A rating firm said it is keeping Odyssey Re on “rating watch negative” because the firm may face government legal action in the wake of an earnings restatement last week reducing shareholders' equity by more than $35 million after tax.

Fitch Ratings made its announcement after Odyssey Re's delayed Securities and Exchange Commission 10K filing last week for 2005.

The Stamford, Conn.-based reinsurer filed on a delayed basis in order to restate its accounting for controversial finite reinsurance transactions.

As a result of the restatement, Odyssey Re increased its 2005 net loss to shareholders to $105.4 million from $101.8 million.

Fitch in Chicagosaid there is now increased risk that the ongoing SEC investigations, along with those of the U.S. Attorney for the Southern District of New York, could bring about a civil action against the company.

“We believe that any such action could negatively affect the company's franchise, reputation and competitive position, particularly for Odyssey Re as an insurer, in addition to the financial implication of any fines or penalties levied,” said Fitch analyst Brian Schneider.

Odyssey Re spokesman Robert Giammarco said that since the company did not participate in the Fitch ratings process it would have no reaction to the commentary.

But A.M. Best Co. rating firm in Oldwick, N.J., took a different view, removing the “under review with negative implication” status as a result of the action for both Odyssey Re and Toronto-based Fairfax Holdings, which owns 80 percent of Odyssey.

“Statutory accounting is not materially affected by the restatements, and A.M. Best's evaluation of Odyssey's statutory capital remains unchanged and currently supportive of its ratings,” Best said in a prepared statement.

Nonetheless, Best noted that Fairfax and some subsidiaries have received subpoenas from federal authorities. But the agency said the issues surrounding these investigations cannot be factored into ratings yet due to a lack of knowledge at this point.

Mr. Schneider noted that Odyssey has now instituted a plan to remediate the internal control weakness that prompted the need for the restatement. And he also noted that relatively small changes resulting from the restatement were a positive sign, but not enough to make up for the uncertainty surrounding the federal probes.

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Fitch Sees Legal Threat For Odyssey Re

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