters are based in Mexico City, Miami and São Paulo, Brazil. TREATY FACULTATIVE 87% 13% 2018 GROSS PREMIUMS WRITTEN PROPERTY SURETY CROP ACCIDENT & HEALTH MOTOR/AUTO CASUALTY MARINE 50% 22% 13% 5% 4% 3% 3% Carl A. Overy Chief Executive Officer $87.3 MILLION 2018 GROSS PREMIUMS WRITTEN PROPERTY MARINE & AEROSPACE MOTOR/AUTO CASUALTY 46% 27% 22% 5% London OdysseyRe’s London branch provides treaty solutions to reinsurance clients in the London Market, including Lloyd’s. Its remit is global in scope allowing access to business where we have particular expertise. 14 ANNUAL REPORT 2018 Isabelle Dubots-Lafitte Chief Executive Officer EMEA OdysseyRe offers treaty reinsurance in Continental Europe, the Middle East and Africa (EMEA) from its offices in Paris and Stockholm. The Paris-based underwriting team is responsible for writing property and casualty treaties in EMEA, while the Stockholm office services the Nordic, Russian and Baltic markets. Lucien Pietropoli Chief Executive Officer AsiaPacific OdysseyRe’s AsiaPacific team underwrites treaty reinsurance from Singapore, with the support of two representative offices in Beijing and Tokyo. Its geographical focus includes China, Japan, South Korea, Indonesia, Hong Kong, India, South East Asia, Australia and New Zealand. $394.4 MILLION 2018 GROSS PREMIUMS WRITTEN $226.5 MILLION 2018 GROSS PREMIUMS WRITTEN EUROPE MIDDLE EAST AFRICA 63% 31% 6% PROPERTY MOTOR/AUTO MARINE & AEROSPACE CREDIT & BOND CROP CASUALTY ACCIDENT & HEALTH 57% 19% 7% 7% 4% 3% 3% PROPERTY CROP CREDIT & BOND MARINE & AEROSPACE MOTOR/AUTO CASUALTY 67% 17% 10% 3% 2% 1% CHINA JAPAN SOUTH EAST ASIA/PACIFIC INDIA SOUTH KOREA 43% 23% 19% 9% 6% GLOBAL REACH. IMMEASURABLE EXPERTISE. With the right people in the right places, OdysseyRe consistently delivers exceptional service, excellent security and innovative reinsurance solutions to our clients and business partners around the world. 15 INSURANCE U.S. Only 16 HUDSON INSURANCE COMPANY HUDSON SPECIALTY INSURANCE COMPANY HUDSON EXCESS INSURANCE COMPANY 78% 16% 6% CROP COMMERCIAL AUTO SPECIALTY LIABILITY PROFESSIONAL LINES GENERAL LIABILITY & PACKAGE SURETY SPECIALTY PROPERTY & ENERGY 32% 22% 15% 11% 11% 5% 4% PRODUCTS Commercial Auto Commercial Excess & Umbrella Commercial Primary Casualty Crop General Liability & Package Management Liability Medical Malpractice Personal Umbrella Professional Liability Specialty Property & Energy Subcontractor Default Insurance Surety ANNUAL REPORT 2018Hudson Insurance Group is a market-leading specialty insurer that operates in the United States and offers a wide range of property and casualty products to corporations, professional firms and individuals through a vast network of retail and wholesale brokers, MGUs and program administrators. From its headquarters in New York and offices across the U.S. and in Vancouver, Canada, Hudson offers primary and excess insurance on an admitted basis through Hudson Insurance Company and on a non-admitted basis through Hudson Specialty Insurance Company and Hudson Excess Insurance Company. Its nine business units include Commercial Auto, Crop, Financial Products, General Liability & Package, Healthcare Liability, Non-Medical Professional Liability, Specialty Property & Energy, Surety and Tribal. In 2018, Hudson celebrated its 100th anniversary, which was made even more memorable as we reached a record $1.4 billion in gross premiums written. This represents an increase of 30% compared to gross premiums written of $1.1 billion in 2017. We experienced growth across most lines, though it was predominantly driven by our Crop, Commercial Auto, Liability & Package and Tribal businesses. Our underwriting performance was positive despite current year extraordinary losses. Crop was impacted by drought in Texas, Hurricane Michael and reduced commodity prices. Commercial Auto was impacted by a larger frequency of severe claims. However, our results benefitted from favorable prior year development, principally from liability lines of business. For the year, we produced a net combined ratio of 99.5% compared to 91.8% in 2017. We continue to see the benefit from the investments made to expand into niche products and specialized services. Our newest business, Subcontractor Default Insurance, launched in March 2018, generated gross premiums written of $9 million in less than 12 months. Our third-party administrator, Napa River Insurance Services, grew its client base significantly and increased staff accordingly across the safety and risk management team, as well as its claims team, which has tripled in size since 2017. Our efforts to build underwriting operations from the ground-up, acquire niche businesses and partner with key distributors has fueled our growth and ultimately created the Hudson you know today. We are proud of our history and will continue to invest in talent and technology to ensure our future sustainability. As Hudson enters its second century of operation, we are excited by the many new ways we can deliver innovative specialty insurance products and services to our valued clients. OFFICE LOCATIONS NEW YORK 100 William Street New York, NY 10038 USA +1 212 978 2800 ATLANTA +1 678 331 4200 AVON +1 203 977 6400 CALABASAS +1 818 206 1500 CHICAGO +1 312 596 0222 CORONA +1 951 278 5648 LAKE MARY +1 407 710 1880 MINEOLA +1 212 384 0100 FORT WASHINGTON +1 212 978 2714 MORRISTOWN +1 212 384 0125 INDIANAPOLIS +1 317 582 0073 KANSAS CITY +1 816 778 0708 NAPA +1 707 225 3300 OVERLAND PARK +1 913 345 1515 SAN FRANCISCO +1 415 423 1333 SCOTTSDALE +1 480 566 6601 STAMFORD +1 203 977 8000 VANCOUVER +1 604 449 5360 WESTLAKE +1 440 925 1995 Christopher L. Gallagher Chief Executive Officer Hudson Insurance Group 99.5% 2018 COMBINED RATIO $1.4 BILLION 2018 GROSS PREMUIMS WRITTEN 17 INSURANCE International 18 ANNUAL REPORT 2018 NEWLINE SYNDICATE 87% AT LLOYD’S NEWLINE INSURANCE COMPANY LIMITED 13% LIABILITY MEDICAL MALPRACTICE FINANCIAL INSTITUTIONS PROFESSIONAL LIABILITY DIRECTORS & OFFICERS AFFINITY & SPECIAL RISKS SPACE, CARGO & SPECIE 50% 13% 9% 8% 7% 7% 6% PRODUCTS Affinity & Special Risks Cargo & Specie Crime Directors & Officers Liability Medical Malpractice Professional Liability Space Newline Group offers a suite of specialty casualty insurance products in more than 80 countries around the world. Our territorial focus is predominantly the U.K., Continental Europe, Australia, Asia Pacific and Canada. Headquartered in London, Newline Group operates through two underwriting platforms, Newline Syndicate 1218 and Newline Insurance Company Limited. Newline Syndicate 1218 transacts business at its underwriting box at Lloyd’s and through its service companies that act as “coverholders” around the world, providing local, customized service from its offices in Singapore, Melbourne, Malaysia and Toronto. Newline also participates in Lloyd’s Insurance Company (China) Limited’s platform in Shanghai. With a branch office in Cologne and a regional office in Leeds, Newline Insurance Company Limited provides casualty insurance throughout the European Community and facultative reinsurance in most jurisdictions around the world. Our product offerings include Public Liability, Employers Liability, Products Liability, Commercial Crime, Bankers Blanket Bond, Professional Liability, Directors & Officers Liability, Medical Malpractice, Satellite, Cargo, Specie and Affinity & Special Risks. Newline delivered excellent results in 2018, with gross premiums written of $221.7 million and a net combined ratio of 92.1%. This compares to gross premiums written of $205.1 million and a net combined ratio of 92.4% in 2017. We saw continued growth in Liability, and our Directors & Officers and Affinity & Special Risks portfolios expanded as well. In addition, we were encouraged by improving terms and conditions across all Financial and Professional Lines as well as Cargo. Our performance across the year benefitted from favourable loss emergence together with negligible exposure to the catastrophe events of 2018. Highlights from 2018 include the establishment of a new service company, Newline Canada Insurance Limited, which is based in Toronto and offers a suite of specialty insurance products primarily focused on small- and mid-sized clients. Our business in Cologne continues to grow and now enters its third year of operation. We are seeing the benefits of being closer to our distribution partners and our clients, which will provide further opportunites for growth. Moving forward, we anticipate continued improvement of terms and conditions across Cargo and most casualty classes. We also expect our footprint to expand as our newer operations in Toronto and Cologne become more established. OFFICE LOCATIONS LONDON Corn Exchange 55 Mark Lane London EC3R 7NE England +44 020 7090 1700 COLOGNE +49 221 9669 4510 LABUAN +65 6212 1290 LEEDS +44 0113 350 8734 MELBOURNE +61 03 9999 1901 SINGAPORE +65 6212 1290 SHANGHAI Newline Underwriting Division at Lloyd’s +86 021 6162 8278 TORONTO +1 416 572 4729 Carl A. Overy Chief Executive Officer Newline Group 92.1% 2018 COMBINED RATIO $221.7 MILLION 2018 GROSS PREMUIMS WRITTEN 19 EXECUTIVE LEADERSHIP ODYSSEY GROUP HOLDINGS, INC. BOARD OF DIRECTORS Andrew A. Barnard (1) Brandon W. Sweitzer (1) (2) Peter S. Clarke (2) (1) Compensation Committee (2) Audit Committee Chairman of the Board, President and Chief Operating Officer Fairfax Insurance Group Dean, School of Risk Management Vice President and Chief Operating Officer St. John’s University School of Risk Management Fairfax Financial Holdings Limited Brian D. Young President and Chief Executive Officer Odyssey Group Holdings, Inc. David J. Bonham (2) Vice President and Chief Financial Officer Fairfax Financial Holdings Limited Paul C. Rivett President Fairfax Financial Holdings Limited OFFICERS Brian D. Young President and Chief Executive Officer Michael G. Wacek Elizabeth A. Sander Executive Vice President and Chief Risk Officer Executive Vice President and Chief Actuary Jan Christiansen Executive Vice President and Chief Financial Officer Peter H. Lovell Senior Vice President, General Counsel and Corporate Secretary EXECUTIVE TEAM Alane R. Carey Executive Vice President Director of Global Marketing Philippe E. Mallier Chief Executive Officer Latin America Isabelle Dubots-Lafitte Carl A. Overy Chief Executive Officer Europe, Middle East & Africa Chief Executive Officer London Market Christopher L. Gallagher Lucien Pietropoli Chief Executive Officer U.S. Insurance Chief Executive Officer AsiaPacific Brian D. Quinn Chief Executive Officer North America Jeffrey M. Rubin Senior Vice President Director of Global Claims 20 ANNUAL REPORT 2018 To the Board of Directors of Odyssey Group Holdings, Inc.: Report of Independent Auditors We have audited the accompanying consolidated financial statements of Odyssey Group Holdings, Inc. (formerly known as Odyssey Re Holdings Corp.) and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Odyssey Group Holdings, Inc. (formerly known as Odyssey Re Holdings Corp.) and its subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the three years in the period ended December 31, 2018 in accordance with accounting principles generally accepted in the United States of America. Other Matters Accounting principles generally accepted in the United States of America require that information about incurred and paid claims development that precedes the current reporting period and the historical claims payout percentages included in Note 6 from page 57 to 63 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board (FASB) who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017 T: (646) 471 3000, F: (646) 471 8320, www.pwc.com/us have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. /s/ PricewaterhouseCoopers LLP New York, New York March 1, 2019 PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017 T: (646) 471 3000, F: (646) 471 8320, www.pwc.com/us ODYSSEY GROUP HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS Investments and cash: ASSETS (cid:3) (cid:3) (cid:3) Fixed income securities, available for sale, at fair value (amortized cost $74,648 (cid:3)(cid:3)(cid:3)and $621,394, respectively) ................................................................................... (cid:3) $ Fixed income securities, held for trading, at fair value (amortized cost $4,445,491 (cid:3)(cid:3)(cid:3)and $1,251,075, respectively) ................................................................................ (cid:3) Preferred stocks, held for trading, at fair value (cost $31,395 and $32,307, (cid:3)(cid:3)(cid:3)respectively) ........................................................................................................... (cid:3) Equity securities: (cid:3) Common stocks, available for sale, at fair value (cost $106,367 and $108,200, (cid:3)(cid:3)(cid:3)respectively) ..................................................................................................... (cid:3) Common stocks, held for trading and fair value options, at fair value (cost (cid:3)(cid:3)(cid:3)$1,028,168 and $913,429, respectively) .......................................................... (cid:3) Common stocks, at equity................................................................................... (cid:3) Short(cid:882)term investments, held for trading, at fair value (amortized cost $484,549 (cid:3)(cid:3)(cid:3)and $2,095,823, respectively) ................................................................................ (cid:3) Cash and cash equivalents ........................................................................................ (cid:3) Cash and cash equivalents held as collateral ............................................................ (cid:3) Other invested assets................................................................................................ (cid:3) Total investments and cash................................................................................. (cid:3) Accrued investment income ........................................................................................... (cid:3) Premiums receivable....................................................................................................... (cid:3) Reinsurance recoverable on paid losses ......................................................................... (cid:3) Reinsurance recoverable on unpaid losses ..................................................................... (cid:3) Prepaid reinsurance premiums ....................................................................................... (cid:3) Funds held by reinsureds ................................................................................................ (cid:3) Deferred acquisition costs .............................................................................................. (cid:3) Federal and foreign income taxes receivable ................................................................. (cid:3) Other assets .................................................................................................................... (cid:3) Total assets ......................................................................................................... (cid:3) $ (cid:3) LIABILITIES (cid:3) (cid:3) Commitments and Contingencies (Note 11) (cid:3)(cid:3) Unpaid losses and loss adjustment expenses ................................................................. (cid:3) $ Unearned premiums ....................................................................................................... (cid:3) Reinsurance balances payable ........................................................................................ (cid:3) Funds held under reinsurance contracts......................................................................... (cid:3) Debt obligations .............................................................................................................. (cid:3) Other liabilities................................................................................................................ (cid:3) Total liabilities ..................................................................................................... (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) SHAREHOLDERS' EQUITY (cid:3) Non(cid:882)controlling interest(cid:3)(cid:882)(cid:3)preferred shares of subsidiaries ............................................ (cid:3) Common shares, $10.00 par value; 60,000 shares authorized; 49,170 shares issued (cid:3)(cid:3) and outstanding ........................................................................................................... (cid:3) Additional paid(cid:882)in capital ................................................................................................ (cid:3) Accumulated other comprehensive (loss) income, net of deferred income taxes ......... (cid:3) Retained earnings ........................................................................................................... (cid:3) Total shareholders’ equity .................................................................................. (cid:3) Total liabilities and shareholders’ equity ............................................................ (cid:3) $ (cid:3) (cid:3) (cid:3) 2017 2018 (cid:3) December 31, (cid:3) (cid:3) (cid:3) (cid:3) (In thousands, except share and per share amounts) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) 76,654(cid:3) (cid:3) $ 651,083 4,432,603(cid:3) (cid:3) 24,125(cid:3) (cid:3) (cid:3) (cid:3) 111,665(cid:3) (cid:3) 785,330(cid:3) (cid:3) 816,322(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 531,957(cid:3) (cid:3) (cid:3) 786,019(cid:3) (cid:3) (cid:3) 28,381(cid:3) (cid:3) (cid:3) 1,182,069(cid:3) (cid:3) (cid:3) 8,775,125(cid:3) (cid:3) (cid:3) 24,232(cid:3) (cid:3) (cid:3) 1,089,758(cid:3) (cid:3) (cid:3) 159,611(cid:3) (cid:3) (cid:3) 927,035(cid:3) (cid:3) (cid:3) 121,465(cid:3) (cid:3) (cid:3) 163,372(cid:3) (cid:3) (cid:3) 230,335(cid:3) (cid:3) (cid:3) 232,863(cid:3) (cid:3) (cid:3) 146,346(cid:3) (cid:3) (cid:3) 11,870,142(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) 5,728,203(cid:3) (cid:3) $ 1,077,182(cid:3) (cid:3) (cid:3) 277,902(cid:3) (cid:3) (cid:3) 78,223(cid:3) (cid:3) (cid:3) 89,900(cid:3) (cid:3) (cid:3) 602,962(cid:3) (cid:3) (cid:3) 7,854,372(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) 29,299(cid:3) (cid:3) (cid:3) 492(cid:3) (cid:3) (cid:3) 1,725,992(cid:3) (cid:3) (cid:3) (68,729) (cid:3) (cid:3) 2,328,716(cid:3) (cid:3) (cid:3) 4,015,770(cid:3) (cid:3) (cid:3) 11,870,142(cid:3) (cid:3) $ 1,289,610 31,983 166,911 872,027 809,638 2,095,823 1,710,485 230,074 881,879 8,739,513 21,039 850,272 29,680 866,985 79,439 145,618 201,994 144,357 128,745 11,207,642 5,463,595 909,078 171,048 89,906 89,857 471,625 7,195,109 29,299 492 1,738,968 37,222 2,206,552 4,012,533 11,207,642 23 See accompanying notes to consolidated financial statements. ODYSSEY GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (cid:3) (cid:3) (cid:3) 2018 Years Ended December 31, 2017 (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) 2016 REVENUES Gross premiums written................................................................... $ 3,328,628 430,808 Ceded premiums written.................................................................. 2,897,820 Net premiums written................................................................. (142,391) Increase in net unearned premiums................................................. 2,755,429 Net premiums earned ................................................................. Net investment income .................................................................... 209,226 Net realized investment (losses) gains: Realized investment (losses) gains.............................................. Other(cid:882)than(cid:882)temporary impairment losses.................................. Total net realized investment (losses) gains.......................... Total revenues............................................................................. (cid:3) EXPENSES Losses and loss adjustment expenses .............................................. Acquisition costs ............................................................................... Other underwriting expenses........................................................... Other expenses, net ......................................................................... Interest expense ............................................................................... Total expenses............................................................................. Income before income tax................................................................ (cid:3)(cid:3) Federal and foreign income tax provision (benefit): Current ........................................................................................ Deferred ...................................................................................... Total federal and foreign income tax provision..................... Net income ....................................................................................... $ (117,106) (299) (117,405) 2,847,250 1,715,745 588,740 275,868 15,811 4,132 2,600,296 246,954 51,071 (27,892) 23,179 223,775 (In thousands) (185,688) (16,227) (201,915) 2,087,254 (cid:3)(cid:3) (cid:3)(cid:3) $ 2,783,105(cid:3)(cid:3) $ 2,380,747 280,570 (cid:3)(cid:3) 2,100,177 (cid:3)(cid:3) (26,081) (cid:3)(cid:3) 2,074,096 (cid:3)(cid:3) 215,073 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) $ 287,218(cid:3)(cid:3) 2,495,887(cid:3)(cid:3) (162,486) 2,333,401(cid:3)(cid:3) 191,790(cid:3)(cid:3) (cid:3)(cid:3) 390,367(cid:3)(cid:3) (12,286) 378,081(cid:3)(cid:3) 2,903,272(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 1,539,522(cid:3)(cid:3) 492,482(cid:3)(cid:3) 246,181(cid:3)(cid:3) 3,526(cid:3)(cid:3) 3,260(cid:3)(cid:3) 2,284,971(cid:3)(cid:3) 618,301(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 144,491(cid:3)(cid:3) 148,556(cid:3)(cid:3) 293,047(cid:3)(cid:3) 325,254(cid:3)(cid:3) $ 1,171,825 431,417 241,329 74,559 2,801 1,921,931 165,323 28,508 (24,093) 4,415 160,908 See accompanying notes to consolidated financial statements. 24 ODYSSEY GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (cid:3) (cid:3) (cid:3) (cid:3) 2018 Years Ended December 31, 2017 (cid:3) (cid:3) (cid:3) (In thousands) (cid:3) (cid:3) (cid:3) (cid:3) 2016 Net income ....................................................................................... $ 223,775 OTHER COMPREHENSIVE (LOSS) INCOME, BEFORE TAX Unrealized net (depreciation) appreciation on securities arising (cid:3)(cid:3) during the year.............................................................................. Reclassification adjustment for net realized investment gains included in net income.................................................................. Foreign currency translation adjustments........................................ Benefit plan liabilities ....................................................................... Other comprehensive loss, before tax ........................................ (cid:3) TAX BENEFIT (PROVISION) Unrealized net depreciation (appreciation) on securities arising (64,946) (17,956) (62,689) 11,411 (134,180) during the year.............................................................................. 13,690 Reclassification adjustment for net realized investment gains included in net income.................................................................. Foreign currency translation adjustments........................................ Benefit plan liabilities ....................................................................... Total tax benefit .......................................................................... Other comprehensive loss, net of tax.................................... Comprehensive income.................................................... $ 3,771 13,164 (2,396) 28,229 (105,951) 117,824 (cid:3) $ (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) $ 325,254(cid:3) $ 160,908 (cid:3) (cid:3) 56,831(cid:3) (cid:3) (100,845) 528(cid:3) (13,180) (56,666) (cid:3) (cid:3) (53,043) (48,910) (24,166) (2,440) (128,559) (20,025) (cid:3) 35,296(cid:3) (185) 4,613(cid:3) 19,699(cid:3) (36,967) 288,287(cid:3) $ 18,546 17,118 8,458 854 44,976 (83,583) 77,325 See accompanying notes to consolidated financial statements. 25 ODYSSEY GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cid:3) (cid:3) NON(cid:882)CONTROLLING INTEREST(cid:3)(cid:882) PREFERRED SHARES OF (cid:3)(cid:3)(cid:3)(cid:3)SUBSIDIARIES Balance, beginning and end of year ................................................. $$ COMMON SHARES (par value) Balance, beginning and end of year ................................................. ADDITIONAL PAID(cid:882)IN CAPITAL Balance, beginning of year ............................................................... (cid:3)(cid:3)(cid:3)(cid:3)Net change due to stock option exercises and (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)restricted share awards ............................................................ Balance, end of year ......................................................................... ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME NET OF DEFERRED INCOME TAXES Balance, beginning of year ............................................................... (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Unrealized depreciation on securities, net of reclassification (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) adjustments ............................................................................. (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Foreign currency translation adjustments ................................... (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Benefit plan liabilities................................................................... (cid:3) U.S. tax reform deferred income tax reclassification................... Balance, end of year ......................................................................... RETAINED EARNINGS Balance, beginning of year ............................................................... (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Net income................................................................................... (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Dividends to preferred shareholders and non(cid:882)controlling (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)interest ..................................................................................... (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Dividends to common shareholder.............................................. (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)U.S. tax reform deferred income tax reclassification................... Balance, end of year ......................................................................... 2018 Years Ended December 31, 2017 (cid:3) (In thousands, except common share amounts) 2016 (cid:3) (cid:3) (cid:3) 29,299 492 1,738,968 (12,976) 1,725,992 37,222 (cid:3) $$ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (65,441) (49,525) 9,015 (68,729) (cid:3) (cid:3) (cid:3) —— (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2,206,552 223,775 (cid:3) 29,299(cid:3) $$ 29,299 (cid:3) 492(cid:3) (cid:3) 1,746,290(cid:3) (7,322) 1,738,968(cid:3) (cid:3) (cid:3) 67,581(cid:3) (28,743) 343(cid:3) (8,567) 6,608(cid:3) 37,222(cid:3) (cid:3) 1,989,517(cid:3) 325,254(cid:3) 492 1,747,017 (727) 1,746,290 151,164 (66,289) (15,708) (1,586) —— 67,581 2,030,220 160,908 (1,611) (100,000) (1,611) (100,000) (6,608) 2,206,552(cid:3) (1,611) (cid:3) (200,000) (cid:3) —— (cid:3) —— 1,989,517 (cid:3) $$ 4,012,533(cid:3) $$ 3,833,179 2,328,716 TOTAL SHAREHOLDERS' EQUITY........................................ $$ 4,015,770 (cid:3) SHARES OUTSTANDING Balance, beginning and end of year ................................................. 49,170 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 49,170(cid:3) 49,170 See accompanying notes to consolidated financial statements. 26 ODYSSEY GROUP HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 2018 Years Ended December 31, 2017 (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2016 (cid:3) (cid:3) (cid:3) CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: $ Increase in premiums receivable and funds held, net of reinsurance............................ Increase in unearned premiums and prepaid reinsurance premiums, net .................... Increase in unpaid losses and loss adjustment expenses, net of reinsurance................ (Increase) decrease in current and deferred federal and foreign income taxes, net ..... Increase in deferred acquisition costs............................................................................ Change in other assets and liabilities, net...................................................................... Net realized investment losses (gains) ........................................................................... Bond discount amortization, net.................................................................................... Amortization of compensation plans ............................................................................. Net cash provided by operating activities ............................................................... (cid:3)(cid:3) CASH FLOWS FROM INVESTING ACTIVITIES Maturities of fixed income securities, available for sale....................................................... Sales of fixed income securities, available for sale ............................................................... Purchases of fixed income securities, available for sale ....................................................... Sales of equity securities, available for sale.......................................................................... Purchases of equity securities, available for sale.................................................................. Net settlements of other invested assets ............................................................................. Purchases of other invested assets....................................................................................... Net change in cash and cash equivalents held as collateral.................................................. Sales of trading securities ..................................................................................................... Purchases of trading securities ............................................................................................. Net purchases of fixed assets ............................................................................................... Net cash (used in) provided by investing activities.................................................. (cid:3) CASH FLOWS FROM FINANCING ACTIVITIES Purchases of restricted shares.............................................................................................. Dividends paid to preferred shareholders ............................................................................ Dividends paid to common shareholder............................................................................... Net cash used in financing activities........................................................................ (cid:3) Effect of exchange rate changes on cash and cash equivalents............................................ (cid:3) (Decrease) increase in cash and cash equivalents ................................................................ Cash and cash equivalents, beginning of year ...................................................................... Cash and cash equivalents, end of year ......................................................................... (cid:3) disclosures of cash flow information: Interest paid................................................................................................................... Income taxes paid .......................................................................................................... (cid:3) $ $ $ Non(cid:882)cash activity: Dividends paid to common shareholder ........................................................................ $ (cid:3) (cid:3) 325,254 (71,061) 159,249 200,386 277,366 (33,549) (55,752) (378,081) (10,803) 15,021 428,030 (cid:3) (In thousands) (cid:3) 223,775(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 786,019(cid:3) (cid:3) $ (cid:3) (cid:3) (302,471) (cid:3) 139,269(cid:3) (cid:3) 292,180(cid:3) (cid:3) (60,301) (cid:3) (28,766) (cid:3) 129,996(cid:3) (cid:3) 117,405(cid:3) (cid:3) (27,982) (cid:3) 17,234(cid:3) (cid:3) 500,339(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 530,941(cid:3) (cid:3) 43,750(cid:3) (cid:3) (13,983) (cid:3) 5,771(cid:3) (cid:3) (29,584) (cid:3) 244,245(cid:3) (cid:3) (486,805) (cid:3) 194,860(cid:3) (cid:3) 5,063,733(cid:3) (cid:3) (6,854,273) (cid:3) (15,323) (cid:3) (1,316,668) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (29,492) (cid:3) (1,611) (cid:3) (50,001) (cid:3) (81,104) (cid:3) (cid:3) (cid:3) (27,033) (cid:3) (cid:3) (cid:3) (924,466) (cid:3) 1,710,485(cid:3) (cid:3) 147,492 158,332 (15,179) 275,373 (362,353) 485,327 (308,411) (36,676) 4,272,564 (3,930,490) (10,769) 675,210 (22,696) (1,611) (1) (24,308) 1,105,624 604,861 1,710,485 26,692 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 4,068(cid:3) (cid:3) $ 83,367(cid:3) (cid:3) $ (cid:3) (cid:3) 49,999(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) 3,193 17,991 $ 160,908 (26,572) 26,792 10,496 (148,440 ) (11,419 ) 41,937 201,915 (4,183 ) 14,655 266,089 63,890 501,833 (5,330 ) 584 (95,254 ) (9,944 ) (112,762) (11,280 ) 5,345,260 (5,748,858) (10,680 ) (82,541) (15,382) (1,611 ) (2 ) (16,995 ) (21,959 ) 144,594 460,267 604,861 2,741 152,842 $ $ $ 99,999 $ 199,998 See accompanying notes to consolidated financial statements. 27 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Odyssey Group Holdings, Inc., formerly known as Odyssey Re Holdings Corp., a Delaware corporation (together with its subsidiaries, the “Company”, or “OGHI” on a stand(cid:882)alone basis), is an underwriter of reinsurance, providing a full range of property and casualty products on a worldwide basis, and an underwriter of specialty insurance, primarily in the United States and through the Lloyd’s of London (“Lloyd’s”) marketplace. OGHI owns all of the common shares of Odyssey Reinsurance Company (“ORC”), its principal operating subsidiary, which is domiciled in the state of Connecticut. ORC directly or indirectly owns all of the common shares of the following subsidiaries: Hudson Insurance Company (“Hudson”) and its subsidiaries: Hudson Specialty Insurance Company (“Hudson Specialty”); Hudson Excess Insurance Company (“Hudson Excess”);(cid:3) Greystone Insurance Company (“Greystone”), formerly known as Clearwater Select Insurance Company; Newline Holdings U.K. Limited and its subsidiaries (collectively, “Newline”): Newline Underwriting Management Limited, which manages Newline Syndicate (1218), a member of Lloyd’s; Newline Insurance Company Limited (“NICL”); Newline Corporate Name Limited (“NCNL”), which provides capital for and receives distributed earnings from Newline Syndicate (1218); and Newline Verwaltungs AG (“NV”). Odyssey Re Europe Holdings S.A.S. (“OREH”): Odyssey Re Europe S.A. (“ORESA”). Fairfax Financial Holdings Limited (“Fairfax”), a publicly traded financial services holding company based in Canada, ultimately owns 100% of the common shares of OGHI and 100% of the non(cid:882)controlling interest(cid:3)(cid:882)(cid:3)preferred shares of OGHI’s subsidiaries. OGHI’s direct 100% owner is Odyssey US Holdings Inc. (“OUSHI”), all of the common shares of which are ultimately owned by Fairfax. Dividends and returns of capital from the Company are expected to be the source of funds for servicing OUSHI’s debt obligations owed to various Fairfax entities. 28 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2. Summary of Significant Accounting Policies (a) Basis of Presentation.(cid:3) The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that could differ materially from actual results affecting the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities.(cid:3) (cid:3) The Company considers its accounting policies that are most dependent on the application of estimates and assumptions as critical accounting estimates, which are defined as estimates that are both: i) important to the portrayal of the Company’s financial condition and results of operations and ii) require the Company to exercise significant judgment. These estimates, by necessity, are based on assumptions about numerous factors. The Company reviews its critical accounting estimates and assumptions on a quarterly basis, including: the estimate of reinsurance premiums and premium related amounts; establishing deferred acquisition costs; goodwill and intangible impairment evaluations; an evaluation of the adequacy of reserves for unpaid losses and loss adjustment expenses; review of its reinsurance and retrocession agreements; estimates related to income taxes, including an analysis of the recoverability of deferred income tax assets; and an evaluation of its investment portfolio, including a review for other(cid:882)than(cid:882)temporary declines in estimated fair value. (b) Investments.(cid:3)(cid:3)The majority of the Company’s investments in fixed income securities and common stocks are categorized as “available for sale” or “held for trading” and are recorded at their estimated fair value based on quoted market prices (see Note 3).(cid:3) Most investments in common stocks of affiliates are carried at the Company’s proportionate share of the equity of those affiliates. Short(cid:882)term investments, which are classified as “held for trading” and which have a maturity of one year or less from the date of purchase, are carried at fair value. The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include certificates of deposits totaling $19.5 million and $17.7 million as of December 31, 2018 and 2017, respectively. Investments in limited partnerships, investment funds, mortgage loans and real estate have been reported in other invested assets. Other invested assets also include trust accounts relating to the Company’s benefit plans and derivative securities, all of which are carried at fair value. The Company routinely evaluates the carrying value of its investments in common stocks of affiliates and in partnerships and investment funds. In the case of limited partnerships and investment funds, the carrying value is generally established on the basis of the net valuation criteria as determined by the managers of the investments. Such valuations could differ significantly from the values that would have been available had markets existed for the securities. Investment transactions are recorded on their trade date, with balances pending settlement reflected in the consolidated balance sheets as a component of other assets or other liabilities. Investment income, which is reported net of applicable investment expenses, is recorded as earned. Realized investment gains or losses are determined on the basis of average cost. The Company records, in investment income, its proportionate share of income or loss, including realized gains or losses, for those securities for which the equity method of accounting is utilized, which include most common stocks of affiliates, limited partnerships and investment funds. Due to the timing of when financial information is reported by equity investees and received by the Company, results attributable to these investments are generally reported by the Company on a one month or one quarter lag. Unrealized appreciation and depreciation related to trading securities is recorded as realized investment gains or losses in the consolidated statements of operations. The net amount of unrealized appreciation or depreciation on the Company’s available for sale investments, net of applicable deferred income taxes, is reflected in shareholders’ equity in accumulated other comprehensive income. A decline in the fair value of an available for sale investment below its cost or amortized cost that is deemed other(cid:882)than(cid:882)temporary is recorded as a realized investment loss in the consolidated statements of operations, resulting in a new cost or amortized cost basis for the investment. Other(cid:882)than(cid:882)temporary declines in the carrying values of investments recorded in accordance with the equity method of accounting are recorded in net investment income in the consolidated statements of operations. 29 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (c) Revenue Recognition. Reinsurance assumed premiums written and related costs are based upon reports received from ceding companies. When reinsurance assumed premiums written have not been reported by the ceding company they are estimated, at the individual contract level, based on historical patterns and experience from the ceding company and judgment of the Company. Subsequent adjustments to premiums written, based on actual results or revised estimates from the ceding company, are recorded in the period in which they become known. Reinsurance assumed premiums written related to proportional treaty business are established on a basis that is consistent with the coverage periods under the terms of the underlying insurance contracts. Reinsurance assumed premiums written related to excess of loss and facultative reinsurance business are recorded over the coverage term of the contracts, which is generally one year. Unearned premium reserves are established for the portion of reinsurance assumed premiums written that are to be recognized over the remaining contract period. Unearned premium reserves related to proportional treaty contracts are computed based on reports received from ceding companies, which show premiums written but not yet earned. Premium adjustments made over the life of the contract are recognized as earned premiums based on the applicable contract period. Insurance premiums written are based upon the effective date of the underlying policy and are generally earned on a pro rata basis over the policy period, which is usually one year. A reserve for uncollectible premiums is established when deemed necessary. The Company has established a reserve for potentially uncollectible premium receivable balances of $8.4 million and $10.7 million as of December 31, 2018 and 2017, respectively, which has been netted against premiums receivable. The cost of reinsurance purchased by the Company (reinsurance premiums ceded) is reported as prepaid reinsurance premiums and amortized over the contract period in proportion to the amount of reinsurance protection provided. The ultimate amount of premiums, including adjustments, is recognized as premiums ceded, and amortized over the applicable contract period. Premiums earned are reported net of reinsurance ceded premiums earned in the consolidated statements of operations. Amounts paid by the Company for retroactive reinsurance that meet the conditions for reinsurance accounting are reported as reinsurance receivables to the extent those amounts do not exceed the associated liabilities. If the liabilities exceed the amounts paid, reinsurance receivables are increased to reflect the difference, and the resulting gain is deferred and amortized over the estimated settlement period. If the amounts paid for retroactive reinsurance exceed the liabilities, the related liabilities are increased or the reinsurance receivable is reduced, or both, at the time the reinsurance contract is effective, and the excess is charged to net income. Changes in the estimated amount of liabilities relating to the underlying reinsured contracts are recognized in net income in the period of the changes. Assumed and ceded reinstatement premiums represent additional premiums related to reinsurance coverages, principally catastrophe excess of loss contracts, which are paid when the incurred loss limits have been utilized under the reinsurance contract and such limits are reinstated. Premiums written and earned premiums related to a loss event are estimated and accrued as earned. The accrual is adjusted based upon any change to the ultimate losses incurred under the contract. Leasing revenue is generally recognized ratably over the term of the leases. All of the Company’s leasing revenue are generated from operating leases. Assets held for leases consist of land and buildings with estimated useful lives of 30 to 40 years and are valued at $130.2 million. (d) Deferred Acquisition Costs.(cid:3) Acquisition costs, which are reported net of costs recovered under ceded contracts, consist of commissions and brokerage expenses incurred on insurance and reinsurance business written, and premium taxes on direct insurance written, and are deferred and amortized over the period in which the related premiums are earned. Commission adjustments are accrued based on changes in premiums and losses recorded by the Company in the period in which they become known. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premium, which considers anticipated losses and loss adjustment expenses and estimated remaining costs of servicing the business, all based on historical experience. The realizable value of the Company’s deferred acquisition costs is determined without consideration of investment income. Included in acquisition costs in the consolidated statements of operations are amortized deferred acquisition costs of $569.8 million, $483.6 million and $418.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. 30 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (e) Goodwill and Intangible Assets. The Company accounts for goodwill and intangible assets as permitted or required by GAAP. A purchase price paid that is in excess of net assets arising from a business combination is recorded as an asset (“goodwill”) and is not amortized. Intangible assets with finite lives are amortized over the estimated useful life of the asset. Intangible assets with indefinite useful lives are not amortized. Goodwill and intangible assets are analyzed for impairment on a quarterly basis to determine if the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in the consolidated statements of operations. For the year ended December 31, 2018, the Company did not impair any goodwill or intangible assets. For the year ended December 31, 2017, the Company impaired $0.3 million of intangible assets with finite lives related to its acquisition of an agency producing surety business. For the year ended December 31, 2016, the Company impaired $6.8 million of goodwill related to its acquisition of an agency producing financial products.(cid:3)(cid:3) The following table reflects the carrying amount of goodwill, intangible assets with indefinite lives and intangible assets with finite lives as of December 31, 2018 and 2017 (in thousands): (cid:3) Balance, January 1, 2017 .................................................... $ Amortization during 2017 ............................................. Impairment during 2017 ............................................... Balance, December 31, 2017 .............................................. Acquired during 2018.................................................... Amortization during 2018 ............................................. (cid:3) Balance, December 31, 2018 .............................................. $ (cid:3) Goodwill Indefinite Lives (cid:3) (cid:3) Finite Lives Intangible Assets 52,257 $ —— (cid:3) —— 52,257 11 —— 52,268 $ 5,813(cid:3)(cid:3)(cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3) (cid:3) 5,813(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3) (cid:3) 5,813(cid:3)(cid:3)(cid:3) $ 6,723 $ (3,674) (329) 2,720 11,416 (2,581) 11,555 $ Total 64,793 (3,674) (329) 60,790 11,427 (2,581) 69,636 The following table provides the estimated amortization expense related to intangible assets for the succeeding years (in thousands): Years Ended December 31, 2024 and thereafter Amortization of intangible assets ..................... $ 2,132 $ 1,712 $ 1,712 $ 1,712(cid:3) $ 1,712 $ 2,573 2022 2020 2023 2021 2019 (cid:3) (cid:3) (cid:3) (f) Unpaid losses and loss adjustment expenses. The reserves for losses and loss adjustment expenses are estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses. The estimates are based on assumptions related to the ultimate cost to settle such claims. The inherent uncertainties of estimating reserves are greater for reinsurers than for primary insurers due to the diversity of development patterns among different types of reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. As a result, there can be no assurance that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on the Company. The reserves for unpaid losses and loss adjustment expenses are based on the Company’s evaluations of reported claims and individual case estimates received from ceding companies for reinsurance business or the estimates advised by the Company’s claims adjusters for insurance business. The Company utilizes generally accepted actuarial methodologies to determine reserves for losses and loss adjustment expenses on the basis of historical experience and other estimates. The reserves are reviewed continually during the year and changes in estimates in losses and loss adjustment expenses are reflected as an expense in the consolidated statements of operations in the period the adjustment is made. Reinsurance recoverables on unpaid losses and loss adjustment expenses are reported as assets. A reserve for uncollectible reinsurance recoverables is established based on an evaluation of each reinsurer or retrocessionaire and historical experience. The Company uses tabular reserving for workers’ compensation indemnity loss reserves, which are considered to be fixed and determinable, and discounts such reserves using an interest rate of 3.5% and the Life Table for Total Population: United States, 2009. 31 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (g) Deposit Assets and Liabilities. The Company may enter into assumed and ceded reinsurance contracts that contain certain loss limiting provisions and, as a result, do not meet the risk transfer provisions of GAAP. These contracts are deemed as either transferring only significant timing risk or only significant underwriting risk or transferring neither significant timing nor underwriting risk and are accounted for using the deposit accounting method, under which revenues and expenses from reinsurance contracts are not recognized as written premium and incurred losses. Instead, the profits or losses from these contracts are recognized net, as other income or other expense, over the contract or contractual settlement periods.(cid:3) For such contracts, the Company initially records the amount of consideration paid as a deposit asset or received as a deposit liability. Revenue or expense is recognized over the term of the contract, with any deferred amount recorded as a component of assets or liabilities until such time it is earned. The ultimate asset or liability under these contracts is estimated, and the asset or liability initially established, which represents the consideration transferred, is increased or decreased over the term of the contract. The change during the period is recorded in the Company’s consolidated statements of operations, with increases and decreases in the ultimate asset or liability shown in other expense, net. As of December 31, 2018 and 2017, the Company had reflected $5.2 million and $5.9 million in other assets and $0.4 million and $0.5 million in other liabilities, respectively, related to deposit contracts. In cases where cedants retain the consideration on a funds held basis, the Company records those assets in other assets, and records the related investment income on the assets in the Company’s consolidated statements of operations as investment income. (h) Income Taxes.(cid:3)(cid:3)The Company records deferred income taxes to provide for the net tax effect of temporary differences between the carrying values of assets and liabilities in the Company’s consolidated financial statements and their tax bases. Such differences relate principally to deferred acquisition costs, unearned premiums, unpaid losses and loss adjustment expenses, investments and tax credits. Deferred tax assets are reduced by a valuation allowance when the Company believes it is more likely than not that all or a portion of deferred taxes will not be realized. As of December 31, 2018 and 2017, a valuation allowance was not required. The Company has elected to recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision.(cid:3)(cid:3) (i) Derivatives.(cid:3) The Company utilizes derivative instruments to manage against potential adverse changes in the value of its assets and liabilities. Derivatives include total return swaps, interest rate swaps, forward currency contracts, U.S. Treasury bond forward contracts, CPI(cid:882)linked derivative contracts, credit default swaps, call options and warrants and other equity and credit derivatives. In addition, the Company holds options on certain securities within its fixed income portfolio that allow the Company to extend the maturity date on fixed income securities or convert fixed income securities to equity securities. The Company categorizes these investments as trading securities, and changes in fair value are recorded as realized investment gains or losses in the consolidated statements of operations. All derivative instruments are recognized as either assets or liabilities on the consolidated balance sheets and are measured at their fair value. Gains or losses from changes in the derivative values are reported based on how the derivative is used and whether it qualifies for hedge accounting. For derivative instruments that do not qualify for hedge accounting, changes in fair value are included in realized investment gains and losses in the consolidated statements of operations. Margin balances required by counterparties in support of derivative positions are included in fixed income securities and short(cid:882)term investments. (j) Foreign Currency.(cid:3) Foreign currency transaction gains or losses resulting from a change in exchange rates between the currency in which a transaction is denominated, or the original currency, and the functional currency are reflected in the consolidated statements of operations in the period in which they occur. The Company translates the financial statements of its foreign subsidiaries and branches that have functional currencies other than the U.S. dollar into U.S. dollars by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the rate at which the transaction occurs or the average exchange rate for each quarter. Translation gains or losses are recorded, net of deferred income taxes, as a component of accumulated other comprehensive income. 32 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents the foreign exchange effects, net of the effects of foreign currency forward contracts purchased as an economic hedge against foreign exchange rate volatility and of tax, on specific line items in the Company’s financial statements for the years ended December 31, 2018, 2017 and 2016 (in thousands): Statements of operations: Realized investment gains (losses): Foreign currency forward contracts gains (losses)...................... $ Other investment (losses) gains.................................................. Total realized investment gains (losses) ................................ Net investment (loss) income ..................................................... Other income (expenses), net..................................................... Income (loss) before income tax ........................................... Total federal and foreign income tax provision (benefit) ........... Net income (loss) ................................................................... Other comprehensive (loss) income: Other comprehensive (loss) income before income tax ............. Federal and foreign income tax (benefit) provision before (cid:3)(cid:3)(cid:3)income tax ................................................................................ Other comprehensive (loss) income, net of tax ............................... Total effects on comprehensive (loss) income and (cid:3)(cid:3)(cid:3)shareholders' equity ........................................................... $ 2018 2017 (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 58,841 (24,139) 34,702 (4,214) 1,575 32,063 6,734 25,329 (62,689) (13,164) (49,525) (cid:3) (cid:3) 2016 (cid:3) (cid:3) (cid:3) (35,407) $ 35,187(cid:3) (220) 868(cid:3) 18,552(cid:3) 19,200(cid:3) 6,720(cid:3) 12,480(cid:3) (cid:3) 528 185(cid:3) 343(cid:3) 4,330 41,940 46,270 1,240 (52,084) (4,574) (1,600) (2,974) (24,166) (8,458) (15,708) (24,196) $ 12,823(cid:3) $ (18,682) (k) Stock(cid:882)Based Compensation Plans.(cid:3) The Company reflects awards of restricted common stock of Fairfax to employees as a reduction to additional paid(cid:882)in(cid:882)capital when the shares are purchased. The award value is amortized through compensation expense over the related vesting periods. (l) Claims Payments.(cid:3) Payments of claims by the Company, as reinsurer, to a broker on behalf of a reinsured company are recorded in the Company’s financial statements as paid losses at the time the cash is disbursed and are treated as paid to the reinsured.(cid:3) Premiums due to the Company from the reinsured are recorded as receivables from the reinsured until the cash is received by the Company, either directly from the reinsured or from the broker. (m) Funds Held Balances.(cid:3)(cid:3)“Funds held under reinsurance contracts” represents amounts due to reinsurers arising from the Company’s receipt of a deposit from a reinsurer, or the withholding of a portion of the premiums due, in accordance with contractual terms, as a guarantee that the reinsurer will meet its loss and other obligations. Interest generally accrues on withheld funds in accordance with contract terms. “Funds held by reinsured” represents amount due from a ceding company that withholds, in accordance with the contractual terms, a portion of the premium due the Company as a guarantee that the Company will meet its loss and other obligations. (n) Fixed Assets.(cid:3) Fixed assets, with a net book value of $32.7 million and $28.2 million as of December 31, 2018 and 2017, respectively, are recorded at amortized cost and are included in other assets.(cid:3)(cid:3)Depreciation and amortization are generally computed on a straight(cid:882)line basis over the following estimated useful lives: Leasehold improvements ................................................................................. (cid:3) 10 years or term of lease, if shorter Electronic data processing equipment and furniture....................................... Personal computers and software.................................................................... 5 years 3 years Depreciation and amortization expense for the years ended December 31, 2018, 2017 and 2016 was $11.4 million, $9.4 million and $9.8 million, respectively. (o) Contingent Liabilities.(cid:3)(cid:3)Amounts are accrued for the resolution of claims that have either been asserted or are deemed probable of assertion if, in the opinion of the Company, it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated.(cid:3)(cid:3)In many cases it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until years after the contingency arises, in which case no accrual is made until that time. As of December 31, 2018 and 2017, no contingent liabilities have been recorded (see Note 11). 33 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (p) Recent Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) is the organization responsible for establishing and improving GAAP.(cid:3)(cid:3) In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016(cid:882)01, “Financial Instruments(cid:3)(cid:882) Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016(cid:882)01 generally requires that equity investments (excluding those investments for which the equity method of accounting is utilized) be measured at fair value with changes in fair value recognized in net income. Under existing GAAP, changes in fair value of available(cid:882)for(cid:882)sale equity investments are recorded in other comprehensive income. ASU 2016(cid:882)01 is effective for the Company in 2019, with the cumulative effect of the adoption made to the balance sheet as of January 1, 2019. The adoption will result in a reclassification of the related accumulated unrealized appreciation currently included in accumulated other comprehensive income to retained earnings, with no impact on the Company’s shareholders’ equity.(cid:3) (cid:3) If ASU 2016(cid:882)01 had been adopted as of December 31, 2018, the required reclassification would have decreased other comprehensive income and increased retained earnings by approximately $5.8 million. In February 2016 and July 2018, the FASB issued ASU 2016(cid:882)02 and ASU 2018(cid:882)11, respectively, both entitled “Leases”, requiring a lessee i)(cid:3)(cid:3)to recognize in the statement of financial position a liability to make lease payments and a right(cid:882)of(cid:882)use asset representing its right to use the underlying asset for the lease term, and ii) to make additional qualitative and quantitative disclosures about its leases.(cid:3) (cid:3) Under ASU 2016(cid:882)02, the new guidance was required to be applied retroactively with previously issued financial statements restated.(cid:3) (cid:3) Under the additional transition guidance provided by ASU 2018(cid:882)11, entities may elect to recognize a cumulative(cid:882)effect adjustment to the opening balance of retained earnings in the year of adoption. Consequently, if the transition option available under ASU 2018(cid:882)11 is elected, an entity’s reporting for the comparative periods prior to adoption presented in the consolidated financial statements would continue to be in accordance with current lease guidance. ASU 2016(cid:882)02 and ASU(cid:882)2018(cid:882)11 are effective for the Company in 2020, with early adoption permitted. If ASU 2016(cid:882)02 and ASU 2018(cid:882)11 had been adopted as of December 31, 2018, the Company would have been required to establish a right(cid:882) of(cid:882)use asset and a lease obligation of $86.7 million. In June 2016, the FASB issued ASU 2016(cid:882)13, “Financial Instruments(cid:3)(cid:882)(cid:3)Credit Losses,” which provides for the recognition and measurement at the reporting date of all expected credit losses for financial assets that are not accounted for at fair value through net income, including investments in available(cid:882)for(cid:882)sale debt securities and loans, premiums receivable and reinsurance recoverable. The updated guidance amends the current other(cid:882)than(cid:882) temporary impairment model for available(cid:882)for(cid:882)sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit(cid:882)related impairments for financial instruments measured at amortized cost. ASU 2016(cid:882)13 is effective for the Company in 2021, with early adoption permitted. The Company is evaluating the effect this standard will have on its consolidated financial statements, although such effect is not expected to be significant.(cid:3)(cid:3)(cid:3) In November 2016, the FASB issued ASU 2016(cid:882)18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016(cid:882)18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts described as restricted cash or restricted cash equivalents.(cid:3) Disclosure will be required to reconcile such total to amounts on the balance sheet and to describe the nature of the restrictions. ASU 2016(cid:882)18 is effective for the Company in 2019, with early adoption permitted. The Company is evaluating the effect this standard will have on its consolidated financial statements, although such effect is not expected to be significant.(cid:3)(cid:3)(cid:3) In March 2017, the FASB issued ASU 2017(cid:882)07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017(cid:882)07 requires that the service cost component of net periodic benefit costs be reported within the same line items of the statements of operations as other compensation costs are reported. Other components of net periodic benefit costs should be reported separately. Disclosure is required to state within which line items of the statements of operations each component is reported. ASU 2017(cid:882)07 is effective for the Company in 2019. As there is no change in the total cost reported,(cid:3) the adoption of ASU 2017(cid:882)07 will not have a material impact on the Company’s consolidated financial statements.(cid:3)(cid:3) In March 2017, the FASB issued ASU 2017(cid:882)08, “Receivables(cid:3) (cid:882) Nonrefundable Fees and Other Costs (Subtopic 310(cid:882)20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2017(cid:882)08 requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity 34 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) date of the callable security. ASU 2017(cid:882)08 is effective for the Company in 2020. The Company does not expect the adoption of ASU 2017(cid:882)08 to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU 2018(cid:882)13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018(cid:882)13 is effective for the Company in 2020. Implementation is on a prospective or retroactive basis, depending on the specific disclosure element. Early adoption is permitted. The Company does not expect the adoption of ASU 2018(cid:882)13 to have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU 2018(cid:882)15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018(cid:882)15 requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the requirements for capitalizing implementation costs incurred to develop or obtain internal(cid:882)use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement. ASU 2018(cid:882)15 is effective for the Company in 2021. Early adoption is permitted. The Company does not expect the adoption of ASU 2018(cid:882)15 to have a material impact on the Company’s consolidated financial statements. (q) Subsequent Events.(cid:3) The Company has evaluated the significance of events occurring subsequent to December 31, 2018 with respect to disclosing the nature and expected impact of such events as of March 1, 2019, the date these consolidated financial statements were available to be issued. 3. Fair Value Measurements The Company accounts for a significant portion of its financial instruments at fair value as permitted or required by GAAP. Fair Value Hierarchy The assets and liabilities recorded at fair value in the consolidated balance sheets are measured and classified in a three level hierarchy for disclosure purposes based on the observability of inputs available in the marketplace used to measure fair values.(cid:3) (cid:3) The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Gains and losses for assets and liabilities categorized within the Level 3 table below, therefore, may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Financial assets and liabilities recorded in the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows: Level 1:(cid:3) Level 1 financial instruments are financial assets and liabilities for which the values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.(cid:3) Market price data generally is obtained from exchange markets.(cid:3) The Company does not adjust the quoted price for such instruments. (cid:3) The majority of the Company’s Level 1 investments are common stocks that are actively traded in a public market and short(cid:882)term investments and cash equivalents, for which the cost basis approximates fair value. Level 2:(cid:3)(cid:3)Level 2 financial instruments are financial assets and liabilities for which the values are based on quoted prices in markets that are not active, or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following: a) b) c) d) Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in non(cid:882)active markets; Pricing models, the inputs for which are observable for substantially the full term of the asset or liability; and Pricing models, the inputs for which are derived principally from, or corroborated by, observable market data through correlation or other means, for substantially the full term of the asset or liability. 35 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 include government and corporate fixed income securities, which are priced using publicly traded over(cid:882)the(cid:882)counter prices and broker(cid:882) dealer quotes. Observable inputs such as benchmark yields, reported trades, broker(cid:882)dealer quotes, issuer spreads and bids are available for these investments.(cid:3)(cid:3)Also included in Level 2 are inactively traded convertible corporate debentures that are valued using a pricing model that includes observable inputs such as credit spreads and discount rates in the calculation. Level 3:(cid:3) Level 3 financial instruments are financial assets and liabilities for which the values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These measurements include circumstances in which there is little, if any, market activity for the asset or liability.(cid:3)(cid:3)In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.(cid:3) (cid:3) In such cases, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety.(cid:3) Therefore, these inputs reflect the Company’s own assumptions about the methodology and valuation techniques that a market participant would use in pricing the asset or liability. For the years ended December 31, 2018 and 2016, no securities were transferred into or out of Level 3. For the year ended December 31, 2017, the Company transferred $79.2 million of Level 2 securities to Level 3 after determining that the valuation technique required unobservable inputs.(cid:3)(cid:3)(cid:3) (cid:3) During the years ended December 31, 2018, 2017 and 2016, the Company purchased $83.4 million, $159.0 million and $258.1 million, respectively, of investments that are classified as Level 3.(cid:3)(cid:3)As of December 31, 2018 and 2017, the Company held $470.0 million and $518.9 million, respectively, of investments that are classified as Level 3.(cid:3) (cid:3) Level 3 investments include CPI(cid:882)linked derivative contracts, and certain loans, bonds, preferred stocks and common stocks. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are generally reported as transfers in or out of the Level 3 category as of the beginning of the period in which the reclassifications occur. The Company has determined, after carefully considering the impact of recent economic conditions and liquidity in the credit markets on the Company’s portfolio, that it should not re(cid:882)classify any of its investments from Level 1 or Level 2 to Level 3 for the years ended December 31, 2018 or 2016.(cid:3)(cid:3)There were no transfers of securities between Level 1 and Level 2 during the years ended December 31, 2018 and 2017.(cid:3)(cid:3)For the year ended December 31, 2016, $0.9 million common stock – held for trading and fair value option was transferred from Level 1 to Level 2.(cid:3) The Company is responsible for determining the fair value of its investment portfolio by utilizing market driven fair value measurements obtained from active markets, where available, by considering other observable and unobservable inputs and by employing valuation techniques that make use of current market data. For the majority of the Company’s investment portfolio, the Company uses quoted prices and other information from independent pricing sources to determine fair values. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) GROUP HOLDINGS, INC. The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 (in thousands): Fixed income securities, available for sale: (cid:3) (cid:3) Reported Fair Value Fair Value Measurements as of December 31, 2018 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Level 2 Level 1 (cid:3) Level 3 United States government, government agencies (cid:3)(cid:3)(cid:3)and authorities ..................................................... $$ States, municipalities and political subdivisions ..... Corporate ................................................................ Total fixed income securities, available for (cid:3)(cid:3)(cid:3)sale .................................................................. $$ 617 39,062 36,975 76,654 Fixed income securities, held for trading: ——(cid:3)(cid:3)(cid:3) $$ —— (cid:3) (cid:3) 1,968 (cid:3) (cid:3) 1,968(cid:3)(cid:3)(cid:3) (cid:3) (cid:3) (cid:3) $$ 617 39,062 35,007 74,686 United States government, government agencies (cid:3)(cid:3)(cid:3)and authorities ..................................................... States, municipalities and political subdivisions ..... Foreign governments .............................................. Corporate ................................................................ Total fixed income securities, held for trading .. Preferred stocks, held for trading................................. Common stocks, available for sale ............................... Common stocks, held for trading and fair value (cid:3)(cid:3)(cid:3)options ....................................................................... Short(cid:882)term investments, held for trading..................... Cash equivalents........................................................... Derivatives .................................................................... Other investments........................................................ 459,088 531,957 258,386 61,399 55,305 Total assets measured at fair value ................... $$ 5,999,529 2,583,063 54,635 624,229 1,170,676 4,432,603 24,125 100,012 ——(cid:3)(cid:3)(cid:3) (cid:3) 2,583,063 54,635 —— (cid:3) (cid:3) 624,229 —— (cid:3) (cid:3) 788,364 —— (cid:3) (cid:3) —— (cid:3) (cid:3) 4,050,291 —— 3,667 1,109 (cid:3) (cid:3) 96,345 (cid:3) (cid:3) (cid:3)(cid:3) Derivative liabilities ...................................................... $$ Total liabilities measured at fair value............... $$ 30,236 30,236 $$ $$ (cid:3) (cid:3) —— (cid:3) $$ —— (cid:3) $$ 30,236 30,236 18,330 419,610(cid:3)(cid:3)(cid:3) (cid:3) 84,608 447,349 (cid:3) (cid:3) 258,386 (cid:3) (cid:3) —— 58,284 —— (cid:3) (cid:3) 14,875 —— (cid:3) (cid:3) $$ 1,224,767 (cid:3) $$ 4,304,741 $$ $$ $$ —— —— —— —— —— —— —— 382,312 382,312 23,016 —— 21,148 —— —— 3,115 40,430 470,021 —— —— 37 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Fair Value Measurements as of December 31, 2017 Reported Fair Value Level 1 (cid:3) Level 2 Level 3 (cid:3) Fixed income securities, available for sale: United States government, government (cid:3)(cid:3)(cid:3)agencies and authorities ...................................... $$ States, municipalities and political subdivisions ..... Corporate ................................................................ Total fixed income securities, available for (cid:3)(cid:3)(cid:3)sale .................................................................. Fixed income securities, held for trading: United States government, government (cid:3)(cid:3)(cid:3)agencies and authorities ...................................... States, municipalities and political subdivisions ..... Foreign governments .............................................. Corporate ................................................................ Total fixed income securities, held for trading .. Preferred stocks, held for trading................................. Common stocks, available for sale ............................... Common stocks, held for trading and fair value (cid:3)(cid:3) options ....................................................................... Short(cid:882)term investments, held for trading..................... Cash equivalents........................................................... Derivatives .................................................................... Other investments........................................................ 514,584 2,095,823 1,541,866 48,321 13,812 Total assets measured at fair value ................... $$ 6,339,251 $$ 5,894 590,633 54,556 651,083 184,013 382,975 267,772 454,850 1,289,610 31,983 152,169 ——(cid:3) (cid:3)(cid:3) $$ —— (cid:3)(cid:3) (cid:3) 1,170 (cid:3)(cid:3) (cid:3) 5,894 590,633 53,386 $$ 1,170(cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) 649,913 ——(cid:3) (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) (cid:3) —— 1,199 (cid:3)(cid:3) (cid:3) 147,909 (cid:3)(cid:3) (cid:3) 184,013 382,975 267,772 26,556 861,316 —— 4,260 30,469 435,912(cid:3) (cid:3)(cid:3) (cid:3) 34,576 2,061,247 (cid:3)(cid:3) (cid:3) 1,541,866 (cid:3)(cid:3) (cid:3) —— 36,731 —— (cid:3)(cid:3) (cid:3) 13,812 —— (cid:3)(cid:3) (cid:3) $$ 4,189,303 (cid:3)(cid:3) $$ 1,631,077 (cid:3) Derivative liabilities ...................................................... $$ Total liabilities measured at fair value............... $$ 60,952 60,952 $$ $$ (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) $$ —— (cid:3)(cid:3) $$ 60,952 60,952 —— —— —— —— —— —— —— 428,294 428,294 30,784 —— 48,203 —— —— 11,590 —— 518,871 —— —— $$ $$ $$ In accordance with ASU 2015(cid:882)17, “Fair Value Measurement (Topic 820): Disclosure for Investments in Certain Entities That Calculate Net Asset Value (NAV) per Share (or Its Equivalent),” investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient, have not been classified in the fair value hierarchy. As of December 31, 2018 and 2017, $1,003.0 million and $965.5 million, respectively, of investments, reported as equity securities and other invested assets are not included within the fair value hierarchy tables.(cid:3) The following table provides a summary of changes in the fair value of Level 3 financial assets for the years ended December 31, 2018 and 2017 (in thousands): (cid:3) Fixed Income Securities Other Invested (cid:3) Assets (cid:3) Equity Securities Balance, January 1, 2017 .................................................................. $ (cid:3)(cid:3)(cid:3)(cid:3) Change in value related to securities sold ................................... (cid:3)(cid:3)(cid:3)(cid:3) Change in value related to securities held ................................... (cid:3)(cid:3)(cid:3)(cid:3) Purchases / advances................................................................... (cid:3)(cid:3)(cid:3)(cid:3) Settlements / paydowns .............................................................. (cid:3)(cid:3)Transfers from Level 2 to Level 3 ................................................. Balance, December 31, 2017 ............................................................ (cid:3)(cid:3)(cid:3)(cid:3) Change in value related to securities sold ................................... (cid:3)(cid:3)(cid:3)(cid:3) Change in value related to securities held ................................... (cid:3)(cid:3)(cid:3)(cid:3) Purchases / advances................................................................... (cid:3)(cid:3)(cid:3)(cid:3) Settlements / paydowns .............................................................. Balance, December 31, 2018 ............................................................ $ 221,198 8,480 81,871 122,410 (84,865) 79,200 428,294 (2,634) (63,953) 48,916 (28,311) 382,312 $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ 13,614(cid:3) $ (8,164) ——(cid:3) 6,140(cid:3) ——(cid:3) ——(cid:3) 11,590(cid:3) (670) 2,768(cid:3) 34,470(cid:3) (4,613) 43,545(cid:3) $ 53,936 —— (5,441) 30,492 —— —— 78,987 10,693 (17,451) —— (28,065) 44,164 38 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following tables present changes in value included in net income related to Level 3 assets for the years ended December 31, 2018, 2017, and 2016 (in thousands): (cid:3) Year ended December 31, 2018 Net Investment Income (Losses) Net Realized Capital Gains (Losses) (cid:3) (cid:3) Currency Translation Fixed income securities .............................................. $ Other invested assets ................................................. Equity securities.......................................................... Total changes in value included in net loss ........... $ (1,458) $ —— —— (1,458) $ Year ended December 31, 2017 Fixed income securities .............................................. $ Other invested assets ................................................. Equity securities.......................................................... Total changes in value included in net income ..... $ 865 $ —— —— 865 $ Year ended December 31, 2016 Fixed income securities .............................................. $ Other invested assets ................................................. Equity securities.......................................................... Total changes in value included in net loss ........... $ (2,842) $ —— —— (2,842) $ (64,078) $ 2,023 (cid:3) (6,630) (cid:3) (68,685) $ (cid:3) (cid:3) (cid:3) 89,489 $ (8,164) (cid:3) (5,696) (cid:3) 75,629 $ (cid:3) (20,691) $ (48,695) (cid:3) 9,118 (cid:3) (60,268) $ (1,051) $ 75 (128) (1,104) $ (cid:3) (3) $ —— 255 252 $ Total (66,587) 2,098 (6,758) (71,247) 90,351 (8,164) (5,441) 76,746 (2,616) $ —— (259) (2,875) $ (26,149) (48,695) 8,859 (65,985) 39 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company uses valuation techniques to establish the fair value of Level 3 investments. The following table provides information on the valuation techniques, significant unobservable inputs and ranges for each major category of Level 3 assets measured at fair value on a recurring basis at December 31, 2018 and 2017 (in thousands): Valuation Technique/Asset Type Market Approach (cid:3) (cid:3) (cid:3) As of December 31, 2017 2018 Significant Unobservable (cid:3) Inputs (cid:3) (cid:3) (cid:3) (cid:3) Range 2018 (cid:3) 2017 (cid:3) 260,956 $ 121,356 306,938 Risk premium for credit risk 121,356 Net Asset Valuation Fixed income securities, held for (cid:3)(cid:3) trading ............................................... $ (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) Preferred stocks, held for trading ........ (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) CPI(cid:882)linked derivatives (1) ..................... (cid:3) (cid:3) (cid:3)(cid:3) Warrants .............................................. (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) Total valued using market (cid:3)(cid:3)(cid:3)approach ..................................... (cid:3) Income Approach Common stocks, held for trading......... Market Price to Book Value Common stocks, fair value option........ (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Total(cid:3)(cid:882) Level 3 ................................. $ Par Value Other investments ............................... (cid:3)(cid:3) (cid:3)(cid:3) 20,516 28,284 2,500 3,115 —— 2,500 6,382 5,209 408,443 470,669 —— 17,499 21,148 30,703 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2.6%(cid:882)5.7% (cid:3) (cid:3) 60%(cid:882)100% for secured loans and (cid:3) Comparable transactions (cid:3) (cid:3) (cid:3) (cid:3) 5.1%(cid:882)5.7% Risk premium for credit risk (cid:3) Transaction price (cid:3) (cid:3) (cid:3) Broker quotes (cid:3) (cid:3) (cid:3) Volatility (cid:3) (cid:3) (cid:3) (cid:3) — (cid:3) (cid:3) (cid:3) — (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) EV/EBITDA multiple (cid:3) (cid:3) Time lag in receiving book value of comparable companies (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) — (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 5.0% (cid:3) (cid:3) 1.6%(cid:882)4.0% (cid:3) 60%(cid:882)100% (cid:3) (cid:3) (cid:3) 3.5%(cid:882)3.6% (cid:3) — (cid:3) (cid:3) (cid:3) 30.7%(cid:882)31.2% (cid:3) (cid:3) (cid:3) (cid:3) 7.5x (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) — (cid:3) (cid:3) 40,430 —— Yield to Maturity 470,021 $ 518,871 (cid:3) (cid:3) (1) Valued using broker(cid:882)dealer quotes that use market observable inputs except for the inflation volatility input, which is not market observable. Fair Value Option The fair value option (“FVO”) allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in the fair value of assets and liabilities for which the election is made are recognized in net income as they occur. The FVO election is permitted on an instrument(cid:882)by(cid:882)instrument basis at initial recognition of an asset or liability or upon the occurrence of an event that gives rise to a new basis of accounting for that instrument. The Company elected the FVO for its investment in Advent Capital (Holdings) PLC (“Advent”) as, at the time of the election, Advent was publicly traded and its trading price was believed to be a better indicator of its value than an amount computed under the equity method.(cid:3) Fairfax and its subsidiaries currently own 100% of Advent’s common stock, of which the Company holds 17.0%.(cid:3) For 2018, following the placement of Advent into run(cid:882)off, the Company began using Advent’s book value as the best approximation of its fair value. Prior to 2018, in order to determine the fair value of Advent, the Company evaluated observable price(cid:882)to(cid:882)book multiples of peer companies and applied such to Advent’s most recently available book value per share.(cid:3)(cid:3)As of December 31, 2018 and 2017, the Company’s interest in Advent was recorded at fair value of $21.1 million and $30.7 million, respectively, in common stocks held for trading and fair value options, with related changes in fair value recognized as a realized 40 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) investment gain or loss in the period in which they occurred.(cid:3) The change in Advent’s fair value resulted in the recognition of realized investment losses of $9.6 million and $8.6 million for the years ended December 31, 2018 and 2017, respectively, and a realized investment gain of $5.8 million for the year ended December 31, 2016. The value of the Company’s interest in Advent as of December 31, 2018, calculated in accordance with the equity method of accounting, would have been $24.3 million. The Company owns Classes A, C, E, G, H, J, K(cid:3)(cid:3)and Q common shares of HWIC Asia Fund (“HWIC Asia”), which is 100% owned by Fairfax and of which the Company owns 30.1% as of December 31, 2018. At the time of the purchase of each class of shares, the Company elected the FVO for these investments, as HWIC Asia is a multi(cid:882)class investment company that reports its investments at fair value and provides a Net Asset Value on a monthly basis. The carrying value of the Company’s investment in the various HWIC Asia common share issues as of December 31, 2018 and 2017, which is included in common stocks held for trading and fair value option on the balance sheet, and the changes in fair value for each issue for the years then ended, are summarized below (in thousands): HWIC Asia HWIC Asia HWIC Asia HWIC Asia HWIC Asia HWIC Asia (cid:3) (cid:3)HWIC Asia (cid:3) HWIC Asia (cid:3) Fair value as of January 1, 2017 ................(cid:3) $ (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Purchases .............................................(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Change in fair value ..............................(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Currency translation adjustment ..........(cid:3) (cid:3) Fair value as of December 31, 2017 ..........(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Purchases (sales) ..................................(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Change in fair value ..............................(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Currency translation adjustment ..........(cid:3) (cid:3) Fair value as of December 31, 2018 ..........(cid:3) $ Class A Class C Class E Class G Class H Class J (cid:3) (cid:3) Class K (cid:3) Class Q Total —— $ 4,189 396 —— 4,585 1,000 (1,482 ) —— 4,103 $ 35,400 $ —— 1,482 —— 36,882 —— (12,226 ) —— 24,656 $ —— $ —— —— —— —— 272 (227 ) —— 45 $ 76,073 $ 112,249 $ —— 11,462 —— 87,535 500 (3,587 ) —— —— 49,929 163 162,341 (22,565 ) (22,885 ) (113 ) 84,448 $ 116,778 $ 44,177(cid:3) $ ——(cid:3) (cid:3) (541 ) (cid:3) 1,113 (cid:3) (cid:3) 44,749(cid:3) (cid:3) ——(cid:3) (cid:3) 1,803(cid:3) (cid:3) (775 ) (cid:3) 45,777(cid:3) $ —— (cid:3) $ —— (cid:3) (cid:3) —— (cid:3) (cid:3) —— (cid:3) (cid:3) —— (cid:3) (cid:3) 33,578 (cid:3) (cid:3) (2,606 ) (cid:3) (223 ) (cid:3) 30,749 (cid:3) $ —— 754 928 21,351 19,669 $ 287,568 4,189 63,482 2,204 357,443 —— 12,785 (42,261) (1,725 ) 19,686 $ 326,242 (1,051 ) (614 ) HWIC Asia’s fair value decreased by $10.0 million for the year ended December 31, 2016. The Company did not elect the FVO for its other affiliated investments, as these affiliated investments were ultimately 100% owned by Fairfax and its subsidiaries, and fair values were deemed to be not readily obtainable. As of December 31, 2018 and 2017, respectively, the Company has not elected the FVO for any of its liabilities. 4. Investments and Cash A summary of the Company’s available for sale investment portfolio as of December 31, 2018 and 2017, is as follows (in thousands): 2018 Fixed income securities: (cid:3) Cost or Amortized Cost Gross Unrealized Appreciation Gross (cid:3) (cid:3) Unrealized (cid:3) Depreciation (cid:3)(cid:3) (cid:3) Fair Value United States government, government (cid:3)(cid:3)(cid:3)agencies and authorities ...................................... $$ States, municipalities and political (cid:3)(cid:3)(cid:3)subdivisions .......................................................... Corporate ................................................................ Total fixed income securities ............................. Common stocks ............................................................ Total ................................................................... $$ 567 $$ 50(cid:3) (cid:3)(cid:3) $$ —— $$ 617 37,106 36,975 74,648 106,367 181,015 $$ 1,956(cid:3) (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) (cid:3) 2,006 (cid:3)(cid:3) (cid:3) 13,101 (cid:3)(cid:3) (cid:3) 15,107 (cid:3)(cid:3) $$ —— —— —— 7,803 7,803 $$ 39,062 36,975 76,654 111,665 188,319 41 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2017 Fixed income securities: (cid:3) United States government, government (cid:3)(cid:3)(cid:3)agencies and authorities ............................. States, municipalities and political (cid:3)(cid:3)(cid:3)subdivisions ................................................. Corporate ....................................................... Total fixed income securities .................... Common stocks ................................................... Total .......................................................... Cost or Amortized Cost Gross Unrealized Appreciation Gross (cid:3) (cid:3) Unrealized (cid:3) Depreciation (cid:3)(cid:3) (cid:3) Fair Value $$ 5,225 $$ 669(cid:3) (cid:3)(cid:3) $$ —— $$ 5,894 560,973 55,196 621,394 108,200 729,594 $$ $$ 29,716(cid:3) (cid:3)(cid:3) (cid:3) —— (cid:3)(cid:3) (cid:3) 30,385 (cid:3)(cid:3) (cid:3) 58,711 (cid:3)(cid:3) (cid:3) 89,096 (cid:3)(cid:3) $$ 56 640 696 —— 696 $$ 590,633 54,556 651,083 166,911 817,994 Common stocks accounted for under the equity method of accounting were carried at $816.3 million and $809.6 million as of December 31, 2018 and 2017, respectively. Common stocks at equity had gross unrealized appreciation of $14.9 million and $6.8 million and gross unrealized depreciation of $20.5 million and $9.6 million as of December 31, 2018 and 2017, respectively. Other invested assets were carried at $1,182.1 million and $881.9 million as of December 31, 2018 and 2017, respectively, reflecting no gross unrealized appreciation or depreciation. A summary of the Company’s held for trading and fair value option portfolios as of December 31, 2018 and 2017 is as follows (in thousands): Fixed income securities: United States government, government agencies (cid:3)(cid:3)(cid:3)and authorities ........................................................................................... (cid:3) $$ States, municipalities and political subdivisions ........................................... Foreign governments .................................................................................... Corporate ...................................................................................................... Total fixed income securities ................................................................... Preferred stocks.................................................................................................. Common stocks .................................................................................................. Short(cid:882)term investments...................................................................................... Cash and cash equivalents.................................................................................. Cash and cash equivalents held as collateral...................................................... Total ......................................................................................................... $$ 2018 Fair Value 2017 Fair Value (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2,583,063(cid:3) (cid:3) $$ 54,635(cid:3) (cid:3) (cid:3) 624,229(cid:3) (cid:3) (cid:3) 1,170,676(cid:3) (cid:3) (cid:3) 4,432,603(cid:3) (cid:3) (cid:3) 24,125(cid:3) (cid:3) (cid:3) 785,330(cid:3) (cid:3) (cid:3) 531,957(cid:3) (cid:3) (cid:3) 786,019(cid:3) (cid:3) (cid:3) 28,381(cid:3) (cid:3) (cid:3) 6,588,415(cid:3) (cid:3) $$ 184,013 382,975 267,772 454,850 1,289,610 31,983 872,027 2,095,823 1,710,485 230,074 6,230,002 (a) Fixed Income Maturity Schedule The amortized cost and fair value of fixed income securities as of December 31, 2018, by contractual maturity, are shown below (in thousands): At December 31, 2018 (cid:3) (cid:3) Available for Sale Cost or Amortized Cost 9,240 $ (cid:3) Due in one year or less .............................. $ Due after one year through five years....... Due after five years through ten years...... Due after ten years .................................... Fair Value 9,240 27,846 16,598 22,970 Total fixed income securities................ $ 74,648 $ 76,654 27,843 15,845 21,720 Held for Trading (cid:3) (cid:3) Amortized (cid:3) (cid:3) Cost or (cid:3)(cid:3) (cid:3)(cid:3) Cost (cid:3) (cid:3) Fair Value % of Total Fair Value 12.0% $1,923,405(cid:3)(cid:3)(cid:3) $1,923,130 2,138,611(cid:3)(cid:3)(cid:3) 2,120,217 36.3 111,312 21.7 106,741(cid:3)(cid:3)(cid:3) 30.0 277,944 276,734(cid:3)(cid:3)(cid:3) 100.0% $4,445,491(cid:3)(cid:3)(cid:3) $4,432,603 % of Total Fair Value 43.4% 47.8 2.5 6.3 100.0% 42 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Actual maturities may differ from the contractual maturities shown in the previous table due to the existence of call options. In the case of securities containing call options, the actual maturity will be the same as the contractual maturity if the issuer elects not to exercise its call option. Total securities subject to call options represent approximately 13.5% of the total fair value. (b) Net Investment Income and Realized Investment Gains (Losses) The following table sets forth the sources and components of net investment income for the years ended December 31, 2018, 2017 and 2016 (in thousands): Interest on fixed income securities .................................................. $ Dividends on preferred stocks.......................................................... Dividends on common stocks ........................................................... Net income of common stocks, at equity......................................... Interest on cash and short(cid:882)term investments .................................. Net income from other invested assets ........................................... Gross investment income............................................................ Less: investment expenses ............................................................... Net investment income............................................................... $ 2018 112,428 1,495 16,396 21,300 26,816 65,666 244,101 34,875 209,226 $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) 2017 103,052(cid:3) $ 60(cid:3) 20,831(cid:3) 46,679(cid:3) 20,984(cid:3) 26,020(cid:3) 217,626(cid:3) 25,836(cid:3) 191,790(cid:3) $ 2016 189,520 6,112 25,954 22,890 6,049 24,489 275,014 59,941 215,073 The following table summarizes the Company’s net realized investment gains and losses for the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 Available for sale: From sales ................................................................................... $ Other(cid:882)than(cid:882)temporary impairments........................................... Total available for sale ........................................................... Held for trading: From sales and settlements ........................................................ From mark to market adjustments ............................................. Total held for trading ............................................................. Total net realized investment(cid:3)(cid:3)(losses) gains ................... $ 12,106 (299) 11,807 (cid:3) $ (cid:3) (cid:3) (cid:3) 49,431 (cid:3) (178,643) (cid:3) (129,212) (cid:3) (117,405) $ 2016 (cid:3) (cid:3) 114,085(cid:3) $ (12,286) 101,799(cid:3) (cid:3) (1,912) 278,194(cid:3) 276,282(cid:3) 378,081(cid:3) $ 58,547 (16,227) 42,320 (264,734) 20,499 (244,235) (201,915) 43 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table sets forth the components of net realized investment gains and losses on the Company’s available for sale securities for the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 (cid:3) 2016 Fixed income securities: Realized investment gains........................................................... $ Realized investment losses ......................................................... Other(cid:882)than(cid:882)temporary impairments........................................... Net realized investment gains ............................................... (cid:3) Equity securities: Realized investment gains........................................................... Realized investment losses ......................................................... Other(cid:882)than(cid:882)temporary impairments........................................... Net realized investment (losses) gains .................................. (cid:3) Common stocks, at equity: Realized investment gains........................................................... Realized investment losses ......................................................... Net realized investment gains ............................................... (cid:3) Total available for sale securities: Realized investment gains........................................................... Realized investment losses ......................................................... Other(cid:882)than(cid:882)temporary impairments........................................... Net realized investment gains ............................................... $ 18,805 (6,526) (56) 12,223 (173) (243) (416) $ (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) —— (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) —— (cid:3)(cid:3) —— (cid:3)(cid:3) —— (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) $ 18,805 (6,699) (299) 11,807 67,281(cid:3) $ (1,523) ——(cid:3) 65,758(cid:3) (cid:3) (cid:3) 20,052(cid:3) ——(cid:3) (12,286) 7,766(cid:3) (cid:3) (cid:3) 30,854(cid:3) (2,579) 28,275(cid:3) (cid:3) (cid:3) 118,187(cid:3) (4,102) (12,286) 101,799(cid:3) $ 68,081 (9,905) —— 58,176 724 (353) (16,227) (15,856) —— —— —— 68,805 (10,258) (16,227) 42,320 For those fixed income securities that were determined to be other(cid:882)than(cid:882)temporarily impaired, the Company determined that such impairments were related to credit, requiring the recognition of an impairment charge to income, and not related to other factors (e.g., interest rates and market conditions) which would have required charges to other comprehensive income. 44 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The net realized investment gains or losses on disposal of held for trading securities in the table below represent the total gains or losses from the purchase dates of the investments and have been reported in net realized investment gains in the consolidated statements of operations.(cid:3) The change in fair value presented below consists of two components:(cid:3)(cid:3)(i) the reversal of the gain or loss recognized in previous years on securities sold and (ii) the change in fair value resulting from mark(cid:882)to(cid:882)market adjustments on contracts still outstanding.(cid:3) (cid:3) The following table sets forth the total net realized investment gains and losses on held for trading securities for the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 2016 (cid:3) (cid:3) Fixed income securities: Net realized investment (losses) gains on disposal..................... $ Change in fair value..................................................................... Net realized investment (losses) gains .................................. (cid:3)(cid:3) Preferred stock: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment (losses) gains .................................. (cid:3)(cid:3) Equity securities: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment (losses) gains .................................. (cid:3)(cid:3) Derivative securities: Net realized investment losses on disposal/ settlement ................................................................................ Change in fair value..................................................................... Net realized investment gains (losses) .................................. (cid:3)(cid:3) Other securities: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment gains ............................................... (cid:3)(cid:3) Total held for trading securities: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment (losses) gains .................................. $ (7,141) (7,141) 62,577 (206,038) (143,461) (cid:3) (13,227) $ (50,425) (cid:3) (63,652) (cid:3) (cid:3) (cid:3) —— (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 49,431 (cid:3) (178,643) (cid:3) (129,212) $ (32,456) 48,221 15,765 32,537 36,740 69,277 13,551(cid:3) $ 105,547(cid:3) 119,098(cid:3) (cid:3) (cid:3) 410(cid:3) (301) 109(cid:3) (cid:3) (cid:3) 84,714(cid:3) 60,434(cid:3) 145,148(cid:3) (cid:3) (cid:3) (cid:3) (95,186) (20,215) (115,401) (cid:3) (cid:3) (5,401) 132,729(cid:3) 127,328(cid:3) (cid:3) (cid:3) (1,912) 278,194(cid:3) 276,282(cid:3) $ 75,991 47,776 123,767 (41,989) 34,719 (7,270) (20,756) (15,490) (36,246) (327,402) (79,779) (407,181) 49,422 33,273 82,695 (264,734) 20,499 (244,235) 45 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (c) Unrealized (Depreciation) Appreciation The following table sets forth the changes in net unrealized (depreciation) appreciation of investments, and the related tax effect, reflected in accumulated other comprehensive income for the years ended December 31, 2018, 2017 and 2016 (in thousands): Fixed income securities .................................................................... $ Equity securities................................................................................ Other................................................................................................. Decrease in unrealized net appreciation of investments .............................................................................. Deferred income tax benefit on disposal.................................... Change in net unrealized depreciation of (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) investments included in other comprehensive (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (loss) income................................................................. $ 2018 (27,720) $ (55,290) (cid:3) 108 (cid:3) (cid:3) (cid:3) (cid:3) (82,902) 17,461 (cid:3) 2017 (77,126) $ 33,160(cid:3) (48) (cid:3) (44,014) 15,271(cid:3) 2016 (88,131) (13,578) (244) (101,953) 35,664 (65,441) $ (28,743) $ (66,289) On a quarterly basis, the Company reviews its investment portfolio classified as available for sale for declines in value and specifically evaluates securities with fair values that have declined to less than 80% of their cost or amortized cost at the time of review. Declines in the fair value of investments that are determined to be temporary are recorded as unrealized depreciation, net of tax, in accumulated other comprehensive income. If the Company determines that a decline relating to credit issues is “other(cid:882)than(cid:882)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 the Company’s consolidated statements of operations.(cid:3)(cid:3)If the Company determines that a decline related to other factors (e.g., interest rates or market conditions) is “other(cid:882)than(cid:882)temporary,” the cost or amortized cost of the investment will be written down to the fair value within other comprehensive income. In assessing the value of the Company’s debt and equity securities that are classified as available for sale and possible impairments of such securities, the Company reviews (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 the Company may consider relevant. Generally, a change in the market or interest rate environment would not, of itself, result in an impairment of an investment. In addition, the Company considers its ability and intent to hold the security to recovery when evaluating possible impairments. The facts and circumstances involved in making a decision regarding an other(cid:882)than(cid:882)temporary impairment are those that exist at that time. Should the facts and circumstances change such that an other(cid:882)than(cid:882)temporary impairment is considered appropriate, the Company will recognize the impairment by reducing the cost, amortized cost or carrying value of the investment to its fair value, and recording the loss in its consolidated statements of operations. Upon the disposition of a security where an “other(cid:882)than(cid:882)temporary” impairment has been taken, the Company will record a gain or loss based on the adjusted cost or carrying value of the investment. The following table reflects the fair value and gross unrealized depreciation of the Company’s fixed income securities and common stocks, at fair value classified as available for sale, aggregated by investment category for individual securities that have been in a continuous unrealized depreciation position for less than 12 months, as of December 31, 2018 and 2017 (in thousands): December 31, 2018 Common stock securities: Industrial and miscellaneous................................................ $ Total common stock securities ....................................... Total temporarily impaired securities .................................. $ 71,395 71,395 71,395 $ $ Fair Value Number of Securities (cid:3) Gross Unrealized Depreciation (cid:3) (cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3) 7,803(cid:3)(cid:3)(cid:3) 7,803(cid:3)(cid:3)(cid:3) 7,803(cid:3)(cid:3)(cid:3) 2 2 2 46 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Fair Value December 31, 2017 Fixed income securities: States, municipalities and political subdivisions .................. $ Corporate ............................................................................. Total fixed income securities .......................................... Total temporarily impaired securities .................................. $ —— $ 11,000 11,000 11,000 $ Gross Unrealized Depreciation (cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) 56(cid:3)(cid:3)(cid:3)(cid:3) 640(cid:3)(cid:3)(cid:3)(cid:3) 696(cid:3)(cid:3)(cid:3)(cid:3) 696(cid:3)(cid:3)(cid:3)(cid:3) Number of Securities 1 1 2 2 The Company did not own any fixed income or common stocks, at fair value classified as available for sale, that have been in a continuous unrealized loss position for more than 12 months as of December 31, 2018 or 2017.(cid:3)(cid:3)(cid:3) The Company believes the gross unrealized depreciation for securities classified as available for sale is temporary in nature and has not recorded a realized investment loss related to these securities. Given the size of the Company’s investment portfolio and capital position, the Company believes it is likely that it will not be required to sell or liquidate these securities before the fair value recovers the gross unrealized depreciation. (d) Common Stocks, at Equity The following table sets forth the components of common stocks, at equity, as of December 31, 2018 and 2017 (in thousands): (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Carrying Value Goodwill and Other included in Carrying Value 2018 2017 2018 2017 Quoted Market Value (cid:3) (cid:3) (cid:3) 2018 2017 2,710 $ Grivalia Properties Real Estate (cid:3)(cid:3)(cid:3) Investment Company ...................... (cid:3) $ 198,791 $ 201,691 $ Recipe Unlimited Corporation............. (cid:3) (cid:3) 134,678 Fairfax India Holdings Corp .................(cid:3)(cid:3) (cid:3) 132,479 Fairfax Africa Holdings Corp................(cid:3)(cid:3) (cid:3) 125,206 71,998 Apple Bidco Limited ............................ (cid:3) (cid:3) 39,212 Zenith National Insurance Corp. .........(cid:3)(cid:3) (cid:3) 25,215 Boat Rocker Media Inc. .......................(cid:3)(cid:3) (cid:3) 22,083 Sigma Companies International Corp..(cid:3)(cid:3) (cid:3) 18,525 2018296 Alberta ULC ..........................(cid:3)(cid:3) (cid:3) 17,679 Davos Brands LLC ................................(cid:3)(cid:3) (cid:3) 14,446 Farmers Edge Inc.................................(cid:3)(cid:3) (cid:3) 11,910 Peak Achievement Athletics Inc. .........(cid:3)(cid:3) (cid:3) 4,100 Toys "R" Us (Canada) Ltd.....................(cid:3)(cid:3) (cid:3) 2,847 $ 174,609(cid:3) (cid:3) $201,845 (cid:3) 126,992 136,678(cid:3) (cid:3) (cid:3) 87,467 —— 129,388(cid:3) (cid:3) (cid:3) (cid:3) 151,679 —— (cid:3) 144,162 93,976(cid:3) (cid:3) (cid:3) n/a n/a(cid:3) (cid:3) (cid:3) (653) n/a n/a(cid:3) (cid:3) (cid:3) 3,928 n/a n/a(cid:3) (cid:3) (cid:3) 15,923 —— n/a n/a(cid:3) (cid:3) (cid:3) —— n/a n/a(cid:3) (cid:3) (cid:3) n/a n/a(cid:3) (cid:3) (cid:3) 12,824 n/a n/a(cid:3) (cid:3) (cid:3) 15,747 n/a n/a(cid:3) (cid:3) (cid:3) 469 —— n/a n/a(cid:3) (cid:3) (cid:3) Total common stocks, at equity .... (cid:3) $ 816,322 $ 809,638 $ 144,270 $ 138,552 (cid:3) (cid:3) (cid:3) 134,887 137,217 106,822 73,752 37,084 28,356 21,705 18,298 18,298 16,940 14,588 —— 93,160 —— 2,779 (653) 3,928 14,607 —— —— 12,824 14,446 469 —— (cid:3) Relative Economic Ownership (cid:3) 2018 18.8% 11.7% 6.6% 18.8% 16.9% 6.1% 27.3% 41.9% 27.3% 14.3% 7.1% 3.8% 25.0% During 2017, the Company and Fairfax purchased additional common shares of Grivalia Properties Real Estate Investment Company (“Grivalia”), resulting in Grivalia becoming an affiliate of the Company and a change in the accounting for the Company’s investment in Grivalia to the equity method.(cid:3) Prior to 2017, the Company’s investment in Grivalia was reported as a common stock, held for trading, at fair value. Zenith National Insurance Corp., Toys “R” Us (Canada) Ltd. and 2018296 Alberta ULC are wholly(cid:882)owned subsidiaries of Fairfax, while Fairfax is the controlling or largest shareholder of Grivalia (52.7%), Fairfax India Holdings Corp. (33.7%), Recipe(cid:3) Limited Corporation (43.7%), Fairfax Africa Holdings Corp. (58.7%), Apple Bidco Limited (67.8%), Boat Rocker Media Inc. (58.2%), Sigma Companies International Corp. (81.1%), Davos Brands LLC (35.7%), Farmers Edge Inc. (49.2%) and Peak Achievement Athletics Inc. (42.6%). 47 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (e) Other Invested Assets The following table shows the components of other invested assets as of December 31, 2018 and 2017 (in thousands): 2018 (cid:3) (cid:3) 2017 Investment funds and partnerships, at fair value............................................... $ Investment funds and partnerships, at equity ................................................... Real estate .......................................................................................................... Affiliate loans...................................................................................................... Derivatives, at fair value ..................................................................................... Mortgage loans................................................................................................... Benefit plan funds, at fair value.......................................................................... Other................................................................................................................... Total other invested assets ........................................................................... $ 665,143(cid:3)(cid:3)(cid:3)(cid:3) $ 176,911(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 136,891(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 99,873(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 61,399(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 20,837(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 14,874(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 6,141(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 1,182,069(cid:3)(cid:3)(cid:3)(cid:3) $ 568,586 186,567 39,912 19,155 48,322 —— 13,812 5,525 881,879 The Company’s investment funds and partnership investments may be subject to restrictions on redemptions or sales, which are determined by the governing documents thereof, and may limit the Company’s ability to liquidate these investments in the short term. Due to a time lag in reporting by a majority of investment fund and partnership fund managers, valuations for these investments are recorded by the Company on a one month or one quarter lag. For the years ended December 31, 2018, 2017 and 2016, the Company recognized net investment income of $38.5 million, $15.8 million and $20.0 million, respectively, from its investment funds and partnership investments. For the years ended December 31, 2018, 2017 and 2016, the Company recognized net realized investment gains of $73.8 million, $145.6 million and $67.7 million, respectively, from its investment funds and partnerships that are held as trading securities. With respect to the Company’s $842.1 million in investments in investment funds and partnerships, the Company has commitments that may require additional funding of up to $87.4 million.(cid:3)(cid:3) The Company’s investments in real estate consists of land of $43.7 million and $25.0 million and buildings of $94.4 million and $15.1 million less accumulated depreciation of $1.2 million and $0.2 million, as of December 31, 2018 and 2017, respectively.(cid:3)(cid:3) The Company’s investments in mortgage loans consists of loans collateralized by commercial property in various locations in Canada as of December 31, 2018. (f) Derivative Investments The Company has utilized CPI(cid:882)linked derivative contracts, total return swaps, forward currency contracts, U.S. Treasury bond forward contracts and various other contracts, to manage against adverse changes in the values of assets and liabilities. These products are typically not directly linked to specific assets or liabilities on the consolidated balance sheets or a forecasted transaction. The following tables set forth the Company’s derivative positions, which are included in other invested assets or other liabilities in the consolidated balance sheets, as of December 31, 2018 and 2017, respectively (in thousands): Exposure/ Notional Amount As of December 31, 2018 CPI(cid:882)linked derivative contracts ........................................... $34,359,534 $ 229,779(cid:3) (cid:3)(cid:3)$ Forward currency contracts................................................ ——(cid:3) (cid:3)(cid:3)(cid:3) 7,519(cid:3) (cid:3)(cid:3)(cid:3) Option contracts................................................................. Long total return swaps...................................................... ——(cid:3) (cid:3)(cid:3)(cid:3) Short total return swaps..................................................... ——(cid:3) (cid:3)(cid:3)(cid:3) U.S. Treasury bond forward contracts................................ ——(cid:3) (cid:3)(cid:3)(cid:3) $ 237,298(cid:3) (cid:3)(cid:3)$ Total .............................................................................. 1,077,687 437,500 135,147 134,586 10,175 Cost (cid:3) (cid:3) Fair Value Asset Fair Value Liability 3,115 $ 42,965 7,431 2,396 5,492 —— 61,399 $ —— 11,896 —— 17,732 —— 608 30,236 48 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Exposure/ Notional Amount As of December 31, 2017 CPI(cid:882)linked derivative contracts ........................................... $35,399,630 $ 229,779(cid:3) (cid:3)(cid:3)$ Forward currency contracts................................................ ——(cid:3) (cid:3)(cid:3)(cid:3) U.S. Treasury bond forward contracts................................ ——(cid:3) (cid:3)(cid:3)(cid:3) Long total return swaps...................................................... ——(cid:3) (cid:3)(cid:3)(cid:3) Short total return swaps..................................................... ——(cid:3) (cid:3)(cid:3)(cid:3) Warrants............................................................................. 12,074(cid:3) (cid:3)(cid:3)(cid:3) $ 241,853(cid:3) (cid:3)(cid:3)$ Total .............................................................................. 829,519 230,875 230,820 120,136 117,913 Cost (cid:3) (cid:3) Fair Value Asset Fair Value Liability 6,382 $ 28,502 —— 6,546 1,493 5,399 48,322 $ —— 47,757 6,905 4,159 2,131 —— 60,952 The Company held long position common stock total return swaps, with a total notional value of $135.1 million and $230.8 million as of December 31, 2018 and 2017, respectively, as replications of investments in publicly(cid:882)listed common stocks.(cid:3) The common stock total return swaps, which are carried at fair value, are recorded in other invested assets or other liabilities based on the positive or negative value of the underlying contracts as of the financial statement date.(cid:3) (cid:3) Changes in the fair value of common stock total return swaps are recorded as realized investment gains or losses in the consolidated statements of operations in the period in which they occur. As of December 31, 2018 and 2017, the Company held short position common stock total return swaps with a notional value of $134.6 million and $120.1 million, respectively.(cid:3) (cid:3) The common stock total return swaps are recorded at fair value in other invested assets or other liabilities based on the positive or negative value of the underlying contracts as of the financial statement date.(cid:3) (cid:3)Changes in the fair value of the swaps are recorded as realized investment gains or losses in the consolidated statements of operations in the period in which they occur. As a result of fundamental changes to the macroeconomic outlook for the U.S. during the fourth quarter of 2016 and the ensuing potential for a significant increase in market interest rates, the Company reduced its exposure to interest rate risk by selling certain U.S. state and municipal bonds and long dated U.S. Treasury bonds. To further reduce its exposure to interest rate risk (specifically exposure to U.S. state and municipal bonds and any remaining long dated U.S. Treasury bonds held in its fixed income portfolio), the Company began entering into, and continues to hold, forward contracts to sell long dated U.S. Treasury bonds. These contracts have an average term to maturity of less than one year and may be renewed at market rates.(cid:3) The U.S. Treasury bond forward contracts are recorded at fair value in other invested assets or in other liabilities based on the positive or negative value of the underlying contracts as of the financial statement date, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur. As an economic hedge against the potential adverse impact on the Company of decreasing price levels in the economy, the Company has purchased derivative contracts referenced to consumer price indices (“CPI”) in various geographic regions in which the Company operates. These contracts had a remaining average life of 3.1 years and 4.1 years as of December 31, 2018 and 2017, respectively.(cid:3) (cid:3) As the remaining life of a contract declines, the fair value of the contract (excluding the impact of CPI changes) will generally decline.(cid:3) The initial premium paid for the contracts is recorded as a derivative asset and subsequently adjusted for changes in the unrealized fair value of the contracts at each balance sheet date.(cid:3) Changes in the unrealized fair value of the contracts are recorded as realized gains or losses on investments in the Company’s consolidated statements of operations with a corresponding adjustment to the carrying value of the derivative asset.(cid:3) In the event of a sale, expiration or early settlement of one of the Company’s CPI(cid:882)linked derivative contracts, the Company would receive the fair value of that contract on the date of the transaction.(cid:3)(cid:3)The Company’s maximum potential cash loss is limited to the premiums already paid to enter into the derivative contracts. The Company has entered into forward currency contracts to manage its foreign currency exchange rate risk on a macro basis.(cid:3) (cid:3) Under a forward currency contract, the Company and the counterparty are obligated to purchase or sell an underlying currency at a specified price and time.(cid:3)(cid:3)Forward currency contracts are recorded at fair value in other invested assets or other liabilities based on the positive or negative value of the underlying contracts as of the financial statement date, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur. 49 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company has investments in call options, which are contracts that grant the holder the right (but not the obligation) to purchase a financial instrument at a specified price within a specific time period. Call options, which are included in other invested assets, are recorded at fair value, with changes in the fair value recognized as realized investment gains or losses in the consolidated statement of operations in the period in which they occur. The Company had investments in warrants, which are contracts that grant the holder the right, but not the obligation, to purchase an underlying financial instrument at a given price and time or at a series of prices and times. Warrants, which were included in other invested assets, are recorded at fair value, with the related changes in fair value recognized as realized investment gains or losses in the consolidated statements of operations in the period in which they occur.(cid:3)(cid:3) Pursuant to the agreements governing various derivative contracts, the fair value of collateral deposited by the Company with the contracts’ counterparties totaled $38.3 million and $51.2 million as of December 31, 2018 and 2017, respectively, while the fair value of collateral deposited by various counterparties for the benefit of the Company was $7.8 million and $8.8 million as of December 31, 2018 and 2017, respectively. Counterparties to the derivative instruments expose the Company to credit risk in the event of non(cid:882) performance. The Company believes this risk is low, given the diversification of the placement of the contracts among various highly rated counterparties.(cid:3)(cid:3)The credit risk exposure is reflected in the fair value of the derivative instruments. 50 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The net realized investment gains or losses on disposal of derivatives in the table below represent the total gains or losses for the years ended December 31, 2018, 2017 and 2016 from the purchase dates of the investments and have been reported in net realized investment gains in the consolidated statements of operations; the change in fair value presented consists of two components: (i) the reversal of the gain or loss recognized in previous years on securities sold and (ii) the change in fair value resulting from mark(cid:882)to(cid:882)market adjustments on contracts still outstanding (in thousands): (cid:3) 2018 2017 CPI(cid:882)linked derivative contracts: Change in fair value..................................................................... $ Net realized investment losses .............................................. (cid:3) Forward currency contracts: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment gains (losses) .................................. (cid:3)(cid:3) U.S. Treasury bond forward contracts: Net realized investment gains (losses) on disposal..................... Change in fair value..................................................................... Net realized investment gains (losses) .................................. (cid:3) Long total return swaps: Net realized investment (losses) gains on disposal..................... Change in fair value..................................................................... Net realized investment (losses) gains .................................. (cid:3) Short total return swaps: Net realized investment losses on disposal ................................ Change in fair value..................................................................... Net realized investment losses .............................................. (cid:3) Warrants: Net realized investment losses on disposal ................................ Change in fair value..................................................................... Net realized investment losses .............................................. (cid:3) Call options: Net realized investment gains on disposal.................................. Change in fair value..................................................................... Net realized investment (losses) gains .................................. (cid:3)(cid:3) Other: Net realized investment losses on disposal ................................ Change in fair value..................................................................... Net realized investment losses .............................................. (cid:3) Total derivatives: Net realized investment losses on disposal ................................ Change in fair value..................................................................... Net realized investment gains (losses) .................................. $ (14,451) 6,130 (8,321) (16,258) (17,722) (33,980) 8,636 50,205 58,841 388 6,297 6,685 (cid:3) (3,267) $ (3,267) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) —— (cid:3) (87) (cid:3) (87) (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (10,771) 6,665 (4,106) (32,456) 48,221 15,765 2016 (cid:3) (cid:3) (7,233) $ (7,233) (cid:3) (cid:3) (8,241) (27,166) (35,407) (cid:3) (cid:3) (35,950) 6,961(cid:3) (28,989) (cid:3) (cid:3) 6,469(cid:3) (367) 6,102(cid:3) (cid:3) (cid:3) (53,848) 7,605(cid:3) (46,243) (cid:3) (cid:3) ——(cid:3) (6,638) (6,638) (cid:3) (cid:3) 3,007(cid:3) ——(cid:3) 3,007(cid:3) (cid:3) (cid:3) (6,623) 6,623(cid:3) ——(cid:3) (cid:3) (cid:3) (95,186) (20,215) (115,401) $ (48,695) (48,695) 23,037 (18,707) 4,330 33,143 (13,866) 19,277 1,674 5,282 6,956 (308,629) (80,359) (388,988) —— —— —— —— —— —— (76,627) 76,566 (61) (327,402) (79,779) (407,181) 51 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (g) Assets on Deposit The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutes and regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. For certain reinsurance contracts, derivative contracts and affiliate guarantees, the Company utilizes trust funds to collateralize its obligations or potential obligations to the ceding companies and counterparties. As of December 31, 2018, restricted assets supporting these deposits and trust fund requirements totaled $1.0 billion, as depicted in the following table (in thousands): Restricted Assets Relating to: Fixed Income Securities Cash Cash Equivalents Short(cid:882)term Investments 84,622 $ —— $ Common Stocks (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Partnerships (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) $ Total —— $ 84,622 194,196 38,295 381,590 33,457 732,160 $ 60,563 —— 46,289 1,954 108,806 $ 20,036(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) 109,857(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) 129,893(cid:3) (cid:3)(cid:3) $ —— —— 19,372 —— 19,372 $ 274,795 38,295 557,108 35,411 990,231 (cid:3) (cid:3) (cid:3) U.S. regulatory requirements ................ $ Foreign regulatory/Lloyd's (cid:3)(cid:3)(cid:3) requirements ..................................... Derivative collateral requirements........ Reinsurance collateral requirements .... Guarantee collateral requirements ....... Total ................................................. $ 52 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 5. Accumulated Other Comprehensive Income The following table shows the components of the change in accumulated other comprehensive income, net of deferred income taxes, for the years ended December 31, 2018, 2017 and 2016 (in thousands): Beginning balance of unrealized net appreciation on securities prior to U.S. tax reform adjustment............................................ $ Beginning balance adjustment for U.S. tax reform .......................... Beginning balance of unrealized net appreciation on securities after U.S. tax reform adjustment ................................................ Ending balance of unrealized net appreciation on securities........... Current period change in unrealized net depreciation (cid:3)(cid:3)(cid:3)on securities ............................................................................. Beginning balance of foreign currency translation adjustments (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) prior to U.S. tax reform adjustment............................................ Beginning balance adjustment for U.S. tax reform .......................... Beginning balance of foreign currency translation adjustments (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) after U.S. tax reform adjustment ................................................ Ending balance of foreign currency translation adjustments........... Current period change in foreign currency translation (cid:3)(cid:3)(cid:3) adjustments............................................................................. Beginning balance of benefit plan liabilities prior to U.S. tax (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) reform adjustment ...................................................................... Beginning balance adjustment for U.S. tax reform .......................... Beginning balance of benefit plan liabilities after U.S. tax reform (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) adjustment .................................................................................. Ending balance of benefit plan liabilities.......................................... Current period change in benefit plan liabilities......................... Other comprehensive loss ..................................................... $ (cid:3)(cid:3) balance of accumulated other comprehensive income .. $ Other comprehensive loss................................................................ U.S. tax reform deferred income tax reclassification ....................... Ending balance of accumulated other comprehensive (cid:3)(cid:3)(cid:3) (loss) income............................................................................ $ 2018 2017 58,115 12,531 70,646 5,205 (65,441) 11,197 2,412 13,609 (35,916) (49,525) (38,698) (8,335) (cid:3) (cid:3)(cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (47,033) (cid:3) (38,018) (cid:3) 9,015 (cid:3) (105,951) $ 37,222 (105,951) (cid:3) (cid:3)(cid:3) $ (cid:3) —— (cid:3) 2016 (cid:3) (cid:3) 86,858(cid:3) $ ——(cid:3) (cid:3) 86,858(cid:3) 58,115(cid:3) 153,147 —— 153,147 86,858 (28,743) (66,289) 10,854(cid:3) ——(cid:3) 10,854(cid:3) 11,197(cid:3) 26,562 —— 26,562 10,854 343(cid:3) (15,708) (30,131) ——(cid:3) (30,131) (38,698) (8,567) (36,967) $ (cid:3) 67,581(cid:3) $ (36,967) 6,608(cid:3) (28,545) —— (28,545) (30,131) (1,586) (83,583) 151,164 (83,583) —— (68,729) $ 37,222(cid:3) $ 67,581 53 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In February 2018, the FASB issued ASU 2018(cid:882)02, “Income Statement – Reporting Comprehensive Income (Topic 220).” This ASU allows the effect of remeasuring deferred tax assets and liabilities related to the Tax Cuts and Jobs Act of 2017 with respect to items with accumulated other comprehensive income to be reclassified to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited using the newly enacted 21 percent rate.(cid:3) The Company implemented this ASU in its 2017 consolidated financial statements; the effect of the reclassification was to increase accumulated other comprehensive income and decrease retained earnings by $6.6 million. The following table shows the components of accumulated other comprehensive income and the related deferred income taxes on each component, as of December 31, 2018 and 2017 (in thousands): Gross: Unrealized appreciation on securities........................................................... $ Foreign currency translation adjustments .................................................... Benefit plan liabilities.................................................................................... (cid:3)(cid:3)(cid:3) Total accumulated other comprehensive (loss) income, (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)gross of deferred income taxes ..............................................................(cid:3) $ (cid:3)(cid:3) Deferred taxes: Unrealized depreciation on securities........................................................... $ Foreign currency translation adjustments .................................................... Benefit plan liabilities.................................................................................... (cid:3)(cid:3)(cid:3) Total deferred taxes on accumulated (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)other comprehensive income (loss)........................................................(cid:3) $ 2018 (cid:3) 2017 (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) 6,543(cid:3) (cid:3) $ (cid:3)(cid:3) (cid:3)(cid:3) (45,463) (cid:3) (48,125) (cid:3) 89,445 17,227 (59,537) (87,045) (cid:3) $ 47,135 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (1,338) (cid:3) $ 9,547(cid:3) (cid:3) (cid:3)(cid:3) 10,107(cid:3) (cid:3) (cid:3)(cid:3) (18,799) (3,618) 12,504 18,316(cid:3) (cid:3) $ (9,913) The following table shows the changes in the balances of each component of accumulated other comprehensive income (loss), for the years ended December 31, 2018, 2017 and 2016 (in thousands): Unrealized Gains and Losses on Securities Foreign Currency Items (cid:3) (cid:3) Benefit Plan Items (28,545) $ 151,164 (61,743) (3,017) Total Balance, January 1, 2016 ..................................................... $ 153,147 (34,497) Amounts arising during the period ................................ $ 26,562(cid:3)(cid:3)(cid:3) $ (24,229) (cid:3) (cid:3) Reclassification adjustment included in (cid:3)(cid:3)(cid:3)net (loss) income.................................................... Net other comprehensive loss............................................. Balance, December 31, 2016 .................................... Amounts arising during the period ................................ Reclassification adjustment included in (cid:3)(cid:3)(cid:3)net (loss) income.................................................... Net other comprehensive (loss) income ............................. Adjustment for U.S. Tax Reform .......................................... Balance, December 31, 2017 .................................... Amounts arising during the period ................................ Reclassification adjustment included in (cid:3)(cid:3)(cid:3)net (loss) income.................................................... Net other comprehensive (loss) income ............................. Balance, December 31, 2018 .................................... $ (31,792) (66,289) 86,858 36,806 (65,549) (28,743) 12,531 70,646 (51,256) 8,521(cid:3)(cid:3)(cid:3) (cid:3) (15,708) (cid:3) (cid:3) 10,854(cid:3)(cid:3)(cid:3) (cid:3) 11,116(cid:3)(cid:3)(cid:3) (cid:3) (10,773) (cid:3) (cid:3) 343(cid:3)(cid:3)(cid:3) (cid:3) 2,412(cid:3)(cid:3)(cid:3) (cid:3) 13,609(cid:3)(cid:3)(cid:3) (cid:3) (51,137) (cid:3) (cid:3) 1,431 (1,586) (30,131) (10,000) 1,433 (8,567) (8,335) (47,033) 6,204 (21,840) (83,583) 67,581 37,922 (74,889) (36,967) 6,608 37,222 (96,189) (14,185) (65,441) 5,205 $ 1,612(cid:3)(cid:3)(cid:3) (cid:3) (49,525) (cid:3) (cid:3) (35,916) (cid:3) $ 2,811 9,015 (38,018) $ (9,762) (105,951) (68,729) 54 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table shows the significant amounts reclassified out of each component of accumulated other comprehensive income for the years ended of December 31, 2018, 2017 and 2016 (in thousands): Details about Accumulated Other Comprehensive Income Components (cid:3) Unrealized net depreciation of securities: (cid:3)(cid:3) currency translations: Amount Reclassified from Accumulated Other Comprehensive Income (a) 2017 2018 2016 Affected Line Item in the Consolidated Statement of Operations Where Net Income is Presented (cid:3) (cid:3) $ (cid:3) 17,956 (3,771) $ 100,845 (35,296) (cid:3) $ (cid:3) 48,910 Net realized investment gains (17,118) Total federal and foreign income tax benefit $ 14,185 $ 65,549 $ 31,792 Net income (loss) $ (2,041) $ 16,574 $ (13,109) Net realized investment (losses) gains 429 (5,801) 4,588 Total federal and foreign income tax provision (benefit) $ (1,612) $ 10,773 $ (8,521) Net (loss) gain of benefit plan items: Net actuarial loss............................ $ (cid:3)(cid:3) Prior service costs .......................... (cid:3)(cid:3) (3,563) $ (2,242) $ (2,239) Other underwriting expenses (b) 5 37 37 Other underwriting expenses (b) (3,558) (2,205) (2,202) Loss before federal and foreign 747 772 income tax benefit 771 Total federal and foreign income tax provision $ (2,811) $ (1,433) $ (1,431) Net loss reclassifications .......................... $ 9,762 $ 74,889 $ 21,840 (a) Amounts in parentheses indicate decreases to the indicated line item of the consolidated statements of operations. (b) These accumulated other comprehensive income components are included in the computation of net periodic benefit plan costs (see Note 14 for additional details). 55 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. Unpaid Losses and Loss Adjustment Expenses Estimates of reserves for unpaid losses and loss adjustment expenses, which relate to loss events that have occurred on or before the balance sheet date, are contingent on many assumptions that may or may not occur in the future. The estimates reflect assumptions regarding initial expectations of losses and patterns of loss reporting, both for claims with higher frequency and lower severity as well as for claims with lower frequency and higher severity associated with individual large loss events, such as earthquakes, windstorms, and floods. The eventual outcome of these loss events may be different from the assumptions underlying the Company’s reserve estimates. When the business environment and loss trends diverge from expected trends, the Company may have to adjust its reserves accordingly, potentially resulting in adverse or favorable effects to the Company’s financial results. The Company believes that the recorded estimate represents the best estimate of unpaid losses and loss adjustment expenses based on the information available as of December 31, 2018. The estimate is reviewed on a quarterly basis and the ultimate liability may be greater or less than the amounts provided, for which any adjustments will be reflected in the periods in which they become known. The Company’s 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 the Company utilizes in its 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/insured claim information to determine ultimate loss. These methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. Loss ratio methods multiply expected loss ratios, derived from aggregated analyses of internally developed pricing trends, by earned premium to determine ultimate loss. The incurred and paid BF methods are a blend of the loss development and loss ratio methods. These methods utilize both loss development patterns, as well as expected loss ratios, to determine ultimate loss. When using the BF methods, the initial treaty year ultimate loss is based predominantly on expected loss ratios. As loss experience matures, the estimate of ultimate loss using this methodology is based predominantly on loss development patterns. The Company generally does not utilize methodologies that are dependent on claim counts reported, claim counts settled or claim counts open. Due to the nature of the Company’s business, this information is not routinely provided for every treaty/program. Consequently, actuarial methods utilizing this information generally cannot be relied upon by the Company in its loss reserve estimation process. As a result, for much of the Company’s business, the separate analysis of frequency and severity of loss activity underlying overall loss emergence trends is not practical. Generally, the Company relies on BF and loss ratio methods for estimating ultimate loss liabilities for more recent treaty years. These methodologies, at least in part, apply a loss ratio, determined from aggregated analyses of internally developed pricing trends across reserve cells, to premium earned on that business. Adjustments to premium estimates generate appropriate adjustments to ultimate loss estimates in the quarter in which they occur, using the BF and loss ratio methods. To estimate losses for more mature treaty years, the Company generally relies on the incurred loss development methodology, which does not rely on premium estimates. In addition, the Company may use other methods to estimate liabilities for specific types of claims. For property catastrophe losses, the Company may utilize vendor catastrophe models to estimate ultimate loss soon after a loss occurs, where loss information is not yet reported to the Company from cedants/insureds. Incurred but not reported reserves are determined by subtracting the total of paid loss and case reserves including additional case reserves from ultimate loss. The Company completes comprehensive loss reserve reviews, which include a reassessment of loss development and expected loss ratio assumptions, on an annual basis. The Company completed this year’s annual review in the fourth quarter of 2018. The results of these reviews are reflected in the period in which they are completed. Quarterly, the Company compares actual loss emergence to expectations established by the comprehensive loss reserve review process. In the event that loss trends diverge from expected trends, the Company may have to adjust its reserves for losses and loss adjustment expenses (“LAE”) accordingly. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse or favorable effects to our financial results. The Company believes that the recorded estimate represents the best estimate of unpaid losses and LAE based on the information available at December 31, 2018. The Company’s most significant assumptions underlying its 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 56 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) provision is made for extraordinary future emergence of new classes of loss or types of loss that are not sufficiently represented in its historical database or that are not yet quantifiable if not in its database. (cid:3) U.S. Casualty Reinsurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total incurred but not reported ("IBNR") liabilities plus expected development on reported loss and iii) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the U.S. Casualty Reinsurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Accident Year 2013 2014 2015 2016 2017 2018 (cid:3) 2018 (cid:3) 2013 2014 (cid:3) (cid:3) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 173,475(cid:3) (cid:3) $ (cid:3) $ ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 179,282 $ 186,478 —— —— —— —— 2015 (unaudited) (cid:3) 2016 (unaudited) (cid:3) 2017 (unaudited) (cid:3) (cid:3) 185,531 $ 192,000 192,427 —— —— —— (cid:3) 171,977(cid:3) $ 190,283(cid:3) (cid:3) 196,147(cid:3) (cid:3) 209,386(cid:3) (cid:3) 230,950(cid:3) (cid:3) 259,565(cid:3) (cid:3) (cid:3) (cid:3) Total incurred loss and loss adjustment expenses $ 1,258,308(cid:3) (cid:3) 188,566 $ 194,204 190,234 202,231 —— —— 185,102 $ 194,920 193,610 206,349 225,702 —— (cid:3) (cid:3) (cid:3) (cid:3) As of (cid:3) (cid:3) (cid:3) (cid:3)December 31, 2018 Total of IBNR (cid:3) (cid:3) Liabilities Plus (cid:3) (cid:3) Expected (cid:3) (cid:3) (cid:3) (cid:3) Development on (cid:3) (cid:3) Reported Losses (cid:3) (cid:3) 47,623 68,913 72,940 86,149 138,327 190,539 (cid:3) (cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 9,984(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 17,035 13,175 —— —— —— —— 89,405(cid:3) $ 75,105(cid:3) 56,614(cid:3) 44,284(cid:3) 20,463(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 46,501 31,159 11,710 —— —— —— 70,275 52,671 29,654 18,189 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 102,698 92,812 79,814 68,958 42,549 31,578 418,409 1,258,308 317,364 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 1,157,263 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 8.4% (cid:3) (cid:3) 8.1% 12.8% 11.1% 10.0% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 9.4% 57 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) U.S. Property Reinsurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total IBNR liabilities plus expected development on reported loss and iii) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the U.S. Property Reinsurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) Accident Year 2013 2014 2015 2016 2017 2018 (cid:3) 2013 2014 (cid:3) (cid:3) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 228,551(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) 227,495 $ 155,687 —— —— —— —— (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) 2016 (unaudited) (cid:3) As of (cid:3) (cid:3) (cid:3) (cid:3)December 31, 2018 Total of IBNR (cid:3) (cid:3) Liabilities Plus (cid:3) (cid:3) Expected (cid:3) (cid:3) (cid:3) (cid:3) Development on (cid:3) (cid:3) Reported Losses (cid:3) (cid:3) (cid:3) 196,987(cid:3) (cid:3) $ 137,587(cid:3) (cid:3) (cid:3) 133,765(cid:3) (cid:3) (cid:3) 136,690(cid:3) (cid:3) (cid:3) 275,398(cid:3) (cid:3) (cid:3) 314,964(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Total incurred loss and loss adjustment expenses $ 1,195,391(cid:3) (cid:3) (cid:3) 204,527 $ 141,365 142,206 141,628 —— —— 215,505 $ 154,915 147,224 —— —— —— 197,149 $ 138,129 134,285 137,728 318,837 —— 1,532 1,345 2,622 7,144 16,723 185,917 2017 (unaudited) (cid:3) 2018 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 90,254(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 149,693 53,366 —— —— —— —— 190,908(cid:3) $ 132,480(cid:3) 116,884(cid:3) 117,928(cid:3) 93,193(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 177,151 96,611 65,507 —— —— —— 188,531 124,154 100,427 48,509 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 191,500 134,507 125,285 122,071 236,758 78,189 888,310 1,195,391 8,998 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 316,079 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 35.9% (cid:3) (cid:3) 43.8% 9.6% 6.0% 2.0% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 0.0% 58 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Non(cid:882)U.S. Casualty Reinsurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total IBNR liabilities plus expected development on reported loss and iii) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the Non(cid:882)U.S. Casualty Reinsurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Accident Year 2013 2014 2015 2016 2017 2018 (cid:3) (cid:3) (cid:3) 2013 (cid:3) (cid:3) 2014 (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 97,521(cid:3) (cid:3) $ (cid:3) $ ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 95,200 $ 86,093 —— —— —— —— (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) 96,136 $ 87,538 84,179 —— —— —— 95,800 $ 92,910 85,159 91,993 —— —— 84,295 $ 98,499 103,918 98,499 122,881 —— (cid:3) (cid:3) (cid:3) Total incurred loss and loss adjustment expenses $ As of (cid:3) (cid:3) (cid:3) (cid:3)December 31, 2018 Total of IBNR (cid:3) (cid:3) Liabilities Plus (cid:3) (cid:3) Expected (cid:3) (cid:3) (cid:3) (cid:3) Development on (cid:3) (cid:3) Reported Losses (cid:3) (cid:3) (cid:3) (cid:3) 2018 (cid:3) (cid:3) (cid:3) (cid:3) 80,658(cid:3) $ 97,190(cid:3) (cid:3) 102,892(cid:3) (cid:3) 104,331(cid:3) (cid:3) 126,079(cid:3) (cid:3) 137,907(cid:3) (cid:3) (cid:3) (cid:3) 649,057(cid:3) (cid:3) 20,060 32,133 35,735 38,113 62,809 100,081 (cid:3) (cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 13,131(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 23,028 9,434 —— —— —— —— 36,288(cid:3) $ 31,738(cid:3) 25,142(cid:3) 23,283(cid:3) 11,022(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 28,121 20,585 8,480 —— —— —— 31,966 26,668 18,275 8,733 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 39,134 35,888 29,187 30,122 25,625 14,087 174,043 649,057 351,789 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 826,803 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 10.0% (cid:3) (cid:3) 11.7% 6.9% 4.5% 7.5% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 7.9% 59 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Non(cid:882)U.S. Property Reinsurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total IBNR liabilities plus expected development on reported loss and iii) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the Non(cid:882)U.S. Property Reinsurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) Accident Year 2013 2014 2015 2016 2017 2018 (cid:3) (cid:3) 2013 (cid:3) 2014 (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 393,481(cid:3) (cid:3) $ (cid:3) $ ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 326,973 $ 390,301 —— —— —— —— (cid:3) 2015 (unaudited) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) 2018 (cid:3) (cid:3) 306,362 $ 331,084 394,745 —— —— —— (cid:3) 275,751(cid:3) $ 280,875(cid:3) (cid:3) 245,200(cid:3) (cid:3) 336,811(cid:3) (cid:3) 357,498(cid:3) (cid:3) 412,985(cid:3) (cid:3) (cid:3) (cid:3) Total incurred loss and loss adjustment expenses $ 1,909,120(cid:3) (cid:3) 295,180 $ 306,912 298,307 378,789 —— —— 280,945 $ 287,891 253,938 353,333 438,555 —— (cid:3) (cid:3) (cid:3) (cid:3) 5,083 9,532 19,044 35,780 76,346 177,481 (cid:3) (cid:3) As of (cid:3) (cid:3) (cid:3) (cid:3)December 31, 2018 Total of IBNR (cid:3) (cid:3) Liabilities Plus (cid:3) (cid:3) Expected (cid:3) (cid:3) (cid:3) (cid:3) Development on (cid:3) (cid:3) Reported Losses (cid:3) (cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 60,835(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 162,658 84,168 —— —— —— —— 253,247(cid:3) $ 246,345(cid:3) 189,346(cid:3) 196,495(cid:3) 87,883(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 220,232 186,629 68,131 —— —— —— 242,312 231,818 160,618 78,492 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 259,597 254,456 203,240 240,718 215,878 60,879 1,234,768 1,909,120 104,525 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 778,877 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 23.1% (cid:3) (cid:3) 38.6% 15.8% 8.8% 4.9% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 2.9% 60 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) U.S. Casualty Insurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total iii) cumulative number of reported loss IBNR liabilities plus expected development on reported loss, (determined by the number of events, not claimants, regardless of whether or not any payments were ultimately made) and iv) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the U.S. Casualty Insurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses , Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) 2014 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3)(unaudited) (cid:3)(cid:3) (cid:3) (unaudited) 2015 (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) 2018 (cid:3)(cid:3) As of December 31, 2018 Total of IBNR Liabilities Plus Expected (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Development on Cumulative Number (cid:3) (cid:3) (cid:3) (cid:3) 241,873(cid:3)(cid:3)(cid:3)(cid:3) $ 294,177(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3) (cid:3) $ 238,051 275,305 287,419 —— —— —— (cid:3) $ 217,364 269,942 286,650 278,509 —— —— 207,109 259,288 278,209 278,025 341,698 —— Total incurred loss and loss adjustment expenses (cid:3) Reported Losses (cid:3) (cid:3) $ 206,216 $ 252,427 (cid:3) 258,870 (cid:3) 263,819 (cid:3) 356,730 (cid:3) 458,328 (cid:3) 10,457 25,092 30,691 66,349 174,508 306,165 of Reported Claims (cid:3)(cid:3) 23,067 29,583 27,503 18,219 15,595 14,326 (cid:3) (cid:3) $1,796,390 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) 2013 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3)(unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 244,726(cid:3) (cid:3)(cid:3) $ ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) Accident Year 2014 2015 2016 2017 2018 (cid:3)(cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 51,986(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 86,527 59,690 —— —— —— —— 174,795(cid:3) $ 177,765(cid:3) 154,993(cid:3) 100,615(cid:3) 60,032(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 128,490 94,896 66,555 —— —— —— 162,146 143,152 103,030 59,657 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 186,538 209,941 196,107 154,153 118,611 74,198 939,548 1,796,390 24,822 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 881,664 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 20.7% (cid:3) (cid:3) 16.9% 21.5% 15.5% 9.2% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 6.6% 61 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) U.S. Property Insurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance), ii) total iii) cumulative number of reported loss IBNR liabilities plus expected development on reported loss, (determined by the number of events, not claimants, regardless of whether or not any payments were ultimately made) and iv) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the U.S. Property Insurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses , Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) 2014 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3)(unaudited) (cid:3)(cid:3) (cid:3) (unaudited) 2015 (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) 2018 (cid:3)(cid:3) As of December 31, 2018 Total of IBNR Liabilities Plus Expected (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Development on Cumulative Number (cid:3)(cid:3)(cid:3)(cid:3) (cid:3) (cid:3)(cid:3) 203,970(cid:3)(cid:3)(cid:3)(cid:3) $ 227,198(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) ——(cid:3)(cid:3)(cid:3)(cid:3) (cid:3) 197,496 233,124 187,266 —— —— —— (cid:3)(cid:3) $ 197,124 232,178 197,486 221,585 —— —— (cid:3)(cid:3) $ 196,391 231,401 195,061 209,572 230,670 —— (cid:3)(cid:3)(cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Total incurred loss and loss adjustment expenses (cid:3)(cid:3) (cid:3)(cid:3) Reported Losses (cid:3) (cid:3) $ 196,374 $ 230,867 (cid:3) 194,253 (cid:3) 205,659 (cid:3) 224,065 (cid:3) 289,059 (cid:3) 3 (cid:3)(cid:3) 18 (cid:3)(cid:3) 213 (cid:3)(cid:3) 523 (cid:3)(cid:3) 5,234 (cid:3)(cid:3) 106,029 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) $1,340,277 (cid:3) (cid:3) of Reported Claims 10,604 12,399 11,332 11,563 15,587 18,055 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) 2013 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3)(unaudited) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) 212,167(cid:3) (cid:3)(cid:3) $ ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) ——(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) Accident Year 2014 2015 2016 2017 2018 (cid:3)(cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 101,466(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ ——(cid:3) (cid:3) ——(cid:3) (cid:3) ——(cid:3) (cid:3) ——(cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) 2013 2014 2015 2016 2017 2018 (cid:3) 190,056 80,295 —— —— —— —— 195,998(cid:3) $ 230,614(cid:3) 193,617(cid:3) 199,384(cid:3) 77,377(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 192,033 221,162 77,398 —— —— —— 194,391 228,772 181,585 75,333 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 196,122 230,488 193,539 203,238 208,714 113,119 1,145,220 1,340,277 429 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 195,486 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 39.2% (cid:3) (cid:3) 56.0% 3.6% 0.7% 0.3% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 0.0% 62 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Non(cid:882)U.S. Casualty Insurance The following tables present i) incurred loss and allocated loss adjustment expenses (net of reinsurance) and(cid:3)(cid:3) ii) total IBNR liabilities plus expected development on reported loss and iii) cumulative paid loss and allocated loss adjustment expenses (net of reinsurance) for the Non(cid:882)U.S. Casualty Insurance line of business for the year ended and as of December 31, 2018 (in thousands): (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) Incurred Loss and Allocated Loss Adjustment Expenses , Net of Reinsurance For the Years Ended December 31, Accident Year 2013 2014 2015 2016 2017 2018 (cid:3) (cid:3) (cid:3) 2013 (cid:3) (cid:3) 2014 (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 85,602(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) 82,127 86,045 —— —— —— —— (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) $ $ 82,531 87,342 86,053 —— —— —— $ 83,780 85,787 84,689 80,613 —— —— 82,181 83,280 83,112 77,205 90,998 —— (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) Total incurred loss and loss adjustment expenses $ (cid:3) (cid:3) 2018 (cid:3) As of (cid:3) (cid:3) (cid:3) (cid:3)December 31, 2018 Total of IBNR Liabilities Plus Expected (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Development on (cid:3) (cid:3) Reported Losses (cid:3) (cid:3) (cid:3) 86,126(cid:3) $ 77,193(cid:3) (cid:3) 75,657(cid:3) (cid:3) 80,111(cid:3) (cid:3) 92,579(cid:3) (cid:3) 103,988(cid:3) (cid:3) (cid:3) (cid:3) 515,654(cid:3) (cid:3) 25,847 23,792 32,771 45,093 70,206 90,802 (cid:3) (cid:3) Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2013 (unaudited) Accident Year (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2014 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2015 (unaudited) (cid:3) (cid:3) (cid:3) 2016 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2017 (unaudited) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 5,683(cid:3) (cid:3) $ ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ $ 2013 2014 2015 2016 2017 2018 (cid:3) 9,210 5,013 —— —— —— —— 34,998(cid:3) $ 32,143(cid:3) 19,028(cid:3) 10,611(cid:3) 4,119(cid:3) ——(cid:3) (cid:3) Total paid loss and loss adjustment expenses(cid:3) Total incurred loss and loss adjustment expenses(cid:3) Outstanding liabilities for loss and allocated loss adjustment expenses for accident years prior to 2013(cid:3) (cid:3) (cid:3) 17,040 11,990 3,843 —— —— —— 25,228 19,725 8,828 3,399 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) —— (cid:3) —— (cid:3) (cid:3) (cid:3) 2018 (cid:3) 41,112 37,394 26,185 18,244 12,683 5,072 140,690 515,654 233,501 (cid:3) (cid:3) (cid:3) Liabilities for loss and allocated loss adjustment expenses, net of reinsurance(cid:3) $ 608,465 Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance In Year: Average of each year (cid:3) 1 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2 (cid:3) 3 (cid:3) 4 (cid:3) 5 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 5.3% (cid:3) (cid:3) 7.7% 10.2% 11.8% 9.4% (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 6 3.4% 63 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The reconciliation of the net incurred and paid claims development tables (preceding) to the liability for unpaid losses and loss adjustment expenses in the consolidated statement of financial position as of December 31, 2018 is as follows (in thousands): 2018 (cid:3) December 31, (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Net unpaid loss and allocated loss adjustment expenses: (cid:3) (cid:3) (cid:3) (cid:3) U.S. Casualty Reinsurance ............................................................................................... (cid:3) $ U.S. Property Reinsurance .............................................................................................. (cid:3) (cid:3) Non(cid:882)U.S. Casualty Reinsurance ....................................................................................... (cid:3) (cid:3) Non(cid:882)U.S. Property Reinsurance....................................................................................... (cid:3) (cid:3) U.S. Casualty Insurance ................................................................................................... (cid:3) (cid:3) U.S. Property Insurance .................................................................................................. (cid:3) (cid:3) Non(cid:882)U.S. Casualty Insurance ........................................................................................... (cid:3) (cid:3) Unallocated loss adjustment expenses........................................................................... (cid:3) (cid:3) Workers' compensation discount ................................................................................... (cid:3) (cid:3) Other ............................................................................................................................... (cid:3) (cid:3) Effect of foreign exchange rates ..................................................................................... (cid:3) (cid:3) Total unpaid loss and allocated loss adjustment expenses, (cid:3)(cid:3)(cid:3) net of reinsurance ................................................................................................ (cid:3) (cid:3) (cid:3) U.S. Casualty Reinsurance ............................................................................................... (cid:3) U.S. Property Reinsurance .............................................................................................. (cid:3) Non(cid:882)U.S. Casualty Reinsurance ....................................................................................... (cid:3) Non(cid:882)U.S. Property Reinsurance....................................................................................... (cid:3) U.S. Casualty Insurance ................................................................................................... (cid:3) U.S. Property Insurance .................................................................................................. (cid:3) Non(cid:882)U.S. Casualty Insurance ........................................................................................... (cid:3) Unallocated loss adjustment expenses........................................................................... (cid:3) Effect of foreign exchange rates ..................................................................................... (cid:3) Other ............................................................................................................................... (cid:3) Total reinsurance recoverable on unpaid losses..................................................... (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Total gross unpaid loss and loss adjustment expenses................................................... (cid:3) $ (cid:3)(cid:3) Reinsurance recoverable on unpaid losses and loss adjustment expenses: 1,157,263 316,079 826,803 778,877 881,664 195,486 608,465 71,749 (36,979) 149,945 (148,184) 4,801,168 (cid:3)(cid:3) 18,670 142,839 84 152,246 225,454 131,249 222,624 300 (11,237) 44,806 927,035 5,728,203 (cid:3)(cid:3) 64 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table sets forth the activity in the liability for unpaid losses and loss adjustment expenses for the years ended December 31, 2018, 2017 and 2016 (in thousands): Gross unpaid losses and loss adjustment expenses, (cid:3)(cid:3)(cid:3)beginning of year ........................................................................... $ 5,463,595 Less: Ceded unpaid losses and loss adjustment (cid:3)(cid:3)(cid:3)expenses, beginning of year .......................................................... 866,985 $ 4,876,848(cid:3) $ 5,002,422 (cid:3) 658,607(cid:3) 690,884 2018 2017 (cid:3) 2016 Net unpaid losses and loss adjustment expenses, (cid:3)(cid:3)(cid:3)beginning of year...................................................................... (cid:3)(cid:3) Add: Net incurred losses and loss adjustment expenses related to: Current year ................................................................................ Prior years ................................................................................... Total net incurred losses and loss adjustment (cid:3)(cid:3)(cid:3)expenses.............................................................................. (cid:3)(cid:3) Less: Net paid losses and loss adjustment expenses related to: 4,596,610 2,061,397 (345,652) 1,715,745 Current year ................................................................................ Prior years ................................................................................... 399,891 1,033,807 Total net paid losses and loss adjustment (cid:3)(cid:3)(cid:3)expenses.............................................................................. (cid:3)(cid:3) Effect of exchange rate changes....................................................... (cid:3)(cid:3) Net unpaid losses and loss adjustment expenses, end of year ........ Add: Ceded unpaid losses and loss adjustment (cid:3)(cid:3)(cid:3)expenses, end of year .................................................................... 1,433,698 (77,489) 4,801,168 (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3) 4,218,241(cid:3) (cid:3) (cid:3) 1,827,571(cid:3) (288,049) 1,539,522(cid:3) (cid:3) (cid:3) 376,331(cid:3) 953,050(cid:3) 1,329,381(cid:3) (cid:3) 168,228(cid:3) (cid:3) 4,596,610(cid:3) 4,311,538 1,438,311 (266,486) 1,171,825 264,582 972,915 1,237,497 (27,625) 4,218,241 927,035 (cid:3) 866,985(cid:3) 658,607 Gross unpaid losses and loss adjustment (cid:3)(cid:3)(cid:3)expenses, end of year ......................................................... $ 5,728,203 $ 5,463,595(cid:3) $ 4,876,848 Net incurred losses and loss adjustment expenses related to the current year were $2,061.4 million, $1,827.6 million and $1,438.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.(cid:3) The increase in incurred losses and loss adjustment expenses for the year ended December 31, 2018 was principally attributable to increased losses associated with premium growth partially offset by a reduction in current year catastrophe losses.(cid:3)(cid:3)The increase in incurred losses and loss adjustment expenses for the year ended December 31, 2017 was principally attributable to an increase in current year catastrophe losses and increased losses associated with premium growth.(cid:3) For the years ended December 31, 2018, 2017 and 2016, current year property catastrophe losses were $257.4 million, $406.0 million and $190.3 million, respectively.(cid:3) For the year ended December 31, 2018, current year catastrophe losses included $35.0 million related to the Northern California Wildfires, $30.9 million related to Hurricane Michael, $28.1 million related to Typhoon Jebi, and $15.0 million related to the Southern California Wildfires.(cid:3)(cid:3)For the year ended December 31, 2017, current year property catastrophe losses included $105.9 million related to Hurricane Maria, $75.7 million related to Hurricane Irma, $54.1 million related to Hurricane Harvey, $25.0 million related to the Northern California Wildfires, and $25.0 million related to the Southern California Wildfires.(cid:3) For the year ended December 31, 2016, current year property catastrophe losses included $30.8 million related to Hurricane Matthew.(cid:3) Net incurred losses and loss adjustment expenses related to prior years included reductions in loss estimates of $345.7 million, $288.0 million and $266.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. The reductions in prior years’ incurred losses and loss adjustment expenses were attributable to decreased loss estimates due to loss emergence lower than expectations in most regions and lines of business. Net paid losses and loss adjustment expenses related to the current year were $399.9 million, $376.3 million and $264.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.(cid:3) (cid:3) The increase in paid losses and loss adjustment expenses for the year ended December 31, 2018 was principally attributable to increased losses associated with premium growth partially offset by a reduction in current year catastrophe losses.(cid:3) 65 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The increase in paid losses and loss adjustment expenses for the year ended December 31, 2017 was principally due to increased current year catastrophe losses.(cid:3)(cid:3) The effects of exchange rate changes on net unpaid losses and loss adjustment expenses resulted in a decrease of $77.5 million for the year ended December 31, 2018, an increase of $168.2 million for the year ended December 31, 2017, and a decrease of $27.6 million for the year ended December 31, 2016, and were attributable to Non(cid:882)U.S. Reinsurance and Non(cid:882)U.S. Insurance. Ceded unpaid losses and loss adjustment expenses were $927.0 million, $867.0 million and $658.6 million as of December 31, 2018, 2017 and 2016, respectively.(cid:3) The increase in ceded unpaid losses and loss adjustment expenses for the year ended December 31, 2018 was principally attributable to an increase in ceded unpaid reinsurance recoverables on catastrophe losses.(cid:3) The increase in ceded unpaid losses and loss adjustment expenses for the year ended December 31, 2017 was principally attributable to an increase in ceded unpaid reinsurance recoverables as a result of Hurricanes Irma and Maria, and the Northern California Wildfires.(cid:3) The Company uses tabular reserving for workers’ compensation indemnity loss reserves, which are considered to be fixed and determinable, and discounts such reserves using an interest rate of 3.5%.(cid:3) (cid:3) Workers’ compensation indemnity loss reserves have been discounted using the Life Table for Total Population: United States, 2009.(cid:3)(cid:3)Reserves reported at the discounted value were $52.4 million and $53.4 million as of December 31, 2018 and 2017, respectively.(cid:3) (cid:3) The amount of case reserve discount was $16.8 million and $17.5 million as of December 31, 2018 and 2017, respectively.(cid:3) The amount of incurred but not reported reserve discount was $20.2 million and $20.5 million as of December 31, 2018 and 2017, respectively. The Company is not materially exposed to asbestos and environmentally(cid:882)related liabilities and does not establish a specific reserve for such exposures. 7. Reinsurance and Retrocessions The Company utilizes reinsurance and retrocessional agreements to reduce and spread the risk of loss on its insurance and reinsurance business and to limit exposure to multiple claims arising from a single occurrence. The Company is subject to accumulation risk with respect to catastrophic events involving multiple treaties, facultative certificates and insurance policies. To protect against these risks, the Company purchases catastrophe excess of loss protection. The retention, the level of capacity purchased, the geographical scope of the coverage and the costs vary from year to year. Additionally, the Company purchases specific protections related to the insurance business underwritten in both the U.S. and abroad. There is credit risk with respect to reinsurance, which would result in the Company recording a charge to earnings in the event that such reinsuring companies are unable, at some later date, to meet their obligations under the reinsurance agreements in force. Reinsurance recoverables are recorded as assets and a reserve for uncollectible reinsurance recoverables is established based on the Company’s evaluation of each reinsurer’s or retrocessionaire’s ability to meet its 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 for the years ended December 31, 2018, 2017 and 2016 follow (in thousands): Premiums Written (cid:3) 2018 Year Ended December 31, 2017 (cid:3) (cid:3) (cid:3) (cid:3) 2016 Direct.................................................................................... $$ Add: assumed....................................................................... Less: ceded ........................................................................... Net .................................................................................. $$ 1,626,198 1,702,430 430,808 2,897,820 (cid:3)(cid:3) Earned Direct.................................................................................... $$ Add: assumed....................................................................... Less: ceded ........................................................................... Net .................................................................................. $$ 1,491,083 1,652,231 387,885 2,755,429 $$ $$ $$ $$ $$ 1,289,551 1,493,554(cid:3) (cid:3) 287,218(cid:3) (cid:3) 2,495,887(cid:3) (cid:3) $$ 1,086,119 1,294,628 280,570 2,100,177 (cid:3) (cid:3) (cid:3) (cid:3) 1,195,849(cid:3) (cid:3) $$ 1,420,639(cid:3) (cid:3) 283,087(cid:3) (cid:3) 2,333,401(cid:3) (cid:3) $$ 1,070,553 1,303,878 300,335 2,074,096 66 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The total amount of reinsurance recoverable on paid and unpaid losses as of December 31, 2018 and 2017 was $1,086.6 million and $896.7 million, respectively. The reserve for uncollectible reinsurance recoverable was $14.0 million and $13.1 million, as of December 31, 2018 and 2017, respectively, and has been netted against reinsurance recoverables on loss payments in the consolidated balance sheets. In accordance with the terms of certain reinsurance agreements, the Company has recorded interest expense associated with its ceded reinsurance agreements of less than $0.1 million for each of the years ended December 31, 2018, 2017 and 2016. 8. Reinsurance Recoverables The Company’s ten largest reinsurers represent 78.4% of its total reinsurance recoverables as of December 31, 2018. Amounts due from all other reinsurers are diversified, with no other individual reinsurer representing more than $20.0 million, or 1.9%, of reinsurance recoverables as of December 31, 2018, and the average balance is less than $1.6 million. The Company held total collateral of $373.6 million as of December 31, 2018, representing 34.4% of total reinsurance recoverables. The following table shows the total amount as of December 31, 2018 that is recoverable from each of the Company’s ten largest reinsurers for paid and unpaid losses, the amount of collateral held and each reinsurer’s A.M. Best rating (in thousands): Reinsurer Markel CatCo Reinsurance Ltd. ................................................ $ Federal Crop Insurance Corporation ........................................ Lloyd's Syndicates (excluding Brit PLC Syndicate 2987) ........... CRC Reinsurance Limited .......................................................... Chubb Tempest Reinsurance Ltd. ............................................. Berkley Insurance Company ..................................................... National Indemnity Company................................................... Markel Global Reinsurance Company ...................................... Hannover Rueck SE................................................................... Brit (Lloyds Syndicate 2987) ..................................................... Sub(cid:882)total.............................................................................. All other .................................................................................... Reinsurance Recoverable 251,328 245,990 130,157 51,492 34,750 34,142 29,076 27,283 27,188 21,006 852,412 234,234 Total ............................................................................... $ 1,086,646 % of Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3) (cid:3) 23.1%(cid:3) $ 22.7(cid:3) (cid:3) (cid:3) 12.0(cid:3) (cid:3) (cid:3) 4.7(cid:3) (cid:3) (cid:3) 3.2(cid:3) (cid:3) (cid:3) 3.1(cid:3) (cid:3) (cid:3) 2.7(cid:3) (cid:3) (cid:3) 2.5(cid:3) (cid:3) (cid:3) 2.5(cid:3) (cid:3) (cid:3) 1.9(cid:3) (cid:3) (cid:3) 78.4(cid:3) (cid:3) (cid:3) 21.6(cid:3) (cid:3) (cid:3) 100.0%(cid:3) $ (cid:3) Collateral A.M. Best Rating 251,328 NR —— NR 4,050 A 51,271 NR 27,318 A++ —— A+ —— A++ —— A 328 A+ —— A 334,295 39,258 373,553 Several individual reinsurers are part of the same corporate group. The following table shows the five largest aggregate amounts that are recoverable from all individual entities that form part of the same corporate group as of December 31, 2018 and the amount of collateral held from each group (in thousands): Reinsurance Recoverable Reinsurer Markel Corporation .......................................................................... $ Federal Crop Insurance Corporation ................................................ Lloyd's Syndicates (excluding Brit PLC Syndicate 2987) ................... Fairfax Financial Holdings Ltd. .......................................................... Chubb................................................................................................ Sub(cid:882)total...................................................................................... All other ............................................................................................ 296,514 245,990 130,157 91,260 35,184 799,105 287,541 Total ....................................................................................... $ 1,086,646 % of Total (cid:3) (cid:3) 27.3% $ 22.6(cid:3)(cid:3) 12.0(cid:3)(cid:3) 8.4(cid:3)(cid:3) 3.2(cid:3)(cid:3) 73.5(cid:3)(cid:3) 26.5(cid:3)(cid:3) 100.0% $ Collateral 251,813 —— 4,050 52,824 27,318 336,005 37,548 373,553 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Reinsurance recoverables were $896.7 million and collateral was $265.1 million, or 29.6% of the reinsurance recoverable balance, as of December 31, 2017. 67 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company is the beneficiary of letters of credit, cash and other forms of collateral to secure certain amounts due from its reinsurers. Collateral held by the Company as of December 31, 2018 was comprised of the following forms (in thousands): Form of Collateral Trust agreements............................................................................................... $ Funds withheld from reinsurers ........................................................................ Letters of credit ................................................................................................. Total ............................................................................................................. $ Collateral (cid:3)(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 274,230(cid:3) (cid:3) 62,944(cid:3) (cid:3) 36,379(cid:3) (cid:3) 373,553(cid:3) (cid:3) % of Recoverables (cid:3) (cid:3) (cid:3) (cid:3) 25.3% 5.8 3.3 34.4% Each reinsurance contract between the Company and the reinsurer describes the losses that are covered under the contract and terms upon which payments are to be made. The Company generally has the ability to utilize collateral to settle unpaid balances due under its reinsurance contracts when it determines that the reinsurer has not met its contractual obligations. Letters of credit are for the sole benefit of the Company to support the obligations of the reinsurer, providing the Company with the unconditional ability, in its sole discretion, to draw upon the letters of credit in support of any unpaid amounts due under the relevant contracts. Cash and investments supporting funds withheld from reinsurers are included in the Company’s invested assets. Funds withheld from reinsurers are typically used to automatically offset payments due to the Company in accordance with the terms of the relevant reinsurance contracts. Amounts held under trust agreements are typically comprised of cash and investment grade fixed income securities and are not included in the Company’s invested assets. The ability of the Company to draw upon funds held under trust agreements to satisfy any unpaid amounts due under the relevant reinsurance contracts is typically unconditional and at the sole discretion of the Company. 9. Debt Obligations, Common Shares and Non(cid:882)Controlling Interest – Preferred Shares of Subsidiaries Debt Obligations The amortized cost by component of the Company’s debt obligations as of December 31, 2018 and 2017 were as follows (in thousands): Series A Floating Rate Senior Debentures due 2021 .......................................... $ Series C Floating Rate Senior Debentures due 2021 .......................................... Total debt obligations ................................................................................... $ 49,944(cid:3) (cid:3) $ 39,956(cid:3) (cid:3) (cid:3)(cid:3) 89,900(cid:3) (cid:3) $ 49,917 39,940 89,857 December 31, 2018 (cid:3) (cid:3) (cid:3) (cid:3) December 31, 2017 On November 28, 2006, the Company completed the private sale of a $40.0 million aggregate principal amount of floating rate senior debentures, Series C, due December 15, 2021 (the “Series C Notes”). Interest on the Series C Notes accrues at a rate per annum equal to the three(cid:882)month London Interbank Offer Rate (“LIBOR”), reset quarterly, plus 2.50%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The Company has the option to redeem the Series C Notes at par, plus accrued and unpaid interest, in whole or in part on any interest payment date. For the years ended December 31, 2018 and 2017, the average annual interest rate on the Series C Notes was 4.65% and 3.69%, respectively. On February 22, 2006, the Company issued a $50.0 million aggregate principal amount of floating rate senior debenture Series A, due March 15, 2021 (the “Series A Notes”), pursuant to a private placement offering. Interest on the Series A Notes is due quarterly in arrears on March 15, June 15, September 15 and December 15 of each year at an interest rate equal to the three(cid:882)month LIBOR, reset quarterly, plus 2.20%. The Series A Notes are callable by the Company on any interest payment date at their par value, plus accrued and unpaid interest. For the years ended December 31, 2018 and 2017, the average annual interest rate on Series A Notes was 4.35% and 3.39%, respectively. As of December 31, 2018 and 2017, the estimated fair value of the Company’s debt obligations was $92.3 million and $92.9 million, respectively. The estimated fair value is based on quoted market prices of the Company’s debt, where available, for debt similar to the Company’s, and discounted cash flow calculations. 68 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Common Shares The Company did not issue any common shares during the years ended December 31, 2018, 2017 and 2016. The Company declared and paid $100.0 million in common share dividends during each of the years ended December 31, 2018 and 2017. The Company declared and paid $200.0 million in common share dividends during the year ended December 31, 2016.(cid:3)(cid:3) Non(cid:882)Controlling Interest – Preferred Shares of Subsidiaries TIG Insurance Company (“TIG”), a Fairfax affiliate, holds all 23,807 shares of Hudson’s 5.5% Series A preferred stock with a liquidation preference of $1,000 per share and an aggregate book value of $23.8 million, and all 5,492 shares of Greystone’s 5.5% Series A preferred stock, with a liquidation preference of $1,000 per share and an aggregate book value of $5.5 million. The shares are not redeemable by Hudson or Greystone prior to January 1, 2031. On or after January 1, 2031, the shares are redeemable, in whole or in part, by Hudson or Greystone. On October 4, 2018, Greystone’s Board of Directors declared a preferred dividend to TIG in the amount of $0.3 million, which was paid on October 22, 2018. On December 6, 2018, Hudson’s Board of Directors declared a preferred dividend to TIG in the amount of $1.3 million, which was paid on December 21, 2018.(cid:3)(cid:3) On October 3, 2017, Greystone’s Board of Directors declared a preferred dividend to TIG in the amount of $0.3 million and Hudson’s Board of Directors declared a preferred dividend to TIG in the amount of $1.3 million.(cid:3) Both dividends were paid on October 20, 2017. On October 6, 2016, Greystone’s Board of Directors declared a preferred dividend to TIG in the amount of $0.3 million and Hudson’s Board of Directors declared a preferred dividend to TIG in the amount of $1.3 million.(cid:3) Both dividends were paid on October 20, 2016. The aggregate amount of the preferred shares of Hudson and Greystone owned by TIG is presented on the balance sheet as non(cid:882)controlling interest – preferred shares of subsidiaries in the amount of $29.3 million. 10. Federal and Foreign Income Taxes The components of the federal and foreign income tax provision included in the consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands): 2018 2017 Current: United States............................................................................... $ Foreign ........................................................................................ Total current income tax provision........................................ Deferred: United States............................................................................... Foreign ........................................................................................ Total deferred income tax (benefit) provision....................... Total federal and foreign income tax provision ............... $ 19,516 31,555 51,071 (28,134) 242 (27,892) 23,179 (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ 2016 (cid:3) (cid:3) 98,131(cid:3) $ 46,360(cid:3) 144,491(cid:3) (cid:3) 158,583(cid:3) (10,027) 148,556(cid:3) 293,047(cid:3) $ 5,593 22,915 28,508 (19,766) (4,327) (24,093) 4,415 69 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred federal and foreign income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Components of federal and foreign income tax assets and liabilities as of December 31, 2018 and 2017 are as follows (in thousands): Unpaid losses and loss adjustment expenses..................................................... $ Unearned premiums........................................................................................... Reserve for potentially uncollectible balances................................................... Pension and benefit accruals.............................................................................. Investments ........................................................................................................ Foreign tax credit................................................................................................ Other................................................................................................................... Total deferred tax assets............................................................................... Deferred acquisition costs .................................................................................. Foreign deferred items ....................................................................................... Subsidiary net operating loss.............................................................................. Other................................................................................................................... Total deferred tax liabilities .......................................................................... Net deferred tax assets............................................................................ Deferred income taxes on accumulated other (cid:3)(cid:3)(cid:3)comprehensive income (loss) ...............................................................(cid:3)(cid:3) Deferred federal and foreign income tax asset .................................................. Current federal and foreign income tax payable .......................................... Federal and foreign income taxes receivable..................................................... $ 2018 (cid:3) (cid:3) 2017 44,322(cid:3) (cid:3) $ 36,388(cid:3) (cid:3) (cid:3) 3,170(cid:3) (cid:3) (cid:3) 25,538(cid:3) (cid:3) (cid:3) 142,456(cid:3) (cid:3) (cid:3) 19,381(cid:3) (cid:3) (cid:3) 3,966(cid:3) (cid:3) (cid:3) 275,221(cid:3) (cid:3) (cid:3) 44,139(cid:3) (cid:3) (cid:3) 9,913(cid:3) (cid:3) (cid:3) 4,653(cid:3) (cid:3) (cid:3) ——(cid:3) (cid:3) (cid:3) 58,705(cid:3) (cid:3) (cid:3) 216,516(cid:3) (cid:3) (cid:3) 18,316(cid:3) (cid:3) (cid:3) 234,832(cid:3) (cid:3) (cid:3) (1,969) (cid:3) (cid:3) 232,863(cid:3) (cid:3) $ 50,867 31,291 3,111 23,640 98,593 35,112 —— 242,614 38,684 10,155 4,653 500 53,992 188,622 (9,909) 178,713 (34,356) 144,357 The following table reconciles federal and foreign income taxes at the statutory federal income tax rate to the Company’s tax provision and effective tax rate for the years ended December 31, 2018, 2018 and 2016 (in thousands): (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) % of Pre(cid:882)tax Income Amount 2018 2017 (cid:3) % of (cid:3) Pre(cid:882)tax (cid:3) Income (cid:3) (cid:3) 2016 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Amount (cid:3) $165,323 % of Pre(cid:882)tax Income Amount $618,301 Income before income tax................................ $246,954 Income tax provision computed at the (cid:3)(cid:3)(cid:3)U.S. statutory tax rate on income .................. $ 51,860 increase in income tax (cid:3)(cid:3)(cid:3)resulting from: Dividend received deduction ...................... Tax(cid:882)exempt income..................................... Proration recovery of tax preferred (cid:3)(cid:3)(cid:3)income ...................................................... Foreign tax expense .................................... State tax expense ........................................ True(cid:882)up of prior year taxes ......................... Write(cid:882)off of subsidiary NOL DTL.................. U.S. tax reform(cid:3)(cid:882)(cid:3)tax rate adjustment ......... U.S. tax reform(cid:3)(cid:882)(cid:3)mandatory deemed (cid:3)(cid:3)(cid:3)repatriation............................................... Other, net.................................................... (1,499) (3,325) 831 380 1,226 (7,434) —— (22,156) —— 3,296 Total federal and foreign income (cid:3)(cid:3)(cid:3)tax provision........................................ $ 23,179 70 21.0% $216,405 35.0%(cid:3) $ 57,863 35.0% (cid:3) (0.6) (1.3) 0.3(cid:3) 0.2 0.5 (3.0) —— (9.0) ——(cid:3) 1.3 (3,013) (14,135) 2,140 (176) (364) (430) —— 95,074 (6,643) 4,189 (cid:3) (cid:3) (cid:3) (0.5) (cid:3) (cid:3) (3,259) (2.3) (cid:3) (cid:3) (23,353) 0.3(cid:3) (cid:3) (cid:3) (0.0) (cid:3) (cid:3) (0.1) (cid:3) (cid:3) (0.1) (cid:3) (cid:3) ——(cid:3) 15.4(cid:3) —— —— —— —— (cid:3) (cid:3) (32,999) —— (cid:3) (cid:3) (1.1) (cid:3) (cid:3) 0.8(cid:3) (cid:3) (cid:3) —— 6,163 (cid:3) (2.0) (14.1) ——(cid:3) —— —— —— (20.0) —— ——(cid:3) 3.7 9.4% $293,047 47.4%(cid:3) $ 4,415 2.6% ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Pre(cid:882)tax income (loss) generated in the United States was $132.0 million, $463.7 million and $(3.3) million for the years ended December 31, 2018, 2017 and 2016, respectively. Foreign pre(cid:882)tax income was $115.0 million, $154.6 million and $168.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company has claimed the benefit of a foreign tax credit in the tax years ended December 31, 2018, 2017 and 2016.(cid:3) During 2016, the Company released the deferred tax liability relating to a contingent contractual obligation to a former subsidiary of the Company as a result of the Company’s utilization of the former subsidiary’s net operating losses in years prior to the sale of the former subsidiary, pursuant to tax sharing agreements in effect for those years, following the determination that such liability will not be realized. The Company is included in the United States tax group of Fairfax (US) Inc. (“Fairfax (US)”).(cid:3)(cid:3)The method of allocation among the companies is subject to a written agreement.(cid:3) (cid:3) Tax payments are made to, or refunds received from, Fairfax (US) in amounts equal to the amounts as if separate income tax returns were filed with federal taxing authorities. The United States Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one(cid:882)time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Act also includes the following provisions for tax years beginning after December 31, 2017: repeal of the alternative minimum tax regime, changes to loss reserve discounting, a new minimum base erosion and anti(cid:882)abuse tax (“BEAT”) on certain payments to foreign affiliates and a US tax on foreign earnings for certain global intangible low(cid:882)taxed income ("GILTI"), as well as a number of other provisions expected to have an immaterial impact on the Company. As of December 31, 2018, the Company completed the estimates of the impact of the Act, as discussed below. Pursuant to Accounting Standards Codification(cid:3) (“ASC”) 740 “Income Taxes”, deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") as of December 31, 2017, were measured using the new enacted tax rate of 21% that is expected to apply to taxable income in the periods in which the DTAs and DTLs are expected to be settled or realized. The impact of the federal rate change was determined as of December 31, 2017. Any difference between the impact measured as of that date and the date of enactment was considered not material to the financial statements. Changes in DTAs and DTLs resulting from changes in tax law or tax rates are recognized in continuing operations, including DTAs and DTLs related to accumulated other comprehensive income.(cid:3) (cid:3) The remeasurement of deferred taxes due to the change in tax rate resulted in a reduction of net deferred tax assets of $95.1 million, as of December 31, 2017.(cid:3) The Company recorded a benefit of $22.2 million in 2018 for the effects of the change in tax rates on certain return(cid:882)to(cid:882)provision adjustments reflected on the 2017 filed US corporate income tax return. See Note 5 for discussion of the effects on accumulated other comprehensive income and the application of ASU 2018(cid:882)02. For tax years beginning before January 1, 2018, the Act requires that U.S. companies include in income the impacts of a mandatory deemed repatriation of post(cid:882)1986 undistributed foreign earnings ("transition tax" or "toll charge"). As of December 31, 2017, the Company estimated that income on previously untaxed foreign earnings would be $36.8 million. The amount estimated as of December 31, 2017 noted above was finalized with the filing of the 2017 income tax return during 2018, which included $32.4 million in taxable income related to mandatory deemed repatriation. The effects of the $4.4 million adjustment to the transition tax estimate had no material impact due to the Company utilizing foreign tax credits to reduce the transition tax liability to zero . As a result of the transition tax, as of December 31, 2017 the Company recognized a reduction in net deferred tax liability of $37.6 million related to previously deferred earnings of the Newline Group as well as a reduction in its foreign tax credits of $31.3 million related to foreign tax credits that no longer have value due to the mandatory repatriation. In accordance with Staff Accounting Bulletin No. 118 (SAB 118), for the year ended December 31, 2018 the estimate has been updated and the Company has recognized a reduction in net deferred tax liability of $43.9 million related to previously deferred earnings of the Newline Group as well as a reduction in its foreign tax credits of $36.7 million. The net $0.9 million adjustment to the SAB 118 estimate in foreign deferred tax attributes results in an effective tax rate benefit of 0.4%.(cid:3) The effects of the Act related to loss reserve discounting have been computed for the years ended December 31, 2018 and 2017. Due to special transition rules, the changes to loss reserve discounting are spread ratably over 71 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 8 years. The Company will recognize a benefit of $9.4 million ratably from years ending December 31, 2018 to December 31, 2025.(cid:3) The tax effects included in these consolidated financial statements represent the Company's best estimate based upon the information available, as of December 31, 2018. The finalization during 2019 of proposed regulations issued by the U.S. tax authorities during 2018 could potentially affect the estimates of the tax impacts related to BEAT and GILTI as of December 31, 2018. The Company will recognize the charges, if any, related to BEAT or GILTI in the period in which it is included on the Company’s income tax return. The Company has, therefore, not included impacts from BEAT or GILTI in measuring its current or deferred taxes as of December 31, 2018 or 2017. The Company paid federal and foreign income taxes of $83.4 million, $18.0 million and $152.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.(cid:3) (cid:3) As of December 31, 2018, the Company had a current tax payable of $2.0 million, which included $6.4 million receivable from Fairfax (US) and a net payable of $8.4 million to various foreign governments.(cid:3) As of December 31, 2017, the Company had a current tax payable of $34.4 million, which included $6.4 million payable to Fairfax (US) and a net payable of $28.0 million to various foreign governments.(cid:3) The Company files income tax returns with various federal, state and foreign jurisdictions.(cid:3) The Company’s U.S. federal income tax returns for tax years prior to 2017 are closed. The Internal Revenue Service (“IRS”) is expected to complete their audit of the Company’s 2017 returns during 2019.(cid:3) Effective for 2017 and 2018 tax years, the Company participates in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS begins their examination of the tax year before the income tax return is filed. The goal of CAP is to expedite the exam process and reduce the level of uncertainty regarding a taxpayer’s filing positions by examining significant transactions and events as they occur.(cid:3) The IRS has not proposed any material adjustments as part of the Company’s ongoing examinations. Income tax returns filed with various state and foreign jurisdictions remain open to examination in accordance with individual statutes. The Company has elected to recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision.(cid:3)(cid:3)The Company does not have any material unrecognized tax benefits and has not recognized any accrued interest or penalties associated with uncertain tax positions. For federal income tax return purposes, the Company has foreign tax credit carryovers of $19.4 million, of which $13.9 million and $4.2 million expire in 2027 and 2028, respectively. 72 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 11. Commitments and Contingencies (a) Contingencies The Company participates in Lloyd’s through its 100% ownership of the capital provider for Newline Syndicate (1218), for which the Company directly or indirectly provides 100% of the capacity. The results of Newline Syndicate (1218) are consolidated in the financial statements of the Company. In support of Newline Syndicate (1218)’s capacity at Lloyd’s, the Company has pledged securities and cash with a fair value of $291.7 million as of December 31, 2018 in a deposit trust account in favor of the Society and Council of Lloyd’s. The securities may be substituted with other securities at the discretion of the Company, subject to approval by Lloyd’s. The securities are carried at fair value and are included in investments and cash in the Company’s consolidated balance sheets. Interest earned on the securities is included in investment income. The pledge of assets in support of Newline Syndicate (1218) provides the Company with the ability to participate in writing business through Lloyd’s, which remains an important part of the Company’s business. The pledged assets effectively secure the contingent obligations of Newline Syndicate (1218) should it not meet its obligations. The Company’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the pledged assets. The Company has the ability to remove funds at Lloyd’s annually, subject to certain minimum amounts required to support outstanding liabilities as determined under risk(cid:882)based capital models and approved by Lloyd’s. The funds used to support outstanding liabilities are adjusted annually and the obligations of the Company to support these liabilities will continue until they are settled or the liabilities are reinsured by a third party approved by Lloyd’s. The Company expects to continue to actively operate Newline Syndicate (1218) and support its requirements at Lloyd’s. The Company believes that Newline Syndicate (1218) maintains sufficient liquidity and financial resources to support its ultimate liabilities and the Company does not anticipate that the pledged assets will be utilized. ORC agreed to guarantee the performance of all the insurance and reinsurance contract obligations of Compagnie Transcontinentale de Réassurance (“CTR”), a subsidiary of Fairfax, in the event CTR became insolvent and CTR was not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. Fairfax has agreed its obligations incurred under its guarantee. The Company’s potential exposure in to indemnify ORC for all connection with this agreement stems from CTR’s remaining gross reserves, which are estimated to be $54.7 million as of December 31, 2018. The Company believes that the financial resources of the Fairfax subsidiaries that have assumed CTR’s liabilities provide adequate protection to satisfy the obligations that are subject to this guarantee. The Company does not expect to make payments under this guarantee and does not consider its potential exposure under this guarantee to be material to its consolidated financial position. ORC has agreed to guarantee the payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agreement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), a subsidiary of Fairfax Asia, in the event Falcon becomes insolvent. The guarantee by ORC was made to assist Falcon in writing business through access to ORC’s financial strength ratings and capital resources. ORC is paid a fee for this guarantee of one quarter of one percent of all gross premiums earned associated with the Subject Contracts on a quarterly basis. For each of the years ended December 31, 2018, 2017 and 2016, Falcon paid $0.1 million to ORC in connection with this guarantee. ORC’s potential exposure in connection with this agreement is estimated to be $125.6 million, based on Falcon’s loss reserves at December 31, 2018. Fairfax has agreed to indemnify ORC for any obligation under this guarantee. The Company believes that the financial resources of Falcon provide adequate protection to support its liabilities in the ordinary course of business. The Company anticipates that Falcon will meet all of its obligations in the normal course of business and does not expect to make any payments under this guarantee. The Company does not consider its potential exposure under this guarantee to be material to its consolidated financial position. During 2015, in consideration for an appropriate fee, ORC agreed to guarantee the payment of certain obligations of TIG with respect to a certain contract of reinsurance of asbestos, pollution and health hazard claims (the “APH contract”) entered into by TIG with an unrelated third party.(cid:3) The guarantee was made to enable TIG to access ORC’s financial strength ratings and capital resources for securing the APH Contract.(cid:3) ORC’s maximum exposure in connection with this guarantee is $350.0 million; as of December 31, 2018, the Company’s estimated exposure under the guarantee is $63.5 million, based on TIG’s loss reserves for the APH Contract at December 31, 2018.(cid:3) (cid:3) The Company i) believes that the financial resources of TIG provide adequate protection to support is liabilities in the ordinary course of business; ii) anticipates that TIG will meet all of its obligations in the normal course of business and iii) does not expect to make any payments under this guarantee. 73 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company and its subsidiaries are involved from time to time in ordinary litigation and arbitration proceedings as part of the Company’s business operations. In the Company’s opinion, the outcome of these suits, individually or collectively, is not likely to result in judgments that would be material to the financial condition or results of operations of the Company. (b) Commitments The Company and its subsidiaries lease office space and furniture and equipment under long(cid:882)term operating leases expiring through the year 2033. Minimum annual rentals follow (in thousands): 2019............................................................................................................................................(cid:3)(cid:3)(cid:3) $ 2020............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2021............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2022............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2023............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2024 and thereafter....................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) Total ...................................................................................................................................... (cid:3)(cid:3)(cid:3)(cid:3) $ 11,289 11,184 10,692 9,929 9,459 55,639 108,192 (cid:3) Amount The Company leases certain office and retail space held as an investment under various operating leases.(cid:3)(cid:3) Lease income for the years ended December 31, 2018 and(cid:3)(cid:3)2017(cid:3)(cid:3)was $5.6 million and $1.1 million, respectively. There was no lease income for the year ended December 31, 2016. Future rental income from these leases are as follows (in thousands): 2019............................................................................................................................................(cid:3)(cid:3)(cid:3) $ 2020............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2021............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2022............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2023............................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) 2024 and thereafter....................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) Total ...................................................................................................................................... (cid:3)(cid:3)(cid:3)(cid:3) $ 4,428 4,156 3,107 2,277 1,685 6,633 22,286 (cid:3) Amount Rental expense, before sublease income under these operating leases, was $12.2 million, $11.9 million and $12.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company recovered $0.1 million for each of the years ended December 31, 2018, 2017 and 2016.(cid:3) 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) GROUP HOLDINGS, INC. 12. Statutory Information and Dividend Restrictions ORC, the Company’s principal operating subsidiary, is subject to state regulatory restrictions that limit the maximum amount of dividends payable. In any 12(cid:882)month period, ORC may pay dividends equal to the greater of (i) 10% of statutory capital and surplus as of the prior year end or (ii) net income for such prior year, without prior approval of the Insurance Commissioner of the State of Connecticut (the “Connecticut Commissioner”). Connecticut law further provides that (i) ORC must report to the Connecticut Commissioner, for informational purposes, all dividends and other distributions within five business days after the declaration thereof and at least ten days prior to payment and (ii) ORC may not pay any dividend or distribution in excess of its 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 reflected in its most recent statutory annual statement on file with the Connecticut Commissioner, without the Connecticut Commissioner’s approval. The maximum ordinary dividend capacity available during 2019, without prior approval, is $329.7 million.(cid:3) ORC declared and paid to OGHI dividends of $150.0 million, $100.0 million and $200.0 million during the years ended December 31, 2018, 2017 and 2016, respectively.(cid:3) Hudson declared and paid dividends on its preferred shares owned by TIG of $1.3 million during each of the years ended December 31, 2018, 2017 and 2016.(cid:3) Greystone declared and paid dividends on its preferred shares owned by TIG of $0.3 million during each of the years ended December 31, 2018, 2017 and 2016.(cid:3)(cid:3) The following is the consolidated statutory basis net income and policyholders’ surplus of ORC and its subsidiaries, for each of the years ended and as of December 31, 2018, 2017 and 2016 (in thousands): Net income ....................................................................................... $ Policyholders' surplus ....................................................................... 2018 302,562 3,336,595 2017 (cid:3) 64,095(cid:3) $ 3,285,326(cid:3) 2016 145,455 3,223,232 $ (cid:3) 13. Related Party Transactions The Company has entered into various reinsurance arrangements with Fairfax and its affiliates. The amounts included in or deducted from income, expense, assets and liabilities in the accompanying consolidated financial statements with respect to reinsurance assumed and ceded from and to affiliates as of and for the years ended December 31, 2018, 2017 and 2016, follow (in thousands): 2018 2017 Assumed: Premiums written........................................................................ $ Premiums earned ........................................................................ Losses and loss adjustment expenses ......................................... Acquisition costs.......................................................................... Reinsurance payable on paid losses............................................ Reinsurance balances receivable ................................................ Unpaid losses and loss adjustment expenses ............................. Unearned premiums ................................................................... (cid:3)(cid:3) Ceded: Premiums written........................................................................ $ Premiums earned ........................................................................ Losses and loss adjustment expenses ......................................... Acquisition costs.......................................................................... Ceded reinsurance balances payable.......................................... Reinsurance recoverables on paid losses.................................... Reinsurance recoverables on unpaid losses ............................... Unearned premiums ................................................................... 75,672 81,975 59,295 14,749 6,873 22,033 158,833 22,751 44,805 41,883 12,989 7,020 4,316 950 99,673 18,489 (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 2016 (cid:3) (cid:3) 57,691(cid:3) $ 53,713(cid:3) 43,705(cid:3) 9,523(cid:3) 1,223(cid:3) 13,956(cid:3) 147,010(cid:3) 22,871(cid:3) (cid:3) (cid:3) 43,283(cid:3) $ 37,309(cid:3) 29,132(cid:3) 5,574(cid:3) 1,817(cid:3) 3,143(cid:3) 110,186(cid:3) 15,651(cid:3) 25,267 23,148 8,278 1,722 667 4,604 57,896 8,826 32,661 32,566 22,066 3,253 2,705 1,299 99,585 10,588 75 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company’s subsidiaries have entered into investment management agreements with Fairfax and its wholly(cid:882)owned subsidiary, Hamblin Watsa Investment Counsel Ltd. These agreements generally provide for an annual base fee, calculated and paid quarterly based upon each subsidiary’s average invested assets for the preceding three months, and an incentive fee, which is payable if realized gains on equity investments exceed certain benchmarks. These agreements may be terminated by either party on 30 days’ notice. For the years ended December 31, 2018, 2017 and 2016, total fees, including incentive fees, of $22.4 million, $13.5 million and $21.5 million, respectively, are included in the consolidated statements of operations. Included in other expenses, net, for the years ended December 31, 2018, 2017 and 2016, are charitable contribution expenses of $2.5 million, $6.0 million and $1.6 million, respectively, primarily representing amounts to be funded by OGHI to the Odyssey Group Foundation, a not(cid:882)for(cid:882)profit entity through which the Company provides funding to charitable organizations active in the communities in which the Company operates. Due to expense sharing and investment management agreements with Fairfax and its affiliates, the Company has accrued, on its consolidated balance sheet, amounts receivable from affiliates of $2.4 million and $3.6 million as of December 31, 2018 and 2017, respectively, and amounts payable to affiliates of $9.4 million and $5.2 million as of December 31, 2018 and 2017, respectively. On December 6, 2016, the Company loaned to 9938982 Canada Inc., $50.1 million, the proceeds of which were used to fund a debtor in possession loan to a Canadian retail company. The loan to 9938982 Canada Inc. bore interest at 8.0% per annum and was repaid on February 28, 2017. During 2017, the Company loaned an affiliate, Farmers Edge Inc. (“Farmers Edge”), $19.2 million. The loans to Farmers Edge bore interest at 7% per annum and came due on January 31, 2018.(cid:3) (cid:3) Under the same loan agreement, the Company loaned Farmers Edge an additional $4.3 million during January 2018.(cid:3) (cid:3) On February 1, 2018, the Company exchanged its $23.4 million loan to Farmers Edge for a new $19.9 million loan and $3.9 million of warrants. The new loan bears interest at a rate of 5% per annum until January 1, 2019 and then at 10% per annum until the maturity date of March 31, 2019.(cid:3) (cid:3) On August 17, 2018 and November 15, 2018, the Company loaned Farmers Edge an additional $6.4 million and $8.2 million and purchased warrants for $2.4 million and $2.8 million.(cid:3) These loans bear interest at a rate of 5% per annum until January 1, 2019 and then at 12% per annum until the maturity date of January 7, 2019. On January 22, 2018, the Company loaned an affiliate, Exco Resources Inc., $59.4 million in the form of a senior secured debtor(cid:882)in(cid:882)possession revolving credit facility loan.(cid:3) The notes bear interest at 4.9% per annum on Tranche A and 5.9% per annum on Tranche B and has a maturity date of January 22, 2019, with a maturity extension clause until July 22, 2019.(cid:3)(cid:3)(cid:3) On August 10, 2018 and October 29, 2018, the Company loaned to Fairfax (US), $50.0 million and $50.0 million, respectively, at interest rates of 2.42% and 2.55% per annum, respectively.(cid:3) (cid:3) The loans were repaid on September 28, 2018 and December 19, 2018, respectively.(cid:3) On July 17, 2017, September 15, 2017 and October 11, 2017, the Company loaned to Fairfax (US), $150.0 million, $50.0 million and $150.0 million, respectively, at interest rates of 1.22%, 1.29% and 1.27% per annum, respectively.(cid:3) The July 17, 2017 loan was repaid on September 13, 2017. The September 15, 2017 and October 11, 2017 loans were repaid on December 28, 2017. In the ordinary course of the Company’s investment activities, the Company makes investments in investment funds, limited partnerships and other investment vehicles in which Fairfax or its affiliates may also be investors. 14. Employee Benefits The Company provides its employees with benefits through various plans as described below. Defined Benefit Pension Plan The Company maintains a qualified, non(cid:882)contributory, defined benefit pension plan (the “Pension Plan”) covering substantially all employees in the United States hired prior to August 1, 2011 who have reached age twenty(cid:882)one.(cid:3) (cid:3) Employer contributions to the Pension Plan are in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. 76 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The amortization period for unamortized pension costs and credits, including prior service costs, if any, and actuarial gains and losses, is based on the remaining service period for those employees expected to receive pension benefits. Actuarial gains and losses result when actual experience differs from that assumed or when actuarial assumptions are changed. The following tables set forth the Pension Plan’s unfunded status and accrued pension cost recognized in the Company’s consolidated financial statements as of December 31, 2018 and 2017 (in thousands): Change in projected benefit obligation: Benefit obligation at beginning of year................................................................ $ Service cost .......................................................................................................... Interest cost ......................................................................................................... Actuarial (gain) loss .............................................................................................. Benefits paid ........................................................................................................ Benefit obligation at end of year .................................................................... Change in Plan assets: Fair value of Pension Plan assets at beginning of year ........................................ Actual (depreciation) appreciation on Pension Plan assets ................................. Actual contributions during the year ................................................................... Benefits paid ........................................................................................................ Fair value of Pension Plan assets at end of year............................................. Funded status and accrued pension cost .................................................. $ 2018 (cid:3)(cid:3) (cid:3) 2017 207,314(cid:3) $ 9,739(cid:3) 7,607(cid:3) (18,546) (10,666) 195,448(cid:3) (cid:3) 142,969(cid:3) (12,920) 7,800(cid:3) (10,666) 127,183(cid:3) (68,265) $ 179,299 9,003 7,438 17,676 (6,102) 207,314 130,263 8,508 10,300 (6,102) 142,969 (64,345) The net amount reported in the consolidated balance sheets related to the accrued pension cost for the Pension Plan of $68.3 million and $64.3 million, as of December 31, 2018 and 2017, respectively, is included in other liabilities. The unamortized amount of accumulated other comprehensive loss related to the Pension Plan is $43.5 million and $43.6 million, before taxes, as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the fair value and percentage of fair value of the total Pension Plan assets by type of investment are as follows (in thousands): (cid:3) As of December 31, (cid:3) (cid:3) 2017 2018 Equity securities........................................................................... $ 95,587 24,556 Mutual funds(cid:3)(cid:882) fixed income securities ....................................... 7,039 Money market ............................................................................. Fair value of Plan assets ......................................................... $ 127,182 75.2%(cid:3) $ 94,482 19.3(cid:3)(cid:3) (cid:3) (cid:3)(cid:3) 38,721 9,766 5.5(cid:3)(cid:3) (cid:3) (cid:3)(cid:3) 100.0%(cid:3) $ 142,969 66.1% 27.1 6.8 100.0% The Pension Plan seeks to maximize the economic value of its investments by applying a long(cid:882)term, value(cid:882) oriented approach to optimize the total investment returns of the Pension Plan’s invested assets. Assets are transferred and allocated among various investment vehicles, when appropriate. The long(cid:882)term rate of return assumption is based on this flexibility to adjust to market conditions. The actual return on assets has historically been in line with the Company’s assumptions of expected returns.(cid:3)(cid:3)During the years ended December 31, 2018 and 2016, the Company contributed $7.8 million to the Pension Plan. The Company contributed $10.3 million to the Pension Plan during the year ended December 31, 2017.(cid:3)(cid:3) The Company currently expects to make a contribution to the Pension Plan of $7.8 million during 2019. The Company accounts for its Pension Plan assets at fair value as required by GAAP. The Company has categorized its Pension Plan assets, based on the priority of the inputs to the valuation technique, into a three(cid:882) level fair value hierarchy, using the three(cid:882)level hierarchy approach described in Note 3.(cid:3) Quoted market prices are used for determining the fair value of the Company’s Pension Plan assets. The majority of these Pension Plan assets are common stocks and mutual funds that are actively traded in a public market. The Pension Plan’s money market account, for which the cost basis approximates fair value, is also classified as a Level 1 investment.(cid:3)(cid:3)As of December 31, 2017, all of the Pension Plan’s assets were categorized as Level 1 assets. 77 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company’s Level 3 Pension Plan assets are valued by a third party, providing a net asset value, by using valuation techniques that include unobservable inputs. Generally, hedge funds invest in securities that trade in active markets, and as a result, their net asset values reflect their fair values.(cid:3) (cid:3) As of December 31, 2018, the Pension Plan investments that are classified as Level 3 had a fair value of $12.9 million. For the year ended December 31, 2018, there was a decrease in the market value of $1.6 million for the Pension Plan investments that are classified as Level 3. The following table presents a summary of changes in the fair value of investments that are classified as Level 3: Balance, January 1, 2018 ............................................................................................................(cid:3)(cid:3)(cid:3) $ Purchases....................................................................................................................................(cid:3)(cid:3)(cid:3) (cid:3) Unrealized investment loss related to securities held................................................................ Balance, December 31, 2018................................................................................................. (cid:3)(cid:3)(cid:3)(cid:3) $ —— 14,500 (1,562) 12,938 (cid:3)(cid:3) Hedge Fund The following table presents the targeted asset allocation percentages for the Pension Plan’s assets by type: Equities .................................................................................................................................................. Mutual funds(cid:3)(cid:882) fixed income securities ................................................................................................. Total target asset allocations ........................................................................................................... Targeted Asset Allocation % 80.00 20.00 100.00 The weighted average assumptions used to calculate the benefit obligation as of December 31, 2018 and 2017 are as follows: (cid:3) Discount rate ............................................................................................................................ (cid:3) Rate of compensation increase ................................................................................................(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2018 2017 4.25% 3.60% 3.75% 3.80% The discount rate represents the Company’s estimate of the interest rate at which the Pension Plan’s benefits could be effectively settled. The discount rates are used in the measurement of the expected and accumulated Pension Plan benefit obligations and the service and interest cost components of net periodic Pension Plan benefit cost. The net periodic benefit cost included in the Company’s consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 is comprised of the following (in thousands): Net Periodic Benefit Cost: Service cost ......................................................................................... $ Interest cost ........................................................................................ Return on Plan assets.......................................................................... Recognized actuarial loss .................................................................... Net periodic benefit cost ............................................................... $ (cid:3)(cid:3) in accumulated other comprehensive loss: Beginning balance ............................................................................... $ Actuarial loss and return on plan assets arising during the year ........ Amortization of actuarial gain recognized in net periodic costs......... Accumulated other comprehensive loss at end of year ................ $ 2018 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 9,739(cid:3) (cid:3) $ 7,607(cid:3) (cid:3) (cid:3) (8,483) (cid:3) (cid:3) 2,933(cid:3) (cid:3) (cid:3) 11,796(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 43,612(cid:3) (cid:3) $ 2,857(cid:3) (cid:3) (cid:3) (2,933) (cid:3) (cid:3) 43,536(cid:3) (cid:3) $ 2017 2016 9,003 7,438 (7,709) 1,252 9,984 27,987 16,877 (1,252) 43,612 $ $ $ $ 8,819 6,935 (6,582) 1,504 10,676 28,729 762 (1,504) 27,987 The Company estimates that the net periodic benefit cost for the Pension Plan will be $12.0 million for the year ended December 31, 2019. The Company does not expect any refunds of Pension Plan assets during the year ended December 31, 2019. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) GROUP HOLDINGS, INC. The weighted average assumptions used to calculate the net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows: Discount rate .............................................................................................................. Rate of compensation increase .................................................................................. Expected long term rate of return on Pension Plan assets ........................................ 2018 (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) 3.75%(cid:3) (cid:3)(cid:3) 3.80%(cid:3) (cid:3)(cid:3) 6.00%(cid:3) 2017 (cid:3)(cid:3) 4.25% (cid:3)(cid:3) 3.80% (cid:3)(cid:3) 6.00% 2016 4.50% 3.80% 6.00% The accumulated benefit obligation for the Pension Plan was $171.0 million and $178.4 million as of the December 31, 2018 and 2017 measurement dates, respectively. The Pension Plan’s expected future benefit payments for the next 10 years are shown below (in thousands): Year 2019..................................................................................................................................................... (cid:3)(cid:3)(cid:3) $ 2020..................................................................................................................................................... (cid:3)(cid:3)(cid:3) 2021..................................................................................................................................................... (cid:3)(cid:3)(cid:3) 2022..................................................................................................................................................... (cid:3)(cid:3)(cid:3) 2023..................................................................................................................................................... (cid:3)(cid:3)(cid:3) 2024 – 2028 ......................................................................................................................................... (cid:3)(cid:3)(cid:3) (cid:3) Amount 8,722 9,893 10,341 10,863 11,151 68,581 The amortization of actuarial losses and of prior service costs (currently reflected in accumulated other comprehensive income) as components of net periodic cost are expected to be $2.7 million and $0.0 million, respectively, for the year ended December 31, 2019. Excess Benefit Plans The Company maintains two non(cid:882)qualified excess benefit plans (the “Excess Plans”) that provide more highly compensated officers and employees in the United States hired prior to August 1, 2011 with defined retirement benefits in excess of qualified plan limits imposed by federal tax law. The following tables set forth the combined amounts recognized for the Excess Plans in the Company’s consolidated financial statements as of December 31, 2018 and 2017 (in thousands): Change in projected benefit obligation: Benefit obligation at beginning of year................................................................ $ Service cost .......................................................................................................... Interest cost ......................................................................................................... Actuarial (gain) loss .............................................................................................. Benefits paid ........................................................................................................ Benefit obligation at end of year .................................................................... Change in Excess Plans’ assets: Fair value of Excess Plans’ assets at beginning of year........................................ Actual contributions during the year ................................................................... Benefits paid ........................................................................................................ Fair value of Excess Plans’ assets at end of year ............................................ Funded status and accrued pension cost .................................................. $ 2018 (cid:3)(cid:3) (cid:3)(cid:3) 2017 27,974(cid:3)(cid:3) $ 1,410(cid:3)(cid:3) 1,011(cid:3)(cid:3) (3,078) (484) 26,833(cid:3)(cid:3) (cid:3)(cid:3) ——(cid:3)(cid:3) 484(cid:3)(cid:3) (484) ——(cid:3)(cid:3) (26,833) $ 26,600 1,378 1,105 23 (1,132) 27,974 —— 1,132 (1,132) —— (27,974) The net amount reported in the consolidated balance sheets related to the accrued pension cost for the Excess Plans of $26.8 million and $28.0 million, as of December 31, 2018 and 2017, respectively, is included in other liabilities. The unamortized amount of accumulated other comprehensive loss related to the Excess Plan is $1.9 million and $5.2 million, before taxes, as of December 31, 2018 and 2017, respectively. 79 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The weighted average assumptions used to calculate the benefit obligation as of December 31, 2018 and 2017 are as follows: (cid:3) Discount rate ............................................................................................................................ (cid:3) Rate of compensation increase ................................................................................................(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2018 2017 4.25% 3.60% 3.75% 3.80% The discount rate represents the Company’s estimate of the interest rate at which the Excess Plans’ benefits could be effectively settled. The discount rates are used in the measurement of the expected and accumulated Excess Plans’ benefit obligations and the service and interest cost components of net periodic Excess Plans’ benefit cost. Net periodic benefit cost included in the Company’s consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 is comprised of the following (in thousands): Net Periodic Benefit Cost: Service cost ......................................................................................... $ Interest cost ........................................................................................ Recognized net actuarial loss .............................................................. Recognized prior service cost.............................................................. Net periodic benefit cost ............................................................... $ (cid:3)(cid:3) in accumulated other comprehensive loss: Beginning balance ............................................................................... $ Actuarial (gain) loss arising during the year ........................................ Amortization of actuarial gain recognized in net periodic costs......... Amortization of prior service costs recognized in net periodic costs . Accumulated other comprehensive loss at end of year ................ $ 2018 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 1,410(cid:3) (cid:3) $ 1,011(cid:3) (cid:3) (cid:3) 279(cid:3) (cid:3) (cid:3) (5) (cid:3) (cid:3) 2,695(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 5,270(cid:3) (cid:3) $ (3,077) (cid:3) (cid:3) (279) (cid:3) (cid:3) 5(cid:3) (cid:3) (cid:3) 1,919(cid:3) (cid:3) $ 2017 2016 1,378 1,105 309 (37) 2,755 5,519 23 (309) 37 5,270 $ $ $ $ 1,232 1,046 242 (37) 2,483 4,740 985 (243) 37 5,519 The weighted average assumptions used to calculate the net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows: Discount rate .............................................................................................................. Rate of compensation increase .................................................................................. (cid:3) 2018 (cid:3)(cid:3) (cid:3)(cid:3) 3.75%(cid:3) (cid:3)(cid:3) 3.80%(cid:3) 2017 (cid:3)(cid:3) 4.25% (cid:3)(cid:3) 3.80% 2016 4.50% 3.80% The accumulated benefit obligation for the Excess Plans was $22.3 million and $21.6 million as of December 31, 2018 and 2017, respectively. The Excess Plans’ expected benefit payments for the next 10 years are shown below (in thousands): Year 2019..................................................................................................................................................(cid:3) $ 2020..................................................................................................................................................(cid:3) (cid:3) 2021..................................................................................................................................................(cid:3) (cid:3) 2022..................................................................................................................................................(cid:3) (cid:3) 2023..................................................................................................................................................(cid:3) (cid:3) 2024 – 2028 ............................................................................................................................... .......(cid:3) . (cid:3) (cid:3) Amount 2,011 2,189 3,138 3,051 2,743 13,754 The amortization of actuarial losses and of prior service costs (currently reflected in accumulated other comprehensive income) as components of net periodic costs are expected to be less than $0.1 million and $0.0 million, respectively, for the year ended December 31, 2019. The Company expects to contribute $2.0 million to the Excess Plans during the year ended December 31, 2019, which represents the amount necessary to fund the 2019 expected benefit payments. 80 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Postretirement Benefit Plan The Company provides certain health care and life insurance (“postretirement”) benefits for retired employees in the United States. Substantially all employees in the United States hired prior to August 1, 2011 may become eligible for these benefits if they reach retirement age while working for the Company. The Company’s cost for providing postretirement benefits other than pensions is accounted for in accordance with ASC 715, “Compensation – Retirement Benefits.” The following tables set forth the amounts recognized for the postretirement benefit plan in the Company’s consolidated financial statements as of December 31, 2018 and 2017 (in thousands): Change in accumulated post retirement obligation: (cid:3)(cid:3) Accumulated postretirement obligation at beginning of year............................. $$ Service cost ..................................................................................................... (cid:3)(cid:3) Interest cost .................................................................................................... (cid:3)(cid:3) Actuarial gain .................................................................................................. (cid:3)(cid:3) Benefits paid ................................................................................................... (cid:3)(cid:3) Participant contributions ................................................................................ (cid:3)(cid:3) Retiree Drug Subsidy receipts......................................................................... (cid:3)(cid:3) Accumulated post retirement obligation at end of year........................... (cid:3)(cid:3) Funded status and accrued prepaid pension cost ............................... $$ 2018 $$ (cid:3) (cid:3)(cid:3) 80,956(cid:3)(cid:3) 4,007(cid:3)(cid:3) 3,010(cid:3)(cid:3) (7,631) (1,382) 120(cid:3)(cid:3) 103(cid:3)(cid:3) 79,183(cid:3)(cid:3) (79,183) $$ 2017 75,431 4,638 3,176 (1,515) (848) 74 —— 80,956 (80,956) The net amount reported in the consolidated balance sheets related to the accrued benefit cost for the postretirement plan of $79.2 million and $81.0 million, as of December 31, 2018 and 2017, respectively, is included in other liabilities. The unamortized amount of accumulated other comprehensive loss related to the postretirement plan is $2.7 million and $10.7 million, before taxes, as of December 31, 2018 and 2017, respectively. The weighted average assumptions used to calculate the benefit obligation as of December 31, 2018 and 2017 are as follows: Discount rate ............................................................................................................................ (cid:3) Rate of compensation increase ................................................................................................(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 4.25% 3.80% 3.75% 3.80% (cid:3) 2018 2017 The discount rate represents the Company’s estimate of the interest rate at which the postretirement benefit plan benefits could be effectively settled. The discount rates are used in the measurement of the expected and accumulated postretirement benefit obligations and the service and interest cost of net periodic postretirement benefit cost. Net periodic benefit cost included in the Company’s consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 is comprised of the following (in thousands): Net Periodic Benefit Cost: Service cost ......................................................................................... $ Interest cost ........................................................................................ Recognized actuarial loss .................................................................... Net periodic benefit cost ............................................................... $ (cid:3)(cid:3) in accumulated other comprehensive loss: Beginning balance ............................................................................... $ Actuarial (gain) loss arising during the year ........................................ Amortization of actuarial gain recognized in net periodic costs......... Accumulated other comprehensive loss at end of year ................ $ 2018 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 4,007(cid:3) (cid:3) $ 3,010(cid:3) (cid:3) (cid:3) 351(cid:3) (cid:3) (cid:3) 7,368(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 10,655(cid:3) (cid:3) $ (7,631) (cid:3) (cid:3) (351) (cid:3) (cid:3) 2,673(cid:3) (cid:3) $ 2017 2016 4,638 3,176 681 8,495 12,851 (1,515) (681) 10,655 $ $ $ $ 4,181 2,947 492 7,620 10,447 2,896 (492) 12,851 81 ODYSSEY GROUP HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The weighted average assumptions used to calculate the net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows: Discount rate .............................................................................................................. Rate of compensation increase .................................................................................. (cid:3) 2018 (cid:3)(cid:3) (cid:3)(cid:3) 3.75%(cid:3) (cid:3)(cid:3) 3.80%(cid:3) 2017 (cid:3)(cid:3) 4.25% (cid:3)(cid:3) 3.80% 2016 4.50% 3.80% The postretirement plan’s expected benefit payments for the next 10 years are shown below (in thousands): Year 2019..................................................................................................................................................(cid:3) $ 2020..................................................................................................................................................(cid:3) (cid:3) 2021..................................................................................................................................................(cid:3) (cid:3) 2022..................................................................................................................................................(cid:3) (cid:3) 2023..................................................................................................................................................(cid:3) (cid:3) 2024 – 2028 ............................................................................................................................... .......(cid:3) . (cid:3) (cid:3) Amount 1,770 2,112 2,455 2,847 3,123 20,448 For the year ended December 31, 2019, there will be no amortization of actuarial losses and of prior service costs (currently reflected in accumulated other comprehensive income) as components of net periodic costs. The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 5.96% in 2019, gradually decreasing to 4.50% in 2038 and remaining constant thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation by $15.1 million (19.12% of the benefit obligation as of December 31, 2018) and the service and interest cost components of net periodic postretirement benefit costs by $1.7 million for the year ended December 31, 2018. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2018 by $12.1 million and $1.3 million, respectively. Other Plans The Company also maintains a defined contribution profit sharing plan for all eligible employees. Each year, the Board of Directors may authorize payment of an amount equal to a percentage of each participant’s basic annual earnings based on the results of the Company for that year. These amounts are credited to the employees’ accounts maintained by a third party, which has contracted to provide benefits under the plan. No contributions were authorized for the years ended December 31, 2018, 2017 or 2016. The Company maintains a qualified deferred compensation plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute up to 50% of base salary on a pre(cid:882)tax basis, subject to annual maximum contributions set by law ($19,000 in 2019 plus an additional $6,000 if an employee is age 50 or older). The Company contributes an amount equal to 100% of each employee’s pre(cid:882)tax contribution up to certain limits. The maximum matching contribution is 4.0% of annual base salary, with certain government(cid:882) mandated restrictions on contributions to highly compensated employees. The Company also maintains a non(cid:882) qualified deferred compensation plan to allow for contributions in excess of qualified plan limitations. The Company’s contributions to both of these plans, which totaled $3.1 million, $3.7 million, and $3.1 million for the years ended December 31, 2018, 2017 and 2016, respectively, are included primarily in other underwriting expenses in the consolidated statements of operations. All employees in the United States hired on or after August 1, 2011 are eligible for an annual profit sharing contribution, subject to the profit sharing plan limitations. The Company makes this contribution regardless of whether or not elective deferrals were made during the year.(cid:3)(cid:3)The profit sharing contribution is paid each January and uses the prior year’s 401(k) compensation (base pay, short(cid:882)term disability earnings and any overtime earnings) to determine the actual contribution for each employee. These profit sharing contributions are calculated as a percentage of earnings at the end of each year and allocated to participant accounts in January of the following year. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) GROUP HOLDINGS, INC. The profit sharing contribution percentages are based upon each employee’s years of service as follows: Years of Service Less than or equal to 5 years ....................................................................................................................... More than 5 years but less than or equal to 15 .......................................................................................... More than 15 years ..................................................................................................................................... Percent 6% 7% 8% The profit sharing contribution amounts vest based upon the following vesting schedule: Years of Service Less than 2 years.......................................................................................................................................... 2 years but less than 3 ................................................................................................................................. 3 years but less than 4 ................................................................................................................................. 4 years but less than 5 ................................................................................................................................. 5 years but less than 6 ................................................................................................................................. 6 years or more............................................................................................................................................ Percent 0% 20% 40% 60% 80% 100% 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) GROUP HOLDINGS, INC. 15. Stock(cid:882)Based Compensation Plans Fairfax Restricted Share Plan and Share Option Plan In 1999, Fairfax established the Fairfax Financial 1999 Restricted Share Plan (the “Fairfax Restricted Share Plan”) and the Share Option Plan (the “Option Plan”) (collectively, the “Fairfax Plans”), in which the Company participates.(cid:3)(cid:3)The Fairfax Plans generally provide officers, key employees and directors who were employed by or provided services to the Company with awards of restricted shares or stock options (with a grant price of zero) of Fairfax common stock (collectively, “Restricted Share Awards”).(cid:3) The Restricted Share Awards generally vest over five years. The Company had 314,204 Restricted Share Awards outstanding as of December 31, 2018. The fair value of the Restricted Share Awards is estimated on the date of grant based on the market price of Fairfax’s stock and is amortized to compensation expense on a straight(cid:882)line basis over the related vesting periods.(cid:3) The Company purchases Fairfax common stock on the open market to cover the grant of a Restricted Share Award and reflects such purchase as a reduction in the Company’s additional paid(cid:882)in capital.(cid:3)(cid:3)As of December 31, 2018, there was $70.1 million of unrecognized compensation cost related to unvested Restricted Share Awards granted from the Fairfax Plans that was netted against additional paid(cid:882)in capital, which is expected to be recognized over a remaining weighted(cid:882)average vesting period of 2.5 years.(cid:3) (cid:3) The total fair values of the Restricted Share Awards granted for the years ended December 31, 2018, 2017 and 2016 were $18.8 million, $28.9 million and $14.2 million, respectively. As of December 31, 2018, the aggregate fair value of the Restricted Share Awards outstanding was $76.7 million. For the years ended December 31, 2018, 2017 and 2016, the Company recognized expense related to the Fairfax Plans of $17.2 million, $14.7 million and $14.2 million, respectively. The following table summarizes activity for the Fairfax Plans for the year ended December 31, 2018: Awards outstanding as of December 31, 2017 Granted ......................................................................................................... Vested ........................................................................................................... Forfeited........................................................................................................ Unallocated ................................................................................................... (cid:3) Awards outstanding as of December 31, 2018................................................... (cid:3) Vested and exercisable as of December 31, 2018.............................................. Shares / Options (cid:3) (cid:3) Weighted(cid:882) Average Value at Grant Date 273,990(cid:3) (cid:3) $ 36,928(cid:3) (cid:3) (cid:3) (43,844) (cid:3) (cid:3) (2,734) (cid:3) (cid:3) 49,864(cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 314,204(cid:3) (cid:3) $ (cid:3) (cid:3) (cid:3) 7,256(cid:3) (cid:3) $ 463.55 509.54 378.45 481.40 458.92 479.94 363.98 Employee Share Purchase Plans Under the terms off the Odyssey Re Holdings Corp. (Non(cid:882)Qualified) 2010 Employee Share Purchase Plan (the “2010 ESPP”), eligible employees are given the election to purchase Fairfax common shares in an amount up to 10% of their annual base salary. The Company matches these contributions by purchasing, on the employee’s behalf, a number of Fairfax’s common shares equal in value to 30% of the employee’s contribution. In the event that the Company achieves a net combined ratio in any calendar year that is less than the lesser of i) 100% or ii) the average of the reported net combined ratios of the ten (10) most recent calendar years prior to the current calendar year, additional shares are purchased by the Company for the employee’s benefit, in an amount equal in value to 20% of the employee’s contribution during that year. During the year ended December 31, 2018, the Company purchased 13,404 Fairfax common shares on behalf of employees pursuant to the 2010 ESPP, at an average purchase price of $522.71. The compensation expense recognized by the Company for purchases of Fairfax’s common shares under the 2010 ESPP was $1.5 million, $1.9 million and $2.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. 84 CONTENTS 02 LETTER FROM THE CEO 05 MISSION STATEMENT 06 AT A GLANCE 07 FINANCIAL HIGHLIGHTS 08 OPERATIONS OVERVIEW 11 ODYSSEY GROUP FOUNDATION 12 REINSURANCE 16 18 INSURANCE INTERNATIONAL 20 EXECUTIVE LEADERSHIP 21 FINANCIAL REPORT INSURANCE U.S. ONLY ENDURING MOMENTUM 2018 ANNUAL REPORT 300 First Stamford Place Stamford, CT 06902 odysseygroup.com

Continue reading text version or see original annual report in PDF format above