Odyssey Re Holdings Corp. reported a 183 percent increase in first quarter gains helped by a sharp increase in net realized investment gains, but warned of a challenging underwriting environment affecting its future.

For the first quarter of 2008 the Stamford, Conn.-based company reported net income of $250.9 million compared to only $88.6 million figure reported in the first quarter of 2007, primarily on net realized investment gains.

In a conference call, Odyssey Re President and Chief Executive Officer Andy Barnard noted the company has experienced its second straight quarter of record net income, and attributed that to its investments. In contrast, Mr. Barnard said that the underwriting side continues to weaken "pretty much across the board."

The company reported $517.8 million in net premiums written for the quarter, a 1.6 percent decline from the first quarter of 2007. Odyssey Re's combined ratio for the quarter climbed 2.1 points to 98.4, due to an increase in mid-sized property risk losses and catastrophes.

During the conference call, Mr. Barnard said that reinsurance volume continues to drop significantly. Driving this reduction is deterioration in terms and conditions, Mr. Barnard said. He added that price reductions at the primary level and pressure at the reinsurance level for better terms means that more business is becoming unpalatable.

Non-U.S. reinsurance business has been steadier than U.S. business, Mr. Barnard said, in part because it has benefited from appreciation of foreign currencies against the dollar.

On the insurance side, Mr. Barnard said that Odyssey Re's international liability business written out of London continues to suffer from significant rate pressure. Core lines, he said, have approximately halved in volume over the last several years, and this has been partially offset by new opportunities in the U.K. auto market and non-U.S. medical malpractice business.

For the U.S. insurance business, Mr. Barnard said that the larges line of health care liability has been shrinking in accordance with price reductions in the market. Other core programs, he said, have remained relatively steady.

Mr. Barnard noted that for the last two years, loss activity has been "generally benign." He noted that, "Should loss frequency revert to former higher levels; should rates terms and conditions remain on their present course, underwriting profitability will be increasingly challenged in the years ahead."

He said that Odyssey Re intends to shrink its portfolio and increasingly avoid lines of business attracting the fiercest competition. He added that while premium volume was only slightly off for the quarter, he expects declines to worsen. "Our best estimate at this juncture is that we will be off last year's net premium volume by up to 10 percent for all of 2008," Mr. Barnard said.

Net investment income for Odyssey Re was reported at $73.1 million for the first quarter of 2008 compared to $81.5 in 2007. The decline was due to the lower interest rate environment impacting the company's large cash position, as well as lower income from equity investments in the quarter, according to Odyssey Re executive vice president and chief financial officer Scott Donovan.

Net realized investment gains increased sharply, from $48.1 million in the first quarter of 2007 to $323 million in 2008. Mr. Donovan said that the company realized "substantial investment gains resulting largely from our derivative positions and sales of fixed income securities.

Odyssey Re noted in a statement, "Net realized gains benefited significantly from the company's investment in credit default swaps." However, Odyssey Re added the fair value of the credit default swaps can vary in short periods due to their volatility.

The company said, "As of March 31, 2008, the fair value of the $4.1 billion notional amount of credit default swaps held by the company was $239.2 million. At April 25, 2008, the fair value of the credit default swaps was $166.9 million, a decrease of $72.3 million compared to March 31, 2008. The credit default swaps are extremely volatile, and as a result their fair value may vary dramatically either up or down in short periods. Their ultimate value will, therefore, only be known upon their disposition."