form10q.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 March 31, 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 April 30, 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
  
     
Page
     
       
   
       
   
 
1
       
   
 
2
       
   
 
3
       
   
 
4
       
   
 5
       
 
 
19
       
 
 39
       
 
 43
       
     
       
 
44
       
 
  44
       
 
  44
       
 
44
       
 
44
       
 
44
       
 
44
 
 
 


 
 
 

Index
 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FLAGSTONE REINSURANCE HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars, except share data)


   
As at March 31, 2009
    
As at December 31, 2008
  
   
(Unaudited)
        
ASSETS
            
Investments:
            
Fixed maturities, at fair value (Amortized cost: 2009 - $937,374 ; 2008 - $787,792)
   $ 944,520     $ 784,355  
Short term investments, at fair value (Amortized cost: 2009 - $121,347; 2008 - $30,491)
     124,907       30,413  
Equity investments, at fair value (Cost: 2009 - $10,698; 2008 - $16,266)
     2,855       5,313  
Other investments
     52,314       54,655  
Total Investments
     1,124,596       874,736  
Cash and cash equivalents
     603,950       783,705  
Restricted cash
     41,644       42,403  
Premium balances receivable
     363,382       218,287  
Unearned premiums ceded
     68,014       31,119  
Reinsurance recoverable
     11,582       16,422  
Accrued interest receivable
     6,840       7,226  
Receivable for investments sold
     14,578       9,634  
Deferred acquisition costs
     59,970       44,601  
Funds withheld
     12,425       14,433  
Goodwill
     16,022       17,141  
Intangible assets
     32,531       32,873  
Other assets
     116,505       123,390  
Total Assets
   $ 2,472,039     $ 2,215,970  
                 
LIABILITIES
                
Loss and loss adjustment expense reserves
   $ 429,802     $ 411,565  
Unearned premiums
     421,218       270,891  
Insurance and reinsurance balances payable
     51,641       31,123  
Payable for investments purchased
     28,762       7,776  
Long term debt
     265,306       252,575  
Other liabilities
     51,158       58,577  
Total Liabilities
     1,247,887       1,032,507  
                 
EQUITY
                
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
     901,344       897,344  
Accumulated other comprehensive loss
     (6,377 )     (8,271 )
Retained earnings
     128,307       96,092  
Total Flagstone Shareholders' Equity
     1,024,123       986,013  
Noncontrolling Interest in Subsidiaries
     200,029       197,450  
Total Equity
     1,224,152       1,183,463  
Total Liabilities and Equity
   $ 2,472,039     $ 2,215,970  

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.

 
1
 

Index
  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
  
   
March 31, 2009
    
March 31, 2008
  
             
REVENUES
            
Gross premiums written
   $ 361,485     $ 242,246  
Premiums ceded
     (75,669 )     (16,014 )
Net premiums written
     285,816       226,232  
Change in net unearned premiums
     (112,981 )     (90,975 )
Net premiums earned
     172,835       135,257  
Net investment (loss) income
     (1,753 )     18,696  
Net realized and unrealized losses - investments
     (1,899 )     (12,412 )
Net realized and unrealized gains (losses) - other
     7,430       (12,237 )
Other income
     5,169       1,724  
Total revenues
     181,782       131,028  
                 
EXPENSES
                
Loss and loss adjustment expenses
     76,594       39,767  
Acquisition costs
     28,037       24,165  
General and administrative expenses
     34,300       26,549  
Interest expense
     3,557       5,340  
Net foreign exchange losses (gains)
     1,097       (6,699 )
Total expenses
     143,585       89,122  
Income before income taxes and interest in earnings of equity investments
     38,197       41,906  
Provision for income tax
     706       (865 )
Interest in loss of equity investments
     (378 )     -  
Net income
     38,525       41,041  
Less: Income attributable to noncontrolling interest
     (2,782 )     (8,181 )
NET INCOME ATTRIBUTABLE TO FLAGSTONE
   $ 35,743     $ 32,860  
                 
Net income
   $ 38,525     $ 41,041  
Change in currency translation adjustment
     1,867       (1,420 )
Change in defined benefit pension plan obligation
     (176 )     (549 )
Comprehensive income
     40,216       39,072  
Less: Comprehensive income attributable to noncontrolling interest
     (2,579 )     (8,181 )
COMPREHENSIVE INCOME ATTRIBUTABLE TO FLAGSTONE
   $ 37,637     $ 30,891  
                 
Weighted average common shares outstanding—Basic
     85,070,002       85,469,270  
Weighted average common shares outstanding—Diluted
     85,208,295       85,690,742  
Net income attributable to Flagstone per common share—Basic
   $ 0.42     $ 0.38  
Net income attributable to Flagstone per common share—Diluted
   $ 0.42     $ 0.38  
Dividends declared per common share
   $ 0.04     $ 0.04  


The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.

 
2
 

Index
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Expressed in thousands of U.S. dollars, except share data)
 

For the period ended March 31, 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
     38,525       38,525       35,743                               2,782  
   Other comprehensive income:
                                                        
     Change in currency translation adjustment
     1,867       1,867               2,070                       (203 )
     Defined benefit pension plan obligation
     (176 )     (176 )             (176 )                        
      1,691       1,691                                          
Comprehensive income
     40,216     $ 40,216                                          
Stock based compensation
     4,000                                       4,000          
Subsidiary stock based compensation
                                                        
Issue of shares, net
     1                               1                  
Dividends declared
     (3,528 )             (3,528 )                                
Ending balance
   $ 1,224,152             $ 128,307     $ (6,377 )   $ 849     $ 901,344     $ 200,029  
                                                         
For the period ended March 31, 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 )
Comprehensive income:
                                                        
   Net income
     41,041       41,041       32,860                               8,181  
   Other comprehensive income:
                                                        
     Change in currency translation adjustment
     (1,420 )     (1,420 )             (1,420 )                        
     Defined benefit pension plan obligation
     (549 )     (549 )             (549 )                        
      (1,969 )     (1,969 )                                        
Comprehensive income
     39,072     $ 39,072                                          
Stock based compensation
     3,710                                       3,710          
Subsidiary stock based compensation
     (131 )                                             (131 )
Issue of shares, net
     -                                                  
Dividends declared
     (3,524 )             (3,524 )                                
Other
     (91 )                                             (91 )
Ending balance
   $ 1,427,660             $ 326,226     $ 5,457     $ 853     $ 909,026     $ 186,098  

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.

 
3
 

Index
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Expressed in thousands of U.S. dollars)

   
For the Three Months Ended
  
   
March 31, 2009
    
March 31, 2008
  
             
Cash flows provided by (used in) operating activities:
            
Net income
   $ 38,525     $ 41,041  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Net realized and unrealized (gains) losses
     (5,531 )     24,649  
Net unrealized foreign exchange gains
     (3,824 )     -  
Depreciation expense
     1,616       1,154  
Share based compensation expense
     3,873       3,599  
Interest in earnings of equity investments
     378       -  
Accretion/amortization on fixed maturities
     8,727       (4,754 )
Changes in assets and liabilities, excluding net assets acquired:
                
Reinsurance premium receivable
     (145,763 )     (66,304 )
Unearned premiums ceded
     (36,864 )     (3,475 )
Deferred acquisition costs
     (15,947 )     (6,237 )
Funds withheld
     1,969       (3,696 )
Loss and loss adjustment expense reserves
     24,161       18,257  
Unearned premiums
     152,944       98,123  
Insurance and reinsurance balances payable
     20,708       (287 )
Resinsurance recoverable
     5,306       -  
Other changes in assets and liabilities, net
     22,867       3,726  
Net cash provided by operating activities
     73,145       105,796  
                 
Cash flows (used in) provided by investing activities:
                
Purchases of fixed income securities
     (735,207 )     (399,242 )
Sales and maturities of fixed income securities
     509,347       732,348  
Purchases of equity securities
     (2,006 )     (20,131 )
Sales of equity securities
     4,177       -  
Purchases of other investments
     (46)       (2,002 )
Sales of other investments
     (12,480 )     (51,885 )
Purchases of fixed assets
     (3,813 )     (4,830 )
Sale of fixed asset
     145       -  
Change in restricted cash
     759       (250 )
Net cash (used in) provided by investing activities
     (239,124 )     254,008  
                 
Cash flows (used in) provided by financing activities:
                
Contribution of minority interest
     -       (222 )
Repurchase of minority interest
     -       (6,639 )
Dividend paid on common shares
     (3,392 )     (3,413 )
Repayment of long term debt
     (749 )     -  
Other
     207       205  
Net cash used in financing activities
     (3,934 )     (10,069 )
                 
Effect of foreign exchange rate on cash
     (9,842 )     (1,904 )
                 
(Decrease) increase in cash and cash equivalents
     (179,755 )     347,831  
Cash and cash equivalents - beginning of year
     783,705       362,622  
Cash and cash equivalents - end of period
   $ 603,950     $ 710,453  
                 
Supplemental cash flow information:
                
Receivable for investments sold
   $ 14,578     $ 5,660  
Payable for investments purchased
   $ 28,762     $ 23,843  
Interest paid
   $ 3,762     $ 5,588  

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.

 
4
 
FLAGSTONE REINSURANCE HOLD INGS 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)


Index

1.      Basis of Presentation and Consolidation

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 of prior period amounts is consistent with the current period presentation with no effect on net income or loss attributable to Flagstone

2.       New Accounting Pronouncements
 
Adoption of new accounting pronouncements
 
On January 1, 2009, the Company adopted the provisions of the FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 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. The effect of adopting this Statement 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 this Statement was immaterial to our financial statements.
 
New accounting pronouncements issued during 2009 impacting the Company are as follows:
 
On April 9, 2009, the FASB issued 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”).
 
5
 
FLAGSTONE REINSURANCE HOLD INGS 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)

 
Index
 
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.
 
These FSPs are effective for interim and annual periods ending after June 15, 2009. The Company has considered the provisions of these FSPs and determined that their application will not have a material effect on the Company’s financial position when adopted. 
 
3.       Investments

Fair value disclosure

In accordance with SFAS 157, the Company determined that its investments in U.S. government securities, listed equity securities and fixed income fund 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 corporate bonds, mortgage-backed securities, asset-backed securities, exchange traded funds, investment funds that are hedge funds, real estate investment trusts (“REITs”) and REIT 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 were classified as Level 3 due to the limited availability of the pricing sources. 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 private equity investments 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. The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets. When the market for a security is considered active and multiple quotes are obtained with identical prices, the quote is considered to be binding.  
 
As at March 31, 2009 and December 31, 2008, the Company’s investments are allocated between levels as follows:
 
   
Fair Value Measurement at March 31, 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
                        
Fixed maturity investments
   $ 944,520     $ 443,362     $ 500,200     $ 958  
Short term investments
     124,907       -       124,907       -  
Equity investments
     2,855       2,855       -       -  
      1,072,282       446,217       625,107       958  
Other Investments
                                
Investment funds
     7,841       -       -       7,841  
Catastrophe bonds
     39,175       -       -       39,175  
      47,016       -       -       47,016  
                                 
Totals
   $ 1,119,298     $ 446,217     $ 625,107     $ 47,974  

For reconciliation purposes, the table above does not include an equity investment of $5.3 million in which the Company is deemed to have a significant influence and 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”).  
 
 
6
 
FLAGSTONE REINSURANCE HOLD INGS 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)


Index
 

The total change in fair value of the Level 3 items still held as of March 31, 2009 is $(1.3) million.
 

   
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 is accounted for under the equity method and as such, is not accounted for at fair value under SFAS 159.
 
The reconciliation of the fair value for the Level 3 investments for the three months ended March 31, 2009, including net purchases and sales and change in unrealized gains, is set out below:
 

   
For the Three Months Ended March 31, 2009
  
Description
      
Fair value, December 31, 2008
   $ 49,258  
Total unrealized losses included in earnings
     (1,260 )
Net purchases and sales
     54  
Total investment income included in earning
     (78 )
Fair value, March 31, 2009
   $ 47,974  

Pledged assets

As at March 31, 2009 and December 31, 2008, approximately $41.6 million and $42.4 million, respectively, of cash and cash equivalents and approximately $360.5 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.

 

 
7
 
FLAGSTONE REINSURANCE HOLD INGS 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)


Index
 
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 March 31, 2009 and December 31, 2008 are as follows:


 
As at March 31, 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
                              
Forward currency   forward contracts (1)
Other Assets
   $ 41,108   $ 214  
Other Liabilities
   $ 140,706   $ 627   $ 181,814   $ (413 )
              214               627           (413 )
                                             
Derivatives not designated as hedging instruments
                                          
Futures contracts
Other Assets
   $ 44,578   $ 2,981  
Other Liabilities
   $ -   $ -   $ 44,578   $ 2,981  
Total return swaps
Other Assets
     48,000     1,620  
Other Liabilities
     -     -     48,000     1,620  
Currency swaps
Other Assets
     -     -  
Other Liabilities
     17,272     1,124     17,272     (1,124 )
Forward currency   forward contracts
Other Assets
     166,975     5,881  
Other Liabilities
     345,362     10,080     512,337     (4,199 )
Mortgage backed securities TBA
Other Assets
     44,249     445  
Other Liabilities
     -     -     44,249     445  
Other reinsurance   derivatives
Other Assets
     -     -  
Other Liabilities
     -     1,355     -     (1,355 )
              10,927               12,559           (1,632 )
                                             
Total Derivatives
           $ 11,141             $ 13,186         $ (2,045 )

(1)
Recognized as a foreign currency hedge under SFAS 133.


 
8
 
FLAGSTONE REINSURANCE HOLD INGS 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)

Index
 
 
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 )
Forward 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
  
Derivatives Designated
as Hedging Instruments
    
Comprehensive Iincome (Loss)
(Effective Portion)
For the Three Months Ended
      
 Income Statement
(Ineffective Portion)
For the Three Months Ended
  
   
March 31, 2009
  
March 31, 2008
  
Location
  
March 31, 2009
  
March 31, 2008
  
Forward currency forward contracts (1)
   $ 6,795   $ (29,854 )
Net realized and unrealized (losses) gains - other
   $ (582 ) $ 843  
                               
    $ 6,795   $ (29,854 )     $ (582 )   $ 843  

(1)
Recognized as a foreign currency hedge under SFAS 133.

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.  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.


 
9
 
FLAGSTONE REINSURANCE HOLD INGS 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)


Index
 
Non Designated

   
Gain or (Loss) on Derivatives Rrecognized in Income Statement
  
Derivatives Not Designated
        
For the Three Months Ended
  
as Hedging Instruments
  
Location
  
March 31, 2009
    
March 31, 2008
  
Futures contracts
  
Net realized and unrealized (losses) gains - investments
   $ (4,153 )   $ (20,071 )
Total return swaps
  
Net realized and unrealized (losses) gains - investments
     (8,735 )     (347 )
Currency swaps