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, 2010
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 May 5, 2010 the Registrant had 80,001,073 common voting shares outstanding, net of treasury shares with a par value of $0.01 per share.
FLAGSTONE REINSURANCE HOLDINGS LIMITED
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44 |
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, 2010 |
|
|
As at December 31, 2009 |
|
| |
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
Fixed maturities, at fair value (Amortized cost: 2010 - $1,178,266 ; 2009 - $1,198,187) |
|
$ |
1,199,577 |
|
|
$ |
1,228,561 |
|
|
Short term investments, at fair value (Amortized cost: 2010 - $313,415; 2009 - $231,609) |
|
|
310,061 |
|
|
|
232,434 |
|
|
Equity investments, at fair value (Cost: 2010 - $8,017; 2009 - $8,516) |
|
|
212 |
|
|
|
290 |
|
|
Other investments |
|
|
56,395 |
|
|
|
45,934 |
|
|
Total investments |
|
|
1,566,245 |
|
|
|
1,507,219 |
|
|
Cash and cash equivalents |
|
|
412,441 |
|
|
|
352,185 |
|
|
Restricted cash |
|
|
24,293 |
|
|
|
85,916 |
|
|
Premium balances receivable |
|
|
386,831 |
|
|
|
278,956 |
|
|
Unearned premiums ceded |
|
|
83,125 |
|
|
|
52,690 |
|
|
Reinsurance recoverable |
|
|
22,213 |
|
|
|
19,270 |
|
|
Accrued interest receivable |
|
|
9,475 |
|
|
|
11,223 |
|
|
Receivable for investments sold |
|
|
41,104 |
|
|
|
5,160 |
|
|
Deferred acquisition costs |
|
|
66,057 |
|
|
|
54,637 |
|
|
Funds withheld |
|
|
23,934 |
|
|
|
22,168 |
|
|
Goodwill |
|
|
16,295 |
|
|
|
16,533 |
|
|
Intangible assets |
|
|
33,528 |
|
|
|
35,790 |
|
|
Other assets |
|
|
131,878 |
|
|
|
125,021 |
|
|
Total assets |
|
$ |
2,817,419 |
|
|
$ |
2,566,768 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
540,528 |
|
|
$ |
480,660 |
|
|
Unearned premiums |
|
|
466,022 |
|
|
|
330,416 |
|
|
Insurance and reinsurance balances payable |
|
|
72,883 |
|
|
|
62,864 |
|
|
Payable for investments purchased |
|
|
68,520 |
|
|
|
11,457 |
|
|
Long term debt |
|
|
251,309 |
|
|
|
252,402 |
|
|
Other liabilities |
|
|
49,710 |
|
|
|
63,155 |
|
|
Total liabilities |
|
|
1,448,972 |
|
|
|
1,200,954 |
|
| |
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
Common voting shares, 300,000,000 authorized, $0.01 par value, issued and outstanding (2010 - 80,001,073; 2009 - 82,985,219) |
|
|
850 |
|
|
|
850 |
|
|
Common shares held in treasury, at cost (2010 - 4,984,146; 2009 - 2,000,000) |
|
|
(50 |
) |
|
|
(20 |
) |
|
Additional paid-in capital |
|
|
864,708 |
|
|
|
892,817 |
|
|
Accumulated other comprehensive loss |
|
|
(10,173 |
) |
|
|
(6,976 |
) |
|
Retained earnings |
|
|
352,266 |
|
|
|
324,347 |
|
|
Total Flagstone shareholders' equity |
|
|
1,207,601 |
|
|
|
1,211,018 |
|
|
Noncontrolling interest in subsidiaries |
|
|
160,846 |
|
|
|
154,796 |
|
|
Total equity |
|
|
1,368,447 |
|
|
|
1,365,814 |
|
|
Total liabilities and equity |
|
$ |
2,817,419 |
|
|
$ |
2,566,768 |
|
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 March 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
400,202 |
|
|
$ |
361,485 |
|
|
Premiums ceded |
|
|
(76,421 |
) |
|
|
(75,669 |
) |
|
Net premiums written |
|
|
323,781 |
|
|
|
285,816 |
|
|
Change in net unearned premiums |
|
|
(106,966 |
) |
|
|
(112,981 |
) |
|
Net premiums earned |
|
|
216,815 |
|
|
|
172,835 |
|
|
Net investment income (loss) |
|
|
7,285 |
|
|
|
(1,753 |
) |
|
Net realized and unrealized gains (losses) - investments |
|
|
9,811 |
|
|
|
(1,899 |
) |
|
Net realized and unrealized gains - other |
|
|
5,658 |
|
|
|
7,430 |
|
|
Other income |
|
|
11,041 |
|
|
|
5,169 |
|
|
Total revenues |
|
|
250,610 |
|
|
|
181,782 |
|
| |
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
127,379 |
|
|
|
76,594 |
|
|
Acquisition costs |
|
|
42,837 |
|
|
|
28,037 |
|
|
General and administrative expenses |
|
|
41,175 |
|
|
|
34,300 |
|
|
Interest expense |
|
|
2,514 |
|
|
|
3,557 |
|
|
Net foreign exchange (gains) losses |
|
|
(3,956 |
) |
|
|
1,097 |
|
|
Total expenses |
|
|
209,949 |
|
|
|
143,585 |
|
|
Income before income taxes and interest in earnings of equity investments |
|
|
40,661 |
|
|
|
38,197 |
|
|
Provision for income tax |
|
|
(2,852 |
) |
|
|
706 |
|
|
Interest in earnings of equity investments |
|
|
(259 |
) |
|
|
(378 |
) |
|
Net income |
|
|
37,550 |
|
|
|
38,525 |
|
|
Less: Income attributable to noncontrolling interest |
|
|
(6,046 |
) |
|
|
(2,782 |
) |
|
NET INCOME ATTRIBUTABLE TO FLAGSTONE |
|
$ |
31,504 |
|
|
$ |
35,743 |
|
| |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,550 |
|
|
$ |
38,525 |
|
|
Change in currency translation adjustment |
|
|
(3,697 |
) |
|
|
1,867 |
|
|
Change in defined benefit pension plan obligation |
|
|
500 |
|
|
|
(176 |
) |
|
Comprehensive income |
|
|
34,353 |
|
|
|
40,216 |
|
|
Less: Comprehensive income attributable to noncontrolling interest |
|
|
(6,046 |
) |
|
|
(2,579 |
) |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO FLAGSTONE |
|
$ |
28,307 |
|
|
$ |
37,637 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—Basic |
|
|
82,558,971 |
|
|
|
85,070,001 |
|
|
Weighted average common shares outstanding—Diluted |
|
|
82,741,580 |
|
|
|
85,208,294 |
|
|
Net income attributable to Flagstone per common share—Basic |
|
$ |
0.38 |
|
|
$ |
0.42 |
|
|
Net income attributable to Flagstone per common share—Diluted |
|
$ |
0.38 |
|
|
$ |
0.42 |
|
|
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.
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Expressed in thousands of U.S. dollars)
| |
|
|
|
|
|
|
|
Flagstone Shareholders' Equity |
|
|
|
|
|
For the three months ended March 31, 2010 |
|
Total equity |
|
|
Comprehensive income |
|
|
Retained earnings |
|
|
Accumulated other comprehensive loss |
|
|
Common voting shares |
|
|
Additional paid-in capital |
|
|
Noncontrolling interest in subsidiaries |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,365,814 |
|
|
$ |
- |
|
|
$ |
324,347 |
|
|
$ |
(6,976 |
) |
|
$ |
830 |
|
|
$ |
892,817 |
|
|
$ |
154,796 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
37,550 |
|
|
|
37,550 |
|
|
|
31,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,046 |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment |
|
|
(3,697 |
) |
|
|
(3,697 |
) |
|
|
|
|
|
|
(3,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan obligation |
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(3,197 |
) |
|
|
(3,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
34,353 |
|
|
$ |
34,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
5,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,463 |
|
|
|
|
|
|
Subsidiary stock based compensation |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
Shares repurchased and held in treasury |
|
|
(33,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(33,572 |
) |
|
|
|
|
|
Dividends declared |
|
|
(3,585 |
) |
|
|
|
|
|
|
(3,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,368,447 |
|
|
|
|
|
|
$ |
352,266 |
|
|
$ |
(10,173 |
) |
|
$ |
800 |
|
|
$ |
864,708 |
|
|
$ |
160,846 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Flagstone Shareholders' Equity |
|
|
|
|
|
|
For the three months ended March 31, 2009 |
|
Total equity |
|
|
Comprehensive income |
|
|
Retained earnings |
|
|
Accumulated other comprehensive income |
|
|
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 |
|
|
|
|
|
|
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 |
|
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 three months ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
37,550 |
|
|
$ |
38,525 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Net realized and unrealized (gains) losses |
|
|
(15,469 |
) |
|
|
(5,531 |
) |
|
Net unrealized foreign exchange gains |
|
|
37 |
|
|
|
(3,824 |
) |
|
Depreciation and amortization expense |
|
|
2,164 |
|
|
|
1,616 |
|
|
Share based compensation expense |
|
|
5,211 |
|
|
|
3,873 |
|
|
Interest in earnings of equity investments |
|
|
259 |
|
|
|
378 |
|
|
Accretion/amortization on fixed maturities |
|
|
695 |
|
|
|
8,727 |
|
|
Changes in assets and liabilities, excluding net assets acquired: |
|
|
|
|
|
|
|
|
|
Reinsurance premium receivable |
|
|
(109,074 |
) |
|
|
(145,763 |
) |
|
Unearned premiums ceded |
|
|
(30,567 |
) |
|
|
(36,864 |
) |
|
Deferred acquisition costs |
|
|
(11,525 |
) |
|
|
(15,947 |
) |
|
Funds withheld |
|
|
(1,693 |
) |
|
|
1,969 |
|
|
Loss and loss adjustment expense reserves |
|
|
63,134 |
|
|
|
24,161 |
|
|
Unearned premiums |
|
|
136,165 |
|
|
|
152,944 |
|
|
Insurance and reinsurance balances payable |
|
|
9,246 |
|
|
|
20,708 |
|
|
Reinsurance recoverable |
|
|
(3,563 |
) |
|
|
5,306 |
|
|
Other changes in assets and liabilities, net |
|
|
(15,069 |
) |
|
|
22,867 |
|
|
Net cash provided by operating activities |
|
|
67,501 |
|
|
|
73,145 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of fixed income securities |
|
|
(753,021 |
) |
|
|
(735,207 |
) |
|
Sales and maturities of fixed income securities |
|
|
703,700 |
|
|
|
509,347 |
|
|
Purchases of equity securities |
|
|
- |
|
|
|
(2,006 |
) |
|
Sales of equity securities |
|
|
- |
|
|
|
4,177 |
|
|
Purchases of other investments |
|
|
(202 |
) |
|
|
(46 |
) |
|
Sales of other investments |
|
|
22,596 |
|
|
|
(12,480 |
) |
|
Purchases of fixed assets |
|
|
(1,628 |
) |
|
|
(3,813 |
) |
|
Sales of fixed assets |
|
|
- |
|
|
|
145 |
|
|
Change in restricted cash |
|
|
61,623 |
|
|
|
759 |
|
|
Net cash provided by (used in) investing activities |
|
|
33,068 |
|
|
|
(239,124 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities: |
|
|
|
|
|
|
|
|
|
Shares repurchased and held in treasury |
|
|
(33,602 |
) |
|
|
- |
|
|
Dividend paid on common shares |
|
|
(3,319 |
) |
|
|
(3,392 |
) |
|
Repayment of long term debt |
|
|
2 |
|
|
|
(749 |
) |
|
Other |
|
|
207 |
|
|
|
207 |
|
|
Net cash used in financing activities |
|
|
(36,712 |
) |
|
|
(3,934 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate on cash |
|
|
(3,601 |
) |
|
|
(9,842 |
) |
| |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
60,256 |
|
|
|
(179,755 |
) |
|
Cash and cash equivalents - beginning of year |
|
|
352,185 |
|
|
|
783,705 |
|
|
Cash and cash equivalents - end of period |
|
$ |
412,441 |
|
|
$ |
603,950 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
Receivable for investments sold |
|
$ |
41,104 |
|
|
$ |
14,578 |
|
|
Payable for investments purchased |
|
$ |
68,520 |
|
|
$ |
28,762 |
|
|
Interest paid |
|
$ |
2,282 |
|
|
$ |
3,762 |
|
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
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)
1. ORGANIZATION
On March 22, 2010, Flagstone Reinsurance Holdings Limited (“Flagstone” or the “Company”) announced that its Board of Directors approved a proposal for a redomestication to move Flagstone’s place of incorporation from Bermuda to Luxembourg. Flagstone has chosen to redomesticate to Luxembourg because
the Company believes it will increase its strategic and capital flexibility while maintaining its operating model and long-term strategy. The redomestication proposal is subject to approval by Flagstone’s shareholders and certain regulatory approvals. Flagstone does not expect the redomestication to have a material impact on the way the Company operates or on its financial condition or results of operations. Investors are urged to read the proxy statement/prospectus on Form S-4 filed
April 9, 2010 (the “Proxy Statement”), and any other relevant documents filed or to be filed by Flagstone because they contain or will contain important information about the proposed redomestication. In particular, investors should carefully consider the “Risk Factors” section of the Proxy Statement for a discussion of risks related to the redomestication. The Proxy Statement and other documents filed or to be filed by Flagstone with the SEC are or will be available free of
charge at the SEC’s website (www.sec.gov).
2. BASIS OF PRESENTATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of Flagstone 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. 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. 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 the Consolidation Topic of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). 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 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 (“LAE”), estimates of premiums written, premiums earned, acquisition costs, fair value of investments 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, 2009, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2010.
3. NEW ACCOUNTING PRONOUNCEMENTS
Adoption of new accounting pronouncements
During the first quarter of 2010, the Company adopted the FASB amendments to ASC Topic 860, “Transfers and Servicing,” (“ASC 860”) which codified FASB Statement No. 166, “Accounting for Transfers of Financial Assets” and was amended in December 2009. ASC 860 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. The effect of adopting ASC 860 did not have a material impact on the 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)
During the first quarter of 2010, the Company adopted the amendments to the FASB ASC Topic 810, “Consolidation” (“ASC 810”) which codified FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”. ASC 810 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 impact
the other entity’s economic performance. The effect of adopting the amendments to ASC 810 did not have a material impact on the consolidated results of operations and financial condition.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). This update requires new disclosures about fair value measurement as set forth in the Fair Value Measurements
and Disclosures – Overall Subtopic of the FASB ASC. Specifically, this update requires disclosing (1) the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers, and (2) information about purchases, sales, issuances, and settlements separately in the reconciliation for fair value measurements using significant unobservable inputs. The ASU 2010-06 was effective for interim and annual periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the relevant portions of ASU 2010-06 and the effect of adopting the amendments did not have a material impact on the consolidated results of operations and financial condition.
4. INVESTMENTS
Fair value disclosure
The valuation technique used to determine the fair value of the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.
In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC, the Company determined that its investments in U.S. government treasury securities, listed equity securities and exchange traded funds 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, foreign government bonds and asset-backed securities are stated at Level 2. The fair value of these securities is derived from broker quotes based on inputs that are observable for the asset, either directly or indirectly, such as yield
curves and transactional history. 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 Company has reviewed its Level 3 investments, and the valuation methods are as follows: The fair value of the investment funds, being private equity funds, is determined by the investment fund managers using the net asset value 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 March 31, 2010 and December 31, 2009, the Company’s investments are allocated between levels as follows:
| |
|
Fair Value Measurement at March 31, 2010, using: |
|
| |
|
|
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant other unobservable inputs (Level 3) |
|
| |
|
Fair value measurements |
|
| |
|
Fixed maturity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
427,731 |
|
|
$ |
387,286 |
|
|
$ |
40,445 |
|
|
$ |
- |
|
|
U.S. states and political subdivisions |
|
|
2,206 |
|
|
|
- |
|
|
|
2,206 |
|
|
|
- |
|
|
Other foreign government |
|
|
58,296 |
|
|
|
- |
|
|
|
58,296 |
|
|
|
- |
|
|
Corporates |
|
|
469,900 |
|
|
|
- |
|
|
|
469,900 |
|
|
|
- |
|
|
Mortgage-backed securities |
|
|
179,296 |
|
|
|
- |
|
|
|
179,296 |
|
|
|
- |
|
|
Asset-backed securities |
|
|
62,148 |
|
|
|
- |
|
|
|
62,148 |
|
|
|
- |
|
| |
|
|
1,199,577 |
|
|
|
387,286 |
|
|
|
812,291 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
212 |
|
|
|
212 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
212 |
|
|
|
212 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
239,195 |
|
|
|
227,347 |
|
|
|
11,848 |
|
|
|
- |
|
|
Other foreign government |
|
|
8,099 |
|
|
|
- |
|
|
|
8,099 |
|
|
|
- |
|
|
Corporates |
|
|
61,792 |
|
|
|
- |
|
|
|
61,792 |
|
|
|
- |
|
|
Asset-backed securities |
|
|
975 |
|
|
|
- |
|
|
|
975 |
|
|
|
- |
|
| |
|
|
310,061 |
|
|
|
227,347 |
|
|
|
82,714 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds |
|
|
5,734 |
|
|
|
- |
|
|
|
- |
|
|
|
5,734 |
|
|
Catastrophe bonds |
|
|
46,600 |
|
|
|
- |
|
|
|
46,600 |
|
|
|
- |
|
| |
|
|
52,334 |
|
|
|
- |
|
|
|
46,600 |
|
|
|
5,734 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,562,184 |
|
|
$ |
614,845 |
|
|
$ |
941,605 |
|
|
$ |
5,734 |
|
For reconciliation purposes, the table above does not include an equity investment of $4.1 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 the FASB ASC guidance for financial instruments.
For the Level 3 items still held as of March 31, 2010, the total change in fair value for the three months ended March 31, 2010 is $0.1 million. Transfers between levels, if necessary, are done as of the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during 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)
| |
|
Fair Value Measurement at December 31, 2009, using: |
|
| |
|
|
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant other unobservable inputs (Level 3) |
|
| |
|
Fair value measurements |
|
| |
|
Fixed maturity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
431,715 |
|
|
$ |
380,843 |
|
|
$ |
50,872 |
|
|
$ |
- |
|
|
U.S. states and political subdivisions |
|
|
1,903 |
|
|
|
- |
|
|
|
1,903 |
|
|
|
- |
|
|
Other foreign government |
|
|
114,427 |
|
|
|
- |
|
|
|
114,427 |
|
|
|
- |
|
|
Corporates |
|
|
519,242 |
|
|
|
- |
|
|
|
519,242 |
|
|
|
- |
|
|
Mortgage-backed securities |
|
|
112,067 |
|
|
|
- |
|
|
|
111,290 |
|
|
|
777 |
|
|
Asset-backed securities |
|
|
49,207 |
|
|
|
- |
|
|
|
47,686 |
|
|
|
1,521 |
|
| |
|
|
1,228,561 |
|
|
|
380,843 |
|
|
|
845,420 |
|
|
|
2,298 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
290 |
|
|
|
290 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
290 |
|
|
|
290 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
145,604 |
|
|
|
125,755 |
|
|
|
19,849 |
|
|
|
- |
|
|
Other foreign government |
|
|
4,013 |
|
|
|
- |
|
|
|
4,013 |
|
|
|
- |
|
|
Corporates |
|
|
80,904 |
|
|
|
- |
|
|
|
80,904 |
|
|
|
- |
|
|
Asset-backed securities |
|
|
1,913 |
|
|
|
- |
|
|
|
1,913 |
|
|
|
- |
|
| |
|
|
232,434 |
|
|
|
125,755 |
|
|
|
106,679 |
|
|
|
- |
|
|
Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds |
|
|
5,486 |
|
|
|
- |
|
|
|
- |
|
|
|
5,486 |
|
|
Catastrophe bonds |
|
|
36,128 |
|
|
|
- |
|
|
|
36,128 |
|
|
|
- |
|
| |
|
|
41,614 |
|
|
|
- |
|
|
|
36,128 |
|
|
|
5,486 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,502,899 |
|
|
$ |
506,888 |
|
|
$ |
988,227 |
|
|
$ |
7,784 |
|
For reconciliation purposes, the table above does not include an equity investment of $4.3 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 the FASB ASC guidance for financial instruments.
The reconciliation of the fair value for the Level 3 investments for the three months ended March 31, 2010 and December 31, 2009, including net purchases and sales and change in unrealized gains, is set out below:
| |
|
For the three months ended March 31, 2010 |
|
| |
|
Fixed Maturities |
|
|
Investment funds |
|
|
Total |
|
|
Description |
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2009 |
|
$ |
2,298 |
|
|
$ |
5,486 |
|
|
$ |
7,784 |
|
|
Total realized losses included in earnings |
|
|
(226 |
) |
|
|
- |
|
|
|
(226 |
) |
|
Total unrealized gains (losses) included in earnings |
|
|
512 |
|
|
|
58 |
|
|
|
570 |
|
|
Purchases |
|
|
- |
|
|
|
190 |
|
|
|
190 |
|
|
Sales |
|
|
(2,584 |
) |
|
|
- |
|
|
|
(2,584 |
) |
|
Fair value, March 31, 2010 |
|
$ |
- |
|
|
$ |
5,734 |
|
|
$ |
5,734 |
|
Pledged assets
As at March 31, 2010 and December 31, 2009, approximately $24.3 million and $85.9 million, respectively, of cash and cash equivalents and approximately $477.3 million and $425.1 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.
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)
Commitments
As at March 31, 2010, and December 31, 2009, the Company had total outstanding investment commitments of $15.2 million and $3.4 million, respectively.
5. DERIVATIVES
The Company accounts for its derivative instruments using the Derivatives and Hedging Topic of the FASB ASC, 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 the hedge designation, and if designated as a hedging instrument, whether the hedge is 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 Company enters into derivative instruments such as interest rate futures contracts, foreign currency forward contracts and foreign currency swaps in order to manage portfolio duration and interest rate risk, borrowing costs and foreign currency exposure. The Company enters into index futures contracts and total return swaps to increase
or reduce its exposure to the underlying asset or index. The Company also purchases “to be announced” mortgage-backed securities (“TBAs”) as part of its investing activities. The Company manages the exposure to these instruments based on guidelines established by management and approved by the Board of Directors.
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.
The details of the derivatives held by the Company as of March 31, 2010 and December 31, 2009 are as follows:
| |
As at March 31, 2010 |
|
| |
Asset Derivatives |
|
Liability Derivatives |
|
|
Total Derivatives |
|
| |
Balance sheet location |
|
Derivative exposure |
|
|
|
|
Balance sheet location |
|
Derivative exposure |
|
|
|
|
|
Derivative exposure |
|
|
Net fair value |
|
| |
|
Fair value |
|
|
Fair value |
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (1) |
Other assets |
|
$ |
- |
|
|
$ |
- |
|
Other liabilities |
|
$ |
60,573 |
|
|
$ |
310 |
|
|
$ |
60,573 |
|
|
$ |
(310 |
) |
| |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
310 |
|
|
|
|
|
|
|
(310 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purpose - risk management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency swaps |
Other assets |
|
$ |
- |
|
|
$ |
- |
|
Other liabilities |
|
$ |
17,559 |
|
|
$ |
836 |
|
|
$ |
17,559 |
|
|
$ |
(836 |
) |
|
Foreign currency forward contracts |
Other assets |
|
|
452,238 |
|
|
|
14,335 |
|
Other liabilities |
|
|
172,029 |
|
|
|
2,671 |
|
|
|
624,267 |
|
|
|
11,664 |
|
| |
|
|
|
|
|
|
|
14,335 |
|
|
|
|
|
|
|
|
3,507 |
|
|
|
|
|
|
|
10,828 |
|
|
Purpose - exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts |
Other assets |
|
$ |
160,630 |
|
|
$ |
1,546 |
|
Other liabilities |
|
$ |
3,500 |
|
|
$ |
26 |
|
|
$ |
164,130 |
|
|
$ |
1,520 |
|
|
Total return swaps |
Other assets |
|
|
47,682 |
|
|
|
871 |
|
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
47,682 |
|
|
|
871 |
|
|
Mortgage-backed securities TBA |
Other assets |
|
|
11,020 |
|
|
|
24 |
|
Other liabilities |
|
|
25,817 |
|
|
|
61 |
|
|
|
36,837 |
|
|
|
(37 |
) |
|
Other reinsurance derivatives |
Other assets |
|
|
- |
|
|
|
- |
|
Other liabilities |
|
|
- |
|
|
|
1,204 |
|
|
|
- |
|
|
|
(1,204 |
) |
| |
|
|
|
|
|
|
|
2,441 |
|
|
|
|
|
|
|
|
1,291 |
|
|
|
|
|
|
|
1,150 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
|
$ |
16,776 |
|
|
|
|
|
|
|
$ |
5,108 |
|
|
|
|
|
|
$ |
11,668 |
|
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, 2009 |
|
| |
Asset Derivatives |
|
Liability Derivatives |
|
|
Total Derivatives |
|
| |
Balance sheet location |
|
Derivative exposure |
|
|
|
|
Balance sheet location |
|
Derivative exposure |
|
|
|
|
|
Derivative exposure |
|
|
Net fair value |
|
| |
|
Fair value |
|
|
Fair value |
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (1) |
Other assets |
|
$ |
44,444 |
|
|
$ |
148 |
|
Other liabilities |
|
$ |
117,592 |
|
|
$ |
512 |
|
|
$ |
162,036 |
|
|
$ |
(364 |
) |
| |
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
(364 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purpose - risk management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency swaps |
Other assets |
|
$ |
18,655 |
|
|
$ |
260 |
|
Other liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
18,655 |
|
|
$ |
260 |
|
|
Foreign currency forward contracts |
Other assets |
|
|
378,627 |
|
|
|
12,532 |
|
Other liabilities |
|
|
137,864 |
|
|
|
6,386 |
|
|
|
516,491 |
|
|
|
6,146 |
|
| |
|
|
|
|
|
|
|
12,792 |
|
|
|
|
|
|
|
|
6,386 |
|
|
|
|
|
|
|
6,406 |
|
|
Purpose - exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts |
Other assets |
|
$ |
150,770 |
|
|
$ |
3,847 |
|
Other liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
150,770 |
|
|
$ |
3,847 |
|
|
Total return swaps |
Other assets |
|
|
6,384 |
|
|
|
409 |
|
Other liabilities |
|
|
39,564 |
|
|
|
436 |
|
|
|
45,948 |
|
|
|
(27 |
) |
|
Mortgage-backed securities TBA |
Other assets |
|
|
- |
|
|
|
- |
|
Other liabilities |
|
|
41,496 |
|
|
|
399 |
|
|
|
41,496 |
|
|
|
(399 |
) |
|
Other reinsurance derivatives |
Other assets |
|
|
- |
|
|
|
- |
|
Other liabilities |
|
|
- |
|
|
|
1,596 |
|
|
|
- |
|
|
|
(1,596 |
) |
| |
|
|
|
|
|
|
|
4,256 |
|
|
|
|
|
|
|
|
2,431 |
|
|
|
|
|
|
|
1,825 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
|
$ |
17,196 |
|
|
|
|
|
|
|
$ |
9,329 |
|
|
|
|
|
|
$ |
7,867 |
|
(1) Recognized as a foreign currency hedge under the Derivatives and Hedging Topic of the ASC.
Designated
| |
|
Amount of Gain or (Loss) on Derivatives Recognized in |
|
| |
|
Comprehensive income (loss) |
|
|
|
Net income (loss) |
|
|
Derivatives designated |
|
(Effective portion) |
|
|
|
(Ineffective portion) |
|
|
as hedging instruments |
|
For the three months ended |
|
|
|
For the three months ended |
|
| |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Location |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Foreign currency forward contracts (1) |
|
$ |
594 |
|
|
$ |
6,795 |
|
Net realized and unrealized gains - other |
|
$ |
(25 |
) |
|
$ |
(525 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
594 |
|
|
$ |
6,795 |
|
|
|
$ |
(25 |
) |
|
$ |
(525 |
) |
|
(1) |
Recognized as a foreign currency hedge under the Derivatives and Hedging Topic of the ASC. |
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)
Non-Designated
| |
|
Gain or (Loss) on Derivatives Recognized in Net Income
|
|
|
Derivatives not designated |
|
|
|
For the three months ended |
|
|
as hedging instruments |
|
Location |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Futures contracts |
|
Net realized and unrealized gains (losses) - investments |
|
$ |
396 |
|
|
$ |
(4,153 |
) |
|
Total return swaps |
|
Net realized and unrealized gains (losses) - investments |
|
|
1,244 |
|
|
|
(8,735 |
) |
|
Currency swaps |
|
Net realized and unrealized (losses) - other |
|
|
(1,087 |
) |
|
|
(785 |
) |
|
Foreign currency forward contracts |
|
Net realized and unrealized gains (losses) - investments |
|
|
17,462 |
|
|
|
(3,166 |
) |
|
Foreign currency forward contracts |
|
Net realized and unrealized gains - other |
|
|
6,215 |
|
|
|
8,200 |
|
|
Mortgage-backed securities TBA |
|
Net realized and unrealized gains - investments |
|
|
654 |
|
|
|
958 |
|
|
Other reinsurance derivatives |
|
Net realized and unrealized gains - other |
|
|
555 |
|
|
|
540 |
|
| |
|
|
|
$ |
25,439 |
|
|
$ |
(7,141 |
) |
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.
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 foreign currency forward contracts are not designated as hedges, and are also 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.
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.
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 in accordance with the FASB ASC Topic for Derivatives and Hedging. The Company has entered into industry loss warranty (“ILW”) transactions that may be structured as reinsurance or derivatives.
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)
Fair value disclosure
In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC, the fair value of derivative instruments held as of March 31, 2010 and December 31, 2009 is allocated between levels as follows:
| |
|
Fair Value Measurement at March 31, 2010, using: |
|
| |
|
|
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant other unobservable inputs (Level 3) |
|
| |
|
Fair value measurements |
|
| |
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts |
|
$ |
1,520 |
|
|
$ |
1,520 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Swaps |
|
|
35 |
|
|
|
- |
|
|
|
35 |
|
|
|
- |
|
|
Foreign currency forward contracts |
|
|
11,354 |
|
|
|
- |
|
|
|
11,354 |
|
|
|
- |
|
|
Mortgage-backed securities TBA |
|
|
(37 |
) |
|
|
- |
|
|
|
(37 |
) |
|
|
- |
|
|
Other reinsurance derivatives |
|
|
(1,204 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,204 |
) |
|
Total derivatives |
|
$ |
11,668 |
|
|
$ |
1,520 |
|
|
$ |
11,352 |
|
|
$ |
(1,204 |
) |
For the Level 3 items still held as of March 31, 2010, the total change in fair value recorded in net realized and unrealized gains (losses) – investments for the three months ended March 31, 2010 is a gain of $0.4 million.
| |
|
Fair Value Measurement at December 31, 2009, using: |
|
| |
|
|
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant other unobservable inputs (Level 3) |
|
| |
|
Fair value measurements |
|
| |
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts |
|
$ |
3,847 |
|
|
$ |
3,847 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Swaps |
|
|
233 |
|
|
|
- |
|
|
|
233 |
|
|
|
- |
|
|
Foreign currency forward contracts |
|
|
5,782 |
|
|
|
- |
|
|
|
5,782 |
|
|
|
- |
|
|
Mortgage-backed securities TBA |
|
|
(399 |
) |
|
|
- |
|
|
|
(399 |
) |
|
|
- |
|
|
Other reinsurance derivatives |
|
|
(1,596 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,596 |
) |
|
Total derivatives |
|
$ |
7,867 |
|
|
$ |
3,847 |
|
|
$ |
5,616 |
|
|
$ |
(1,596 |
) |
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:
| |
|
For the three months ended |
|
| |
|
March 31, 2010 |
|
|
Other reinsurance derivatives |
|
|
|
|
Fair value, December 31, 2009 |
|
$ |
(1,596 |
) |
|
Total premium earned included in earnings |
|
|
642 |
|
|
Purchases |
|
|
(250 |
) |
|
Sales |
|
|
- |
|
|
Fair value, March 31, 2010 |
|
$ |
(1,204 |
) |
Transfers between levels, if necessary, are done as of the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during these periods.
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)
6. GOODWILL AND INTANGIBLES
|
Goodwill relates to the following reportable segments: |
|
Reinsurance |
|
|
Lloyd's |
|
|
Island Heritage |
|
|
Total |
|
|
Balance as at December 31, 2009 |
|
$ |
3,144 |
|
|
$ |
3,339 |
|
|
$ |
10,050 |
|
|
$ |
16,533 |
|
|
Impact of foreign exchange and other |
|
|
(36 |
) |
|
|
(202 |
) |
|
|
- |
|
|
|
(238 |
) |
|
Balance as at March 31, 2010 |
|
$ |
3,108 |
|
|
$ |
3,137 |
|
|
$ |
10,050 |
|
|
$ |
16,295 |
|
| |
|
Carrying value at beginning of period |
|
|
Accumulated amortization (1) |
|
|
Impact of foreign exchange |
|
|
Carrying value at end of period |
|
|
Finite life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
$ |
1,308 |
|
|
$ |
(26 |
) |
|
$ |
(87 |
) |
|
$ |
1,195 |
|
|
Software |
|
|
3,924 |
|
|
|
(76 |
) |
|
|
(263 |
) |
|
|
3,585 |
|
|
Distribution network |
|
|
3,356 |
|
|
|
(57 |
) |
|
|
(224 |
) |
|
|
3,075 |
|
| |
|
$ |
8,588 |
|
|
$ |
(159 |
) |
|
$ |
(574 |
) |
|
$ |
7,855 |
|
|
Indefinite life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyd's syndicate capacity |
|
$ |
25,353 |
|
|
$ |
- |
|
|
$ |
(1,529 |
) |
|
$ |
23,824 |
|
|
Licenses |
|
|
1,849 |
|
|
|
- |
|
|
|
- |
|
|
|
1,849 |
|
| |
|
$ |
27,202 |
|
|
$ |
- |
|
|
$ |
(1,529 |
) |
|
$ |
25,673 |
|
|
Aggregate amortization expenses (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
214 |
|
|
Estimated amortization expense |
For the years ending December 31, |
|
Amount |
|
| |
|
|
|
|
| |
2010 |
|
$ |
850 |
|
| |
2011 |
|
|
821 |
|
| |
2012 |
|
|
794 |
|
| |
2013 |
|
|
770 |
|
| |
2014 |
|
|
749 |
|
| |
|
|
|
|
|
|
(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. |
|
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 months ended March 31, 2010, the
Company incurred interest expense of $2.5 million on the Deferrable Interest Debentures compared to $3.6 million for the same period in 2009. Also, at March 31, 2010 and December 31, 2009, the Company had $0.8 million and $0.8 million, respectively, of interest payable included in other liabilities.
The Company does not carry its long term debt at fair value on its consolidated balance sheets. At March 31, 2010, the Company estimated the fair value of its long term debt to be approximately $221.8 million compared to $203.9 million at December 31, 2009.
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)
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 March 31, 2010, 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 March 31, 2010, $32.3 million
had been drawn under the Barclays Facility, and the drawn amount was secured by $35.9 million of fixed maturity securities from the Company’s investment portfolio.
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 comprises a $225.0 million facility for letters of credit with a maximum tenor of 15 months, to be used to support reinsurance obligations
of the Company and its subsidiaries, and a $225.0 million facility for letters of credit drawn in respect of Funds at Lloyd’s with a maximum tenor of 60 months. As at March 31, 2010, $394.5 million had been drawn under the Citi Facility, and the drawn amount of the facility was secured by $438.4 million of fixed maturity securities from the Company’s investment portfolio.
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. SHARE BASED COMPENSATION
The Company accounts for share based compensation in accordance with the Compensation – Stock Compensation Topic of the FASB ASC which requires entities to measure the cost of services received from employees and directors 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 as compensation expense over the period during which an employee or director is required to provide service in exchange for the award. The Company’s share based compensation plans consist of performance share units (“PSUs”) and restricted share units (“RSUs”).
Performance Share Units
The 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, 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 March 31, 2010, and changes during the three months ended March 31, 2010 is as follows:
| |
|
For the three months ended March 31, 2010 |
|
| |
|
Number expected to vest |
|
|
Weighted average grant date fair value |
|
|
Weighted average remaining contractual term |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
3,305,713 |
|
|
$ |
10.04 |
|
|
|
1.6 |
|
|
Granted |
|
|
824,500 |
|
|
|
10.94 |
|
|
|
|
|
|
Outstanding at end of period |
|
|
4,130,213 |
|
|
|
10.22 |
|
|
|
1.6 |
|
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 reviews its assumptions in relation to the PSUs on a quarterly basis. For the three months ended March 31, 2010, $4.1 million of compensation expense has been recorded in general and administrative expenses in relation to the PSU Plan compared to $2.7 million for the same period in 2009. 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 March 31, 2010 and December 31, 2009, there was a total of $24.4 million and $19.4 million, respectively, of unrecognized compensation cost related to non-vested PSUs; that cost is expected to be recognized over a period of approximately 1.9 years and 1.6 years, respectively.
Since the inception of the PSU Plan, 60,000 PSUs have vested and 2,368,658 PSUs have been cancelled.
Restricted Share Units
The purpose of the RSU Plan is to encourage certain 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.
A summary of the activity under the RSU Plan as at March 31, 2010 and changes during the three months ended March 31, 2010, are as follows:
| |
|
For the three months ended March 31, 2010 |
|
| |
|
Number expected to vest |
|
|
Weighted average grant date fair value |
|
|
Weighted average remaining contractual term |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
373,157 |
|
|
$ |
10.89 |
|
|
|
0.5 |
|
|
Granted |
|
|
226,321 |
|
|
|
11.05 |
|
|
|
|
|
|
Forfeited |
|
|
(9,465 |
) |
|
|
9.89 |
|
|
|
|
|
|
Outstanding at end of period |
|
|
590,013 |
|
|
|
10.97 |
|
|
|
0.7 |
|
As at March 31, 2010 and December 31, 2009, there was a total of $2.2 million and $0.9 million, respectively, of unrecognized compensation cost related to non-vested RSUs; that cost is expected to be recognized over a period of approximately 1.5 years and 1.0 year, respectively. A compensation expense of $1.1 million and $1.2
million has been recorded in general and administrative expenses for the three months ended March 31, 2010 and 2009, respectively, in relation to the RSU Plan.
Since the inception of the RSU Plan in July 2006, 400,842 RSUs granted to employees have vested and no RSUs granted to employees have been cancelled. During the three months ended March 31, 2010 and 2009, 64,896 and 72,666 RSUs, respectively, were granted to the directors. During the three months ended March 31, 2010 and
2009, nil and 2,985 RSUs, respectively, granted to directors were converted into common shares of the Company as elected by the directors.
The company uses a nil forfeiture assumption for its PSUs and RSUs. The intrinsic value of the PSUs and RSUs outstanding as of March 31, 2010 was $47.3 million and $6.8 million, respectively.
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)
9. EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings per common share for the three months ended March 31, 2010 and 2009 is as follows:
| |
|
For the three months ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
Basic earnings per common share |
|
|
|
|
|
|
|
Net income attributable to Flagstone |
|
$ |
31,504 |
|
|
$ |
35,743 |
|
|
Weighted average common shares outstanding |
|
|
82,288,918 |
|
|
|
84,862,555 |
|
|
Weighted average vested restricted share units |
|
|
270,053 |
|
|
|
207,446 |
|
|
Weighted average common shares outstanding—Basic |
|
|
82,558,971 |
|
|
|
85,070,001 |
|
|
Basic earnings per common share |
|
$ |
0.38 |
|
|
$ |
0.42 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
|
|
|
|
|
|
|
|
Net income attributable to Flagstone |
|
$ |
31,504 |
|
|
$ |
35,743 |
|
|
Weighted average common shares outstanding |
|
|
82,288,918 |
|
|
|
84,862,555 |
|
|
Weighted average vested restricted share units outstanding |
|
|
270,053 |
|
|
|
207,446 |
|
| |
|
|
82,558,971 |
|
|
|
85,070,001 |
|
|
Share equivalents: |
|
|
|
|
|
|
|
|
|
Weighted average unvested restricted share units |
|
|
182,609 |
|
|
|
138,293 |
|
|
Weighted average common shares outstanding—Diluted |
|
|
82,741,580 |
|
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