form10q063009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ
Quarterly Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
quarterly period ended June 30, 2009
OR
o
Transition Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
transition period from ________________to _______________________
Commission
file number 001-33364
Flagstone
Reinsurance Holdings Limited
(Exact
Name of Registrant as Specified in Its Charter)
Bermuda
|
|
98-0481623
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
Crawford
House
23 Church
Street
Hamilton
HM 11
Bermuda
(Address
of Principal Executive Offices)
(441)
278-4300
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Shares, par value 1 cent per share
Name of
exchange on which registered:
New York
Stock Exchange
Bermuda
Stock Exchange
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of “accelerated filer”, “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o No þ
As of
July 31, 2009 the Registrant had 84,864,844 common voting shares
outstanding, with a par value of $0.01 per share.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
INDEX TO
FORM 10-Q
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46 |
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Item
1. Financial Statements
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Expressed
in thousands of U.S. dollars, except share data)
|
|
As
at June 30, 2009
|
|
|
As
at December 31, 2008
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|
|
(Unaudited)
|
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|
|
ASSETS
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Investments:
|
|
|
|
|
|
|
Fixed
maturities, at fair value (Amortized cost: 2009 - $1,062,445 ; 2008 -
$787,792)
|
|
$ |
1,077,479 |
|
|
$ |
784,355 |
|
Short
term investments, at fair value (Amortized cost: 2009 - $222,882; 2008 -
$30,491)
|
|
|
229,837 |
|
|
|
30,413 |
|
Equity
investments, at fair value (Cost: 2009 - $10,802; 2008 -
$16,266)
|
|
|
3,400 |
|
|
|
5,313 |
|
Other
investments
|
|
|
53,534 |
|
|
|
54,655 |
|
Total
Investments
|
|
|
1,364,250 |
|
|
|
874,736 |
|
Cash
and cash equivalents
|
|
|
378,232 |
|
|
|
783,705 |
|
Restricted
cash
|
|
|
79,561 |
|
|
|
42,403 |
|
Premium
balances receivable
|
|
|
453,668 |
|
|
|
218,287 |
|
Unearned
premiums ceded
|
|
|
85,563 |
|
|
|
31,119 |
|
Reinsurance
recoverable
|
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|
16,810 |
|
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|
16,422 |
|
Accrued
interest receivable
|
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|
9,554 |
|
|
|
7,226 |
|
Receivable
for investments sold
|
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|
11,114 |
|
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|
9,634 |
|
Deferred
acquisition costs
|
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|
70,484 |
|
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|
44,601 |
|
Funds
withheld
|
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|
18,676 |
|
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|
14,433 |
|
Goodwill
|
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|
16,541 |
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|
17,141 |
|
Intangible
assets
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|
36,850 |
|
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32,873 |
|
Other
assets
|
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|
113,095 |
|
|
|
123,390 |
|
Total
Assets
|
|
$ |
2,654,398 |
|
|
$ |
2,215,970 |
|
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|
|
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LIABILITIES
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense reserves
|
|
$ |
453,490 |
|
|
$ |
411,565 |
|
Unearned
premiums
|
|
|
522,681 |
|
|
|
270,891 |
|
Insurance
and reinsurance balances payable
|
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|
46,214 |
|
|
|
31,123 |
|
Payable
for investments purchased
|
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|
16,249 |
|
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|
7,776 |
|
Long
term debt
|
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|
251,987 |
|
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|
252,575 |
|
Other
liabilities
|
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|
57,220 |
|
|
|
58,577 |
|
Total
Liabilities
|
|
|
1,347,841 |
|
|
|
1,032,507 |
|
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|
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EQUITY
|
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Common
voting shares, 150,000,000 authorized, $0.01 par value, issued and
outstanding
(2009
- 84,864,844; 2008 - 84,801,732)
|
|
|
849 |
|
|
|
848 |
|
Additional
paid-in capital
|
|
|
904,228 |
|
|
|
897,344 |
|
Accumulated
other comprehensive loss
|
|
|
(2,902 |
) |
|
|
(8,271 |
) |
Retained
earnings
|
|
|
192,604 |
|
|
|
96,092 |
|
Total Flagstone Shareholders'
Equity
|
|
|
1,094,779 |
|
|
|
986,013 |
|
Noncontrolling
Interest in Subsidiaries
|
|
|
211,778 |
|
|
|
197,450 |
|
Total
Equity
|
|
|
1,306,557 |
|
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|
1,183,463 |
|
Total
Liabilities and Equity
|
|
$ |
2,654,398 |
|
|
$ |
2,215,970 |
|
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
FLAGSTONE REINSURANCE HOLDINGS
LIMITED
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Expressed
in thousands of U.S. dollars, except share and per share data)
|
|
For
the Three Months Ended
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For
the Six Months Ended
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June
30, 2009
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June
30, 2008
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June
30, 2009
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June
30, 2008
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REVENUES
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Gross
premiums written
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$ |
328,709 |
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$ |
271,178 |
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$ |
690,194 |
|
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$ |
513,424 |
|
Premiums
ceded
|
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|
(59,742 |
) |
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|
(38,435 |
) |
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(135,411 |
) |
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(54,449 |
) |
Net
premiums written
|
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|
268,967 |
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|
232,743 |
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|
554,783 |
|
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|
458,975 |
|
Change
in net unearned premiums
|
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|
(81,991 |
) |
|
|
(90,976 |
) |
|
|
(194,972 |
) |
|
|
(181,951 |
) |
Net
premiums earned
|
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|
186,976 |
|
|
|
141,767 |
|
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|
359,811 |
|
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|
277,024 |
|
Net
investment income
|
|
|
10,646 |
|
|
|
13,279 |
|
|
|
8,893 |
|
|
|
31,975 |
|
Net
realized and unrealized gains (losses) - investments
|
|
|
7,082 |
|
|
|
(9,339 |
) |
|
|
5,183 |
|
|
|
(21,751 |
) |
Net
realized and unrealized gains (losses) - other
|
|
|
2,470 |
|
|
|
11,132 |
|
|
|
9,900 |
|
|
|
(1,105 |
) |
Other
income
|
|
|
2,333 |
|
|
|
2,127 |
|
|
|
7,502 |
|
|
|
3,851 |
|
Total
revenues
|
|
|
209,507 |
|
|
|
158,966 |
|
|
|
391,289 |
|
|
|
289,994 |
|
|
|
|
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|
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|
|
|
|
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|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expenses
|
|
|
57,641 |
|
|
|
56,298 |
|
|
|
134,235 |
|
|
|
96,065 |
|
Acquisition
costs
|
|
|
36,203 |
|
|
|
27,210 |
|
|
|
64,240 |
|
|
|
51,375 |
|
General
and administrative expenses
|
|
|
34,578 |
|
|
|
24,214 |
|
|
|
68,878 |
|
|
|
50,763 |
|
Interest
expense
|
|
|
3,119 |
|
|
|
4,609 |
|
|
|
6,676 |
|
|
|
9,949 |
|
Net
foreign exchange (gains) losses
|
|
|
(362 |
) |
|
|
1,630 |
|
|
|
735 |
|
|
|
(5,069 |
) |
Total
expenses
|
|
|
131,179 |
|
|
|
113,961 |
|
|
|
274,764 |
|
|
|
203,083 |
|
Income
before income taxes and interest in earnings of equity
investments
|
|
|
78,328 |
|
|
|
45,005 |
|
|
|
116,525 |
|
|
|
86,911 |
|
Provision
for income tax
|
|
|
(250 |
) |
|
|
(442 |
) |
|
|
456 |
|
|
|
(1,307 |
) |
Interest
in loss of equity investments
|
|
|
(300 |
) |
|
|
- |
|
|
|
(678 |
) |
|
|
- |
|
Net
income
|
|
|
77,778 |
|
|
|
44,563 |
|
|
|
116,303 |
|
|
|
85,604 |
|
Less:
Income attributable to noncontrolling interest
|
|
|
(9,964 |
) |
|
|
(2,615 |
) |
|
|
(12,746 |
) |
|
|
(10,796 |
) |
NET
INCOME ATTRIBUTABLE TO FLAGSTONE
|
|
$ |
67,814 |
|
|
$ |
41,948 |
|
|
$ |
103,557 |
|
|
$ |
74,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
77,778 |
|
|
$ |
44,563 |
|
|
$ |
116,303 |
|
|
$ |
85,604 |
|
Change
in currency translation adjustment
|
|
|
5,399 |
|
|
|
(2,766 |
) |
|
|
7,266 |
|
|
|
(4,186 |
) |
Change
in defined benefit pension plan obligation
|
|
|
(145 |
) |
|
|
27 |
|
|
|
(321 |
) |
|
|
(522 |
) |
Comprehensive
income
|
|
|
83,032 |
|
|
|
41,824 |
|
|
|
123,248 |
|
|
|
80,896 |
|
Less:
Comprehensive income attributable to noncontrolling
interest
|
|
|
(11,743 |
) |
|
|
(2,615 |
) |
|
|
(14,322 |
) |
|
|
(10,796 |
) |
COMPREHENSIVE
INCOME ATTRIBUTABLE TO FLAGSTONE
|
|
$ |
71,289 |
|
|
$ |
39,209 |
|
|
$ |
108,926 |
|
|
$ |
70,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding—Basic
|
|
|
85,070,001 |
|
|
|
85,470,205 |
|
|
|
85,070,001 |
|
|
|
85,470,043 |
|
Weighted
average common shares outstanding—Diluted
|
|
|
85,162,981 |
|
|
|
85,638,506 |
|
|
|
85,253,230 |
|
|
|
85,714,196 |
|
Net
income attributable to Flagstone per common share—Basic
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.22 |
|
|
$ |
0.88 |
|
Net
income attributable to Flagstone per common share—Diluted
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.21 |
|
|
$ |
0.87 |
|
Dividends
declared per common share
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Expressed
in thousands of U.S. dollars, except share data)
For
the six month period ended June 30, 2009
|
|
Total
equity
|
|
Comprehensive
income
|
|
Retained
earnings
|
|
Accumulated
other comprehensive loss
|
|
Common
voting shares
|
|
Additional
paid-in capital
|
|
Noncontrolling
interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,183,463 |
|
$ |
- |
|
$ |
96,092 |
|
$ |
(8,271 |
) |
$ |
848 |
|
$ |
897,344 |
|
$ |
197,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
116,303 |
|
|
116,303 |
|
|
103,557 |
|
|
|
|
|
|
|
|
|
|
|
12,746 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in currency translation adjustment
|
|
|
7,266 |
|
|
7,266 |
|
|
|
|
|
5,690 |
|
|
|
|
|
|
|
|
1,576 |
|
Defined
benefit pension plan obligation
|
|
|
(321 |
) |
|
(321 |
) |
|
|
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
6,945 |
|
|
6,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
123,248 |
|
$ |
123,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
7,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,068 |
|
|
|
|
Subsidiary
stock based compensation
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
Subsidiary
stock issuance
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
184 |
|
Purchase
of noncontrolling interest
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
Issue
of shares, net
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
Dividends
declared
|
|
|
(7,045 |
) |
|
|
|
|
(7,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
1,306,557 |
|
|
|
|
$ |
192,604 |
|
$ |
(2,902 |
) |
$ |
849 |
|
$ |
904,228 |
|
$ |
211,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six month period ended June 30, 2008
|
|
Total
equity
|
|
Comprehensive
income
|
|
Retained
earnings
|
|
Accumulated
other comprehensive income
|
|
Common
voting shares
|
|
Additional
paid-in capital
|
|
Noncontrolling
interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,395,263 |
|
$ |
- |
|
$ |
296,890 |
|
$ |
7,426 |
|
$ |
853 |
|
$ |
905,316 |
|
$ |
184,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of preferred shares
|
|
|
(6,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,639 |
) |
Acquisition
of subsidiaries
|
|
|
7,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,416 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
85,604 |
|
|
85,604 |
|
|
74,808 |
|
|
|
|
|
|
|
|
|
|
|
10,796 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in currency translation adjustment
|
|
|
(4,186 |
) |
|
(4,186 |
) |
|
|
|
|
(4,186 |
) |
|
|
|
|
|
|
|
|
|
Defined
benefit pension plan obligation
|
|
|
(522 |
) |
|
(522 |
) |
|
|
|
|
(522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(4,708 |
) |
|
(4,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
80,896 |
|
$ |
80,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
7,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,012 |
|
|
|
|
Subsidiary
stock based compensation
|
|
|
(337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(337 |
) |
Issue
of shares, net
|
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(364 |
) |
|
|
|
Dividends
declared
|
|
|
(7,049 |
) |
|
|
|
|
(7,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
Ending
balance
|
|
$ |
1,476,107 |
|
|
|
|
$ |
364,649 |
|
$ |
2,718 |
|
$ |
853 |
|
$ |
911,964 |
|
$ |
195,923 |
|
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S.
dollars)
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
Cash flows provided by (used
in) operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
116,303 |
|
|
$ |
85,604 |
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
realized and unrealized (gains) losses
|
|
|
(15,083 |
) |
|
|
22,856 |
|
Net
unrealized foreign exchange gains
|
|
|
(2,430 |
) |
|
|
- |
|
Depreciation
expense
|
|
|
3,347 |
|
|
|
2,214 |
|
Share
based compensation expense
|
|
|
6,832 |
|
|
|
6,788 |
|
Interest
in earnings of equity investments
|
|
|
678 |
|
|
|
- |
|
Accretion/amortization
on fixed maturities
|
|
|
5,683 |
|
|
|
(9,736 |
) |
Changes
in assets and liabilities, excluding net assets acquired:
|
|
|
|
|
|
|
|
|
Reinsurance
premium receivable
|
|
|
(236,036 |
) |
|
|
(175,080 |
) |
Unearned
premiums ceded
|
|
|
(54,158 |
) |
|
|
(24,728 |
) |
Deferred
acquisition costs
|
|
|
(25,729 |
) |
|
|
(20,439 |
) |
Funds
withheld
|
|
|
(4,195 |
) |
|
|
(3,386 |
) |
Loss
and loss adjustment expense reserves
|
|
|
38,663 |
|
|
|
47,063 |
|
Unearned
premiums
|
|
|
249,819 |
|
|
|
210,635 |
|
Insurance
and reinsurance balances payable
|
|
|
19,218 |
|
|
|
21,478 |
|
Resinsurance
recoverable
|
|
|
623 |
|
|
|
- |
|
Other
changes in assets and liabilities, net
|
|
|
25,570 |
|
|
|
4,883 |
|
Net
cash provided by operating activities
|
|
|
129,105 |
|
|
|
168,152 |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided
by investing activities:
|
|
|
|
|
|
|
|
|
Net
cash (paid) received in (disposal) acquisition of
subsidiaries
|
|
|
(1,731 |
) |
|
|
4,729 |
|
Purchases
of fixed income securities
|
|
|
(1,423,515 |
) |
|
|
(936,439 |
) |
Sales
and maturities of fixed income securities
|
|
|
963,914 |
|
|
|
1,230,546 |
|
Purchases
of equity securities
|
|
|
(2,006 |
) |
|
|
(39,974 |
) |
Sales
of equity securities
|
|
|
4,359 |
|
|
|
- |
|
Purchases
of other investments
|
|
|
(4,114 |
) |
|
|
(330,203 |
) |
Sales
of other investments
|
|
|
(3,628 |
) |
|
|
144,675 |
|
Purchases
of fixed assets
|
|
|
(7,456 |
) |
|
|
(10,786 |
) |
Sale
of fixed asset
|
|
|
145 |
|
|
|
- |
|
Change
in restricted cash
|
|
|
(37,158 |
) |
|
|
(1,006 |
) |
Net
cash (used in) provided by investing activities
|
|
|
(511,190 |
) |
|
|
61,542 |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided
by financing activities:
|
|
|
|
|
|
|
|
|
Issue
of common shares, net of issuance costs paid
|
|
|
- |
|
|
|
(364 |
) |
Contribution
of minority interest
|
|
|
- |
|
|
|
(429 |
) |
Repurchase
of minority interest
|
|
|
- |
|
|
|
(8,652 |
) |
Dividend
paid on common shares
|
|
|
(6,786 |
) |
|
|
(6,825 |
) |
Repayment
of long term debt
|
|
|
(15,038 |
) |
|
|
(9,195 |
) |
Other
|
|
|
414 |
|
|
|
(4,003 |
) |
Net
cash used in financing activities
|
|
|
(21,410 |
) |
|
|
(29,468 |
) |
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate on cash
|
|
|
(1,978 |
) |
|
|
(998 |
) |
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(405,473 |
) |
|
|
199,228 |
|
Cash
and cash equivalents - beginning of year
|
|
|
783,705 |
|
|
|
362,622 |
|
Cash
and cash equivalents - end of period
|
|
$ |
378,232 |
|
|
$ |
561,850 |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
Receivable
for investments sold
|
|
$ |
11,114 |
|
|
$ |
2,942 |
|
Payable
for investments purchased
|
|
$ |
16,249 |
|
|
$ |
6,162 |
|
Interest
paid
|
|
$ |
6,681 |
|
|
$ |
10,679 |
|
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
Index
These
unaudited condensed consolidated financial statements include the accounts of
Flagstone Reinsurance Holdings Limited (the “Company”) and its wholly owned
subsidiaries, including Flagstone Réassurance Suisse SA (“Flagstone Suisse”) and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. These unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries, including
those that meet the consolidation requirements of variable interest entities
(“VIEs”). The Company assesses the consolidation of VIEs based on whether the
Company is the primary beneficiary of the entity in accordance with Financial
Accounting Standards Board (“FASB”) Interpretation No. 46, as revised,
“Consolidation of Variable Interest Entities - an interpretation of ARB No. 51”
(“FIN 46(R)”). Entities in which the Company has an ownership of more
than 20% and less than 50% of the voting shares are accounted for using the
equity method. All inter-company accounts and transactions have been
eliminated on consolidation.
The
preparation of these unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported disclosed amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The Company's principal estimates are for loss and loss
adjustment expenses, estimates of premiums written, premiums earned, acquisition
costs and share based compensation. The Company reviews and
revises these estimates as appropriate based on current information. Any
adjustments made to these estimates are reflected in the period the estimates
are revised.
In the
opinion of management, these unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the Company’s financial position
and results of operations as at the end of and for the periods
presented. The results of operations and cash flows for any
interim period will not necessarily be indicative of the results of operations
and cash flows for the full fiscal year or subsequent quarters. This
Quarterly Report on Form 10-Q should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the
Securities and Exchange Commission (the “SEC”) on March 13, 2009.
These
interim financial statements separately present restricted cash and reinsurance
recoverable. In the prior period these amounts were included with cash and cash
equivalents and other assets. This presentation of prior period amounts
have been reclassified consistent with the current period presentation of
separately presenting restricted cash and reinsurance recoverable. This
presentation change has no effect on net income or loss attributable to
Flagstone.
2.
New Accounting Pronouncements
Adoption
of new accounting pronouncements
On April
1, 2009, the Company adopted the provisions of the FASB Statement No. 165,
“Subsequent Events” (“SFAS 165”), which requires the disclosure of the date
after the balance sheet date but before financial statements are issued or
available to be issued through which an entity has evaluated subsequent events
and the basis for that date, that is, whether the date represents the date the
financial statements were issued or were available to be issued. SFAS
165 also alerts all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. We evaluated subsequent events to August 4, 2009 and there are
no subsequent events to note.
On April
1, 2009, the Company adopted the provisions of the three FASB staff positions
(“FSP”) intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities: FSP
FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP FAS 157-4”), FSP FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”) and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FSP FAS
124-2”).
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
FSP FAS
157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in FASB Statement No. 157, “Fair Value
Measurements” (“SFAS 157”). FSP FAS
157-4 relates to determining fair values when there is no active market or where
the price inputs being used represent distressed sales. It reaffirms what SFAS
157 states is the objective of fair value measurement—to reflect how much an
asset would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive.
FSP FAS
107-1 and APB 28-1 enhance consistency in financial reporting by increasing the
frequency of fair value disclosures. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on
the balance sheet at fair value. Prior to issuing this FSP, fair values for
these assets and liabilities were only disclosed once a year. The FSP now
requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.
FSP FAS
115-2 and FSP FAS 124-2 provide additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities. The guidance is intended to bring greater consistency to the timing
of impairment recognition, and provide greater clarity to investors about the
credit and noncredit components of impaired debt securities that are not
expected to be sold. The measure of impairment in comprehensive income remains
fair value. The FSP also requires increased and more timely disclosures sought
by investors regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses.
The
effect of adopting these FSPs was immaterial to our financial
statements.
On
January 1, 2009, the Company adopted the provisions of FASB Statement
No. 161, "Disclosures about Derivative Instruments and Hedging Activities,
an Amendment of FASB Statement No. 133" (“SFAS 161”). The provisions of SFAS
161 amend and expand the disclosure requirements for derivative instruments and
hedging activities by requiring enhanced disclosures about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedged items are accounted for under FASB Statement No. 133 “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS 133”) and its related
interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. The effect of adopting SFAS 161 was immaterial to our financial
statements.
New
accounting pronouncements issued during 2009 impacting the Company are as
follows:
On June
12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets,” (“SFAS No. 166”). SFAS No. 166 requires that a transferor
recognize and initially measure at fair value all assets obtained (including a
transferor’s beneficial interest) and liabilities incurred as a result of
financial assets accounted for as a sale. It is a revision to FASB Statement No.
140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” and requires more information about transfers
of financial assets, including securitization transactions, and where entities
have continuing exposure to the risks related to transferred financial
assets. SFAS No. 166 is effective on a prospective basis in fiscal
years beginning on or after November 15, 2009 and interim periods within those
fiscal years, and will be adopted by the Company in the first quarter of fiscal
year 2010. The Company is assessing the potential impact, if any, of
the adoption of SFAS No. 166 on its consolidated results of operations and
financial condition.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
On June
12, 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” (“SFAS No. 167”). SFAS No. 167 amends FASB Statement No. 46
(revised December 2003), “Consolidation of Variable Interest Entities,” to
require an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity. It determines whether a
reporting entity is required to consolidate another entity based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impacts the
other entity’s economic performance. SFAS No. 167 is effective on a
prospective basis in fiscal years beginning on or after November 15, 2009 and
interim periods within those fiscal years, and will be adopted by the Company in
the first quarter of fiscal year 2010. The Company is assessing the
potential impact, if any, of the adoption of SFAS No. 167 on its consolidated
results of operations and financial condition.
In June,
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles,” (Codification)
(“SFAS No. 168”). SFAS No. 168 is a replacement to SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles,” which became effective
on November 13, 2008 and identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial
statements in conformity with U.S. GAAP. It also arranged these
sources of U.S. GAAP in a hierarchy for users to apply. SFAS No. 168 will become
the source of authoritative U.S. GAAP recognized by the FASB to be applied to
nongovernmental entities in the preparation of financial
statements. The Codification will carry the same level of authority
and effectively supersede SFAS No. 162. The U.S. GAAP hierarchy will
be modified to include two levels of U.S. GAAP: authoritative and
non-authoritative. SFAS No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009, and will
be adopted by the Company in the third quarter of fiscal year
2009. The Company is assessing the potential impact, if any, of the
adoption of SFAS No. 168 on its consolidated results of operations and financial
condition.
3.
Investments
Fair
value disclosure
In
accordance with SFAS 157, the Company determined that its investments in U.S.
government treasury securities and listed equity securities are stated at Level
1 fair value as determined by the quoted market price of these securities, as
provided either by independent pricing services or exchange market
prices. Investments in U.S government agency securities, corporate bonds,
mortgage-backed securities, asset-backed securities, and exchange traded funds
are stated at Level 2 fair value derived from broker quotes based on inputs that
are observable for the asset, either directly or indirectly, such as yield
curves and transactional history. There are two mortgage-backed
securities that are classified as Level 3 due to the limited availability of the
pricing sources which may be indicative of a less active market. Their fair
value is determined using broker quotes. The Company has reviewed its Level
3 investments, and the valuation methods are as follows: Catastrophe bonds are
stated at fair value as determined by reference to broker
indications. Those indications are based on current market
conditions, including liquidity and transactional history, recent issue price of
similar catastrophe bonds and seasonality of the underlying
risks. The investment funds are valued by the investment fund
managers using the valuations and financial statements provided by the general
partners of the funds on a quarterly basis. These valuations are then
adjusted by the investment fund managers for cash flows since the most recent
valuation. The valuation methodology used for the investment funds is
consistent with the methodology that is generally employed in the investment
industry.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
As at
June 30, 2009 and December 31, 2008, the Company’s investments are allocated
between levels as follows:
|
|
Fair Value Measurement at June 30, 2009,
using:
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
Other
|
|
|
|
Fair
Value
|
|
|
Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Measurements
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agency securities
|
|
$ |
435,766 |
|
|
$ |
392,688 |
|
|
$ |
43,078 |
|
|
$ |
- |
|
U.S.
states and political subdivisions
|
|
|
369 |
|
|
|
- |
|
|
|
369 |
|
|
|
- |
|
Non
U.S. government and government agencies
|
|
|
99,846 |
|
|
|
- |
|
|
|
99,846 |
|
|
|
- |
|
Corporates
|
|
|
426,041 |
|
|
|
- |
|
|
|
426,041 |
|
|
|
- |
|
Mortgage-backed
securities
|
|
|
95,096 |
|
|
|
- |
|
|
|
94,133 |
|
|
|
963 |
|
Asset-backed
securities
|
|
|
20,361 |
|
|
|
- |
|
|
|
20,361 |
|
|
|
-
|
|
Equity
investments
|
|
|
3,400 |
|
|
|
3,400 |
|
|
|
- |
|
|
|
- |
|
Short
term investments
|
|
|
229,837 |
|
|
|
85,438 |
|
|
|
144,399 |
|
|
|
- |
|
|
|
|
1,310,716 |
|
|
|
481,526 |
|
|
|
828,227 |
|
|
|
963 |
|
Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
funds
|
|
|
5,316 |
|
|
|
- |
|
|
|
- |
|
|
|
5,316 |
|
Catastrophe
bonds
|
|
|
43,221 |
|
|
|
- |
|
|
|
- |
|
|
|
43,221 |
|
|
|
|
48,537 |
|
|
|
- |
|
|
|
- |
|
|
|
48,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,359,253 |
|
|
$ |
481,526 |
|
|
$ |
828,227 |
|
|
$ |
49,500 |
|
For
reconciliation purposes, the table above does not include an equity investment
of $5.0 million in which the Company is deemed to have a significant influence
and which is accounted for under the equity method and as such, is not accounted
for at fair value under SFAS 159,“The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS
159”).
For the
Level 3 items still held as of June 30, 2009, the total change in fair value for
the three month and six months ended June 30, 2009 is $(2.5) million and $(3.8)
million respectively.
|
|
Fair
Value Measurement at December 31, 2008, using:
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
Other
|
|
|
|
Fair
Value
|
|
|
Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Measurements
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity investments
|
|
$ |
784,355 |
|
|
$ |
447,226 |
|
|
$ |
336,203 |
|
|
$ |
926 |
|
Short
term investments
|
|
|
30,413 |
|
|
|
30,413 |
|
|
|
- |
|
|
|
- |
|
Equity
investments
|
|
|
5,313 |
|
|
|
5,313 |
|
|
|
- |
|
|
|
- |
|
|
|
|
820,081 |
|
|
|
482,952 |
|
|
|
336,203 |
|
|
|
926 |
|
Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
funds
|
|
|
9,805 |
|
|
|
- |
|
|
|
647 |
|
|
|
9,158 |
|
Catastrophe
bonds
|
|
|
39,174 |
|
|
|
- |
|
|
|
- |
|
|
|
39,174 |
|
|
|
|
48,979 |
|
|
|
- |
|
|
|
647 |
|
|
|
48,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
869,060 |
|
|
$ |
482,952 |
|
|
$ |
336,850 |
|
|
$ |
49,258 |
|
For
reconciliation purposes, the table above does not include an equity investment
of $5.7 million in which the Company is deemed to have a significant influence
and which is accounted for under the equity method and as such, is not accounted
for at fair value under SFAS 159.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
The
reconciliation of the fair value for the Level 3 investments as at June 30,
2009, including net purchases and sales and change in unrealized gains, is set
out below:
|
|
For
the Six Months Ended June 30, 2009
|
|
|
|
Mortgage
- backed securities
|
|
|
Investment
funds
|
|
|
Catastrophe
bonds
|
|
|
Total
|
|
Fair
value, December 31, 2008
|
|
$ |
926 |
|
|
$ |
9,158 |
|
|
$ |
39,174 |
|
|
$ |
49,258 |
|
Total
unrealized losses included in earnings
|
|
|
75 |
|
|
|
(1,418 |
) |
|
|
83 |
|
|
|
(1,260 |
) |
Net
purchases and sales
|
|
|
(47 |
) |
|
|
101 |
|
|
|
- |
|
|
|
54 |
|
Total
investment income included in earning
|
|
|
4 |
|
|
|
- |
|
|
|
(82 |
) |
|
|
(78 |
) |
Fair
value, March 31, 2009
|
|
|
958 |
|
|
|
7,841 |
|
|
|
39,175 |
|
|
|
47,974 |
|
Total
unrealized losses included in earnings
|
|
|
70 |
|
|
|
(2,664 |
) |
|
|
54 |
|
|
|
(2,540 |
) |
Net
purchases and sales
|
|
|
(71 |
) |
|
|
139 |
|
|
|
3,925 |
|
|
|
3,993 |
|
Total
investment income included in earning
|
|
|
6 |
|
|
|
- |
|
|
|
67 |
|
|
|
73 |
|
Fair
value, June 30, 2009
|
|
$ |
963 |
|
|
$ |
5,316 |
|
|
$ |
43,221 |
|
|
$ |
49,500 |
|
Pledged
assets
As at
June 30, 2009 and December 31, 2008, approximately $79.6 million and $42.4
million, respectively, of cash and cash equivalents and approximately $407.0
million and $327.2 million, respectively, of fixed maturity securities were
deposited or pledged in favor of ceding companies and other counterparties or
government authorities to comply with reinsurance contract provisions and
insurance laws.
4.
Derivatives
The
Company accounts for its derivative instruments using SFAS No. 133 which
requires an entity to recognize all derivative instruments as either assets or
liabilities in the balance sheet and measure those instruments at fair value,
with the fair value recorded in other assets or liabilities. The
accounting for realized and unrealized gains and losses associated with changes
in the fair value of derivatives depends on its hedge designation and whether
the hedge is highly effective in achieving offsetting changes in the fair value
of the asset or liability being hedged. The realized and unrealized
gains and losses on derivatives not designated as hedging instruments are
included in net realized and unrealized gains and losses in the consolidated
financial statements. Gains and losses associated with changes in fair value of
the designated hedge instruments are recorded with the gains and losses on the
hedged items, to the extent that the hedge is
effective.
The
details of the derivatives held by the Company as of June 30, 2009 and December
31, 2008 are as follows:
|
As
at June 30, 2009
|
|
|
Asset
Derivatives |
|
Liability
Derivatives |
|
Total
Derivatives
|
|
|
Balance
Sheet
|
|
Derivative
|
|
|
|
|
Balance
Sheet
|
|
Derivative
|
|
|
|
|
|
Derivative
|
|
|
Net
|
|
|
Location
|
|
Exposure
|
|
|
Fair
Value
|
|
Location
|
|
Exposure
|
|
|
Fair
Value
|
|
|
Exposure
|
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward contracts (1)
|
Other
Assets
|
|
$ |
117,763 |
|
|
$ |
162 |
|
Other
Liabilities
|
|
$ |
17,295 |
|
|
$ |
444 |
|
|
$ |
135,058 |
|
|
$ |
(282 |
) |
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
(282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
contracts
|
Other
Assets
|
|
$ |
- |
|
|
$ |
- |
|
Other
Liabilities
|
|
$ |
48,351 |
|
|
$ |
1,133 |
|
|
$ |
48,351 |
|
|
$ |
(1,133 |
) |
Total
return swaps
|
Other
Assets
|
|
|
40,000 |
|
|
|
515 |
|
Other
Liabilities
|
|
|
5,000 |
|
|
|
201 |
|
|
|
45,000 |
|
|
|
314 |
|
Currency
swaps
|
Other
Assets
|
|
|
- |
|
|
|
- |
|
Other
Liabilities
|
|
|
18,237 |
|
|
|
154 |
|
|
|
18,237 |
|
|
|
(154 |
) |
Foreign
currency forward contracts
|
Other
Assets
|
|
|
97,314 |
|
|
|
5,170 |
|
Other
Liabilities
|
|
|
431,573 |
|
|
|
15,541 |
|
|
|
528,887 |
|
|
|
(10,371 |
) |
Mortgage
backed securities TBA
|
Other
Assets
|
|
|
39,958 |
|
|
|
353 |
|
Other
Liabilities
|
|
|
5,037 |
|
|
|
6 |
|
|
|
44,995 |
|
|
|
347 |
|
Other
reinsurance derivatives
|
Other
Assets
|
|
|
- |
|
|
|
- |
|
Other
Liabilities
|
|
|
- |
|
|
|
847 |
|
|
|
- |
|
|
|
(847 |
) |
|
|
|
|
|
|
|
|
6,038 |
|
|
|
|
|
|
|
|
17,882 |
|
|
|
|
|
|
|
(11,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
|
|
|
|
|
$ |
6,200 |
|
|
|
|
|
|
|
$ |
18,326 |
|
|
|
|
|
|
$ |
(12,126 |
) |
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
|
As
at December 31, 2008
|
|
|
Asset
Derivatives |
|
Liability
Derivatives |
|
|
Total
Derivatives
|
|
|
Balance
Sheet
|
|
Derivative
|
|
|
|
|
Balance
Sheet
|
|
Derivative
|
|
|
|
|
|
Derivative
|
|
|
Net
|
|
|
Location
|
|
Exposure
|
|
|
Fair
Value
|
|
Location
|
|
Exposure
|
|
|
Fair
Value
|
|
|
Exposure
|
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
currency forward contracts (1)
|
Other
Assets
|
|
$ |
43,327 |
|
|
$ |
1,419 |
|
Other
Liabilities
|
|
$ |
294,385 |
|
|
$ |
7,103 |
|
|
$ |
337,712 |
|
|
$ |
(5,684 |
) |
|
|
|
|
|
|
|
|
1,419 |
|
|
|
|
|
|
|
|
7,103 |
|
|
|
|
|
|
|
(5,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
contracts
|
Other
Assets
|
|
$ |
40,530 |
|
|
$ |
333 |
|
Other
Liabilities
|
|
$ |
21,356 |
|
|
$ |
190 |
|
|
$ |
61,886 |
|
|
$ |
143 |
|
Total
return swaps
|
Other
Assets
|
|
|
58,395 |
|
|
|
5,564 |
|
Other
Liabilities
|
|
|
12,473 |
|
|
|
1,852 |
|
|
|
70,868 |
|
|
|
3,712 |
|
Currency
swaps
|
Other
Assets
|
|
|
- |
|
|
|
- |
|
Other
Liabilities
|
|
|
18,071 |
|
|
|
315 |
|
|
|
18,071 |
|
|
|
(315 |
) |
Foreign
currency forward contracts
|
Other
Assets
|
|
|
54,768 |
|
|
|
1,493 |
|
Other
Liabilities
|
|
|
60,924 |
|
|
|
5,317 |
|
|
|
115,692 |
|
|
|
(3,824 |
) |
Mortgage
backed securities TBA
|
Other
Assets
|
|
|
63,937 |
|
|
|
648 |
|
Other
Liabilities
|
|
|
- |
|
|
|
- |
|
|
|
63,937 |
|
|
|
648 |
|
Other
reinsurance derivatives
|
Other
Assets
|
|
|
- |
|
|
|
- |
|
Other
Liabilities
|
|
|
- |
|
|
|
541 |
|
|
|
- |
|
|
|
(541 |
) |
|
|
|
|
|
|
|
|
8,038 |
|
|
|
|
|
|
|
|
8,215 |
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
|
|
|
|
|
$ |
9,457 |
|
|
|
|
|
|
|
$ |
15,318 |
|
|
|
|
|
|
$ |
(5,861 |
) |
(1)
|
Recognized
as a foreign currency hedge under SFAS
133.
|
Designated
|
|
Amount
of Gain or (Loss) on Derivatives Recognized in
|
|
|
|
Comprehensive Income
(Loss) |
|
|
|
Net
Income |
|
Derivatives
Designated as Hedging Instruments
|
|
(Effective
Portion) |
|
|
|
(Ineffective Portion) |
|
|
|
For the Three Months
Ended |
|
|
|
For
the Three Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Location
|
|
June
30, 2009
|
|
|
June
30, 2008 |
|
Foreign currency forward
contracts (1)
|
|
$ |
(9,182 |
) |
|
$ |
4,287 |
|
Net
realized and unrealized (losses) gains - other
|
|
$ |
(178 |
) |
|
$ |
1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,182 |
) |
|
$ |
4,287 |
|
|
|
$ |
(178 |
) |
|
$ |
1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of Gain or (Loss) on Derivatives Recognized in
|
|
|
|
Comprehensive
Income (Loss) |
|
|
|
Net
Income |
|
Derivatives
Designated as Hedging Instruments
|
|
(Effective
Portion) |
|
|
|
(Ineffective
Portion) |
|
|
|
For the Six Months Ended |
|
|
|
For
the Six Months Ended |
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Location
|
|
June
30, 2009
|
|
|
June
30, 2008 |
|
Foreign currency forward
contracts (1)
|
|
$ |
(2,387 |
) |
|
$ |
(25,567 |
) |
Net
realized and unrealized (losses) gains - other
|
|
$ |
(703 |
) |
|
$ |
2,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,387 |
) |
|
$ |
(25,567 |
) |
|
|
$ |
(703 |
) |
|
$ |
2,264 |
|
(1)
|
Recognized
as a foreign currency hedge under SFAS
133.
|
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
Foreign
currency forward contracts
The
Company has entered into certain foreign currency forward contracts that it has
designated as hedges in order to hedge its net investments in foreign
subsidiaries. These foreign currency forward contracts are carried at
fair value and the gains and losses associated with changes in fair value of the
designated hedge instruments are recorded in other comprehensive income as part
of the cumulative translation adjustment, to the extent that these are effective
as hedges, with the ineffective portion recorded in realized and unrealized
gains and losses included in the income statement. All other
derivatives are not designated as hedges, and accordingly, these instruments are
carried at fair value, with the fair value recorded in other assets or
liabilities with the corresponding realized and unrealized gains and losses
included in net realized and unrealized gains and losses.
Non
Designated
|
|
Gain
or (Loss) on Derivatives Recognized in Net Income
|
|
Derivatives
Not Designated
|
|
|
|
For
the Three Months Ended
|
|
as
Hedging Instruments
|
|
Location
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Futures
contracts
|
|
Net
realized and unrealized (losses) gains - investments
|
|
$ |
8,455 |
|
|
$ |
19,141 |
|
Total
return swaps
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
833 |
|
|
|
(4,738 |
) |
Currency
swaps
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
978 |
|
|
|
136 |
|
Interest
rate swaps
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
- |
|
|
|
- |
|
Interest
rate swaps
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
- |
|
|
|
7,928 |
|
Foreign
currency forward contracts
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
(16,378 |
) |
|
|
- |
|
Foreign
currency forward contracts
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
1,162 |
|
|
|
1,179 |
|
Mortgage
backed securities TBA
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
183 |
|
|
|
(743 |
) |
Other
reinsurance derivatives
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
508 |
|
|
|
468 |
|
|
|
|
|
$ |
(4,259 |
) |
|
$ |
23,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
or (Loss) on Derivatives Recognized in Net Income
|
|
Derivatives
Not Designated
|
|
|
|
For
the Six Months Ended |
|
as
Hedging Instruments
|
|
Location
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Futures
contracts
|
|
Net
realized and unrealized (losses) gains - investments
|
|
$ |
4,302 |
|
|
$ |
(930 |
) |
Total
return swaps
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
(7,902 |
) |
|
|
(2,996 |
) |
Currency
swaps
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
193 |
|
|
|
1,938 |
|
Interest
rate swaps
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
- |
|
|
|
(295 |
) |
Interest
rate swaps
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
- |
|
|
|
(1,266 |
) |
Foreign
currency forward contracts
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
(19,544 |
) |
|
|
- |
|
Foreign
currency forward contracts
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
9,362 |
|
|
|
(5,223 |
) |
Mortgage
backed securities TBA
|
|
Net
realized and unrealized (losses) gains - investments
|
|
|
1,141 |
|
|
|
(301 |
) |
Other
reinsurance derivatives
|
|
Net
realized and unrealized (losses) gains - other
|
|
|
1,048 |
|
|
|
1,182 |
|
|
|
|
|
$ |
(11,400 |
) |
|
$ |
(7,891 |
) |
The
non-designated derivatives are carried at fair value, with the fair value
recorded in other assets or liabilities and the corresponding realized and
unrealized gains and losses included in net realized and unrealized gains and
losses.
Futures
contracts
The
Company uses futures contracts to gain exposure to certain markets or
indexes. The Company has entered into equity index, commodity index
and bond index futures as part of its investment strategy.
Total
return swaps
The
Company uses total return swaps to gain exposure to a global inflation linked
bond index and a global equity index. The total return swaps allow the
Company to earn the return of the underlying index while paying floating
interest plus a spread to the counterparty.
Currency
swaps
The
Company uses currency swaps to minimize the effect of fluctuating foreign
currencies. The currency swaps relate to the Company’s Euro denominated
debentures.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
Foreign
currency forward contracts
The
Company and its subsidiaries use foreign currency forward contracts to manage
currency exposures related to balance sheet and income statement
balances.
To
be announced mortgage backed securities
The
Company also purchases “to be announced” mortgage-backed securities (“TBAs”) as
part of its investing activities. By acquiring a TBA, the Company makes a
commitment to purchase a future issuance of mortgage-backed
securities.
Other
reinsurance derivatives
The
Company writes certain reinsurance contracts that are classified as derivatives
under SFAS 133. The Company has entered into industry loss warranty (“ILW”)
transactions that may be structured as reinsurance or derivatives.
Fair
value disclosure
In
accordance with SFAS 157, the fair value of derivative instruments held as of
June 30, 2009 and December 31, 2008 is allocated between levels as
follows:
|
|
Fair
Value Measurement at June 30, 2009, using:
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
Other
|
|
|
|
Fair
Value
|
|
|
Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Measurements
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
contracts
|
|
$ |
(1,133 |
) |
|
$ |
(1,133 |
) |
|
$ |
- |
|
|
$ |
- |
|
Swaps
|
|
|
160 |
|
|
|
- |
|
|
|
160 |
|
|
|
- |
|
Foreign
currency forward contracts
|
|
|
(10,653 |
) |
|
|
- |
|
|
|
(10,653 |
) |
|
|
- |
|
Mortgage
backed securities TBA
|
|
|
347 |
|
|
|
- |
|
|
|
347 |
|
|
|
- |
|
Other
reinsurance derivatives
|
|
|
(847 |
) |
|
|
- |
|
|
|
- |
|
|
|
(847 |
) |
Total
derivatives
|
|
$ |
(12,126 |
) |
|
$ |
(1,133 |
) |
|
$ |
(10,146 |
) |
|
$ |
(847 |
) |
For the
Level 3 items still held as of June 30, 2009, the total change in fair value for
the three month and six months ended June 30, 2009 is $0.4 million and $(0.8)
million respectively.
|
|
Fair
Value Measurement at December 31, 2008, using:
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
Other
|
|
|
|
Fair
Value
|
|
|
Active
Markets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Measurements
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
contracts
|
|
$ |
143 |
|
|
$ |
143 |
|
|
$ |
- |
|
|
$ |
- |
|
Swaps
|
|
|
3,397 |
|
|
|
- |
|
|
|
3,397 |
|
|
|
- |
|
Foreign
currency forward contracts
|
|
|
(9,508 |
) |
|
|
- |
|
|
|
(9,508 |
) |
|
|
- |
|
Mortgage
backed securities TBA
|
|
|
648 |
|
|
|
- |
|
|
|
648 |
|
|
|
- |
|
Other
reinsurance derivatives
|
|
|
(541 |
) |
|
|
- |
|
|
|
- |
|
|
|
(541 |
) |
Total
derivatives
|
|
$ |
(5,861 |
) |
|
$ |
143 |
|
|
$ |
(5,463 |
) |
|
$ |
(541 |
) |
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
The
reconciliation of the fair value for the Level 3 derivative instruments,
including net purchases and sales, realized gains and changes in unrealized
gains, is as follows:
|
|
Six
Months
|
|
|
|
Ended
|
|
|
|
June
30, 2009
|
|
Other
reinsurance derivatives
|
|
|
|
Opening
fair value, beginning of period
|
|
$ |
(541 |
) |
Total
premium earned included in earnings
|
|
|
540 |
|
Net
purchases and sales
|
|
|
(1,354 |
) |
Fair
value, March 31, 2009
|
|
|
(1,355 |
) |
Total
premium earned included in earnings
|
|
|
508 |
|
Fair
value, June 30, 2009
|
|
$ |
(847 |
) |
5. Disposition
Flagstone
Alliance
On June
30, 2009, Flagstone Alliance Insurance & Reinsurance PLC ("Flagstone
Alliance"), a wholly-owned subsidiary of the Company disposed of 100% of the
share capital in Uni-Alliance Holdings Limited, a subsidiary of Flagstone
Alliance since January 1, 2007. The transaction was completed with Mr. Khader
Hemsi, Chief Executive Officer of Flagstone Alliance, who will retire from the
company during the third quarter of 2009. The sale was completed to
eliminate conflict with existing broker relationships and resulted in a net loss
of $1.2 million, which has been recorded in other income.
6. Goodwill
and Intangibles
|
|
|
|
|
Carrying
value at beginning of period
|
|
|
Accumulated
amortization (1)
|
|
|
Impact
of foreign exchange
|
|
|
Carrying
value at end of period
|
|
Finite
life intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
|
|
$ |
1,294 |
|
|
$ |
(74 |
) |
|
$ |
187 |
|
|
$ |
1,407 |
|
Software
|
|
|
|
|
|
3,882 |
|
|
|
(222 |
) |
|
|
560 |
|
|
|
4,220 |
|
Distribution
network
|
|
|
|
|
|
3,306 |
|
|
|
(187 |
) |
|
|
478 |
|
|
|
3,597 |
|
|
|
|
|
|
$ |
8,482 |
|
|
$ |
(483 |
) |
|
$ |
1,225 |
|
|
$ |
9,224 |
|
Indefinite
life intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyd's
syndicate capacity
|
|
|
|
|
$ |
22,573 |
|
|
$ |
- |
|
|
$ |
3,257 |
|
|
$ |
25,830 |
|
Licenses
|
|
|
|
|
|
1,818 |
|
|
|
- |
|
|
|
(22 |
) |
|
|
1,796 |
|
|
|
|
|
|
$ |
24,391 |
|
|
$ |
- |
|
|
$ |
3,235 |
|
|
$ |
27,626 |
|
Aggregate
amortization expenses (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$ |
834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
relates to the following reportable segments:
|
|
Reinsurance
|
|
|
Lloyd's
|
|
|
Insurance
|
|
|
Unallocated
|
|
|
Total
|
|
Balance
as at beginning of period
|
|
$ |
4,118 |
|
|
$ |
- |
|
|
$ |
10,050 |
|
|
$ |
2,973 |
|
|
$ |
17,141 |
|
Allocated
to Lloyd's segment
|
|
|
- |
|
|
|
2,973 |
|
|
|
- |
|
|
|
(2,973 |
) |
|
|
- |
|
Purchase
price allocation finalized
|
|
|
(1,043 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,043 |
) |
Purchase
of noncontrolling interest
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36 |
|
Impact
of foreign exchange
|
|
|
(21 |
) |
|
|
428 |
|
|
|
- |
|
|
|
- |
|
|
|
407 |
|
Balance
at end of period
|
|
$ |
3,090 |
|
|
$ |
3,401 |
|
|
$ |
10,050 |
|
|
$ |
- |
|
|
$ |
16,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Accumulated amortization is converted at the end of period foreign
exchange rate and amortization expense is converted at an average foreign
exchange rate for the period.
|
|
|
|
|
|
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
7. Debt
and Financing Arrangements
Long
term debt
Interest
expense includes interest payable and amortization of debt offering
expenses. The debt offering expenses are amortized over the period
from the issuance of the Deferrable Interest Debentures to the
earliest date that they may be called by the Company. For the three
and six months ended June 30, 2009, the Company incurred interest expense of
$3.1 million and $6.7 million, respectively, on the Deferrable
Interest Debentures compared to $4.6 million and $9.9 million,
respectively, for the same periods in 2008. Also, at June 30, 2009
and December 31, 2008, the Company had $0.9 million and $1.4 million,
respectively, of interest payable included in other liabilities.
On June
30, 2009, the Company repaid $14.0 million to Banc of America Leasing and
Capital LLC (“BoA”), which terminated the financing agreement related to the
construction and purchase of a Dassault Falcon 7X aircraft.
SFAS No.
107, “Disclosure about Fair Value of Financial Instruments” (“SFAS 107”),
requires disclosure of fair value information of financial instruments.
For financial instruments where quoted market prices are not available, the fair
value of these financial instruments is estimated by discounting future
cash flows or by using similar recent transactions. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. The Company does not
carry its long term debt at fair value on its consolidated balance
sheets. At June 30, 2009, the Company estimated the fair value of its
long term debt to be approximately $159.2 million compared to $151.2 million at
December 31, 2008.
Letter
of credit facilities
On June
5, 2009, Flagstone Suisse entered into a secured $50.0 million standby
letter of credit facility with BNP Paribas (the “BNP Facility”). The BNP
Facility will be used to support the reinsurance obligations of the Company and
its subsidiaries. As at June 30, 2009, no letters of credit have been
issued under the BNP Facility.
On March
5, 2009, Flagstone Suisse entered into a $200.0 million secured committed letter
of credit facility with Barclays Bank Plc (the “Barclays Facility”). The
Barclays Facility will be used to support the reinsurance obligations of the
Company and its subsidiaries. As at June 30, 2009, no letters of credit
have been issued under the Barclays Facility.
On
January 22, 2009, Flagstone Suisse entered into a secured $450.0 million standby
letter of credit facility with Citibank Europe Plc (the “Citi Facility”). The
Citi Facility will be used to support the reinsurance obligations of the Company
and its subsidiaries. As at June 30, 2009, $381.1 million had been
drawn under the Citi Facility, and the drawn amount of the facility was secured
by $423.5 million of fixed maturity securities from the Company’s investment
portfolio. During 2008, the Company had a $400.0 million uncommitted
letter of credit facility agreement with Citibank N.A. As at December 31,
2008, $285.7 million had been drawn under this facility, and the drawn amount of
the facility was secured by $327.2 million of fixed maturity securities
from the Company’s investment portfolio. This facility was replaced by the above
noted $450.0 million facility.
On
June 11, 2009, Flagstone Suisse and Wachovia Bank, N.A. mutually
agreed to terminate a $200.0 million uncommitted letter of credit facility
agreement as it is no longer required by the Company. No amounts had been drawn
under this facility since its inception and there are no penalties associated
with this termination.
These
facilities are used to provide security to reinsureds and are collateralized by
the Company, at least to the extent of the letters of credit outstanding at any
given time.
8. Stock
Transaction of Subsidiary
On
June 30, 2009, Island Heritage Holdings Company (“Island Heritage”), in
which the Company holds a controlling interest, issued 2,709 shares to certain
of its employees under a performance share unit plan. Prior to this transaction,
the Company held an ownership interest in Island Heritage of 59.2% and now holds
an interest of 58.8%.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
The
Company accounts for the issuance of a subsidiary’s stock in accordance with
SFAS 160, which requires that an adjustment is recorded for the difference
between the carrying amount of the parent’s investment in a subsidiary and the
increase or decrease in its proportionate share in the underlying net book value
of the subsidiary after the issuance of stock by the subsidiary. Such increases
or decreases in the Company’s share of the subsidiaries net book value are
reflected as a credit or charge to consolidated additional paid in capital and a
corresponding charge or credit to noncontrolling interest in consolidated
subsidiaries, respectively, depending on whether the issuance of subsidiary
stock is accretive or dilutive to the Company’s investment in the subsidiary.
Accordingly, the Company recorded a loss of $0.2 million as a decrease to
additional paid-in capital.
9. Share
Based Compensation
The
Company accounts for share based compensation in accordance with SFAS No.
123(R), “Share Based Payments” (“SFAS 123(R)”), which requires entities to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the
award. The cost of such services will be recognized over the period
during which an employee is required to provide service in exchange for the
award.
Performance
Share Units
The
Performance Share Unit Plan (“PSU Plan”) is the Company’s shareholder approved
primary executive long-term incentive scheme. Pursuant to the terms of the PSU
Plan, at the discretion of the Compensation Committee of the Board of Directors,
Performance Share Units (“PSUs”) may be granted to executive officers and
certain other key employees and vesting is contingent upon the Company meeting
certain diluted return-on-equity (“DROE”) goals.
A summary
of the activity under the PSU Plan as at June 30, 2009, and changes during the
three and six months ended June 30, 2009, are as
follows:
|
|
Three
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
|
|
Number
expected to vest
|
|
|
Weighted
average grant date fair value
|
|
|
Weighted
average remaining contractual term
|
|
|
Number
expected to vest
|
|
|
Weighted
average grant date fair value
|
|
|
Weighted
average remaining contractual term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
2,871,703 |
|
|
$ |
10.02 |
|
|
|
2.4 |
|
|
|
2,189,982 |
|
|
$ |
10.13 |
|
|
|
2.5 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
818,000 |
|
|
|
9.77 |
|
|
|
|
|
Forfeited
|
|
|
(85,118 |
) |
|
|
10.21 |
|
|
|
|
|
|
|
(161,397 |
) |
|
|
10.22 |
|
|
|
|
|
Exercised
in the period
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(60,000 |
) |
|
|
10.25 |
|
|
|
|
|
Outstanding
at end of period
|
|
|
2,786,585 |
|
|
|
10.01 |
|
|
|
2.2 |
|
|
|
2,786,585 |
|
|
|
10.01 |
|
|
|
2.2 |
|
The
Company reviews its assumptions in relation to the PSUs on a quarterly basis.
For the three and six months ended June 30, 2009, $2.6 million and $5.3 million,
respectively, of compensation expense has been recorded in general and
administrative expenses in relation to the PSU Plan compared to $2.5 million and
$4.8 million, respectively, for the same periods in 2008. The issuance of shares
with respect to the PSUs is contingent upon the attainment of certain levels of
average DROE over a two or three year period. As at June 30, 2009 and
December 31, 2008, there was a total of $22.1 million and $21.0 million,
respectively, of unrecognized compensation cost related to non-vested PSUs; that
cost is expected to be recognized over a period of approximately 2.2 years
and 2.5 years, respectively.
Since the
inception of the PSU Plan, 60,000 PSUs have vested and been exercised and
2,368,658 PSUs have been cancelled.
Restricted
Share Units
Beginning
July 1, 2006, the Company granted Restricted Share Units (“RSUs”) to certain
employees and directors of the Company. The purpose of the Restricted
Share Unit Plan (“RSU Plan”) is to encourage employees and directors of the
Company to further the development of the Company and to attract and retain key
employees for the Company’s long-term success. The RSUs granted to employees
vest over a period of approximately two years while RSUs granted to directors
vest on the grant date.
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
A summary
of the activity under the RSU Plan as at June 30, 2009 and changes during
the three and six months ended June 30, 2009, are as follows:
|
|
Three
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
|
|
Number
expected to vest
|
|
|
Weighted
average grant date fair value
|
|
|
Weighted
average remaining contractual term
|
|
|
Number
expected to vest
|
|
|
Weighted
average grant date fair value
|
|
|
Weighted
average remaining contractual term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
525,367 |
|
|
$ |
11.54 |
|
|
|
0.8 |
|
|
|
282,876 |
|
|
$ |
13.13 |
|
|
|
0.5 |
|
Granted
|
|
|
750 |
|
|
|
9.32 |
|
|
|
|
|
|
|
255,231 |
|
|
|
9.77 |
|
|
|
|
|
Forfeited
|
|
|
(21,300 |
) |
|
|
11.17 |
|
|
|
|
|
|
|
(30,305 |
) |
|
|
11.02 |
|
|
|
|
|
Exercised
in the period
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(2,985 |
) |
|
|
13.90 |
|
|
|
|
|
Outstanding
at end of period
|
|
|
504,817 |
|
|
|
11.55 |
|
|
|
0.6 |
|
|
|
504,817 |
|
|
|
11.55 |
|
|
|
0.6 |
|
As at
June 30, 2009 and December 31, 2008, there was a total of $1.7 million and $1.0
million, respectively, of unrecognized compensation cost related to non-vested
RSUs; that cost is expected to be recognized over a period of approximately
1.2 years and 1.0 year, respectively. A compensation
expense of $0.4 million and $1.6 million, respectively, has been recorded in
general and administrative expenses for the three and six months ended June 30,
2009, compared to $0.7 million and $2.0 million, respectively, for the same
periods in 2008 in relation to the RSU Plan.
Since the
inception of the RSU Plan in July 2006, 230,296 RSUs granted to employees have
vested and no RSUs granted to employees have been cancelled. During the
three and six months ended June 30, 2009, nil and 72,666 RSUs,
respectively, were granted to the directors compared to nil and 55,715
RSUs, respectively, during the same periods in 2008. During the three and six
months ended June 30, 2009, nil and 2,985 RSUs, respectively, granted to
directors were converted into common shares of the Company as elected by the
directors, compared to nil and 7,817 during the same periods
in 2008.
The
company uses a nil forfeiture assumption for its PSUs and RSUs. The intrinsic
value of the PSUs and RSUs outstanding as of June 30, 2009 was $28.7 million and
$5.2 million, respectively.
10.
Earnings Per Common Share
The
computation of basic and diluted earnings per common share for the three and six
months ended June 30, 2009 and 2008 is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Basic earnings per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Flagstone
|
|
$ |
67,814 |
|
|
$ |
41,948 |
|
|
$ |
103,557 |
|
|
$ |
74,808 |
|
Weighted
average common shares outstanding
|
|
|
84,864,844 |
|
|
|
85,317,247 |
|
|
|
84,863,706 |
|
|
|
85,314,637 |
|
Weighted
average vested restricted share units
|
|
|
205,157 |
|
|
|
152,958 |
|
|
|
206,295 |
|
|
|
155,406 |
|
Weighted
average common shares outstanding—Basic
|
|
|
85,070,001 |
|
|
|
85,470,205 |
|
|
|
85,070,001 |
|
|
|
85,470,043 |
|
Basic
earnings per common share
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.22 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Flagstone
|
|
$ |
67,814 |
|
|
$ |
41,948 |
|
|
$ |
103,557 |
|
|
$ |
74,808 |
|
Weighted
average common shares outstanding
|
|
|
84,864,844 |
|
|
|
85,317,247 |
|
|
|
84,863,706 |
|
|
|
85,314,637 |
|
Weighted
average vested restricted share units outstanding
|
|
|
205,157 |
|
|
|
152,958 |
|
|
|
206,295 |
|
|
|
155,406 |
|
|
|
|
85,070,001 |
|
|
|
85,470,205 |
|
|
|
85,070,001 |
|
|
|
85,470,043 |
|
Share
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average unvested restricted share units
|
|
|
92,980 |
|
|
|
168,301 |
|
|
|
183,229 |
|
|
|
244,153 |
|
Weighted
average common shares outstanding—Diluted
|
|
|
85,162,981 |
|
|
|
85,638,506 |
|
|
|
85,253,230 |
|
|
|
85,714,196 |
|
Diluted
earnings per common share
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.21 |
|
|
$ |
0.87 |
|
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
At June
30, 2009 and 2008, there was a warrant outstanding which would result in the
issuance of 8,585,747 common shares that were excluded from the computation of
diluted earnings per common share because the effect would be
anti-dilutive. Because the number of shares contingently issuable
under the PSU Plan depends on the average DROE over a two or three year period,
the PSUs are excluded from the calculation of diluted earnings per common share
until the end of the performance period, at which time the number of shares
issuable under the PSU Plan will be known. As at June 30, 2009,
and 2008, there were 2,786,585 and 2,312,658 PSUs outstanding,
respectively. The maximum number of common shares that could be
issued under the PSU Plan at June 30, 2009 and 2008 were 4,179,878
and 4,625,316, respectively.
11.
Common Shares
|
|
As
at June 30, 2009
|
|
|
As
at December 31, 2008
|
|
Common voting
shares:
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
84,801,732 |
|
|
|
85,309,107 |
|
Conversion
of performance share units
|
|
|
60,000 |
|
|
|
- |
|
Conversion
of restricted share units
|
|
|
3,112 |
|
|
|
190,224 |
|
Shares
repurchased and cancelled
|
|
|
- |
|
|
|
(697,599 |
) |
Balance
at end of period
|
|
|
84,864,844 |
|
|
|
84,801,732 |
|
12.
Legal Proceedings
In the
normal course of business, the Company may become involved in various claims
litigation and legal proceedings. As at June 30, 2009, the Company was not
a party to any material litigation or arbitration proceedings.
13. Segment
Reporting
Effective
January 1, 2009, as a result of our recent acquisition of Marlborough
Underwriting Agency Limited (“Marlborough”), the managing agency for Lloyd’s
Syndicate 1861, management views the Company as being organized into three
reporting segments: Reinsurance, Lloyd’s and Insurance. Our Lloyd’s segment
includes the business generated through the Lloyd’s Syndicate 1861 and
Marlborough. Syndicate 1861, based in London, primarily provides property
and short-tail specialty and casualty reinsurance for risks such as energy, hull
and cargo, marine liability, engineering and aviation. Syndicate 1861 began
writing business for the benefit of Flagstone effective January 1, 2009. As such
there are no comparative numbers for the prior year.
The
following tables provide a summary of gross and net written and earned premiums,
underwriting results, a reconciliation of underwriting income to income before
income taxes and interest in earnings of equity investments, total
assets, and ratios for each of our reporting segments for the three
and six months ended June 30, 2009 and 2008:
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
|
|
For
the Three Months Ended June 30, 2009
|
|
|
For
the Three Months Ended June 30, 2008
|
|
|
|
Reinsurance
|
|
|
Lloyd's
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
279,464 |
|
|
$ |
36,614 |
|
|
$ |
25,088 |
|
|
$ |
(12,457 |
) |
|
$ |
328,709 |
|
|
$ |
265,910 |
|
|
$ |
26,673 |
|
|
$ |
(21,405 |
) |
|
$ |
271,178 |
|
Premiums
ceded
|
|
|
(28,860 |
) |
|
|
(6,375 |
) |
|
|
(37,019 |
) |
|
|
12,512 |
|
|
|
(59,742 |
) |
|
|
(15,039 |
) |
|
|
(44,801 |
) |
|
|
21,405 |
|
|
|
(38,435 |
) |
Net
premiums written
|
|
|
250,604 |
|
|
|
30,239 |
|
|
|
(11,931 |
) |
|
|
55 |
|
|
|
268,967 |
|
|
|
250,871 |
|
|
|
(18,128 |
) |
|
|
- |
|
|
|
232,743 |
|
Net
premiums earned
|
|
$ |
172,082 |
|
|
$ |
13,761 |
|
|
$ |
1,038 |
|
|
$ |
95 |
|
|
$ |
186,976 |
|
|
$ |
140,420 |
|
|
$ |
1,347 |
|
|
$ |
- |
|
|
$ |
141,767 |
|
Other
related income
|
|
|
1,477 |
|
|
|
413 |
|
|
|
5,082 |
|
|
|
(3,660 |
) |
|
|
3,312 |
|
|
|
570 |
|
|
|
2,505 |
|
|
|
(2,847 |
) |
|
|
228 |
|
Loss
and loss adjustment expenses
|
|
|
(48,915 |
) |
|
|
(7,988 |
) |
|
|
(676 |
) |
|
|
(62 |
) |
|
|
(57,641 |
) |
|
|
(56,152 |
) |
|
|
(146 |
) |
|
|
- |
|
|
|
(56,298 |
) |
Acquisition
costs
|
|
|
(33,520 |
) |
|
|
(2,847 |
) |
|
|
(3,475 |
) |
|
|
3,639 |
|
|
|
(36,203 |
) |
|
|
(26,920 |
) |
|
|
(3,137 |
) |
|
|
2,847 |
|
|
|
(27,210 |
) |
General
and administrative expenses
|
|
|
(28,849 |
) |
|
|
(3,463 |
) |
|
|
(2,266 |
) |
|
|
- |
|
|
|
(34,578 |
) |
|
|
(22,686 |
) |
|
|
(1,528 |
) |
|
|
- |
|
|
|
(24,214 |
) |
Underwriting
Income (Loss)
|
|
$ |
62,275 |
|
|
$ |
(124 |
) |
|
$ |
(297 |
) |
|
$ |
12 |
|
|
$ |
61,866 |
|
|
$ |
35,232 |
|
|
$ |
(959 |
) |
|
$ |
- |
|
|
$ |
34,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio (2)
|
|
|
28.4 |
% |
|
|
58.1 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
30.8 |
% |
|
|
40.0 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
39.7 |
% |
Acquisition
cost ratio (2)
|
|
|
19.5 |
% |
|
|
20.7 |
% |
|
|
56.8 |
% |
|
|
|
|
|
|
19.4 |
% |
|
|
19.2 |
% |
|
|
81.4 |
% |
|
|
|
|
|
|
19.2 |
% |
General
and administrative expense ratio (2)
|
|
|
16.8 |
% |
|
|
25.2 |
% |
|
|
37.0 |
% |
|
|
|
|
|
|
18.5 |
% |
|
|
16.2 |
% |
|
|
39.7 |
% |
|
|
|
|
|
|
17.1 |
% |
Combined
ratio (2)
|
|
|
64.7 |
% |
|
|
104.0 |
% |
|
|
104.8 |
% |
|
|
|
|
|
|
68.7 |
% |
|
|
75.4 |
% |
|
|
124.9 |
% |
|
|
|
|
|
|
76.0 |
% |
Total
assets
|
|
$ |
2,450,691 |
|
|
$ |
93,387 |
|
|
$ |
110,319 |
|
|
|
|
|
|
$ |
2,654,398 |
|
|
$ |
2,331,101 |
|
|
$ |
142,075 |
|
|
|
|
|
|
$ |
2,473,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,273 |
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,279 |
|
Net
realized and unrealized gains (losses) - investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,339 |
) |
Net
realized and unrealized gains (losses) - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,132 |
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,899 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,609 |
) |
Net
foreign exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,630 |
) |
Income
before income taxes and interest in earnings of equity
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Inter segment eliminations for 2009 relate to Flagstone Suisse
quota share arrangements with Island Heritage and Lloyd's.
|
|
(2)
For insurance segment all ratios calculated using expenses divided by net
premiums earned plus other related income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
|
|
For
the Six Months Ended June 30, 2009
|
|
|
For
the Six Months Ended June 30, 2008
|
|
|
|
Reinsurance
|
|
|
Lloyd's
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
583,258 |
|
|
$ |
85,593 |
|
|
$ |
41,810 |
|
|
$ |
(20,467 |
) |
|
$ |
690,194 |
|
|
$ |
489,517 |
|
|
$ |
45,778 |
|
|
$ |
(21,871 |
) |
|
$ |
513,424 |
|
Premiums
ceded
|
|
|
(96,495 |
) |
|
|
(11,524 |
) |
|
|
(47,914 |
) |
|
|
20,522 |
|
|
|
(135,410 |
) |
|
|
(20,359 |
) |
|
|
(55,961 |
) |
|
|
21,871 |
|
|
|
(54,449 |
) |
Net
premiums written
|
|
|
486,763 |
|
|
|
74,069 |
|
|
|
(6,104 |
) |
|
|
55 |
|
|
|
554,783 |
|
|
|
469,158 |
|
|
|
(10,183 |
) |
|
|
- |
|
|
|
458,975 |
|
Net
premiums earned
|
|
$ |
338,678 |
|
|
$ |
20,204 |
|
|
$ |
876 |
|
|
$ |
53 |
|
|
$ |
359,811 |
|
|
$ |
269,007 |
|
|
$ |
8,017 |
|
|
$ |
- |
|
|
$ |
277,024 |
|
Other
related income
|
|
|
2,504 |
|
|
|
2,433 |
|
|
|
10,688 |
|
|
|
(7,283 |
) |
|
|
8,342 |
|
|
|
782 |
|
|
|
3,334 |
|
|
|
(2,847 |
) |
|
|
1,269 |
|
Loss
and loss adjustment expenses
|
|
|
(120,145 |
) |
|
|
(13,319 |
) |
|
|
(771 |
) |
|
|
- |
|
|
|
(134,235 |
) |
|
|
(95,954 |
) |
|
|
(111 |
) |
|
|
- |
|
|
|
(96,065 |
) |
Acquisition
costs
|
|
|
(60,895 |
) |
|
|
(3,884 |
) |
|
|
(6,744 |
) |
|
|
7,283 |
|
|
|
(64,240 |
) |
|
|
(47,830 |
) |
|
|
(6,392 |
) |
|
|
2,847 |
|
|
|
(51,375 |
) |
General
and administrative expenses
|
|
|
(56,892 |
) |
|
|
(7,297 |
) |
|
|
(4,689 |
) |
|
|
- |
|
|
|
(68,878 |
) |
|
|
(46,819 |
) |
|
|
(3,944 |
) |
|
|
- |
|
|
|
(50,763 |
) |
Underwriting
Income (Loss)
|
|
$ |
103,250 |
|
|
$ |
(1,863 |
) |
|
$ |
(640 |
) |
|
$ |
53 |
|
|
$ |
100,800 |
|
|
$ |
79,186 |
|
|
$ |
904 |
|
|
$ |
- |
|
|
$ |
80,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio (2)
|
|
|
35.5 |
% |
|
|
65.9 |
% |
|
|
6.7 |
% |
|
|
|
|
|
|
37.3 |
% |
|
|
35.7 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
34.7 |
% |
Acquisition
cost ratio (2)
|
|
|
18.0 |
% |
|
|
19.2 |
% |
|
|
58.3 |
% |
|
|
|
|
|
|
17.9 |
% |
|
|
17.8 |
% |
|
|
56.3 |
% |
|
|
|
|
|
|
18.5 |
% |
General
and administrative expense ratio (2)
|
|
|
16.8 |
% |
|
|
36.1 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
19.1 |
% |
|
|
17.4 |
% |
|
|
34.7 |
% |
|
|
|
|
|
|
18.3 |
% |
Combined
ratio (2)
|
|
|
70.3 |
% |
|
|
121.2 |
% |
|
|
105.5 |
% |
|
|
|
|
|
|
74.3 |
% |
|
|
70.9 |
% |
|
|
92.0 |
% |
|
|
|
|
|
|
71.5 |
% |
Total
assets
|
|
$ |
2,450,691 |
|
|
$ |
93,387 |
|
|
$ |
110,319 |
|
|
|
|
|
|
$ |
2,654,398 |
|
|
$ |
2,331,101 |
|
|
$ |
142,075 |
|
|
|
|
|
|
$ |
2,473,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80,090 |
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,975 |
|
Net
realized and unrealized gains (losses) - investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,751 |
) |
Net
realized and unrealized gains (losses) - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,105 |
) |
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,582 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,949 |
) |
Net
foreign exchange (losses) gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,069 |
|
Income
before income taxes and interest in earnings of equity
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
116,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Inter segment eliminations for 2009 relate to Flagstone Suisse
quota share arrangements with Island Heritage and Lloyds.
|
|
(2)
For insurance segment all ratios calculated using expenses divided by net
premiums earned plus other related income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a discussion and analysis of our financial condition as at June 30,
2009 and December 31, 2008 and our results of operations for the three and six
months ended June 30, 2009 and 2008. This discussion should be read
in conjunction with our unaudited condensed consolidated financial statements
and related notes included in Part 1, Item 1 of this Form 10-Q and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, and the audited consolidated financial statements and notes
thereto, presented under Item 7 and Item 8, respectively, of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008. Some
of the information contained in this discussion and analysis is included
elsewhere in this document, including information with respect to our plans and
strategy for our business, and includes forward-looking statements that involve
risks and uncertainties. Please see the “Cautionary Statement
Regarding Forward-Looking Statements” for more information. You
should review Item 1A, “Risk Factors” contained in our Form 10-K, filed with the
SEC on March 13, 2009, for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements.
References
in this Quarterly Report on Form 10-Q to the “Company”, “Flagstone”, “we”, “us”,
and “our” refer to Flagstone Reinsurance Holdings Limited and/or its
subsidiaries, including Flagstone Réassurance Suisse SA, its wholly-owned
Switzerland reinsurance company, Marlborough Underwriting Agency Limited, its
United Kingdom Lloyd's managing agency, Island Heritage Holdings
Ltd., its Cayman Islands-based insurance holding company, Flagstone Alliance
Insurance & Reinsurance PLC, its wholly-owned Cypriot insurance and
reinsurance company, Flagstone Reinsurance Africa Limited, its South African
reinsurance company, Mont Fort Re Ltd., its wholly-owned Bermuda reinsurance
company, and any other direct or indirect wholly-owned subsidiary, unless the
context suggests otherwise. References to “Flagstone Suisse” refer to Flagstone
Réassurance Suisse SA and its wholly-owned subsidiaries and its Bermuda branch.
References to “Marlborough” refer to Marlborough Underwriting Agency Limited and
its wholly-owned subsidiaries as well as Lloyd’s Syndicate
1861. References to “Island Heritage” refer to Island Heritage
Holdings Ltd. and its subsidiaries. References to “Flagstone Alliance” refer to
Flagstone Alliance Insurance & Reinsurance PLC and its
subsidiaries. References to “Flagstone Africa” refer to Flagstone
Reinsurance Africa Limited. References in this Form
10-Q to “dollars” or “$” are to the lawful currency of the United States of
America, unless the context otherwise requires. All amounts in the
following tables are expressed in thousands of U.S. dollars, except share
amounts, per share amounts and percentages.
Executive
Overview
We are a
global reinsurance and insurance company. Effective January 1, 2009, as a result
of our recent acquisition of Marlborough, the managing agency for Lloyd’s
Syndicate 1861, management views the Company as being organized into three
business segments: Reinsurance, Lloyd’s and Insurance. Through our Reinsurance
segment, we write primarily property, property catastrophe and short-tail
specialty and casualty reinsurance. Through our Lloyd’s segment, we
write primarily property and short-tail specialty and casualty reinsurance
focused on the energy, hull and cargo, marine liability, engineering and
aviation business sectors. Through our Insurance segment, we
primarily write property insurance for homes, condominiums and office buildings
in the Caribbean region.
Because
we have a limited operating history, period to period comparisons of our results
of operations are limited and may not be meaningful in the near future. Our
financial statements are prepared in accordance with U.S. GAAP and our fiscal
year ends on December 31. Since a substantial portion of the
reinsurance we write provides protection from damages relating to natural and
man-made catastrophes, our results depend to a large extent on the
frequency and severity of such catastrophic events, and the specific insurance
coverages we offer to clients affected by these events. This may
result in volatility in our results of operations and financial
condition. In addition, the amount of premiums written with respect
to any particular line of business may vary from quarter to quarter and year to
year as a result of changes in market conditions.
We
measure our financial success through long term growth in diluted book value per
share plus accumulated dividends measured over intervals of three years, which
we believe is the most appropriate measure of the performance of the Company, a
measure that focuses on the return provided to the Company’s common
shareholders. Diluted book value per share is obtained by dividing
Flagstone’s shareholders’ equity by the number of common shares and common
share equivalents outstanding.
We derive
our revenues primarily from net premiums earned from the reinsurance and
insurance policies we write, net of any retrocessional or reinsurance coverage
purchased, net investment income from our investment portfolio, and fees for
services provided. Premiums are generally a function of the number
and type of contracts we write, as well as prevailing market prices. Premiums
are normally due in installments and earned over the contract term, which
ordinarily is twelve months.
Our
expenses consist primarily of the following types: loss and loss adjustment
expenses incurred on the policies of reinsurance and insurance that we sell;
acquisition costs which typically represent a percentage of the premiums that we
write; general and administrative expenses which primarily consist of salaries,
benefits and related costs, including costs associated with awards under our PSU
and RSU Plans, and other general operating expenses; interest expenses related
to our debt obligations; and noncontrolling interest, which represents the
interest of external parties with respect to the net income of Mont Fort, Island
Heritage, and Flagstone Africa. We are also subject to taxes in
certain jurisdictions in which we operate; however, since the majority of our
income to date has been earned in Bermuda, a non-taxable jurisdiction, the tax
impact on our operations has historically been minimal. As a result of the
merger between Flagstone Reinsurance Limited and Flagstone Suisse on
September 30, 2008, we expect our tax expense to increase to approximate our
effective Swiss Federal tax rate of approximately 8% on the portion of
underwriting profits, if any, generated by Flagstone Suisse, excluding the
underwriting profits generated in Bermuda through the Flagstone Suisse branch
office.
The
Company reports its results to the chief operating decision maker based on three
reporting segments: Reinsurance, Lloyd’s and Insurance. The Company
regularly reviews its financial results and assesses performance on the
basis of these three operating segments.
Those
segments are more fully described as follows:
Reinsurance
Our
Reinsurance segment has three main units:
(1)
|
Property
Catastrophe Reinsurance. Property catastrophe reinsurance contracts are
typically “all risk” in nature, meaning that they protect against losses
from earthquakes and hurricanes, as well as other natural and man-made
catastrophes such as tornados, wind, fires, winter storms, and floods
(where the contract specifically provides for coverage). Losses
on these contracts typically stem from direct property damage and business
interruption. To date, property catastrophe reinsurance has been our most
important product. We write property catastrophe reinsurance
primarily on an excess of loss basis. In the event of a loss,
most contracts of this type require us to cover a subsequent event and
generally provide for a premium to reinstate the coverage under the
contract, which is referred to as a “reinstatement
premium”. These contracts typically cover only specific regions
or geographical areas, but may be on a worldwide basis.
|
(2)
|
Property
Reinsurance. We also provide reinsurance on a pro rata share basis and per
risk excess of loss basis. Per risk reinsurance protects insurance
companies on their primary insurance risks on a single risk basis, for
example, covering a single large building. Generally,
our property per risk and pro rata business is written with loss
limitation provisions, such as per occurrence or per event caps, which
serve to limit exposure to catastrophic events.
|
(3)
|
Short-tail
Specialty and Casualty Reinsurance. We also provide short-tail specialty
and casualty reinsurance for risks such as aviation, energy, accident and
health, satellite, marine and workers’ compensation
catastrophe. Generally, our short-tail specialty and
casualty reinsurance is written with loss limitation
provisions.
|
Lloyd’s
Our
Lloyd’s segment includes the business generated through the Lloyd’s Syndicate
1861 and Marlborough. Syndicate 1861 primarily provides property and
short-tail specialty and casualty reinsurance for risks such as energy, hull and
cargo, marine liability, engineering and aviation.
Insurance
Our
Insurance segment includes insurance business generated through Island Heritage.
Island Heritage is a property insurer based in the Cayman Islands which is
primarily in the business of insuring homes, condominiums and office buildings
in the Caribbean region.
Critical
Accounting Policies
Critical
accounting policies at June 30, 2009 have not changed compared to December 31,
2008. The Company’s critical accounting policies are discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.
It is
important to understand our accounting policies in order to understand our
financial position and results of operations. Our unaudited condensed
consolidated financial statements contain certain amounts that are inherently
subjective in nature and have required management to make assumptions and best
estimates to determine the reported values. If events or other
factors, including those described in Item 1A, “Risk Factors,” of our Form 10-K,
cause actual events or results to differ materially from management’s underlying
assumptions or estimates, there could be a material adverse effect on our
results of operations, financial condition and liquidity.
New
Accounting Pronouncements
Adoption
of new accounting pronouncements
On April
1, 2009, the Company adopted the provisions of the FASB Statement No. 165,
“Subsequent Events” (“SFAS 165”), which requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether the date represents the date the financial statements
were issued or were available to be issued. SFAS 165 also alerts all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. We evaluated
subsequent events to August 4, 2009 and there are no subsequent events to
note.
On April
1, 2009, the Company adopted the provisions of the three FASB staff positions
(“FSP”) intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities: FSP
FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP FAS 157-4”), FSP FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”) and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FSP FAS
124-2”).
FSP FAS
157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in FASB Statement No. 157, “Fair Value
Measurements” (“SFAS 157”). FSP FAS
157-4 relates to determining fair values when there is no active market or where
the price inputs being used represent distressed sales. It reaffirms what SFAS
157 states is the objective of fair value measurement—to reflect how much an
asset would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive.
FSP FAS
107-1 and APB 28-1 enhance consistency in financial reporting by increasing the
frequency of fair value disclosures. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on
the balance sheet of companies at fair value. Prior to issuing this FSP, fair
values for these assets and liabilities were only disclosed once a year. The FSP
now requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.
FSP FAS
115-2 and FSP FAS 124-2 provide additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities. The guidance is intended to bring greater consistency to the timing
of impairment recognition, and provide greater clarity to investors about the
credit and noncredit components of impaired debt securities that are not
expected to be sold. The measure of impairment in comprehensive income remains
fair value. The FSP also requires increased and more timely disclosures sought
by investors regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses.
The
effect of adopting these FSPs was immaterial to our financial
statements.
On
January 1, 2009, the Company adopted the provisions of the SFAS
No. 160, which requires all entities to report noncontrolling interests in
subsidiaries (formerly known as minority interests) as a separate component of
equity in the consolidated balance sheets, to clearly identify consolidated net
income attributable to the parent and to the noncontrolling interest on the face
of the consolidated statement of operations and to provide sufficient disclosure
that clearly identifies and distinguishes between the interest of the parent and
the interests of noncontrolling owners. SFAS 160 also establishes accounting and
reporting standards for changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. Upon adoption of SFAS 160, we recharacterized our minority
interest as a noncontrolling interest and classified it as a component of
shareholders’ equity in our consolidated financial statements
On
January 1, 2009, the Company adopted the provisions of SFAS 161. The provisions of SFAS
161 amend and expand the disclosure requirements for derivative instruments and
hedging activities by requiring enhanced disclosures about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. The effect of adopting SFAS 161 was immaterial to our financial
statements.
New
accounting pronouncements issued during 2009 impacting the Company are as
follows:
On June
12, 2009, the FASB issued SFAS No. 166. SFAS No. 166 requires that a
transferor recognize and initially measure at fair value all assets obtained
(including a transferor’s beneficial interest) and liabilities incurred as a
result of financial assets accounted for as a sale. It is a revision
to FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,” and requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial
assets. SFAS No. 166 is effective on a prospective basis in fiscal
years beginning on or after November 15, 2009 and interim periods within those
fiscal years, and will be adopted by the Company in the first quarter of fiscal
year 2010. The Company is assessing the potential impact, if any, of
the adoption of SFAS No. 166 on its consolidated results of operations and
financial condition.
On June
12, 2009, the FASB issued SFAS No. 167. SFAS No. 167 amends FASB Statement No.
46 (revised December 2003), to require an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. It
determines whether a reporting entity is required to consolidate another entity
based on, among other things, the other entity’s purpose and design and the
reporting entity’s ability to direct the activities of the other entity that
most significantly impacts the other entity’s economic
performance. SFAS No. 167 is effective on a prospective basis in
fiscal years beginning on or after November 15, 2009 and interim periods within
those fiscal years, and will be adopted by the Company in the first quarter of
fiscal year 2009. The Company is assessing the potential impact, if
any, of the adoption of SFAS No. 167 on its consolidated results of operations
and financial condition.
In June
2009, the FASB issued SFAS No. 168. SFAS No. 168 is a replacement to SFAS No.
162, which became effective on November 13, 2008 and identified the sources of
accounting principles and the framework for selecting the principles used in
preparing the financial statements in conformity with U.S. GAAP. It
also arranged these sources of U.S. GAAP in a hierarchy for users to apply. SFAS
No. 168 will become the source of authoritative US GAAP recognized by the FASB
to be applied to nongovernmental entities in the preparation of financial
statements. The Codification will carry the same level of authority
and effectively supersede SFAS No. 162. The U.S. GAAP hierarchy will
be modified to include two levels of U.S. GAAP: authoritative and
non-authoritative. SFAS No. 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009, and will
be adopted by the Company in the third quarter of fiscal year
2010. The Company is assessing the potential impact, if any, of the
adoption of SFAS No. 168 on its consolidated results of operations and financial
condition.
Results
of Operations - For the Three and Six months Ended June 30, 2009 and
2008
The
Company’s reporting currency is the U.S. dollar. The Company’s
subsidiaries have one of the following functional currencies: U.S. dollar, Swiss
franc, Euro, British pound, Canadian dollar, Indian rupee, or South African
rand. As a significant portion of the Company’s operations are
transacted in foreign currencies, fluctuations in foreign exchange rates may
affect period-to-period comparisons. To the extent that fluctuations
in foreign currency exchange rates affect comparisons, their impact has been
quantified, when possible, and discussed in each of the relevant
sections. See Note 2 to the consolidated financial statements in Item
8, “Financial Statements and Supplementary Data”, in the Company’s Annual Report
on Form 10-K filed with the SEC on March 13, 2009, for a discussion on
translation of foreign currencies.
U.S.
dollar (weakened) strengthened against:
|
|
For
the three months
ended June
30, 2009
|
|
|
For
the six months
ended June
30, 2009
|
|
|
|
|
|
|
|
|
Canadian
dollar
|
|
|
-8.4 |
% |
|
|
-6.1 |
% |
Swiss
franc
|
|
|
-4.8 |
% |
|
|
2.0 |
% |
Euro
|
|
|
-5.6 |
% |
|
|
-0.9 |
% |
British
pound
|
|
|
-14.7 |
% |
|
|
-14.4 |
% |
Indian
rupee
|
|
|
-5.9 |
% |
|
|
-1.7 |
% |
South
African rand
|
|
|
-22.8 |
% |
|
|
-19.9 |
% |
Summary
Overview
We
generated net income attributable to Flagstone of $67.8 million and $103.6
million for the three and six months ended June 30, 2009, compared to net income
attributable to Flagstone of $41.9 million and $74.8 million for the same
periods in 2008. Our results of operations include the results of
Flagstone Africa beginning in July 2008, the results of Flagstone Alliance
beginning in October 2008 and the results of Marlborough beginning in November
2008. The increases in net income attributable to Flagstone for the
three and six months ended June 30, 2009 of $25.9 million and $28.8
million, respectively, as compared to the same periods in 2008 is primarily due
to:
|
For
the three months
ended
June 30, 2009
|
|
For
the six months
ended
June 30, 2009
|
- change
in underwriting income of:
|
$27.6 million
|
|
$20.7 million
|
- change
in investment income of:
|
$(2.7) million
|
|
$(23.1) million
|
- change in net realized and unrealized losses on investments and
other derivative
instruments and foreign exchange gains of:
|
$9.8
million
|
|
$32.1
million
|
-
change in income attributable to noncontrolling interest
of:
|
$(7.3)
million
|
|
$(2.0) million
|
These
items are discussed in the following sections.
As a
result of our net income attributable to Flagstone for the six months ended June
30, 2009, our diluted book value per share increased to $12.42 compared to
$11.30 at December 31, 2008, representing an increase of 10.4%, inclusive
of dividends declared during the period.
The
following table sets forth our selected unaudited consolidated statement of
operations data for each of the periods indicated.
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
328,709 |
|
|
$ |
271,178 |
|
|
$ |
690,194 |
|
|
$ |
513,424 |
|
Net
premiums written
|
|
|
268,967 |
|
|
|
232,743 |
|
|
|
554,783 |
|
|
|
458,975 |
|
Net
premiums earned
|
|
|
186,976 |
|
|
|
141,767 |
|
|
|
359,811 |
|
|
|
277,024 |
|
Loss
and loss adjustment expenses
|
|
|
57,641 |
|
|
|
56,298 |
|
|
|
134,235 |
|
|
|
96,065 |
|
Acquisition
costs and general and administrative expenses
|
|
|
70,781 |
|
|
|
51,424 |
|
|
|
133,118 |
|
|
|
102,138 |
|
Underwriting
income
|
|
|
61,866 |
|
|
|
34,273 |
|
|
|
100,800 |
|
|
|
80,090 |
|
Net
investment income
|
|
|
10,646 |
|
|
|
13,279 |
|
|
|
8,893 |
|
|
|
31,975 |
|
Net
realized and unrealized gains (losses) - investments
|
|
|
7,082 |
|
|
|
(9,339 |
) |
|
|
5,183 |
|
|
|
(21,751 |
) |
Net
realized and unrealized gains (losses) - other
|
|
|
2,470 |
|
|
|
11,132 |
|
|
|
9,900 |
|
|
|
(1,105 |
) |
Net
income attributable to Flagstone
|
|
|
67,814 |
|
|
|
41,948 |
|
|
|
103,557 |
|
|
|
74,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share outstanding—Basic
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.22 |
|
|
$ |
0.88 |
|
Earnings
per common share outstanding—Diluted
|
|
$ |
0.80 |
|
|
$ |
0.49 |
|
|
$ |
1.21 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio
|
|
|
30.8 |
% |
|
|
39.7 |
% |
|
|
37.3 |
% |
|
|
34.7 |
% |
Expense
ratio
|
|
|
37.9 |
% |
|
|
36.3 |
% |
|
|
37.0 |
% |
|
|
36.8 |
% |
Combined
ratio
|
|
|
68.7 |
% |
|
|
76.0 |
% |
|
|
74.3 |
% |
|
|
71.5 |
% |
Outlook
and Trends
Against
the backdrop of the global financial crisis which originated in the third
quarter of 2008 and coincided with increased land-falling hurricane activity
(2nd
worst catastrophe year) in the United States of Hurricanes Dolly, Gustav and
Ike, resulting in poor investment results, capital erosion, and higher than
average combined ratios for most reinsurers around the globe. This reduction in
reinsurer capital materialized into increased demand for reinsurance at the same
time that supply was constrained for the important January 1 renewal
season. While market price increases varied by line of business and region,
we observed a double digit level of price increase on average for loss-free
accounts and a 20% or more increase on programs impacted by the hurricanes and
other losses. In addition to the price increases, capacity for the peak U.S.
catastrophe zones for wind exposed business was fairly tight, raising the
required hurdle price for programs to get completed. While submission of the
individual program information was generally early, the renewals were completed
late in the season because of the magnitude of price increase and securing of
adequate capacity. This market has also seen a lack of any material new capacity
emerging as no new “Class of 2009” has thus far emerged, bringing any new
capital or capacity to this hardening market.
For the
mid-year renewals we
expected to see continued firming of property catastrophe reinsurance price and
terms and conditions as we headed into the second and third quarter June
and July renewals, an increasingly larger segment of the annual reinsurance
premium generated for U.S. property catastrophe business where Florida, Gulf
region, and the East coast are the most significant exposures being placed. We
likewise expected capacity to be down overall, coupled with a level of price
increase likely to exceed that seen at January 1. This expectation was largely
met on the pricing side where we again saw a mid-teens percent increase in
pricing, however the level of capacity available in the market increased and
proved mostly adequate to meet demand, causing some programs to be
oversubscribed and signed down.
As the
market moves through the Atlantic hurricane season which is widely forecast to
be at a “normal/ below normal” level of activity, we expect this will cause a
flattening of pricing and for capacity to remain adequate as we approach the
January 1, 2010 renewal season. Barring any major catastrophic industry loss
activity, we expect competition to increase for the business.
Underwriting
Results by Segment
The
Company is organized into three reportable segments, Reinsurance, Lloyd’s and
Insurance. Our Reinsurance segment provides reinsurance through our property,
property catastrophe and short-tail specialty and casualty reinsurance business
units. Our Lloyd’s segment primarily provides property and short-tail
specialty and casualty reinsurance for risks such as energy, hull and cargo,
marine liability, engineering and aviation. Our Insurance segment provides
insurance through Island Heritage.
The
following tables provide a summary of gross and net written and earned premiums,
underwriting results, total assets and ratios for each of our business segments
for the three and six months ended June 30, 2009 and 2008:
|
|
For
the Three Months Ended June 30, 2009
|
|
|
For
the Three Months Ended June 30, 2008
|
|
|
|
Reinsurance
|
|
|
Lloyd's
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
279,464 |
|
|
$ |
36,614 |
|
|
$ |
25,088 |
|
|
$ |
(12,457 |
) |
|
$ |
328,709 |
|
|
$ |
265,910 |
|
|
$ |
26,673 |
|
|
$ |
(21,405 |
) |
|
$ |
271,178 |
|
Premiums
ceded
|
|
|
(28,860 |
) |
|
|
(6,375 |
) |
|
|
(37,019 |
) |
|
|
12,512 |
|
|
|
(59,742 |
) |
|
|
(15,039 |
) |
|
|
(44,801 |
) |
|
|
21,405 |
|
|
|
(38,435 |
) |
Net
premiums written
|
|
|
250,604 |
|
|
|
30,239 |
|
|
|
(11,931 |
) |
|
|
55 |
|
|
|
268,967 |
|
|
|
250,871 |
|
|
|
(18,128 |
) |
|
|
- |
|
|
|
232,743 |
|
Net
premiums earned
|
|
$ |
172,082 |
|
|
$ |
13,761 |
|
|
$ |
1,038 |
|
|
$ |
95 |
|
|
$ |
186,976 |
|
|
$ |
140,420 |
|
|
$ |
1,347 |
|
|
$ |
- |
|
|
$ |
141,767 |
|
Other
related income
|
|
|
1,477 |
|
|
|
413 |
|
|
|
5,082 |
|
|
|
(3,660 |
) |
|
|
3,312 |
|
|
|
570 |
|
|
|
2,505 |
|
|
|
(2,847 |
) |
|
|
228 |
|
Loss
and loss adjustment expenses
|
|
|
(48,915 |
) |
|
|
(7,988 |
) |
|
|
(676 |
) |
|
|
(62 |
) |
|
|
(57,641 |
) |
|
|
(56,152 |
) |
|
|
(146 |
) |
|
|
- |
|
|
|
(56,298 |
) |
Acquisition
costs
|
|
|
(33,520 |
) |
|
|
(2,847 |
) |
|
|
(3,475 |
) |
|
|
3,639 |
|
|
|
(36,203 |
) |
|
|
(26,920 |
) |
|
|
(3,137 |
) |
|
|
2,847 |
|
|
|
(27,210 |
) |
General
and administrative expenses
|
|
|
(28,849 |
) |
|
|
(3,463 |
) |
|
|
(2,266 |
) |
|
|
- |
|
|
|
(34,578 |
) |
|
|
(22,686 |
) |
|
|
(1,528 |
) |
|
|
- |
|
|
|
(24,214 |
) |
Underwriting
Income (Loss)
|
|
$ |
62,275 |
|
|
$ |
(124 |
) |
|
$ |
(297 |
) |
|
$ |
12 |
|
|
$ |
61,866 |
|
|
$ |
35,232 |
|
|
$ |
(959 |
) |
|
$ |
- |
|
|
$ |
34,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio (2)
|
|
|
28.4 |
% |
|
|
58.1 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
30.8 |
% |
|
|
40.0 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
39.7 |
% |
Acquisition
cost ratio (2)
|
|
|
19.5 |
% |
|
|
20.7 |
% |
|
|
56.8 |
% |
|
|
|
|
|
|
19.4 |
% |
|
|
19.2 |
% |
|
|
81.4 |
% |
|
|
|
|
|
|
19.2 |
% |
General
and administrative expense ratio (2)
|
|
|
16.8 |
% |
|
|
25.2 |
% |
|
|
37.0 |
% |
|
|
|
|
|
|
18.5 |
% |
|
|
16.2 |
% |
|
|
39.7 |
% |
|
|
|
|
|
|
17.1 |
% |
Combined ratio (2)
|
|
|
64.7 |
% |
|
|
104.0 |
% |
|
|
104.8 |
% |
|
|
|
|
|
|
68.7 |
% |
|
|
75.4 |
% |
|
|
124.9 |
% |
|
|
|
|
|
|
76.0 |
% |
Total
assets
|
|
$ |
2,450,691 |
|
|
$ |
93,387 |
|
|
$ |
110,319 |
|
|
|
|
|
|
$ |
2,654,398 |
|
|
$ |
2,331,101 |
|
|
$ |
142,075 |
|
|
|
|
|
|
$ |
2,473,176 |
|
1) Inter
segment eliminations for 2009 relate to Flagstone Suisse quota share
arrangements with Island Heritage and Lloyd’s.
2) For insurance segment all ratios
calculated using expenses divided by net premiums earned plus other related
income
|
|
For
the Six Months Ended June 30, 2009
|
|
|
For
the Six Months Ended June 30, 2008
|
|
|
|
Reinsurance
|
|
|
Lloyd's
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Inter-segment
Eliminations (1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$ |
583,258 |
|
|
$ |
85,593 |
|
|
$ |
41,810 |
|
|
$ |
(20,467 |
) |
|
$ |
690,194 |
|
|
$ |
489,517 |
|
|
$ |
45,778 |
|
|
$ |
(21,871 |
) |
|
$ |
513,424 |
|
Premiums
ceded
|
|
|
(96,495 |
) |
|
|
(11,524 |
) |
|
|
(47,914 |
) |
|
|
20,522 |
|
|
|
(135,410 |
) |
|
|
(20,359 |
) |
|
|
(55,961 |
) |
|
|
21,871 |
|
|
|
(54,449 |
) |
Net
premiums written
|
|
|
486,763 |
|
|
|
74,069 |
|
|
|
(6,104 |
) |
|
|
55 |
|
|
|
554,783 |
|
|
|
469,158 |
|
|
|
(10,183 |
) |
|
|
- |
|
|
|
458,975 |
|
Net
premiums earned
|
|
$ |
338,678 |
|
|
$ |
20,204 |
|
|
$ |
876 |
|
|
$ |
53 |
|
|
$ |
359,811 |
|
|
$ |
269,007 |
|
|
$ |
8,017 |
|
|
$ |
- |
|
|
$ |
277,024 |
|
Other
related income
|
|
|
2,504 |
|
|
|
2,433 |
|
|
|
10,688 |
|
|
|
(7,283 |
) |
|
|
8,342 |
|
|
|
782 |
|
|
|
3,334 |
|
|
|
(2,847 |
) |
|
|
1,269 |
|
Loss
and loss adjustment expenses
|
|
|
(120,145 |
) |
|
|
(13,319 |
) |
|
|
(771 |
) |
|
|
- |
|
|
|
(134,235 |
) |
|
|
(95,954 |
) |
|
|
(111 |
) |
|
|
- |
|
|
|
(96,065 |
) |
Acquisition
costs
|
|
|
(60,895 |
) |
|
|
(3,884 |
) |
|
|
(6,744 |
) |
|
|
7,283 |
|
|
|
(64,240 |
) |
|
|
(47,830 |
) |
|
|
(6,392 |
) |
|
|
2,847 |
|
|
|
(51,375 |
) |
General
and administrative expenses
|
|
|
(56,892 |
) |
|
|
(7,297 |
) |
|
|
(4,689 |
) |
|
|
- |
|
|
|
(68,878 |
) |
|
|
(46,819 |
) |
|
|
(3,944 |
) |
|
|
- |
|
|
|
(50,763 |
) |
Underwriting
Income (Loss)
|
|
$ |
103,250 |
|
|
$ |
(1,863 |
) |
|
$ |
(640 |
) |
|
$ |
53 |
|
|
$ |
100,800 |
|
|
$ |
79,186 |
|
|
$ |
904 |
|
|
$ |
- |
|
|
$ |
80,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio (2)
|
|
|
35.5 |
% |
|
|
65.9 |
% |
|
|
6.7 |
% |
|
|
|
|
|
|
37.3 |
% |
|
|
35.7 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
34.7 |
% |
Acquisition
cost ratio (2)
|
|
|
18.0 |
% |
|
|
19.2 |
% |
|
|
58.3 |
% |
|
|
|
|
|
|
17.9 |
% |
|
|
17.8 |
% |
|
|
56.3 |
% |
|
|
|
|
|
|
18.5 |
% |
General
and administrative expense ratio (2)
|
|
|
16.8 |
% |
|
|
36.1 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
19.1 |
% |
|
|
17.4 |
% |
|
|
34.7 |
% |
|
|
|
|
|
|
18.3 |
% |
Combined ratio (2)
|
|
|
70.3 |
% |
|
|
121.2 |
% |
|
|
105.5 |
% |
|
|
|
|
|
|
74.3 |
% |
|
|
70.9 |
% |
|
|
92.0 |
% |
|
|
|
|
|
|
71.5 |
% |
Total
assets
|
|
$ |
2,450,691 |
|
|
$ |
93,387 |
|
|
$ |
110,319 |
|
|
|
|
|
|
$ |
2,654,398 |
|
|
$ |
2,331,101 |
|
|
$ |
142,075 |
|
|
|
|
|
|
$ |
2,473,176 |
|
(1)
Inter segment eliminations for 2009 relate to Flagstone Suisse
quota share arrangements with Island Heritage and
Lloyd’s.
|
(2)
For insurance segment all ratios calculated using expenses divided by net
premiums earned plus other related
income.
|
Gross
Premiums Written
Details
of consolidated gross premiums written by line of business and geographic area
of risk insured are provided below:
|
|
Three
Months Ended June 30, 2009
|
|
|
Three
Months Ended June 30, 2008
|
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
Line of
business
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
catastrophe
|
|
$ |
182,311 |
|
|
|
55.5 |
% |
|
$ |
182,600 |
|
|
|
67.3 |
% |
Property
|
|
|
41,088 |
|
|
|
12.5 |
% |
|
|
19,057 |
|
|
|
7.0 |
% |
Short-tail
specialty and casualty
|
|
|
80,222 |
|
|
|
24.4 |
% |
|
|
42,848 |
|
|
|
15.8 |
% |
Insurance
|
|
|
25,088 |
|
|
|
7.6 |
% |
|
|
26,673 |
|
|
|
9.9 |
% |
Total
|
|
$ |
328,709 |
|
|
|
100.0 |
% |
|
$ |
271,178 |
|
|
|
100.0 |
% |
|
|
Six
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2008
|
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
Line of
business
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
catastrophe
|
|
$ |
383,051 |
|
|
|
55.5 |
% |
|
$ |
344,128 |
|
|
|
67.0 |
% |
Property
|
|
|
92,949 |
|
|
|
13.4 |
% |
|
|
39,115 |
|
|
|
7.6 |
% |
Short-tail
specialty and casualty
|
|
|
172,384 |
|
|
|
25.0 |
% |
|
|
84,403 |
|
|
|
16.5 |
% |
Insurance
|
|
|
41,810 |
|
|
|
6.1 |
% |
|
|
45,778 |
|
|
|
8.9 |
% |
Total
|
|
$ |
690,194 |
|
|
|
100.0 |
% |
|
$ |
513,424 |
|
|
|
100.0 |
% |
|
|
Three
Months Ended June 30, 2009
|
|
|
Three
Months Ended June 30, 2008
|
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
Geographic area of risk
insured(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Caribbean
(2)
|
|
$ |
28,393 |
|
|
|
8.6 |
% |
|
$ |
28,537 |
|
|
|
10.5 |
% |
Europe
|
|
|
27,658 |
|
|
|
8.4 |
% |
|
|
10,352 |
|
|
|
3.8 |
% |
Japan
and Australasia
|
|
|
31,061 |
|
|
|
9.4 |
% |
|
|
24,606 |
|
|
|
9.1 |
% |
North
America
|
|
|
194,754 |
|
|
|
59.3 |
% |
|
|
165,072 |
|
|
|
60.9 |
% |
Worldwide
risks(3)
|
|
|
31,802 |
|
|
|
9.7 |
% |
|
|
36,312 |
|
|
|
13.4 |
% |
Other
|
|
|
15,041 |
|
|
|
4.6 |
% |
|
|
6,299 |
|
|
|
2.3 |
% |
Total
|
|
$ |
328,709 |
|
|
|
100.0 |
% |
|
$ |
271,178 |
|
|
|
100.0 |
% |
|
|
Six
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2008
|
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
|
Gross
premiums written
|
|
|
Percentage
of total
|
|
Geographic area of risk
insured(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Caribbean
(2)
|
|
$ |
49,482 |
|
|
|
7.2 |
% |
|
$ |
54,158 |
|
|
|
10.5 |
% |
Europe
|
|
|
98,286 |
|
|
|
14.2 |
% |
|
|
75,441 |
|
|
|
14.7 |
% |
Japan
and Australasia
|
|
|
42,979 |
|
|
|
6.2 |
% |
|
|
33,756 |
|
|
|
6.6 |
% |
North
America
|
|
|
320,490 |
|
|
|
46.5 |
% |
|
|
242,823 |
|
|
|
47.3 |
% |
Worldwide
risks(3)
|
|
|
142,949 |
|
|
|
20.7 |
% |
|
|
93,480 |
|
|
|
18.2 |
% |
Other
|
|
|
36,008 |
|
|
|
5.2 |
% |
|
|
13,766 |
|
|
|
2.7 |
% |
Total
|
|
$ |
690,194 |
|
|
|
100.0 |
% |
|
$ |
513,424 |
|
|
|
100.0 |
% |
(1)
|
Except
as otherwise noted, each of these categories includes contracts that cover
risks located primarily in the designated geographic
area.
|
(2)
|
Gross
written premiums related to the Insurance segment are included in the
Caribbean geographic area.
|
(3)
|
This
geographic area includes contracts that cover risks in two or more
geographic zones.
|
Reinsurance
Segment
Overview
The net
underwriting income for the Reinsurance segment for the three and six months
ended June 30, 2009 amounted to $62.3 million and $103.3 million, respectively,
compared to $35.2 million and $79.2 million for the three and six months ended
June 30, 2008. The increase in net underwriting results is primarily related to
the increase in net premiums earned.
Gross
premiums written for our reinsurance segment in the three and six months ended
June 30, 2009 were $279.5 million and $583.3 million, respectively,
compared to $265.9 million and $489.5 million, respectively, for the same
periods in 2008, an increase in gross premiums written of $13.6 million and
$93.8 million, or 5.1% and 19.2%, respectively. The increase in the three months
ended June 30, 2009, was mainly due to an increase in our property reinsurance
business partially offset by a decrease in our property catastrophe business, as
discussed below. The increase in the six months ended June 30, 2009, is
primarily due to the contribution of Flagstone Africa and Flagstone Alliance of
$28.7 million which were not subsidiaries in 2008, and due to the rate level
increases on catastrophe exposed treaties, in both North America and
International.
Our
Reinsurance segment comprises three lines of business outlined
below.
Gross
Premiums Written
a.
|
Property
catastrophe reinsurance
|
Gross
property catastrophe premiums written for the three months ended June 30, 2009
were $191.8 million, compared to $204.0 million for the three months ended June
30, 2008. The decrease of $12.2 million, or 6.0%, in property
catastrophe premiums written is primarily due to the non renewal of certain
treaties because they did not meet the company’s profitability target or because
cedents chose to retain the risks, partially offset by rate increases on loss
exposed treaties.
During
the three months ended June 30, 2009, we recorded less than $0.1 million of
gross reinstatement premiums compared to $3.1 million recorded for the three
months ended June 30, 2008.
Gross
property catastrophe premiums written for the six months ended June 30, 2009
were $400.6 million, compared to $366.0 million for the six months ended June
30, 2008. The increase of $34.6 million, or 9.4%, is primarily due to
a hardening of prices in the property catastrophe market.
During
the six months ended June 30, 2009, we recorded $2.1 million of gross
reinstatement premiums related to Hurricane Ike and Windstorm Klaus, compared to
$4.3 million recorded for the six months ended June 30, 2008.
Gross
property premiums written for the three months ended June 30, 2009 were $44.2
million, compared to $19.1 million for the three months ended June 30, 2008,
representing an increase of $25.1 million, or 131.4%. The increase is primarily
due to the contribution of Flagstone Africa and Flagstone Alliance of $3.2
million which were not subsidiaries in 2008 and increase in proportional
property premiums due to new business as well as increased shares by existing
clients.
During
the three months ended June 30, 2009, we recorded $1.8 million of gross
reinstatement premiums primarily related to per risk covers, compared to $1.5
million recorded for the three months ended June 30, 2008.
Gross
property premiums written for the six months ended June 30, 2009 were $87.0
million, compared to $39.1 million for the six months ended June 30, 2008,
representing a increase of $47.9 million, or 122.5%. The increase is primarily
due to the contribution of Flagstone Africa and Flagstone Alliance of $11.1
million which were not subsidiaries in 2008 and increase in proportional
property premiums due to new business as well as increased shares by existing
clients.
During
the six months ended June 30, 2009, we recorded $2.5 million gross reinstatement
premiums with various traditional property per risk covers related to the
application of peg loss ratios as well as known property loss events from the
first six months of 2009, compared to $3.0 million recorded for the six months
ended June 30, 2008.
c.
|
Short
tail specialty and casualty
reinsurance
|
Short-tail
specialty and casualty reinsurance premiums were $43.4 million for the
three months ended June 30, 2009, compared to $42.8 million for the three months
ended June 30, 2008, representing an increase of $0.6 million, or
1.4 %. Short-tail specialty and casualty reinsurance premiums
were $95.7 million for the six months ended June 30, 2009, compared to $84.4
million for the six months ended June 30, 2008, representing a increase of $11.3
million or 13.4%. The increases period over period are
primarily coming from our Swiss platform and Flagstone Alliance, offset by
the non renewal of aviation treaties that did not meet the Company’s
profitability targets.
During
the three and six months ended June 30, 2009, we recorded $1.8 million and $3.1
million, of gross reinstatement premiums primarily related to marine, energy and
aviation contracts, compared to $0.9 million and $1.7 million,
respectively, in the three and six months ended June 30, 2008.
Premiums
Ceded
In the
normal course of its business, the Company purchases reinsurance in order to
manage its exposures. The amount and type of reinsurance that it enters into is
dependent on a variety of factors, including the cost of a particular
reinsurance cover and the nature of its gross premiums written during a
particular period.
Reinsurance
purchases to date have represented prospective cover; that is, ceded reinsurance
purchased to protect it against the risk of future losses as opposed to covering
losses that have already incurred but have not been paid. The majority of these
contracts are excess-of-loss contracts covering one or more lines of business.
To a lesser extent we have also purchased quota share reinsurance with respect
to specific lines of business. We also purchase industry loss warranty policies
which provide coverage for certain losses provided they are triggered by events
exceeding a specified industry loss size.
Reinsurance
premiums ceded for the three months ended June 30, 2009 and 2008, were $28.9
million and $15.0 million (10.3% and 5.6% of gross reinsurance premiums
written), respectively, representing an increase of $13.9 million. Reinsurance
premiums ceded for the six months ended June 30, 2009 and 2008 were $96.5
million and $20.4 million (16.5% and 4.2% of gross reinsurance premiums
written), respectively, representing an increase of $76.1 million. The increase
in amount of reinsurance premiums ceded was designed to increase our
underwriting capacity and provide additional protection against potential high
severity loss events.
Various
factors will continue to affect our appetite and capacity to write and retain
risk. These include the impact of changes in frequency and severity assumptions
used in our models and the corresponding pricing required to meet our return
targets, evolving industry-wide capital requirements, increased competition, and
other considerations.
Net
Premiums Earned
As the
levels of net premiums written increase, the levels of net premiums earned also
increase. Reinsurance net premiums earned were $172.1 million
for the three months ended June 30, 2009, compared to $140.4 million for the
three months ended June 30, 2008, representing an increase of $31.7 million, or
22.6%. Reinsurance net premiums earned were $338.7 million for the
six months ended June 30, 2009, compared to $269.0 million for the same period
in 2008, representing an increase of $69.7 million, or 25.9%. The increases
are primarily due to higher levels of premium writings.
Underwriting
Expenses
a.
|
Loss
and loss adjustment expenses
|
Loss and
loss adjustment expenses for the three months ended June 30, 2009 were
$48.9 million, or 28.4% of net premiums earned, compared to $56.2 million,
or 40.0% of net premiums earned, for the three months ended June 30, 2008.
The decrease in the loss ratio from the second quarter of 2008 was
primarily due to the absence of significant losses in the current quarter
compared to the same period last year in which we had incurred losses on Chinese
winter storms ($14.4 million). During the quarter ended June 30, 2009, we
also revisited our loss estimates for previous loss events. Based on
updated estimates provided by clients and brokers, we have recorded net
favorable developments for prior period loss events of $10.8
million, related to small releases on several events.
Loss and
loss adjustment expenses for the six months ended June 30, 2009 were $120.1
million or 35.5% of net premiums earned, compared to $96.0 million, or 35.7% of
net premiums earned, for the six months ended June 30, 2008.
Acquisition
costs for the three and six months ended June 30, 2009 were $33.5 million and
$60.9 million, respectively, compared to $26.9 million and $47.8 million for the
three and six months ended June 30, 2008. The acquisition cost ratio,
which is equal to acquisition cost expenses over net premiums earned, for the
three and six months ended June 30, 2009 were 19.5% and 18.0%,
respectively, compared to 19.2% and 17.8%, respectively, for the three and six
months ended June 30, 2008. The increase in acquisition costs is primarily
due to a large intersegment quota share, which is eliminated on consolidation.
c.
|
General
and administrative expenses
|
General
and administrative expenses for the three and six months ended June 30, 2009,
were $28.8 million and $56.9 million, respectively, compared to $22.7
million and $46.8 million in the three and six months ended June 30, 2008,
respectively. The increase in the general and administrative expenses for
the three and six months ended June 30, 2009 compared to the same period in 2008
is primarily due to increased costs associated with additional staff as a result
of the acquisition of Flagstone Africa and Flagstone Alliance during the second
and third quarters of 2008, respectively.
Lloyd’s
Segment
Overview
As a
result of the acquisition of Marlborough, the managing agency for Lloyd’s
Syndicate 1861, in November 2008, the Company established a new reporting
segment. Syndicate 1861 began writing business for the benefit of
Flagstone effective January 1, 2009. As such there are no comparative
numbers for the prior year. The net underwriting loss for the Lloyd’s segment
for the three and six months ended June 30, 2009 amounted to $0.1 million and
$1.9 million. Due to the start up nature of the 2009 year of account for
Syndicate 1861, the level of earned premium income is slowly ramping up with new
business, placing strain on the underwriting results as we have incurred
expenses for the full quarter. In addition, due to the start up nature there is
a very limited level of funds available and therefore minimal investment income
has been earned to date.
Gross
Premiums Written
Gross
premiums written were $36.6 million and $85.6 million for the three and six
months ended June 30, 2009, respectively, and consist primarily of property and
specialty lines.
Premiums
Ceded
Premiums
ceded for the three and six months ended June 30, 2009 were $6.4 million and
$11.5 million (17.5% and 13.4% of gross premiums written), respectively. In the
normal course of its business, the Company purchases reinsurance in order to
manage its exposures. The amount and type of reinsurance that it enters into is
dependent on a variety of factors, including the cost of a particular
reinsurance cover and the nature of its gross premiums written during a
particular period.
Net
Premiums Earned
Net
premiums earned totaled $13.8 million and $20.2 million, respectively, for the
three and six months ended June 30, 2009. The net premiums earned are
a function of the timing and amount of premiums written and given the start up
nature of the syndicate’s writings, premiums earned are small relative to the
writings during the current quarter.
Other
Related Income
Other
related income, derived from services provided to syndicates and third
parties, totaled $0.4 million and $2.4 million, respectively, for the three and
six months ended June 30, 2009.
Underwriting
Expenses
a.
|
Loss
and loss adjustment expenses
|
Loss and
loss adjustment expenses amounted to $8.0 million and $13.3 million,
respectively, for the three and six months ended June 30, 2009. There were
no significant loss events recorded during the three and six month
periods ended June 30, 2009.
Acquisition
costs totaled $2.8 million and $3.9 million, respectively, for the three and six
months ended June 30, 2009. The acquisition cost ratio, which is equal to
acquisition cost expenses over net premiums earned, for the three and six months
ended June 30, 2009 was 20.7% and 19.2%. Acquisition costs include
brokerage, gross commission costs, profit commission and premium
taxes.
c.
|
General
and administrative expenses
|
General
and administrative expenses for the three and six months ended June 30, 2009
were $3.5 million and $7.3 million, respectively. General and administrative
expenses include staff and salary related costs, administration expenses and
Lloyd’s specific costs such as syndicate expenses.
Insurance
Segment
Overview
The net
underwriting (loss) income for the three and six months ended June 30, 2009
amounted to $(0.3) million and $(0.6) million, respectively, compared to $(1.0)
million and $0.9 million for the three and six months ended June 30,
2008.
Gross
Premiums Written
Gross
premiums written were $25.1 million and $41.8 million, respectively, for the
three and six months ended June 30, 2009, compared to $26.7 million and $45.8
million, respectively, for the three and six months ended June 30,
2008. The decrease is primarily related to the non-renewal of certain
contracts which no longer met the Company’s profitability targets as well as a
reduction in premiums as a result of the cessation of business of the Company’s
agent in Jamaica. Contracts are written on a per risk basis and consist
primarily of property lines. Seasonality is inherent for most Caribbean insurers
given that the storm season begins June 1 and concludes November 30. Therefore,
proportionally higher volumes of property business are traditionally written in
the first two quarters of the fiscal year.
Premiums
Ceded
Insurance
premiums ceded for the three and six months ended June 30, 2009 were
$37.0 million and $47.9 million (147.4% and 114.6% of gross premiums
written), respectively, compared to $44.8 million and $56.0 million (167.8% and
122.3% of gross premiums written), respectively, for the three and six months
ended June 30, 2008. Island Heritage’s reinsurance program, which is
primarily an April 1 renewal, comprising excess of loss and quota share
programs, was significantly changed on April 1, 2008 compared to prior years,
resulting in the addition of increased net quota share reinsurance portfolio
transfer as at April 1, 2008. The change in the reinsurance program enables
Island Heritage to enter into new markets as well as increase penetration in
existing markets.
Net
Premiums Earned
Net
premiums earned totaled $1.0 million and $0.9 million, respectively, for the
three and six months ended June 30, 2009, compared to $1.3 million and $8.0
million, respectively, for the three and six months ended June 30, 2008. The
significant decrease in net premiums earned for the six months ended June 30,
2009, compared to the six months ended June 30, 2008 is primarily due to the
difference in the reinsurance program in place for both years.
Other
Related Income
Other
insurance related income, primarily quota share reinsurance ceding commissions,
totaled $5.1 million and $10.7 million, respectively, for the three and six
months ended June 30, 2009, compared to $2.5 million and $3.3 million,
respectively, for the three and six months ended June 30, 2008. The
increase in other insurance related income for 2009 is due to the changes in the
reinsurance program referred to above, and includes $3.7 million and $7.3
million for the three and six months ended June 30, 2009, respectively, related
to the quota share arrangement between Island Heritage and Flagstone Suisse.
This amount is fully eliminated upon consolidation.
Underwriting
Expenses
a.
|
Loss
and loss adjustment expenses
|
Loss and
loss adjustment expenses amounted to $0.7 million and $0.8 million,
respectively, for the three and six months ended June 30, 2009, compared to $0.1
million and $ 0.1 million, respectively, for the three and six months ended June
30, 2008.
Acquisition
costs totaled $3.5 million and $6.7 million, respectively, for the three and six
months ended June 30, 2009, compared to $3.1 million and $6.4 million,
respectively, for the three and six months ended June 30,
2008. Acquisition costs include gross commission costs, profit
commission, premium taxes, and the change in deferred acquisition
costs.
c.
|
General
and administrative expenses
|
General
and administrative expenses for the three and six months ended June 30, 2009
were $2.3 million and $4.7 million, respectively, compared to $1.5 million and
$3.9 million in the three and six months ended June 30, 2008 as Island Heritage
continues to enhance its underwriting and claims operating
platform.
Investment
Results
The total
return on our investment portfolio, excluding noncontrolling interests in the
investment portfolio, comprises investment income and realized and unrealized
gains and losses on investments. For the three and six months ended June 30,
2009, the total return on invested assets was 1.2% and 1.1%, respectively,
compared to 0.4% and 0.6%, respectively, for the three and six months ended June
30, 2008. The Company modified its asset allocation significantly in
the fourth quarter of 2008, and therefore, the results for the periods
ended June 30, 2009 and June 30, 2008 are not directly
comparable.
a. Net
investment income
Net
investment income for the three months ended June 30, 2009 was $10.6 million
compared to $13.3 million for the same period in 2008, a decrease of $2.7
million. The decrease is principally due to lower amortization on the TIPS in
the current period as compared to the same period of 2008 caused by lower
inflation index and also by lower short-term interest rates in 2009 than
2008.
Net
investment income for the six months ended June 30, 2009 was $8.9 million
compared to $32.0 million for the same period in 2008, a decrease of $23.1
million. The decrease is due to decline in interest rates from 2008 to 2009 and
also to the negative amortization on the TIPS in the first three months of 2009.
This negative amortization was caused by the impact of negative inflation
index. It should be noted that our TIPS portfolio generated positive total
returns for the six months ended June 30, 2009 of 4.3%. However, this return for
the six months ended June 30, 2009 is recorded as $5.1 million of negative
amortization income and $16.6 million of realized and unrealized gains. In
comparison, for the six months ended June 30, 2008, the return was 5.3% which
was recorded as $7.9 million of positive amortization income and $15.9 million
of realized and unrealized gains respectively. Our net investment income may be
impacted by large movement in inflation rates.
Investment
income is principally derived from interest, dividends and amortization earned
on investments, partially offset by investment management and custody
fees. The components are set forth in the table below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
962 |
|
|
$ |
3,125 |
|
|
$ |
1,707 |
|
|
$ |
7,971 |
|
Fixed
maturities
|
|
|
7,405 |
|
|
|
7,119 |
|
|
|
14,788 |
|
|
|
16,315 |
|
Short
term
|
|
|
269 |
|
|
|
12 |
|
|
|
362 |
|
|
|
138 |
|
Equity
investments
|
|
|
16 |
|
|
|
- |
|
|
|
48 |
|
|
|
- |
|
Other
investments
|
|
|
(21 |
) |
|
|
450 |
|
|
|
(57 |
) |
|
|
453 |
|
Amortization
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
2,901 |
|
|
|
4,838 |
|
|
|
(5,772 |
) |
|
|
9,351 |
|
Short
term
|
|
|
76 |
|
|
|
141 |
|
|
|
105 |
|
|
|
302 |
|
Other
investments
|
|
|
67 |
|
|
|
- |
|
|
|
(15 |
) |
|
|
83 |
|
Investment
expenses
|
|
|
(1,029 |
) |
|
|
(2,406 |
) |
|
|
(2,273 |
) |
|
|
(2,638 |
) |
Net
investment income
|
|
$ |
10,646 |
|
|
$ |
13,279 |
|
|
$ |
8,893 |
|
|
$ |
31,975 |
|
Substantially
all of our fixed maturity investments consisted of investment grade securities.
As at June 30, 2009, the average credit rating provided by a recognized
national rating agency of our fixed maturity portfolio was AA+ with an average
duration of 2.5 years.
b. Net
realized and unrealized gains and losses – investments
Our
investment portfolio is structured to preserve capital and provide us with a
high level of liquidity and is managed to produce a total return. In
assessing returns under this approach, we include investment income and realized
and unrealized gains and losses generated by the investment portfolio. Net
realized and unrealized gains on our investment portfolio amounted to a
$7.1 million and $5.2 million for the three and six months ended June 30,
2009, respectively, compared to a $9.3 million and $21.8 million loss for
the three and six months ended June 30, 2008, respectively. The gains in
the three and six months ended June 30, 2009 are attributed to positive
performance on commodity futures and unrealized gains on the TIPS portfolio due
to a lower inflation index. The losses for the three and six months ended June
30, 2008 are attributable to deteriorating conditions in the equity markets
which is slightly offset by gains on fixed maturities and
commodities.
The
following table is the breakdown of net realized and unrealized gains (losses) -
investments in the unaudited condensed consolidated statements of operations
into its various components:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Net
realized gains (losses) on fixed maturities
|
|
$ |
4,699 |
|
|
$ |
(4,052 |
) |
|
$ |
4,455 |
|
|
$ |
12,354 |
|
Net
unrealized gains (losses) on fixed maturities
|
|
|
11,169 |
|
|
|
(6,694 |
) |
|
|
25,356 |
|
|
|
(9,886 |
) |
Net
realized losses on equities
|
|
|
(653 |
) |
|
|
- |
|
|
|
(3,281 |
) |
|
|
- |
|
Net
unrealized gains (losses) on equities
|
|
|
835 |
|
|
|
(3,515 |
) |
|
|
3,415 |
|
|
|
(11,149 |
) |
Net
realized and unrealized (losses) gains on derivative instruments -
investments
|
|
|
(6,907 |
) |
|
|
13,660 |
|
|
|
(22,003 |
) |
|
|
(4,522 |
) |
Net
realized and unrealized losses on other investments
|
|
|
(2,061 |
) |
|
|
(8,738 |
) |
|
|
(2,759 |
) |
|
|
(8,548 |
) |
Total
net realized and unrealized gains (losses) - investments
|
|
$ |
7,082 |
|
|
$ |
(9,339 |
) |
|
$ |
5,183 |
|
|
$ |
(21,751 |
) |
Net
realized and unrealized gains on the fixed maturities of $15.9 million for the
three months ended June 30, 2009, were primarily due to unrealized gains on
the foreign currency portfolios caused by the weakening of the U.S. dollar. Net
realized and unrealized gains on fixed maturities of $29.8 million for the six
months ended June 30, 2009, were primarily due to the unrealized gains on
the TIPS and the unrealized gains on the foreign currency portfolios caused by
the weakening of the US dollar during the period. Foreign exchange gains were
offset by losses on derivatives used for hedging, as described in the note
below.
Net
realized and unrealized gains on equities of $0.2 million and $0.1 million,
respectively, for the three and six months ended June 30, 2009 were due to the
positive performance of the equity in emerging markets during the three and six
months ended June 30, 2009.
Net
realized and unrealized losses on other investments of $2.1 million and $2.8
million, respectively, during the three and six months ended June 30, 2009, were
primarily due to the negative performance of the investment funds during the
periods.
The
following table is a breakdown of the net realized and unrealized (losses) gains
on derivatives included in the table above:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Futures
contracts
|
|
$ |
8,455 |
|
|
$ |
19,141 |
|
|
$ |
4,302 |
|
|
$ |
(930 |
) |
Total
return swaps
|
|
|
833 |
|
|
|
(4,738 |
) |
|
|
(7,902 |
) |
|
|
(2,996 |
) |
Interest
rate swaps
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(295 |
) |
Foreign
currency forward contracts
|
|
|
(16,378 |
) |
|
|
- |
|
|
|
(19,544 |
) |
|
|
- |
|
Mortgage-backed
securities TBA
|
|
|
183 |
|
|
|
(743 |
) |
|
|
1,141 |
|
|
|
(301 |
) |
Net
realized and unrealized (losses) gains on derivatives -
investments
|
|
$ |
(6,907 |
) |
|
$ |
13,660 |
|
|
$ |
(22,003 |
) |
|
$ |
(4,522 |
) |
Net
realized and unrealized gains on futures contracts of $8.5 million during the
three months ended June 30, 2009 were primarily due to $7.6 million of gains on
commodity futures. Net realized and unrealized gains on futures
contracts of $4.3 million during the six months ended June 30, 2009 were
primarily due to $4.1 million of gains on commodity futures.
Net
realized and unrealized gains on total return swaps of $0.8 million during the
three months ended June 30, 2009 were due to $1.0 million gain resulting from
the positive performance of the underlying bond index. The net realized and
unrealized losses on total return swaps of $7.9 million for the six months ended
June 30, 2009 were primarily due to the negative performance of the underlying
U.S. real estate index.
Net
realized and unrealized losses on foreign currency forward contracts of $16.4
million and $19.5 million during the three and six months ended June 30, 2009
respectively are related to currency hedges on non-U.S. dollar investment assets
and are offset by net realized and unrealized gains on the fixed maturities as
described above.
Treasury
Hedging and Other
Net
realized and unrealized gains and losses –
other
|
The
Company’s policy is to hedge the majority of its non-investment currency
exposure with derivative instruments such as foreign currency swaps
and foreign currency forward contracts.
Currency
swaps and foreign currency forward contracts are used to hedge the economic
currency exposure of the Company’s investment in foreign subsidiaries, primarily
our Swiss subsidiary, and to hedge operational balances such as premiums
receivable, loss reserves and the portion of our long term debt issued in
Euros.
The
following table is the breakdown of net realized and unrealized losses - other
in the consolidated statements of operations into its various
components:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
Currency
swaps
|
|
$ |
978 |
|
|
$ |
136 |
|
|
$ |
193 |
|
|
$ |
1,938 |
|
Interest
rate swaps
|
|
|
- |
|
|
|
7,928 |
|
|
|
- |
|
|
|
(1,266 |
) |
Foreign
currency forward contracts
|
|
|
984 |
|
|
|
2,600 |
|
|
|
8,659 |
|
|
|
(2,959 |
) |
Reinsurance
derivatives
|
|
|
508 |
|
|
|
468 |
|
|
|
1,048 |
|
|
|
1,182 |
|
Net
realized and unrealized gains (losses) - other
|
|
$ |
2,470 |
|
|
$ |
11,132 |
|
|
$ |
9,900 |
|
|
$ |
(1,105 |
) |
Net
realized and unrealized gains related to these derivative instruments amounted
to $2.5 million and $9.9 million for the three and six months ended June 30,
2009, compared to net realized and unrealized gains of $11.1 million and net
realized and unrealized losses of $1.1 million for the three and six
months ended June 30, 2008. These amounts are comprised of net
realized and unrealized gains (losses) on foreign currency forward contracts,
interest rate and currency swaps and reinsurance derivatives. We use currency
swaps and foreign currency forward contracts to hedge the economic currency
exposure of the Company’s investments in foreign subsidiaries, primarily our
Swiss subsidiary, and to hedge operational balances such as premiums receivable,
loss reserves and the portion of our long term debt issued in
Euros.
The
Company recorded $1.0 million and $0.2 million of net realized and unrealized
gains on foreign currency swaps on our subordinated debt for the three and six
months ended June 30, 2009. The Company did not hold any interest rate swaps in
2009. For the three and six months ended June 30, 2009, we recorded $1.0
million and $8.7 million of net realized and unrealized gains on foreign
currency forward contracts on Flagstone Suisse’s net assets (undesignated hedge)
and operational hedges on reinsurance balances and undesignated hedges on the
remaining net assets.
Reinsurance
derivatives relate to industry loss warranty contracts (“ILWs”) that are
structured as derivative transactions. The Company recorded premium earned on
ILWs determined to be derivatives of $0.5 million and $1.0 million for the three
and six months ended June 30, 2009, versus $0.5 million and $1.2 million for the
same periods in 2008.
Interest
Expense
Interest
expense was $3.1 million and $6.7 million, respectively, for the three and six
months ended June 30, 2009 compared to $4.6 million and $9.9 million,
respectively, for the three and six months ended June 30, 2008. Interest
expense consists of interest due on outstanding debt securities and the
amortization of debt offering expenses. The decrease in interest
expense for the three and six months ended June 30, 2009 compared to the same
periods in 2008 is primarily related to the decrease in short term interest
rates from period to period and the repurchase of $11.3 million of principal
amount of the Company’s outstanding $100.0 million Notes during the second
quarter of 2008.
Foreign
Exchange
For the
three and six months ended June 30, 2009, we experienced net foreign exchange
gains (losses) of $0.4 million and $(0.7) million, respectively, compared
to gains (losses) of $(1.6) million and $5.1 million, respectively, for the
three and six months ended June 30, 2008. For the
six months ended June 30, 2009, the volatility experienced in the foreign
currency markets resulted in net foreign exchange losses were
principally experienced on the net monetary asset and liability balances
denominated in foreign currencies. The Company’s policy is to hedge the
majority of its foreign currency exposures with derivative instruments such as
foreign currency swaps and foreign currency forward contracts.
Income
Tax Expense
The
Company has subsidiaries that operate in various other jurisdictions around the
world that are subject to tax in the jurisdictions in which they operate. The
significant jurisdictions in which the Company’s subsidiaries are subject to tax
are Canada, India, South Africa, Switzerland, Cyprus, U.S. Virgin Islands
(“USVI”) and the United Kingdom. However since the majority of
our income to date has been earned in Bermuda where we are exempt from income
tax, the Company’s tax impact to date has been minimal. During the
three and six months ended June 30, 2009, income tax (expense) recovery was
$(0.3) million and $0.5 million, respectively, compared to an income tax expense
of $0.4 million and $1.3 million, respectively, for the three and six
months ended June 30, 2008. The decrease for the six months
ended June 30, 2009, compared to the same period in 2008, is primarily
attributable to the finalization of the 2008 income tax returns. As a result of
the merger between Flagstone Reinsurance Limited and Flagstone Suisse on
September 30, 2008, we expect our tax expense to increase to approximate our
effective Swiss Federal tax rate of approximately 8% on the portion of
underwriting profits, if any, generated by Flagstone Suisse, excluding the
underwriting profits generated in Bermuda through the Flagstone Suisse branch
office.
Noncontrolling
Interest
The
results of Mont Fort have been included in the Company’s unaudited condensed
consolidated financial statements, with the portions of Mont Fort’s net income
and shareholders’ equity attributable to the preferred shareholders recorded as
noncontrolling interest. In relation to Mont Fort, the Company
recorded income attributable to noncontrolling interest of $9.9 million and
$12.8 million, respectively, for the three and six months ended June 30, 2009,
compared to $3.4 million and $11.1 million for the same periods in
2008.
The
results of operations of Island Heritage have been included in the Company’s
unaudited condensed consolidated financial statements from July 1, 2007 onwards,
with the portions of Island Heritage’s net income and shareholders’ equity
attributable to minority shareholders recorded as noncontrolling
interest. The Company recorded income attributable to noncontrolling
interest of $0.2 million and $0.1 million, respectively, for the three and
six months ended June 30, 2009, compared to expense of $(0.8)
million and $(0.3) million for the three and six months ended June 30,
2008, respectively.
The
results of operations of Flagstone Africa have been included in the Company’s
unaudited condensed consolidated financial statements from June 26, 2008
onwards, with the portions of Flagstone Africa’s net income and shareholders’
equity attributable to minority shareholders recorded as noncontrolling
interest. The Company recorded a loss attributable to noncontrolling
interest of $0.1 million and $0.2 million, respectively, for the three and six
months ended June 30, 2009.
Comprehensive Income
Comprehensive
income attributable to Flagstone for the three and six months ended June 30,
2009 was $71.3 million and $108.9 million, respectively, compared to $39.2
million and $70.1 million for the same periods in 2008. For the three
months ended June 30, 2009, comprehensive income attributable to Flagstone
included $77.8 million of net income, $5.4 million for the change in the
currency translation adjustment, $(0.1) million for the change in the defined
benefit pension plan obligation and $(11.7) million related to comprehensive
income attributable to noncontrolling interest in subsidiaries, compared to
$44.6 million of net income, $(2.8) million for the change in the
currency translation adjustment and $(2.6) million related to comprehensive
income attributable to noncontrolling interest in subsidiaries for the three
months ended June 30, 2008. For the six months ended June 30, 2009,
comprehensive income included $116.3 million of net income and $7.3 million for
the change in the currency translation adjustment and $(0.3) million for the
change in the defined benefit pension plan obligation and $(14.3) million
related to comprehensive income attributable to noncontrolling interest in
subsidiaries, compared to $85.6 million of net income and $(4.2) million for the
change in the currency translation adjustment, $(0.5) million for the changed in
the defined benefit pension plan obligation and $(10.8) million related to
comprehensive income attributable to noncontrolling interest in subsidiaries for
the six months ended June 30, 2008.
The
currency translation adjustment is as a result of the translation of our foreign
subsidiaries into U.S. dollars, net of transactions designated as hedges of net
foreign investments. The Company has entered into certain foreign
currency forward contracts that it has designated as hedges in order to hedge
its net investment in foreign subsidiaries. To the extent that the contract is
effective as a hedge, both the realized and unrealized gains and losses
associated with the designated hedge instruments are recorded in other
comprehensive income as part of the cumulative translation
adjustment. The Company designated $135.1 million and $337.7 million
of foreign currency forwards contractual value as hedge instruments, which had
fair values of $(0.3) million and $(5.7) million, at June 30, 2009 and
December 31, 2008, respectively. The Company recorded $9.2 million and $2.4
million of realized and unrealized foreign exchange losses on these hedges
during the three and six months ended June 30, 2009 and $4.3 million of realized
and unrealized foreign exchange gains and $25.6 million of realized and
unrealized foreign exchange losses on these hedges during the three and six
months ended June 30, 2008, respectively.
Financial
Condition, Liquidity and Capital Resources
Financial
Condition
Our
investment portfolio on a risk basis, at June 30, 2009, comprised 94.2% fixed
maturities, short-term investments and cash and cash equivalents, 0.9% equities
and the balance in other investments. We believe our investments can
be liquidated and converted into cash within a very short period of
time. However, our investments in investment funds and catastrophe
bonds, which represent 2.7% of our total investments and cash and cash
equivalents at June 30, 2009, do not trade on active markets or are subject to
redemption provisions that prevent us from converting them into cash
immediately.
At June
30, 2009, all of our fixed maturity securities, with the exception of three
bonds with a fair value of less than $0.9 million, were rated
investment-grade (BBB- or higher) by Standard & Poor’s (or an
equivalent rating by another rating agency) with an average rating of
AA+. At December 31, 2008, all of our fixed maturity securities,
with the exception of $0.3 million, were rated investment-grade (BBB- or
higher) by Standard & Poor’s (or an equivalent rating by another rating
agency) with an average rating of AA+.
At June
30, 2009, and December 31, 2008, the average duration of the
Company’s investment portfolio was 2.5 years and 2.9 years,
respectively. The duration decreased mostly due to the implementation
of a change in asset allocation during the quarter that was approved by the
Board of Directors.
At June
30, 2009 and December 31, 2008, we had no exposure to sub-prime backed
investments or collateralized debt obligations (“CDOs”) of sub-prime backed
investments. At June 30, 2009 and December 31, 2008, our holdings of Alt –A
securities were $2.7 million with an average rating of AA+ and $3.0 million with
an average rating of AA+, respectively. Alt – A securities are
defined as a classification of mortgages where the risk profile falls
between prime and sub-prime. The borrowers behind these mortgages will
typically have clean credit histories, but the mortgage itself will generally
have some features that increase its risk profile compared to prime securities,
but less risky than sub-prime backed investments. These features include
higher loan-to-value and debt-to-income ratios or inadequate
documentation of the borrower’s income. Our exposure to
traditional monoline insurers emanates from our non sub-prime asset-backed
holdings. We did not hold securities with credit enhancement from the
traditional monoline insurers at June 30, 2009, and we had $1.2 million as of
December 31, 2008. We do not have any collateralized loan obligations or
CDO exposures in our portfolio.
At June
30, 2009, our total of investments, cash and cash equivalents, and restricted
cash was $1.8 billion, compared to $1.7 billion at December 31, 2008. The major
factors influencing the movement in the six month period ended June 30, 2009,
were as follows:
·
|
Net
investment income of $8.9 million
|
·
|
Total
net realized and unrealized gains on investments and other of $15.1
million
|
·
|
Dividends
paid of $7.0 million
|
·
|
Cash
contributions into the portfolios from underwriting
activities.
|
Other
investments as at June 30, 2009 amounted to $53.5 million compared to $54.7
million at December 31, 2008. At June 30, 2009, our other investments
comprised of catastrophe bonds of $43.2 million, private equity and hedge
funds of $5.3 million and a $5.0 million equity investment.
The decrease in other investments during the first six months of 2009
is principally related to a $4.1 million decrease in the value of the private
equity and hedge funds which was offset by the purchase of a catastrophe bond in
the amount of $3.9 million. Other investments are recorded at fair
value with the exception of our equity investment which is accounted for under
the equity method. On June 30, 2009, the net payable for investments
purchased at June 30, 2009 was $5.1 million, compared to a net receivable for
investments sold $1.9 million at December 31, 2008. Net payables
and receivables for investments are a result of timing differences only, as
investments are accounted for on a trade date basis.
Following
the significant level of gross premiums written during the six months ended
June 30, 2009, our insurance and reinsurance premium balances receivable,
deferred acquisition costs and unearned premiums increased by $235.4 million,
$25.9 million and $251.8 million, respectively, over those balances at December
31, 2008.
At June
30, 2009, we had $453.5 million of loss and loss adjustment expense reserves,
compared to $411.6 million at December 31, 2008. This increase of $41.9
million is due to reserve additions of $150.4 million for the first six
months which includes 2009 catastrophe events, offset by paid losses of $108.5
million. Of the balance at June 30, 2009, $227.2 million, or 50.1%,
represented incurred but not reported reserves.
At June
30, 2009, Flagstone’s shareholders’ equity was $1,094.8 million,
compared to $986.0 million at December 31, 2008. The increase in
Flagstone’s shareholders’ equity is primarily due to the net income
attributable to Flagstone realized by the Company in the six months ended June
30, 2009.
Liquidity
Cash
flows from operations for the six months ended June 30, 2009 decreased to
$129.1 million from $168.2 million as compared to the same period in
2008. This decrease in cash flows from operations was primarily
related to higher claims paid in relation to the 2008 hurricanes losses,
partially offset by higher premiums receipts and higher net income. Because
a large portion of the coverages we provide typically can produce losses of high
severity and low frequency, it is not possible to accurately predict our future
cash flows from operating activities. As a consequence, cash flows
from operating activities may fluctuate, perhaps significantly, between
individual quarters and years.
Cash
flows relating to financing activities include the payment of dividends, share
related transactions and the issuance or repayment of debt. During the
six months ended June 30, 2009, net cash of $(21.4) million was used
in financing activities, compared to $(29.5) million used in financing
activities for the six months ended June 30, 2008. In the first
six months of 2009, the net cash used in financing activities related
principally to the payment of dividends and the repayment of debt. In
the first quarter of 2008, the net cash used by financing activities
related principally to the payment of dividends, the redemption of preferred
shares in Mont Fort ILW2 and the repurchase of $11.3 million of principal
amount of the Company’s outstanding $100.0 million Notes during the second
quarter.
We may
incur additional indebtedness in the future if we determine that it would be an
efficient part of our capital structure.
Generally,
positive cash flows from our operating and financing activities are invested in
the Company’s investment portfolio.
For the
period from October 2005 until June 30, 2009, we have had sufficient cash flows
from operations to meet our liquidity requirements. We expect that our
operational needs for liquidity for at least the next twelve months will be met
by our balance of cash, funds generated from underwriting activities, investment
income and the proceeds from sales and maturities of our investment
portfolio. The Company may require additional capital in the near term,
whether through letters of credit or otherwise. In the current financial
environment, it may be difficult for the insurance industry generally, and the
Company in particular, to raise additional capital when required, on acceptable
terms or at all. Cash and cash equivalents were $378.2 million at
June 30, 2009.
Capital
Resources
Our total
capital resources at June 30, 2009 and December 31, 2008 were as
follows:
|
|
As
at June 30, 2009
|
|
|
As
at December 31, 2008
|
|
Long
term debt
|
|
$ |
251,987 |
|
|
$ |
252,575 |
|
Common
shares
|
|
|
849 |
|
|
|
848 |
|
Additional
paid-in capital
|
|
|
904,228 |
|
|
|
897,344 |
|
Accumulated
other comprehensive income
|
|
|
(2,902 |
) |
|
|
(8,271 |
) |
Retained
earnings
|
|
|
192,604 |
|
|
|
96,092 |
|
Total
capitalization
|
|
$ |
1,346,766 |
|
|
$ |
1,238,588 |
|
The
movement in additional paid-in capital primarily arises from $7.1 million of
stock based compensation for the six months ended June 30,
2009.
The
movement in accumulated other comprehensive income arises from the currency
translation adjustment of $5.7 million, offset by the defined benefit pension
plan obligation of $(0.3) million.
Letter
of Credit Facilities
Under the
terms of certain reinsurance contracts, our reinsurance subsidiaries may be
required to provide letters of credit to reinsureds in respect of reported
claims and/or unearned premiums. On January 22, 2009, Flagstone Suisse entered
into a secured $450.0 million standby letter of credit facility with Citibank
Europe Plc. The Citi Facility will be used to support the reinsurance
obligations of the Company and its subsidiaries. As at June 30, 2009,
$381.1 million had been drawn under this facility, and the drawn amount of the
facility was secured by $423.5 million of fixed maturity securities from the
Company’s investment portfolio. During 2008, the Company had a
$400.0 million uncommitted letter of credit facility agreement with
Citibank N.A. As at December 31, 2008, $285.7 million had been drawn under
this facility, and the drawn amount of the facility was secured by $327.2
million of fixed maturity securities from the Company’s investment portfolio.
This facility was replaced by the above noted $450 million
facility.
On June
11, 2009, Flagstone Suisse and Wachovia Bank, N.A. mutually agreed to
terminate a $200.0 million uncommitted letter of credit facility agreement as it
is no longer required by the Company. No amounts had been drawn under this
facility since its inception and there are no penalties associated with this
termination.
On March
5, 2009, Flagstone Suisse entered into a $200.0 million secured committed letter
of credit facility with Barclays Bank Plc. The Barclays Facility will be used to
support the reinsurance obligations of the Company and its subsidiaries. As at
June 30, 2009, there were no letters of credit issued under the Barclays
Facility.
On June
5, 2009, Flagstone Suisse entered into a secured $50.0 million standby
letter of credit facility with BNP Paribas. The BNP Facility will be used
to support the reinsurance obligations of the Company and its
subsidiaries. As at June 30, 2009, no letters of credit have been issued
under the BNP Facility.
Restrictions
and Specific Requirements
Flagstone
Suisse is licensed to operate as a reinsurer in Switzerland and is also
licensed in Bermuda through the Flagstone Suisse branch office and is not
licensed in any other jurisdictions. Because many jurisdictions do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless appropriate
security mechanisms are in place, we anticipate that our reinsurance
clients will typically require Flagstone Suisse to post a letter of credit or
other collateral.
Swiss law
permits dividends to be declared only after profits have been allocated to the
reserves required by law and to any reserves required by the articles of
incorporation. The articles of incorporation of Flagstone Suisse do
not require any specific reserves. Therefore, Flagstone Suisse must
allocate any profits first to the reserve required by Swiss law generally, and
may pay as dividends only the balance of the profits remaining after that
allocation. In the case of Flagstone Suisse, Swiss law requires that
20% of the company’s profits be allocated to a “general reserve” until the
reserve reaches 50% of its paid-in share capital.
In
addition, a Swiss reinsurance company may pay a dividend only if, after payment
of the dividend, it will continue to comply with regulatory requirements
regarding minimum capital, special reserves and solvency
requirements.
The
Bermuda Insurance Act requires Flagstone Suisse to maintain a minimum solvency
margin (being the minimum amount that the statutory assets must exceed the
statutory liabilities as required by the Bermuda Insurance Act) equal to the
greatest of (i) $100 million, (ii) 50% of net premiums written or
(iii) 15% of the reserve for losses and loss adjustment expenses. Bermuda
law limits the maximum amount of annual dividends or distributions payable by
Flagstone Suisse to the Company and in certain cases requires the prior
notification to, or the approval of, the BMA. As a Bermuda Class 4
reinsurer, Flagstone Suisse may not pay dividends in any financial year which
would exceed 25% of its total statutory capital and surplus unless at least
seven days before payment of those dividends it files an affidavit with the BMA
signed by at least two directors and Flagstone Suisse’s principal
representative, which states that in their opinion, declaration of those
dividends will not cause Flagstone Suisse to fail to meet its prescribed
solvency margin and liquidity ratio. Further, Flagstone Suisse may not reduce by
15% or more its total statutory capital as set out in its previous year’s
statements, without the prior approval of the BMA. Flagstone Suisse must also
maintain, as a Class 4 Bermuda reinsurer, paid-up share capital of
$1 million.
Island
Heritage is domiciled in the Cayman Islands and maintains a Class A Domestic
Insurance License issued in accordance with the terms of the Insurance Law (as
revised) of the Cayman Islands, or the Law, and is subject to regulation by the
Cayman Islands Monetary Authority (“CIMA”) in terms of the
Law. Island Heritage is required to maintain a net worth (defined in
the Law as the excess of assets, including any contingent or reserve fund
secured to the satisfaction of CIMA, over liabilities other than liabilities to
partners or shareholders) of at least 100,000 Cayman Islands dollars (which is
equal to approximately U.S. $120,000), subject to increase by CIMA depending on
the type of business undertaken. In addition Island Heritage may not
issue any dividends without prior approval from the Cayman Islands Monetary
Authority. In order to obtain approval Island Heritage must
demonstrate that the issuing of dividends would not render Island Heritage
insolvent or affect its ability to pay any future claims.
Flagstone
Africa is licensed to operate as a reinsurer in South Africa and is subject to
statutory minimum capital requirements under applicable
legislation. In addition, a South African reinsurance company may pay
a dividend only if, after payment of the dividend, it will continue to comply
with regulatory requirements regarding minimum capital, special reserves and
solvency requirements.
Flagstone
Alliance operates under license issued by the Cyprus Insurance Superintendent to
conduct general reinsurance and insurance business. Cyprus Companies Law permits
dividends to be declared only if there are available sufficient distributable
reserves after profits have been allocated to the reserves required by law and
to any reserves required by the articles of incorporation. The articles of
incorporation of Flagstone Alliance do not require any specific reserves.
Irrespective of the Cyprus Companies Law, Cap 113 requirements and the Flagstone
Alliance’s articles of association, Flagstone Alliance should maintain at any
time, reserves and assets that meet the Solvency criteria and Orders of the
Cyprus Insurance Superintendent. Flagstone Alliance complies and
reports to the Superintendent of Insurance under Solvency I requirements and the
Solvency II requirements will be adopted in 2012. Revenue reserves are
distributable to the extent permitted by the Companies Law, and Flagstone
Alliance’s Articles of Association. The share premium account cannot be
used for the distribution of dividends but can be used to issue bonus shares.
The reserve arising on the conversion of share capital to Euro may be
capitalized by way of a future capital increase; alternatively, Flagstone
Alliance may decide at a shareholders’ general meeting to distribute the
decrease by way of a dividend.
The
financial services industry in the United Kingdom is regulated by the Financial
Services Authority (“FSA”). The FSA is an independent non-governmental body,
given statutory powers by the Financial Services and Markets Act 2000. Although
accountable to treasury ministers and through them to Parliament, it is funded
entirely by the firms it regulates. The FSA has wide ranging powers in relation
to rule-making, investigation and enforcement to enable it to meet its four
statutory objectives, which are summarized as one overall aim: “to promote
efficient, orderly and fair markets and to help retail consumers achieve a fair
deal”.
In
relation to insurance business, the FSA regulates insurers, insurance
intermediaries and Lloyd’s itself. The FSA and Lloyd’s have common objectives in
ensuring that Lloyd’s market is appropriately regulated and, to minimize
duplication, the FSA has agreed arrangements with Lloyd’s for co-operation on
supervision and enforcement.
Marlborough’s
underwriting activities are therefore regulated by the FSA as well as being
subject to the Lloyd’s “franchise”. Both FSA and Lloyd’s have powers to remove
their respective authorization to manage Lloyd’s syndicates. Lloyd’s approves
annually Syndicate 1861’s business plan and any subsequent material changes, and
the amount of capital required to support that plan. Lloyd’s may require changes
to any business plan presented to it or additional capital to be provided to
support the underwriting (known as Funds at Lloyd’s).
Off
Balance Sheet Arrangements
Mont Gele
is a special purpose Cayman Islands exempted company licensed as a restricted
Class B reinsurer in the Cayman Islands and formed solely for the purpose of
entering into certain reinsurance agreements and other risk transfer agreements
with Flagstone Suisse. We have entered into an excess of loss
reinsurance agreement with Mont Gele that provides us with a $60.0 million
limit.
The
Company has determined that Mont Gele has the characteristics of a variable
interest entity that are addressed by FASB Interpretation No. 46R
‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46R’’). In accordance
with FIN 46R, Mont Gele is not consolidated because the Company is
not the primary beneficiary.
Valais Re
is a special purpose Cayman Islands exempted company licensed as a restricted
Class B reinsurer in the Cayman Islands and formed solely for the purpose of
entering into certain reinsurance agreements and other risk transfer agreements
with subsidiaries of Flagstone Suisse. We have entered into a reinsurance
agreement with Valais Re that provides us with $104.0 million of aggregate
indemnity protection for certain losses from global catastrophe
events.
The
Company has determined that Valais Re has the characteristics of a variable
interest entity that are addressed by FASB Interpretation No. 46R
‘‘Consolidation of Variable Interest Entities’’ (‘‘FIN 46R’’). In accordance
with FIN 46R, Valais Re is not consolidated because the Company is not the
primary beneficiary.
We are
not party to any transaction, agreement or other contractual arrangement to
which an affiliated entity unconsolidated with us is a party, other than that
noted above with Mont Gele and Valais Re, that management believes is reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
For
details relating to our letter of credit facilities see “Financial Condition,
Liquidity and Capital Resources - Financial Condition – Letter of Credit
Facilities”.
We
measure and manage market risks and other risks as part of a company-wide risk
management process. The market risks described in this section relate
to financial instruments, primarily in our investment portfolio, that are
sensitive to changes in interest rates, credit risk premiums or spreads, foreign
exchange rates and equity prices.
We
believe that we are currently principally exposed to four types of market risk:
interest rate risk, equity price risk, credit risk and foreign currency
risk.
Interest
Rate Risk
Our
primary market risk exposure is to changes in interest
rates. Fluctuations in interest rates have a direct impact on the
market valuation of our fixed maturity portfolio. As interest rates rise,
the market value of our fixed maturity portfolio falls and we have the risk that
cash outflows will have to be funded by selling assets, which will be trading at
depreciated values. As interest rates decline, the market value of our
fixed maturity portfolio increases and we have reinvestment risk since funds
reinvested will earn less than is necessary to match anticipated
liabilities. We expect to manage interest rate risk by selecting
investments with characteristics such as duration, yield, currency and liquidity
which can be tailored to the anticipated cash outflow characteristics of the
reinsurance liabilities of the Company. In addition, from
time-to-time, the Company may enter into interest rate swap contracts as
protection against unexpected shifts in interest rates, which would affect the
fair value of the fixed maturity portfolio. By using swaps in the
portfolio, the overall duration or interest rate sensitivity of the portfolio
can be altered.
As at
June 30, 2009, the impact on our fixed maturity securities and cash and cash
equivalents, from an immediate 100 basis point increase in market interest rates
would have resulted in an estimated increase in market value of 2.4%, or
approximately $38.9 million. As at June 30, 2009, the impact on our
fixed maturity securities and cash and cash equivalents, from an immediate
100 basis point decrease in market interest rates would have resulted in an
estimated increase in market value of 2.5%, or approximately
$40.1 million.
As at
June 30, 2009, we held $115.5 million, or 8.8%, of our fixed maturity portfolio
in asset-backed and mortgage-backed securities. We did not hold any sub-prime
securities at June 30, 2009. These assets are exposed to prepayment risk, which
occurs when holders of underlying loans increase the frequency with which they
prepay the outstanding principal before the maturity date and refinance at a
lower interest rate cost. The adverse impact of prepayment is more evident
in a declining interest rate environment. As a result, the Company would
also be exposed to reinvestment risk, as cash flows received by the Company
could be accelerated and would be reinvested at the prevailing interest
rates.
Equity
Price Risk
We gain
exposure to the equity, commodities and real estate markets through the use of
various equity securities, index-linked futures, exchange traded funds and
investment funds. The total of such exposure as of June 30, 2009 was $52.9
million. However, from a fair value perspective, futures are valued for
only the unrealized gains and losses, and not for the exposure. As a
result, the fair value of these positions as at June 30, 2009 amounted to $2.1
million and was recorded in both equities and other investments with net
realized and unrealized gains of $8.4 million and net realized and
unrealized losses of $4.4 million, respectively, for the three and six months
ended June 30, 2009, recorded in net realized and unrealized gains (losses) -
investments. The total exposure of the index-linked futures was $49.5
million as at June 30, 2009.
Credit
Risk
The
Company has exposure to credit risk primarily as a holder of fixed maturity
securities. Our risk management strategy and investment guidelines
have been defined to ensure we invest in debt instruments of high credit quality
issuers and to limit the amount of credit exposure with respect to particular
ratings categories and any one issuer. As at June 30, 2009, the majority of our
fixed maturity investments consisted of investment grade securities with an
average rating of AA+. The Company believes this high-quality
portfolio reduces its exposure to credit risk on fixed income investments to an
acceptable level.
The
Company does not allow investment managers to make sub-prime investments and
therefore does not have any exposure to credit risk associated with these types
of securities. The Company does not allow sub-prime investment by any
investment manager. At June 30, 2009, we held $2.7 million of
Alt-A securities with an average rating of AA+, including one security valued at
less than $0.1 million with a rating of D.
The
Company is operating in an investment climate that is characterized by
significant uncertainty and resultant market volatility. The recent failure of
large financial institutions in the United States has exacerbated this
uncertainty. The Company has carefully analyzed its exposure to the recent
market turmoil, and based on its analysis has concluded that it does not have
significant direct exposure to Lehman Brothers, American International Group
Inc. (“AIG”), Federal National Mortgage Association (“Fannie Mae”),
Federal Home Loan Mortgage Corporation (“Freddie Mac”) or investment funds with
Madoff exposure; however the indirect impact of such significant business
failures is difficult to determine and the Company will continue to monitor
market developments as they occur.
To a
lesser extent, the Company also has credit risk exposure through its
over-the-counter derivative instruments. To mitigate this risk, we
monitor our exposure by counterparty and ensure that counterparties to these
contracts are high-credit-quality international banks or
counterparties. These derivative instruments include foreign currency
forwards contracts, currency swaps, interest rate swaps and total return
swaps.
In
addition, the Company has exposure to credit risk as it relates to its trade
balances receivable, namely insurance and reinsurance balances
receivable. Insurance and reinsurance balances receivable from the
Company’s clients at June 30, 2009 and December 31, 2008, were $453.7 million
and $218.3 million, respectively, including balances both currently due and
accrued. The Company believes that credit risk exposure related to
these balances is mitigated by several factors, including but not limited to
credit checks performed as part of the underwriting process, monitoring of aged
receivable balances, our right to cancel the cover for non-payment of premiums,
and our right to offset premiums yet to be paid against losses due to the
cedent. Since our inception in October 2005, we have recorded $1.9
million in bad debt expenses related to its insurance and reinsurance balances
receivable.
The
Company purchases retrocessional reinsurance and we require our reinsurers to
have adequate financial strength. The Company evaluates the financial
condition of its reinsurers and monitors its concentration of credit risk on an
ongoing basis.
In
addition, consistent with industry practice, we assume a degree of credit risk
associated with reinsurance and insurance brokers. We frequently pay
amounts owed on claims under our policies to reinsurance brokers, and these
brokers, in turn, pay these amounts to the ceding insurers that have reinsured a
portion of their liabilities with us. In some jurisdictions, if a broker fails
to make such a payment, we may remain liable to the ceding insurer for the
deficiency. Conversely, in certain jurisdictions, when the ceding
insurer pays premiums to reinsurance brokers for payment to us, these premiums
are considered to have been paid and the ceding insurer will no longer be liable
to us for those amounts, regardless of whether we have received the
premiums.
For risk
management purposes, we use catastrophe bonds to manage our reinsurance risk and
treat the catastrophe risks related to catastrophe bonds as part of the
underwriting risks of the Company. Catastrophe bonds are selected by our
reinsurance underwriters however they are held in our investment portfolio as
low risk floating rate bonds. We believe that amalgamating the catastrophe risk
in the catastrophe bonds with our other reinsurance risks produces more
meaningful risk management reporting.
Foreign
Currency Risk
Premiums,
Reserves, and Claims
The U.S.
dollar is our principal reporting currency and the functional currencies of our
operating subsidiaries are generally their national currencies, except for our
Bermuda, Cayman Islands, Luxembourg, Gibraltar and Marlborough subsidiaries
and the Bermuda branch of Flagstone Suisse, whose functional currency, following
the September 30, 2008 restructuring, is the U.S. dollar. We enter
into reinsurance contracts where the premiums receivable and losses payable are
denominated in currencies other than the U.S. dollar. When we incur a
loss in a non-U.S. dollar currency, we carry the liability on our books in the
original currency. As a result, we have an exposure to foreign
currency risk resulting from fluctuations in exchange rates between the time
premiums are collected and converted to the functional currency (either U.S.
dollars, Swiss franc, Euro, Great Britain pound or South African rand), and
the time claims are paid.
With
respect to loss reserves denominated in non-U.S. dollar currencies, our policy
is to hedge our non-U.S. dollar foreign currency exposure with forward foreign
exchange purchases. Expected losses means incurred and reported
losses and incurred but not reported losses. We do not hedge future
catastrophe events. However, upon the occurrence of a catastrophe
loss and when the actuarial department has estimated the non-U.S.
dollar loss to the Company, we purchase foreign currency promptly on a
forward basis. When we pay claims in a non-base currency, we either
use the proceeds of a foreign currency forward contract to do so, or buy spot
foreign exchange to pay the claim and simultaneously adjust the hedge balance to
the new lower exposure.
Investments
The
majority of the securities held in our investment portfolios are measured in
U.S. dollars, with a portion of our fixed maturities portfolio invested in
non-U.S. dollar currencies. At the time of purchase, each investment
is identified as either a hedged investment, to be maintained with an
appropriate currency hedge to U.S. dollars or an unhedged investment, one not to
be maintained with a hedge. Generally, fixed income investments will
be hedged, listed equity investments may or may not be hedged, and other
investments such as real estate and commodities will not be hedged.
Financing
When the
Company or its subsidiaries issues a debt or equity financing in a currency
other than the functional currency of that company, our practice is to hedge
that exposure. The net contractual amount of these contracts as at
June 30, 2009 and December 31, 2008 was $414.0 million and $432.4 million,
respectively, and these contracts had a fair value of $(10.7) million and
$(9.5) million, respectively. During the three months and six months ended
June 30, 2009, the Company recorded net realized and unrealized gains of
$1.0 million and $8.7 million, respectively, on foreign currency forward
contracts and for the three and six months ended June 30, 2008, the Company
recorded net realized and unrealized gains of $2.6 million and net realized and
unrealized losses of $3.0 million, respectively, on foreign currency forward
contracts. The Company designated $135.1 million of foreign currency forward
contracts with notional contractual value as hedging instruments, which had a
fair value of $(0.3) million as of June 30, 2009. The Company designated
$337.7 million of foreign currency forward contracts with notional contractual
value as hedging instruments, which had a fair value of $(5.7) million as of
December 31, 2008. During the three and six months ended June 30, 2009, the
Company recorded $9.2 million and $2.4 million of realized and unrealized
losses, respectively, directly into comprehensive income as part of the
cumulative translation adjustment for the effective portion of the hedge. In
comparison, during the three and six months ended June 30, 2008, the Company
recorded $4.3 million of realized and unrealized gains and $25.6 million of
realized and unrealized losses, respectively, directly into comprehensive income
as part of the cumulative translation adjustment for the effective portion of
the hedge.
The
Company entered into a currency swap agreement to hedge the Euro-denominated
Deferrable Interest Debentures recorded as long term debt. Under the terms
of the foreign currency swap, the Company exchanged €13.0 million for $18.4
million, will receive Euribor plus 354 basis points and pay LIBOR plus 367 basis
points. The swap expires on September 15, 2011 and had a fair value
of $(0.2) million as at June 30, 2009.
Foreign
currency exchange contracts will not eliminate fluctuations in the value of our
assets and liabilities denominated in foreign currencies but rather allow us to
establish a rate of exchange for a future point in time. Of our
business written in the six month periods ended June 30, 2009 and 2008,
approximately 29.2% and 27.0%, respectively, was written in currencies other
than the U.S. dollar. For the six months ended June 30, 2009, we
had net realized and unrealized foreign exchange losses of $0.7 million
compared to foreign exchange gains of $5.1 million for the same period in
2008.
The
Company does not hedge currencies for which its asset or liability exposures are
not material or where it is unable or impractical to do so. In such cases,
the Company is exposed to foreign currency risk. However, the Company does
not believe that the foreign currency risks corresponding to these unhedged
positions are material.
Effects
of Inflation
We do not
believe that inflation has had a material effect on our combined results of
operations, except insofar as inflation may affect interest rates.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form
10-Q contains, and the Company may from time to time make, written or
oral “forward-looking
statements” within the
meaning of the U.S. federal securities laws, which are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside the Company’s control, that could cause actual results to
differ materially from such statements. In particular, statements using words
such as “may”, “should”, “estimate”, “expect”, “anticipate”, “intend”, “believe”, “predict”, “potential”, or words of similar import
generally involve forward-looking statements.
Important
events and uncertainties that could cause the actual results to differ include,
but are not necessarily limited to: market conditions affecting the Company’s
common share price; the impact of the current unprecedented volatility in the
financial markets, including the duration of the economic crisis and the
effectiveness of governmental solutions; the weakening economy, including the
impact on our consumers’ businesses; fluctuations in interest rates; the effects
of corporate bankruptcies on capital markets; the possibility of severe or
unanticipated losses from natural or man-made catastrophes; the
effectiveness of our loss limitation methods; our dependence on principal
employees; the cyclical nature of the insurance and reinsurance business; the
levels of new and renewal business achieved; opportunities to increase writings
in our core property and specialty reinsurance and insurance lines of business
and in specific areas of the casualty reinsurance market; the sensitivity of our
business to financial strength ratings established by independent rating
agencies; the estimates reported by cedents and brokers on pro-rata contracts
and certain excess of loss contracts where the deposit premium is not specified
in the contract; the inherent uncertainties of establishing reserves for loss
and loss adjustment expenses, our reliance on industry loss estimates and those
generated by modeling techniques; unanticipated adjustments to premium
estimates; changes in the availability, cost or quality of reinsurance or
retrocessional coverage; changes in general economic conditions; changes in
governmental regulation or tax laws in the jurisdictions where we conduct
business; the amount and timing of reinsurance recoverables and reimbursements
we actually receive from our reinsurers; the overall level of competition, and
the related demand and supply dynamics in our markets relating to growing
capital levels in the insurance and reinsurance industries; declining demand due
to increased retentions by cedents and other factors; the impact of terrorist
activities on the economy; and rating agency policies and
practices.
These and
other events that could cause actual results to differ are discussed in more
detail from time to time in our filings with the SEC. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by U.S. federal securities laws. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date on which they are made.
Disclosure
Controls and Procedures
As of the
end of the period covered by this report, our management has performed an
evaluation pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
(the “Exchange Act”), with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange
Act). Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified by SEC rules and forms and that such information is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow for timely decisions regarding
required disclosures. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered in this report, our company’s disclosure controls and procedures were
effective.
Internal
Control over Financial Reporting
There
were no changes in our internal control over financial reporting during our
second fiscal quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
|
|
|
|
NONE
|
|
|
|
|
|
|
|
There
have been no material changes to the risk factors previously described in
Part I, Item 1A of our annual report on Form 10-K for the fiscal year
ended December 31, 2008.
|
|
|
|
|
|
|
|
NONE
|
|
|
|
|
|
|
|
NONE
|
On May
14, 2009 the Company held its Annual General Meeting of shareholders.
Shareholders were asked to vote upon the resolutions set out below. The
following tabulation indicates the number of shares voted for or against, or
withheld, or abstaining with respect to each resolution after giving effect to
the voting limitations contained in the Company’s Bye-laws:
Election of Directors
1) electing
the following persons as Class A directors to hold office until the Company’s
next Annual General Meeting or until their successors are elected or appointed
or their offices are otherwise vacated:
|
FOR
|
ABSTAIN
|
WITHHELD
FROM DIRECTOR
|
MARK
BYRNE
|
54,883,009
|
N/A
|
5,821,822
|
STEWART
GROSS
|
59,411,166
|
N/A
|
1,293,665
|
E.
DANIEL JAMES
|
52,837,179
|
N/A
|
7,867,652
|
ANTHONY
P. LATHAM
|
54,883,009
|
N/A
|
5,821,822
|
In
accordance with the Company’s Bye-Laws the Class A Directors, Mark J. Byrne,
Stewart Gross and E. Daniel James had terms which expired at the 2009 Annual
General Meeting. The Class C Directors, David A. Brown, Stephen Coley, Dr.
Anthony Knap and Peter F. Watson have terms which expire at the 2010 Annual
General Meeting.
2) to
appoint Deloitte & Touche, independent auditors, to serve as our independent
auditors for the 2009 Fiscal year until our 2010 Annual General Meeting, and to
refer the determination of the auditors’ remuneration to the Board of
Directors:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
61,900,322
|
39,847
|
1,235
|
0
|
3) to
approve an amendment to the Company’s Bye-Laws:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
61,920,669
|
18,800
|
1,935
|
0
|
4) to
approve the list of Designated Company Directors for certain subsidiaries of the
Company:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
61,438,774
|
17,685
|
484,945
|
0
|
5) to
approve the amendments to the Restricted Share Unit Plan
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
49,666,016
|
3,380,829
|
35,178
|
0
|
6) to
approve the Amended and Restated Long-Term Incentive Plan for Island Heritage
Holdings Ltd.
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
49,291,169
|
3,278,834
|
512,020
|
0
|
7) to
approve the form of Stock Appreciation Rights Plan for Island Heritage Holdings
Ltd.
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
49,069,658
|
3,977,187
|
35,178
|
0
|
8) to
approve the form of Restricted Share Unit Plan for Flagstone Reinsurance Africa
Limited
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
49,221,667
|
3,824,078
|
37,178
|
0
|
9) to
approve the increase in authorized share capital of the Company
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTE
|
54,284,510
|
7,655,359
|
1,535
|
0
|
|
|
|
|
|
NONE
|
|
|
|
|
|
The
exhibits listed on the accompanying Exhibit Index, and such Exhibit Index,
are filed or incorporated by reference as a part of this
report.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: August
4, 2009
|
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
|
|
|
|
|
|
|
By:
|
/s/ David
Brown
|
|
|
|
David
Brown
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
(Authorized
Officer)
|
|
|
|
|
|
|
By:
|
/s/
Patrick Boisvert
|
|
|
|
Patrick
Boisvert
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
(Principal
Financial Officer)
|
|
Pursuant
to Item 601 of Regulation S-K
Exhibit
No.
|
Description
of Exhibit
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30,
2009.
|