ODYSSEY RE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Rental expense, befor sublease income, under these operating leases was $9.9 million, $8.4 million and $7.8 million in 2004, 2003 and 2002, respectively. The Company recovered $0.4 million, $0.7 million and $1.9 million in 2004, 2003 and 2002, respectively, from subleases. Clearwater agreed to allow Ranger Insurance Company (“Ranger”), a subsidiary of Fairfax, to attach an assumption of liability endorsement to certain Ranger policies issued from July 1, 1999 to April 30, 2004. Clearwater has terminated the agreement, effective April 30, 2004. Clearwater remains liable for any losses occurring prior to the effective date of the termination, pursuant to the terms of the endorsements. Clearwater’s potential exposur e in connection with these endorsements is estimated at approximately $6.7 million, based on the subject policies’ case outstanding loss reserves. We deem the potential exposure to be immaterial, as Fairfax has agreed to indemnify Clearwater for any obligation under this agreement. The Company anticipates that Ranger will meet all of its obligations in the normal course of business, and Clearwater does not anticipate making any payments under this guarantee that would requir Clearwater to utilize the indemnification from Fairfax. As of July 14, 2000, Odyssey America agreed to guarantee the performance of all the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), an affiliate, in the event CTR became insolvent and CTR was not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. The Odyssey America guarantee was entered into as part of the redeployment of CTR’s business to Odyssey America, and was terminated effective December 31, 2001. As part of a Fairfax initiative, CTR was dissolved and its assets and liabilities were assumed by other Fairfax affiliates, which have the r esponsibility for the run-off of its liabilities. Due to the existence of the affiliate guarantee of CTR’s liabilities, the assumption of CTR’ liabilities by other affiliates, and a Fairfax agreement to indemnify Odyssey America for all obligations under its guarantee, we deem the likelihood of loss related to this exposure to be remote. Through UK Holdings, Odyssey America became a limited liability participant in the Lloyd’s market in 1997. In order to continue underwriting at Lloyd’s, Odyssey America has established a clean irrevocable letter of credit and a deposit trust account in favor of the Society and Council of Lloyd’s. As of December 31, 2004, Odyssey America had pledged U.S. treasuries in the amount of $164.7 million in support of the letter of credit and had placed $170.9 million in a deposit trust account in London. The letter of credit and deposit trust account effectively secure the futur contingent obligations of UK Holdings should the Lloyd’s underwriting syndicate in which Odyssey America participates incur net losses. Odyssey America’s contingent liability to the Society and Council of Lloyd’s is limited to the aggregate amount of the letter of credit and the assets in the deposit trust account. Odyssey America agreed, as of April 1, 2002, to guarantee the pr ompt payment of all of the insurance contract obligations (the “Subject Contracts”), whether incurred before or after the agr eement, of Falcon Insurance Company (Hong Kong) Limited (“Falcon”), an affiliate, in the event Falcon becomes insolvent. Odyssey America’s potential exposure in connection with this agreement is estimated to be approximately $38.2 million, based on Falcon’s loss reserves at December 31, 2004. Falcon’s stockholders’ equity on a U.S. GAAP basis is estimated to be $30.0 million as of December 31, 2004. Additionally, Fairfax has agreed to indemnify Odyssey America for any obligation under this agreement. Falcon has agreed to pay Odyssey America one percent of all gross earned premium associated with the Subject Contracts on a quarterly basis. For each of the years ended December 31, 2004 and 2003, Falcon paid $0.6 million and $0.4 million, respectively, to Odyssey America related to this agreement. Odyssey America anticipates that Falcon will meet all of its obligations in the normal course of business and does not anticipate making any payments under this guarantee that would require Odyssey America to utilize the indemnification from Fairfax. In connection with the guarantee, Falcon has granted Odyssey America the option (the “Option”) to assume a ten percent quota share reinsurance participation for a period of up to three years of all of Falcon’s liabilities under the Subject Contracts entered into by Falcon on or after the date of the exer cise of the Option by Odyssey America. If the Option is exercised, the one percent fee will be cancelled during the term of the quota share reinsurance agreement. As of December 31, 2004, this option has not been exercised by Odyssey America. The Option will terminate on December 31, 2005. 76