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 June 30, 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, S.A.
(Exact name of registrant as specified in its charter)
|
Luxembourg |
|
98-0481623 |
|
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
37 Val St André
L-1128
Luxembourg, Grand Duchy of Luxembourg
R.C.S. Luxembourg B153214
(Address of principal executive offices)
+352 273 515 30
(Registrant's telephone number, including area code)
Flagstone Reinsurance Holdings Limited
Crawford House
23 Church Street
Hamilton HM 11
Bermuda
(Former name, and former address, 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 August 3, 2010, the Registrant had 78,009,113 common voting shares outstanding, net of treasury shares with a par value of $0.01 per share.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
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51 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLAGSTONE REINSURANCE HOLDINGS, S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars, except share data)
| |
|
As at June 30, 2010 |
|
|
As at December 31, 2009 |
|
| |
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
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Investments: |
|
|
|
|
|
|
|
Fixed maturities, at fair value (Amortized cost: 2010 - $1,437,518 ; 2009 - $1,198,187) |
|
$ |
1,423,573 |
|
|
$ |
1,228,561 |
|
|
Short term investments, at fair value (Amortized cost: 2010 - $33,570; 2009 - $231,609) |
|
|
30,320 |
|
|
|
232,434 |
|
|
Equity investments, at fair value (Cost: 2010 - $7,259; 2009 - $8,516) |
|
|
182 |
|
|
|
290 |
|
|
Other investments |
|
|
98,018 |
|
|
|
45,934 |
|
|
Total investments |
|
|
1,552,093 |
|
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|
1,507,219 |
|
|
Cash and cash equivalents |
|
|
370,588 |
|
|
|
352,185 |
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|
Restricted cash |
|
|
24,742 |
|
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|
85,916 |
|
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Premium balances receivable |
|
|
502,476 |
|
|
|
278,956 |
|
|
Unearned premiums ceded |
|
|
120,555 |
|
|
|
52,690 |
|
|
Reinsurance recoverable |
|
|
22,589 |
|
|
|
19,270 |
|
|
Accrued interest receivable |
|
|
13,723 |
|
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|
11,223 |
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Receivable for investments sold |
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19,443 |
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|
5,160 |
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Deferred acquisition costs |
|
|
78,582 |
|
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|
54,637 |
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Funds withheld |
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27,709 |
|
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|
22,168 |
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Goodwill |
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16,246 |
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|
16,533 |
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Intangible assets |
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|
31,756 |
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|
35,790 |
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Other assets |
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122,296 |
|
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|
125,021 |
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Total assets |
|
$ |
2,902,798 |
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$ |
2,566,768 |
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LIABILITIES |
|
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Loss and loss adjustment expense reserves |
|
$ |
602,451 |
|
|
$ |
480,660 |
|
|
Unearned premiums |
|
|
557,207 |
|
|
|
330,416 |
|
|
Insurance and reinsurance balances payable |
|
|
101,523 |
|
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|
62,864 |
|
|
Payable for investments purchased |
|
|
17,915 |
|
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|
11,457 |
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Long term debt |
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249,647 |
|
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|
252,402 |
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Other liabilities |
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69,959 |
|
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|
63,155 |
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Total liabilities |
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1,598,702 |
|
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|
1,200,954 |
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EQUITY |
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Common voting shares, 300,000,000 authorized, $0.01 par value, issued and outstanding (2010 - 78,009,113; 2009 - 82,985,219) |
|
|
850 |
|
|
|
850 |
|
|
Common shares held in treasury, at cost (2010 - 4,984,146; 2009 - 2,000,000) |
|
|
(70 |
) |
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|
(20 |
) |
|
Additional paid-in capital |
|
|
845,039 |
|
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|
892,817 |
|
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Accumulated other comprehensive loss |
|
|
(11,754 |
) |
|
|
(6,976 |
) |
|
Retained earnings |
|
|
362,238 |
|
|
|
324,347 |
|
|
Total Flagstone shareholders' equity |
|
|
1,196,303 |
|
|
|
1,211,018 |
|
|
Noncontrolling interest in subsidiaries |
|
|
107,793 |
|
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|
154,796 |
|
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Total equity |
|
|
1,304,096 |
|
|
|
1,365,814 |
|
|
Total liabilities and equity |
|
$ |
2,902,798 |
|
|
$ |
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, S.A.
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 June 30, |
|
|
For the six months ended June 30, |
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| |
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2010 |
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2009 |
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2010 |
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2009 |
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REVENUES |
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Gross premiums written |
|
$ |
369,611 |
|
|
$ |
328,709 |
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$ |
769,813 |
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$ |
690,194 |
|
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Premiums ceded |
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(75,769 |
) |
|
|
(59,742 |
) |
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|
(152,190 |
) |
|
|
(135,411 |
) |
|
Net premiums written |
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|
293,842 |
|
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|
268,967 |
|
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|
617,623 |
|
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|
554,783 |
|
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Change in net unearned premiums |
|
|
(61,763 |
) |
|
|
(81,991 |
) |
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|
(168,729 |
) |
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|
(194,972 |
) |
|
Net premiums earned |
|
|
232,079 |
|
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|
186,976 |
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|
448,894 |
|
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|
359,811 |
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Net investment income |
|
|
8,219 |
|
|
|
10,646 |
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|
15,504 |
|
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|
8,893 |
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|
Net realized and unrealized (losses) gains - investments |
|
|
(12,671 |
) |
|
|
7,082 |
|
|
|
(2,860 |
) |
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|
5,183 |
|
|
Net realized and unrealized (losses) gains - other |
|
|
(1,966 |
) |
|
|
2,470 |
|
|
|
3,692 |
|
|
|
9,900 |
|
|
Other income |
|
|
6,531 |
|
|
|
2,333 |
|
|
|
17,572 |
|
|
|
7,502 |
|
|
Total revenues |
|
|
232,192 |
|
|
|
209,507 |
|
|
|
482,802 |
|
|
|
391,289 |
|
| |
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|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
151,863 |
|
|
|
57,641 |
|
|
|
279,242 |
|
|
|
134,235 |
|
|
Acquisition costs |
|
|
45,584 |
|
|
|
36,203 |
|
|
|
88,421 |
|
|
|
64,240 |
|
|
General and administrative expenses |
|
|
42,722 |
|
|
|
34,578 |
|
|
|
83,897 |
|
|
|
68,878 |
|
|
Interest expense |
|
|
2,545 |
|
|
|
3,119 |
|
|
|
5,059 |
|
|
|
6,676 |
|
|
Net foreign exchange (gains) losses |
|
|
(7,856 |
) |
|
|
(362 |
) |
|
|
(11,812 |
) |
|
|
735 |
|
|
Total expenses |
|
|
234,858 |
|
|
|
131,179 |
|
|
|
444,807 |
|
|
|
274,764 |
|
|
(Loss) income before income taxes and interest in earnings of equity investments |
|
|
(2,666 |
) |
|
|
78,328 |
|
|
|
37,995 |
|
|
|
116,525 |
|
|
Provision for income tax |
|
|
(438 |
) |
|
|
(250 |
) |
|
|
(3,290 |
) |
|
|
456 |
|
|
Interest in earnings of equity investments |
|
|
(283 |
) |
|
|
(300 |
) |
|
|
(542 |
) |
|
|
(678 |
) |
|
Net (loss) income |
|
|
(3,387 |
) |
|
|
77,778 |
|
|
|
34,163 |
|
|
|
116,303 |
|
|
Less: Loss (income) attributable to noncontrolling interest |
|
|
16,656 |
|
|
|
(9,964 |
) |
|
|
10,610 |
|
|
|
(12,746 |
) |
|
NET INCOME ATTRIBUTABLE TO FLAGSTONE |
|
$ |
13,269 |
|
|
$ |
67,814 |
|
|
$ |
44,773 |
|
|
$ |
103,557 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,387 |
) |
|
$ |
77,778 |
|
|
$ |
34,163 |
|
|
$ |
116,303 |
|
|
Change in currency translation adjustment |
|
|
(1,184 |
) |
|
|
5,399 |
|
|
|
(4,881 |
) |
|
|
7,266 |
|
|
Change in defined benefit pension plan obligation |
|
|
(397 |
) |
|
|
(145 |
) |
|
|
103 |
|
|
|
(321 |
) |
|
Comprehensive (loss) income |
|
|
(4,968 |
) |
|
|
83,032 |
|
|
|
29,385 |
|
|
|
123,248 |
|
|
Less: Comprehensive loss (income) attributable to noncontrolling interest |
|
|
16,656 |
|
|
|
(11,743 |
) |
|
|
10,610 |
|
|
|
(14,322 |
) |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO FLAGSTONE |
|
$ |
11,688 |
|
|
$ |
71,289 |
|
|
$ |
39,995 |
|
|
$ |
108,926 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—Basic |
|
|
79,479,918 |
|
|
|
85,070,001 |
|
|
|
81,010,939 |
|
|
|
85,070,001 |
|
|
Weighted average common shares outstanding—Diluted |
|
|
79,613,131 |
|
|
|
85,162,981 |
|
|
|
81,205,844 |
|
|
|
85,253,230 |
|
|
Net income attributable to Flagstone per common share—Basic |
|
$ |
0.17 |
|
|
$ |
0.80 |
|
|
$ |
0.55 |
|
|
$ |
1.22 |
|
|
Net income attributable to Flagstone per common share—Diluted |
|
$ |
0.17 |
|
|
$ |
0.80 |
|
|
$ |
0.55 |
|
|
$ |
1.21 |
|
|
Dividends declared per common share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Expressed in thousands of U.S. dollars)
| |
|
|
|
|
|
|
|
Flagstone Shareholders' Equity |
|
|
|
|
|
For the six months ended June 30, 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 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred shares |
|
|
(32,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,000 |
) |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
34,163 |
|
|
|
34,163 |
|
|
|
44,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,610 |
) |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment |
|
|
(4,881 |
) |
|
|
(4,881 |
) |
|
|
|
|
|
|
(4,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan obligation |
|
|
103 |
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(4,778 |
) |
|
|
(4,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
29,385 |
|
|
$ |
29,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
9,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,774 |
|
|
|
|
|
|
Subsidiary stock based compensation |
|
|
(271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(271 |
) |
|
Shares repurchased and held in treasury |
|
|
(57,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
(57,552 |
) |
|
|
|
|
|
Dividends declared |
|
|
(11,004 |
) |
|
|
|
|
|
|
(6,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,122 |
) |
|
Ending balance |
|
$ |
1,304,096 |
|
|
|
|
|
|
$ |
362,238 |
|
|
$ |
(11,754 |
) |
|
$ |
780 |
|
|
$ |
845,039 |
|
|
$ |
107,793 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Flagstone Shareholders' Equity |
|
|
|
|
|
|
For the six months ended June 30, 2009 |
|
Total equity |
|
|
Comprehensive income |
|
|
Retained earnings |
|
|
Accumulated other comprehensive loss |
|
|
Common voting shares |
|
|
Additional paid-in capital |
|
|
Noncontrolling interest in subsidiaries |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,183,463 |
|
|
$ |
- |
|
|
$ |
96,092 |
|
|
$ |
(8,271 |
) |
|
$ |
848 |
|
|
$ |
897,344 |
|
|
$ |
197,450 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
116,303 |
|
|
|
116,303 |
|
|
|
103,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,746 |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment |
|
|
7,266 |
|
|
|
7,266 |
|
|
|
|
|
|
|
5,690 |
|
|
|
|
|
|
|
|
|
|
|
1,576 |
|
|
Defined benefit pension plan obligation |
|
|
(321 |
) |
|
|
(321 |
) |
|
|
|
|
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
6,945 |
|
|
|
6,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
123,248 |
|
|
$ |
123,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
7,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,068 |
|
|
|
|
|
|
Subsidiary stock based compensation |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
Subsidiary stock issuance |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
|
184 |
|
|
Purchase of noncontrolling interest |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
Issue of shares, net |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
(7,045 |
) |
|
|
|
|
|
|
(7,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,306,557 |
|
|
|
|
|
|
$ |
192,604 |
|
|
$ |
(2,902 |
) |
|
$ |
849 |
|
|
$ |
904,228 |
|
|
$ |
211,778 |
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
| |
|
For the six months ended June 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
34,163 |
|
|
$ |
116,303 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains |
|
|
(832 |
) |
|
|
(15,083 |
) |
|
Net unrealized foreign exchange losses (gains) |
|
|
1,394 |
|
|
|
(2,430 |
) |
|
Depreciation and amortization expense |
|
|
4,047 |
|
|
|
3,347 |
|
|
Share based compensation expense |
|
|
9,357 |
|
|
|
6,832 |
|
|
Interest in earnings of equity investments |
|
|
542 |
|
|
|
678 |
|
|
Accretion/amortization on fixed maturities |
|
|
516 |
|
|
|
5,683 |
|
|
Changes in assets and liabilities, excluding net assets acquired: |
|
|
|
|
|
|
|
|
|
Premium balances receivable |
|
|
(227,762 |
) |
|
|
(236,036 |
) |
|
Unearned premiums ceded |
|
|
(68,321 |
) |
|
|
(54,158 |
) |
|
Deferred acquisition costs |
|
|
(24,302 |
) |
|
|
(25,729 |
) |
|
Funds withheld |
|
|
(5,388 |
) |
|
|
(4,195 |
) |
|
Loss and loss adjustment expense reserves |
|
|
131,860 |
|
|
|
38,663 |
|
|
Unearned premiums |
|
|
228,984 |
|
|
|
249,819 |
|
|
Insurance and reinsurance balances payable |
|
|
38,704 |
|
|
|
19,218 |
|
|
Reinsurance recoverable |
|
|
(4,938 |
) |
|
|
623 |
|
|
Other changes in assets and liabilities, net |
|
|
(6,554 |
) |
|
|
25,570 |
|
|
Net cash provided by operating activities |
|
|
111,470 |
|
|
|
129,105 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities: |
|
|
|
|
|
|
|
|
|
Net cash paid in disposal of subsidiaries |
|
|
- |
|
|
|
(1,731 |
) |
|
Purchases of fixed income securities |
|
|
(2,501,150 |
) |
|
|
(1,423,515 |
) |
|
Sales and maturities of fixed income securities |
|
|
2,467,359 |
|
|
|
963,914 |
|
|
Purchases of equity securities |
|
|
- |
|
|
|
(2,006 |
) |
|
Sales of equity securities |
|
|
- |
|
|
|
4,359 |
|
|
Purchases of other investments |
|
|
(58,798 |
) |
|
|
(4,114 |
) |
|
Sales of other investments |
|
|
44,849 |
|
|
|
(3,628 |
) |
|
Purchases of fixed assets |
|
|
(2,518 |
) |
|
|
(7,456 |
) |
|
Sales of fixed assets |
|
|
- |
|
|
|
145 |
|
|
Change in restricted cash |
|
|
61,174 |
|
|
|
(37,158 |
) |
|
Net cash provided by (used in) investing activities |
|
|
10,916 |
|
|
|
(511,190 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities: |
|
|
|
|
|
|
|
|
|
Shares repurchased and held in treasury |
|
|
(57,602 |
) |
|
|
- |
|
|
Repurchase of noncontrolling interest |
|
|
(32,000 |
) |
|
|
- |
|
|
Dividends paid on common shares |
|
|
(6,439 |
) |
|
|
(6,786 |
) |
|
Repayment of long term debt |
|
|
- |
|
|
|
(15,038 |
) |
|
Other |
|
|
413 |
|
|
|
414 |
|
|
Net cash used in financing activities |
|
|
(95,628 |
) |
|
|
(21,410 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate on cash |
|
|
(8,355 |
) |
|
|
(1,978 |
) |
| |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
18,403 |
|
|
|
(405,473 |
) |
|
Cash and cash equivalents - beginning of year |
|
|
352,185 |
|
|
|
783,705 |
|
|
Cash and cash equivalents - end of period |
|
$ |
370,588 |
|
|
$ |
378,232 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
Receivable for investments sold |
|
$ |
19,443 |
|
|
$ |
11,114 |
|
|
Payable for investments purchased |
|
$ |
17,915 |
|
|
$ |
16,249 |
|
|
Interest paid |
|
$ |
4,552 |
|
|
$ |
6,681 |
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
1. ORGANIZATION
On March 22, 2010, Flagstone Reinsurance Holdings Limited, the predecessor to Flagstone Reinsurance Holdings, S.A. (“Flagstone” or the “Company”), announced that its Board of Directors recommended a proposal for a redomestication to change Flagstone’s jurisdiction of incorporation from Bermuda to Luxembourg. On
May 14, 2010, the Company’s shareholders approved the redomestication and Flagstone thereby discontinued its existence as a Bermuda company as provided in Section 132G of The Companies Act 1981 of Bermuda and continued its existence as a société anonyme under the laws of Luxembourg effective May 17, 2010. 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.
On May 21, 2010, Mark J. Byrne stepped down as Executive Chairman of the Board of Directors of the Company. In connection with his resignation, Flagstone Holdings (Bermuda) Limited (“Bermuda Holdings”), a subsidiary of the Company, and Mr. Byrne entered into a General Release and Settlement Agreement (the “Release
Agreement”) which is filed as Exhibit 10.1 to this Quarterly Report on Form 10Q (this “Quarterly Report”). Mr. Byrne continues to serve as a non-executive member of the Board of Directors. David Brown, who has served as Flagstone’s Chief Executive Officer since the Company’s inception in 2005, and all other members of the senior management team, continue in their current roles. Daniel James, a member of the Board of Directors since the Company’s
inception, has succeeded Mr. Byrne as Chairman.
Under the terms of the Release Agreement, Bermuda Holdings agreed to pay Mr. Byrne a lump-sum cash severance payment of $1.1 million on May 24, 2010, and a second lump-sum cash severance payment of $1.1 million on May 20, 2012, in respect of amounts payable to Mr. Byrne pursuant to the terms of his employment agreement and other compensation
rights. All equity, equity-based, bonus or incentive compensation awards (including performance share units under the Company’s Amended and Restated PSU Plan) held by Mr. Byrne have been forfeited without payment. The Release Agreement also provides Mr. Byrne with continuation of certain benefits, including medical insurance. Pursuant to the Release Agreement, Mr. Byrne and Bermuda Holdings mutually released one another from, amongst other things, any and all existing liabilities
and agreements relating to Mr. Byrne’s employment with the Company.
2. BASIS OF PRESENTATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of Flagstone and its wholly owned subsidiaries, including Flagstone Réassurance Suisse S.A. (“Flagstone Suisse”), and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. References in this Quarterly Report to “dollars” or “$” 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. References in this Quarterly Report to (i) “foreign currency” are to currencies other than U.S. dollars and (ii) “foreign exchange” transactions or “foreign investments” are to transactions or investments, respectively, involving currencies other than U.S. dollars, in each case unless the context otherwise requires. References in this Quarterly Report to “foreign
subsidiaries” are to subsidiaries of Flagstone that are not domiciled in the United States of America or whose primary transactions are in foreign currency. 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.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
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 should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “Annual Report’), 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.
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 prescribes determination of 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 in the first quarter of 2010, and the effect of adopting the amendments did not have a material impact on the consolidated results of operations and
financial condition.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
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 fair value. 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 Level 2 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 Level 3 investments are reviewed by the Company along with the valuation methods. The fair value of the private equity investment 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. The fair value of the mortgage-backed
investment fund is determined by the net asset valuation provided by the independent administrator of the fund. These valuations are then adjusted for cash flows since the most recent valuation, which is a methodology generally employed in the investment industry.
As at June 30, 2010 and December 31, 2009, the Company’s investments are allocated among fair value levels as follows:
| |
|
Fair Value Measurement at June 30, 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 |
|
$ |
265,010 |
|
|
$ |
170,450 |
|
|
$ |
94,560 |
|
|
$ |
- |
|
|
U.S. states and political subdivisions |
|
|
1,617 |
|
|
|
- |
|
|
|
1,617 |
|
|
|
- |
|
|
Other foreign government |
|
|
255,975 |
|
|
|
- |
|
|
|
255,975 |
|
|
|
- |
|
|
Corporates |
|
|
580,712 |
|
|
|
- |
|
|
|
580,712 |
|
|
|
- |
|
|
Mortgage-backed securities |
|
|
161,830 |
|
|
|
- |
|
|
|
161,830 |
|
|
|
- |
|
|
Asset-backed securities |
|
|
158,429 |
|
|
|
- |
|
|
|
158,429 |
|
|
|
- |
|
| |
|
|
1,423,573 |
|
|
|
170,450 |
|
|
|
1,253,123 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
182 |
|
|
|
182 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
182 |
|
|
|
182 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
999 |
|
|
|
- |
|
|
|
999 |
|
|
|
- |
|
|
Other foreign government |
|
|
3,670 |
|
|
|
- |
|
|
|
3,670 |
|
|
|
- |
|
|
Corporates |
|
|
24,695 |
|
|
|
- |
|
|
|
24,695 |
|
|
|
- |
|
|
Asset-backed securities |
|
|
956 |
|
|
|
- |
|
|
|
956 |
|
|
|
- |
|
| |
|
|
30,320 |
|
|
|
- |
|
|
|
30,320 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds |
|
|
22,818 |
|
|
|
- |
|
|
|
- |
|
|
|
22,818 |
|
|
Catastrophe bonds |
|
|
71,422 |
|
|
|
- |
|
|
|
71,422 |
|
|
|
- |
|
| |
|
|
94,240 |
|
|
|
- |
|
|
|
71,422 |
|
|
|
22,818 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,548,315 |
|
|
$ |
170,632 |
|
|
$ |
1,354,865 |
|
|
$ |
22,818 |
|
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
For reconciliation purposes, the table above does not include an equity investment of $3.8 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 June 30, 2010, the total change in fair value for the three and six months ended June 30, 2010 is $nil and $0.1 million, respectively. 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 periods.
| |
|
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.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
The reconciliation of the fair value for the Level 3 investments for the periods ended June 30, 2010 and December 31, 2009, including net purchases and sales and change in realized and unrealized gains (losses) in earnings, is set out below:
| |
|
For the six months ended June 30, 2010 |
|
| |
|
Fixed Maturities |
|
|
Investment funds |
|
|
Total |
|
|
Fair value, December 31, 2009 |
|
$ |
2,298 |
|
|
$ |
5,486 |
|
|
$ |
7,784 |
|
|
Total realized losses included in earnings |
|
|
(226 |
) |
|
|
- |
|
|
|
(226 |
) |
|
Total unrealized gains included in earnings |
|
|
512 |
|
|
|
58 |
|
|
|
570 |
|
|
Purchases |
|
|
- |
|
|
|
190 |
|
|
|
190 |
|
|
Sales |
|
|
(2,584 |
) |
|
|
- |
|
|
|
(2,584 |
) |
|
Fair value, March 31, 2010 |
|
$ |
- |
|
|
$ |
5,734 |
|
|
$ |
5,734 |
|
|
Total realized losses included in earnings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total unrealized gains included in earnings |
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
Purchases |
|
|
- |
|
|
|
17,080 |
|
|
|
17,080 |
|
|
Sales |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Fair value, June 30, 2010 |
|
$ |
- |
|
|
$ |
22,818 |
|
|
$ |
22,818 |
|
Pledged assets
As at June 30, 2010 and December 31, 2009, approximately $24.7 million and $85.9 million, respectively, of cash and cash equivalents and approximately $447.2 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.
Commitments
As at June 30, 2010, and December 31, 2009, the Company had total outstanding investment commitments of $16.1 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 on 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 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 Company’s 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.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
The details of the derivatives held by the Company as of June 30, 2010 and December 31, 2009 are as follows:
| |
As at June 30, 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 |
|
$ |
38,697 |
|
$ |
488 |
|
Other liabilities |
|
$ |
- |
|
$ |
- |
|
$ |
38,697 |
|
|
$ |
488 |
|
| |
|
|
|
|
|
|
488 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
488 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purpose - risk management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency swaps |
Other assets |
|
$ |
- |
|
$ |
- |
|
Other liabilities |
|
$ |
15,893 |
|
$ |
2,502 |
|
$ |
15,893 |
|
|
$ |
(2,502 |
) |
|
Foreign currency forward contracts |
Other assets |
|
|
428,953 |
|
|
15,310 |
|
Other liabilities |
|
|
416,236 |
|
|
7,375 |
|
|
845,189 |
|
|
|
7,935 |
|
| |
|
|
|
|
|
|
15,310 |
|
|
|
|
|
|
|
9,877 |
|
|
|
|
|
|
5,433 |
|
|
Purpose - exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts |
Other assets |
|
$ |
109,861 |
|
$ |
677 |
|
Other liabilities |
|
$ |
564,295 |
|
$ |
3,552 |
|
$ |
674,156 |
|
|
$ |
(2,875 |
) |
|
Mortgage-backed securities TBA |
Other assets |
|
|
3,400 |
|
|
38 |
|
Other liabilities |
|
|
44 |
|
|
- |
|
|
3,444 |
|
|
|
38 |
|
|
Other reinsurance derivatives |
Other assets |
|
|
- |
|
|
- |
|
Other liabilities |
|
|
- |
|
|
641 |
|
|
- |
|
|
|
(641 |
) |
| |
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
4,193 |
|
|
|
|
|
|
(3,478 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
16,513 |
|
|
|
|
|
|
$ |
14,070 |
|
|
|
|
|
$ |
2,443 |
|
| |
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.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
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 June 30, |
|
|
|
For the three months ended June 30, |
|
| |
|
2010 |
|
|
2009 |
|
Location |
|
2010 |
|
|
2009 |
|
|
Foreign currency forward contracts (1) |
|
$ |
3,877 |
|
|
$ |
(9,182 |
) |
Net realized and unrealized gains (losses) - other |
|
$ |
(247 |
) |
|
$ |
(178 |
) |
| |
|
$ |
3,877 |
|
|
$ |
(9,182 |
) |
|
|
$ |
(247 |
) |
|
$ |
(178 |
) |
| |
|
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 six months ended June 30, |
|
|
|
For the six months ended June 30, |
|
| |
|
2010 |
|
|
2009 |
|
Location |
|
2010 |
|
|
2009 |
|
|
Foreign currency forward contracts (1) |
|
$ |
4,471 |
|
|
$ |
(2,387 |
) |
Net realized and unrealized gains (losses) - other |
|
$ |
(272 |
) |
|
$ |
(703 |
) |
| |
|
$ |
4,471 |
|
|
$ |
(2,387 |
) |
|
|
$ |
(272 |
) |
|
$ |
(703 |
) |
|
(1) |
Recognized as a foreign currency hedge under the Derivatives and Hedging Topic of the ASC. |
Non-Designated
| |
|
Gain or (Loss) on Derivatives Recognized in Net Income |
|
|
Derivatives not designated |
|
|
|
For the three months ended June 30, |
|
|
as hedging instruments |
|
Location |
|
2010 |
|
|
2009 |
|
|
Futures contracts |
|
Net realized and unrealized (losses) gains - investments |
|
$ |
(20,749 |
) |
|
$ |
8,455 |
|
|
Total return swaps |
|
Net realized and unrealized (losses) gains - investments |
|
|
(139 |
) |
|
|
833 |
|
|
Currency swaps |
|
Net realized and unrealized (losses) gains - other |
|
|
(1,679 |
) |
|
|
978 |
|
|
Foreign currency forward contracts |
|
Net realized and unrealized gains (losses) - investments |
|
|
30,954 |
|
|
|
(16,378 |
) |
|
Foreign currency forward contracts |
|
Net realized and unrealized (losses) gains - other |
|
|
(604 |
) |
|
|
1,162 |
|
|
Mortgage-backed securities TBA |
|
Net realized and unrealized gains - investments |
|
|
234 |
|
|
|
183 |
|
|
Other reinsurance derivatives |
|
Net realized and unrealized gains - other |
|
|
564 |
|
|
|
508 |
|
| |
|
|
|
$ |
8,581 |
|
|
$ |
(4,259 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Gain or (Loss) on Derivatives Recognized in Net Income |
|
|
Derivatives not designated |
|
|
|
For the six months ended June 30, |
|
|
as hedging instruments |
|
Location |
|
|
2010 |
|
|
|
2009 |
|
|
Futures contracts |
|
Net realized and unrealized (losses) gains - investments |
|
$ |
(20,353 |
) |
|
$ |
4,302 |
|
|
Total return swaps |
|
Net realized and unrealized gains (losses) - investments |
|
|
1,105 |
|
|
|
(7,902 |
) |
|
Currency swaps |
|
Net realized and unrealized (losses) gains - other |
|
|
(2,766 |
) |
|
|
193 |
|
|
Foreign currency forward contracts |
|
Net realized and unrealized gains (losses) - investments |
|
|
48,416 |
|
|
|
(19,544 |
) |
|
Foreign currency forward contracts |
|
Net realized and unrealized gains - other |
|
|
5,611 |
|
|
|
9,362 |
|
|
Mortgage-backed securities TBA |
|
Net realized and unrealized gains - investments |
|
|
888 |
|
|
|
1,141 |
|
|
Other reinsurance derivatives |
|
Net realized and unrealized gains - other |
|
|
1,119 |
|
|
|
1,048 |
|
| |
|
|
|
$ |
34,020 |
|
|
$ |
(11,400 |
) |
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
Foreign currency forward contracts
The Company enters into foreign currency forward contracts for the purpose of hedging its net investment in foreign subsidiaries which are reported as designated hedges. All other foreign currency forward contracts are not designated as hedges and are entered into for the purposes of currency risk management.
Futures contracts
The Company uses futures contracts to gain exposure to certain markets or indexes and to hedge interest rate risk. 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 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.
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 June 30, 2010 and December 31, 2009 is allocated between levels as follows:
| |
Fair Value Measurement at June 30, 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 |
|
$ |
(2,875 |
|
|
$ |
(2,875 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
Swaps |
|
|
(2,502 |
|
|
|
- |
|
|
|
(2,502 |
) |
|
|
- |
|
|
Foreign currency forward contracts |
|
|
8,423 |
|
|
|
- |
|
|
|
8,423 |
|
|
|
- |
|
|
Mortgage-backed securities TBA |
|
|
38 |
|
|
|
- |
|
|
|
38 |
|
|
|
- |
|
|
Other reinsurance derivatives |
|
|
(641 |
|
|
|
- |
|
|
|
- |
|
|
|
(641 |
) |
|
Total derivatives |
|
$ |
2,443 |
|
|
$ |
(2,875 |
) |
|
$ |
5,959 |
|
|
$ |
(641 |
) |
FLAGSTONE REINSURANCE HOLDINGS, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
For the Level 3 items still held as of June 30, 2010, the total change in fair value recorded in net realized and unrealized gains (losses) – other for the three and six months ended June 30, 2010 is a gain of $0.6 million and $1.1 million, respectively.
| |
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 six months ended |
|
| |
|
June 30, 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 |
) |
|
Total premium earned included in earnings |
|
$ |
563 |
|
|
Purchases |
|
|
- |
|
|
Sales |
|
|
- |
|
|
Fair value, June 30, 2010 |
|
$ |
(641 |
) |
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, S.A.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S dollars, except for share amounts, per share amounts and percentages)
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 |
|
|
(36 |
) |
|
|
(251 |
) |
|
|
- |
|
|
|
(287 |
) |
|
Balance as at June 30, 2010 |
|
$ |
3,108 |
|
|
$ |
3,088 |
|
|
$ |
10,050 |
|
|
$ |
16,246 |
|
| |
|
Carrying value at beginning of period |
|
|
Impairment loss |
|
|
Accumulated amortization (1) |
|
|
Impact of foreign exchange |
|
|
Carrying value at end of period |
|
|
Finite life intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
$ |
1,308 |
|
|
$ |
- |
|
|
$ |
(56 |
) |
|
$ |
(109 |
) |
|
$ |
1,143 |
|
|
Software |
|
|
3,924 |
|
|
|
- |
|
|
|
(169 |
) |
|
|
(326 |
) |
|
|
3,429 |
|
|
Distribution network |
|
|
3,356 |
|
|
|
- |
|
|
|
(126 |
) |
|
|
(278 |
) |
|
|
2,952 |
|
| |
|
$ |
8,588 |
|
|
$ |
- |