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 September 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
(Address of principal executive offices)
+352 273 515 30
(Registrant's telephone number, including area code)
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 November 2, 2010, the Registrant had 76,588,153 common voting shares outstanding, net of treasury shares with a par value of $0.01 per share.
FLAGSTONE REINSURANCE HOLDINGS, S.A.
| |
|
|
Page
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
1
|
| |
|
|
|
| |
|
|
2
|
| |
|
|
|
| |
|
|
3
|
| |
|
|
|
| |
|
|
4
|
| |
|
|
|
| |
|
|
5
|
| |
|
|
|
|
|
|
|
28
|
| |
|
|
|
|
|
|
|
52
|
| |
|
|
|
|
|
|
|
56
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
56
|
| |
|
|
|
|
|
|
|
56
|
| |
|
|
|
|
|
|
|
56
|
| |
|
|
|
|
|
|
|
56
|
| |
|
|
|
|
|
|
|
57
|
| |
|
|
|
|
|
|
|
57
|
| |
|
|
|
|
|
|
|
57
|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLAGSTONE REINSURANCE HOLDINGS, S.A.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars, except share data)
| |
|
As at September 30, 2010
|
|
|
As at December 31, 2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (Amortized cost: 2010 - $1,492,989; 2009 - $1,198,187)
|
|
$ |
1,563,469 |
|
|
$ |
1,228,561 |
|
|
Short term investments, at fair value (Amortized cost: 2010 - $20,253; 2009 - $231,609)
|
|
|
19,469 |
|
|
|
232,434 |
|
|
Equity investments, at fair value (Cost: 2010 - $8,091; 2009 - $8,516)
|
|
|
172 |
|
|
|
290 |
|
|
Other investments
|
|
|
108,683 |
|
|
|
45,934 |
|
|
Total investments
|
|
|
1,691,793 |
|
|
|
1,507,219 |
|
|
Cash and cash equivalents
|
|
|
308,962 |
|
|
|
352,185 |
|
|
Restricted cash
|
|
|
51,266 |
|
|
|
85,916 |
|
|
Premium balances receivable
|
|
|
403,861 |
|
|
|
278,956 |
|
|
Unearned premiums ceded
|
|
|
90,084 |
|
|
|
52,690 |
|
|
Reinsurance recoverable
|
|
|
27,834 |
|
|
|
19,270 |
|
|
Accrued interest receivable
|
|
|
14,007 |
|
|
|
11,223 |
|
|
Receivable for investments sold
|
|
|
26,321 |
|
|
|
5,160 |
|
|
Deferred acquisition costs
|
|
|
74,779 |
|
|
|
54,637 |
|
|
Funds withheld
|
|
|
25,806 |
|
|
|
22,168 |
|
|
Goodwill
|
|
|
16,405 |
|
|
|
16,533 |
|
|
Intangible assets
|
|
|
31,963 |
|
|
|
35,790 |
|
|
Assets held for sale
|
|
|
11,000 |
|
|
|
- |
|
|
Other assets
|
|
|
123,392 |
|
|
|
125,021 |
|
|
Total assets
|
|
$ |
2,897,473 |
|
|
$ |
2,566,768 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$ |
683,278 |
|
|
$ |
480,660 |
|
|
Unearned premiums
|
|
|
497,011 |
|
|
|
330,416 |
|
|
Insurance and reinsurance balances payable
|
|
|
78,430 |
|
|
|
62,864 |
|
|
Payable for investments purchased
|
|
|
17,205 |
|
|
|
11,457 |
|
|
Long term debt
|
|
|
251,472 |
|
|
|
252,402 |
|
|
Other liabilities
|
|
|
87,688 |
|
|
|
63,155 |
|
|
Total liabilities
|
|
|
1,615,084 |
|
|
|
1,200,954 |
|
| |
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
Common voting shares, 300,000,000 authorized, $0.01 par value, issued and outstanding (2010 - 76,588,153; 2009 - 82,985,219)
|
|
|
850 |
|
|
|
850 |
|
|
Common shares held in treasury, at cost (2010 - 8,405,106; 2009 - 2,000,000)
|
|
|
(84 |
) |
|
|
(20 |
) |
|
Additional paid-in capital
|
|
|
830,107 |
|
|
|
892,817 |
|
|
Accumulated other comprehensive loss
|
|
|
(6,319 |
) |
|
|
(6,976 |
) |
|
Retained earnings
|
|
|
399,499 |
|
|
|
324,347 |
|
|
Total Flagstone shareholders' equity
|
|
|
1,224,053 |
|
|
|
1,211,018 |
|
|
Noncontrolling interest in subsidiaries
|
|
|
58,336 |
|
|
|
154,796 |
|
|
Total equity
|
|
|
1,282,389 |
|
|
|
1,365,814 |
|
|
Total liabilities and equity
|
|
$ |
2,897,473 |
|
|
$ |
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 September 30,
|
|
|
For the nine months ended September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$ |
185,649 |
|
|
$ |
174,590 |
|
|
$ |
955,462 |
|
|
$ |
864,784 |
|
|
Premiums ceded
|
|
|
(26,273 |
) |
|
|
(39,781 |
) |
|
|
(178,463 |
) |
|
|
(175,192 |
) |
|
Net premiums written
|
|
|
159,376 |
|
|
|
134,809 |
|
|
|
776,999 |
|
|
|
689,592 |
|
|
Change in net unearned premiums
|
|
|
39,318 |
|
|
|
60,708 |
|
|
|
(129,411 |
) |
|
|
(134,264 |
) |
|
Net premiums earned
|
|
|
198,694 |
|
|
|
195,517 |
|
|
|
647,588 |
|
|
|
555,328 |
|
|
Net investment income
|
|
|
7,488 |
|
|
|
10,779 |
|
|
|
22,992 |
|
|
|
19,672 |
|
|
Net realized and unrealized gains - investments
|
|
|
40,165 |
|
|
|
21,286 |
|
|
|
37,305 |
|
|
|
26,469 |
|
|
Net realized and unrealized gains - other
|
|
|
7,677 |
|
|
|
1,373 |
|
|
|
11,369 |
|
|
|
11,273 |
|
|
Other income
|
|
|
1,785 |
|
|
|
4,269 |
|
|
|
19,357 |
|
|
|
11,771 |
|
|
Total revenues
|
|
|
255,809 |
|
|
|
233,224 |
|
|
|
738,611 |
|
|
|
624,513 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
119,089 |
|
|
|
80,175 |
|
|
|
398,331 |
|
|
|
214,410 |
|
|
Acquisition costs
|
|
|
30,615 |
|
|
|
35,224 |
|
|
|
119,036 |
|
|
|
99,464 |
|
|
General and administrative expenses
|
|
|
49,338 |
|
|
|
35,266 |
|
|
|
133,235 |
|
|
|
104,144 |
|
|
Interest expense
|
|
|
2,690 |
|
|
|
2,814 |
|
|
|
7,749 |
|
|
|
9,490 |
|
|
Net foreign exchange losses
|
|
|
17,072 |
|
|
|
2,390 |
|
|
|
5,260 |
|
|
|
3,125 |
|
|
Total expenses
|
|
|
218,804 |
|
|
|
155,869 |
|
|
|
663,611 |
|
|
|
430,633 |
|
|
Income before income taxes and interest in earnings of equity investments
|
|
|
37,005 |
|
|
|
77,355 |
|
|
|
75,000 |
|
|
|
193,880 |
|
|
Provision for income tax
|
|
|
(966 |
) |
|
|
(532 |
) |
|
|
(4,256 |
) |
|
|
(76 |
) |
|
Interest in earnings of equity investments
|
|
|
(364 |
) |
|
|
(370 |
) |
|
|
(906 |
) |
|
|
(1,048 |
) |
|
Net income
|
|
|
35,675 |
|
|
|
76,453 |
|
|
|
69,838 |
|
|
|
192,756 |
|
|
Less: Loss (income) attributable to noncontrolling interest
|
|
|
1,586 |
|
|
|
(9,323 |
) |
|
|
12,196 |
|
|
|
(22,069 |
) |
|
NET INCOME ATTRIBUTABLE TO FLAGSTONE
|
|
$ |
37,261 |
|
|
$ |
67,130 |
|
|
$ |
82,034 |
|
|
$ |
170,687 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
35,675 |
|
|
$ |
76,453 |
|
|
$ |
69,838 |
|
|
$ |
192,756 |
|
|
Change in currency translation adjustment
|
|
|
5,352 |
|
|
|
(4,656 |
) |
|
|
471 |
|
|
|
2,610 |
|
|
Change in defined benefit pension plan obligation
|
|
|
83 |
|
|
|
480 |
|
|
|
186 |
|
|
|
159 |
|
|
Comprehensive income
|
|
|
41,110 |
|
|
|
72,277 |
|
|
|
70,495 |
|
|
|
195,525 |
|
|
Less: Comprehensive loss (income) attributable to noncontrolling interest
|
|
|
1,586 |
|
|
|
(9,577 |
) |
|
|
12,196 |
|
|
|
(23,899 |
) |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO FLAGSTONE
|
|
$ |
42,696 |
|
|
$ |
62,700 |
|
|
$ |
82,691 |
|
|
$ |
171,626 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—Basic
|
|
|
77,631,156 |
|
|
|
84,004,784 |
|
|
|
79,871,964 |
|
|
|
84,711,027 |
|
|
Weighted average common shares outstanding—Diluted
|
|
|
77,772,847 |
|
|
|
84,176,602 |
|
|
|
80,071,159 |
|
|
|
84,909,340 |
|
|
Net income attributable to Flagstone per common share—Basic
|
|
$ |
0.48 |
|
|
$ |
0.80 |
|
|
$ |
1.03 |
|
|
$ |
2.01 |
|
|
Net income attributable to Flagstone per common share—Diluted
|
|
$ |
0.48 |
|
|
$ |
0.80 |
|
|
$ |
1.02 |
|
|
$ |
2.01 |
|
|
Distributions declared per common share (1)
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
(1) Distributions declared per common share are in the form of a non-dividend return of capital. Prior to the Company’s redomestication to Luxembourg on May 17, 2010, such distributions were in the form of dividends.
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 nine months ended September 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
|
|
|
(79,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,529 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
69,838 |
|
|
|
69,838 |
|
|
|
82,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,196 |
) |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment
|
|
|
471 |
|
|
|
471 |
|
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan obligation
|
|
|
186 |
|
|
|
186 |
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
657 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
70,495 |
|
|
$ |
70,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
13,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,278 |
|
|
|
|
|
|
Subsidiary stock based compensation
|
|
|
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274 |
) |
|
Purchase of noncontrolling interest
|
|
|
(750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(411 |
) |
|
|
(339 |
) |
|
Shares repurchased and held in treasury
|
|
|
(72,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
(72,363 |
) |
|
|
|
|
|
Distributions declared per common share (1)
|
|
|
(14,218 |
) |
|
|
|
|
|
|
(6,882 |
) |
|
|
|
|
|
|
|
|
|
|
(3,214 |
) |
|
|
(4,122 |
) |
|
Ending balance
|
|
$ |
1,282,389 |
|
|
|
|
|
|
$ |
399,499 |
|
|
$ |
(6,319 |
) |
|
$ |
766 |
|
|
$ |
830,107 |
|
|
$ |
58,336 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Flagstone Shareholders' Equity
|
|
|
|
|
|
|
For the nine months ended September 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 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred shares
|
|
|
(63,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,117 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
192,756 |
|
|
|
192,756 |
|
|
|
170,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,069 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment
|
|
|
2,610 |
|
|
|
2,610 |
|
|
|
|
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
1,830 |
|
|
Defined benefit pension plan obligation
|
|
|
159 |
|
|
|
159 |
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2,769 |
|
|
|
2,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
195,525 |
|
|
$ |
195,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
10,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,399 |
|
|
|
|
|
|
Subsidiary stock based compensation
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
Subsidiary stock issuance
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
|
184 |
|
|
Purchase of noncontrolling interest
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
Issue of shares, net
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Shares repurchased and held in treasury
|
|
|
(19,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(19,730 |
) |
|
|
|
|
|
Distributions declared per common share (1)
|
|
|
(10,490 |
) |
|
|
|
|
|
|
(10,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
1,295,961 |
|
|
|
|
|
|
$ |
256,289 |
|
|
$ |
(7,332 |
) |
|
$ |
829 |
|
|
$ |
887,829 |
|
|
$ |
158,346 |
|
(1) Distributions declared per common share are in the form of a non-dividend return of capital. Prior to the Company’s redomestication to Luxembourg on May 17, 2010, such distributions were in the form of dividends.
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 nine months ended September 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$ |
69,838 |
|
|
$ |
192,756 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains
|
|
|
(48,674 |
) |
|
|
(37,742 |
) |
|
Net unrealized foreign exchange losses
|
|
|
1,506 |
|
|
|
1,191 |
|
|
Depreciation and amortization expense
|
|
|
5,776 |
|
|
|
5,204 |
|
|
Share based compensation expense
|
|
|
12,694 |
|
|
|
10,048 |
|
|
Interest in earnings of equity investments
|
|
|
906 |
|
|
|
1,048 |
|
|
Accretion/amortization on fixed maturities
|
|
|
3,301 |
|
|
|
3,039 |
|
|
Changes in assets and liabilities, excluding net assets acquired:
|
|
|
|
|
|
|
|
|
|
Premium balances receivable
|
|
|
(124,384 |
) |
|
|
(157,581 |
) |
|
Unearned premiums ceded
|
|
|
(37,369 |
) |
|
|
(49,241 |
) |
|
Deferred acquisition costs
|
|
|
(20,337 |
) |
|
|
(21,802 |
) |
|
Funds withheld
|
|
|
(3,852 |
) |
|
|
(7,280 |
) |
|
Loss and loss adjustment expense reserves
|
|
|
203,944 |
|
|
|
50,666 |
|
|
Unearned premiums
|
|
|
167,268 |
|
|
|
182,819 |
|
|
Insurance and reinsurance balances payable
|
|
|
14,830 |
|
|
|
38,855 |
|
|
Reinsurance recoverable
|
|
|
(9,208 |
) |
|
|
1,960 |
|
|
Asset impairment charge
|
|
|
13,862 |
|
|
|
- |
|
|
Other changes in assets and liabilities, net
|
|
|
(17,412 |
) |
|
|
46,219 |
|
|
Net cash provided by operating activities
|
|
|
232,689 |
|
|
|
260,159 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
|
Net cash received (paid) in acquisition (disposal) of subsidiaries
|
|
|
(750 |
) |
|
|
(1,732 |
) |
|
Purchases of fixed income securities
|
|
|
(2,797,924 |
) |
|
|
(1,940,588 |
) |
|
Sales and maturities of fixed income securities
|
|
|
2,713,093 |
|
|
|
1,352,715 |
|
|
Purchases of equity securities
|
|
|
- |
|
|
|
(2,006 |
) |
|
Sales of equity securities
|
|
|
- |
|
|
|
7,623 |
|
|
Purchases of other investments
|
|
|
(68,442 |
) |
|
|
(8,446 |
) |
|
Sales of other investments
|
|
|
35,283 |
|
|
|
9,998 |
|
|
Purchases of fixed assets
|
|
|
(28,471 |
) |
|
|
(10,726 |
) |
|
Sales of fixed assets
|
|
|
1,563 |
|
|
|
145 |
|
|
Change in restricted cash
|
|
|
34,650 |
|
|
|
(9,967 |
) |
|
Net cash used in investing activities
|
|
|
(110,998 |
) |
|
|
(602,984 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
Shares repurchased and held in treasury
|
|
|
(72,427 |
) |
|
|
(19,750 |
) |
|
Contribution of noncontrolling interest
|
|
|
- |
|
|
|
197 |
|
|
Repurchase of noncontrolling interest
|
|
|
(79,529 |
) |
|
|
(63,117 |
) |
|
Distributions paid per common share (1)
|
|
|
(9,507 |
) |
|
|
(10,100 |
) |
|
Repayment of long term debt
|
|
|
- |
|
|
|
(15,042 |
) |
|
Other
|
|
|
620 |
|
|
|
621 |
|
|
Net cash used in financing activities
|
|
|
(160,843 |
) |
|
|
(107,191 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate on cash
|
|
|
(4,071 |
) |
|
|
1,041 |
|
| |
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(43,223 |
) |
|
|
(448,975 |
) |
|
Cash and cash equivalents - beginning of year
|
|
|
352,185 |
|
|
|
783,705 |
|
|
Cash and cash equivalents - end of period
|
|
$ |
308,962 |
|
|
$ |
334,730 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Receivable for investments sold
|
|
$ |
26,321 |
|
|
$ |
27,410 |
|
|
Payable for investments purchased
|
|
$ |
17,205 |
|
|
$ |
37,944 |
|
|
Interest paid
|
|
$ |
6,967 |
|
|
$ |
9,338 |
|
(1) Distributions paid per common share are in the form of a non-dividend return of capital. Prior to the Company’s redomestication to Luxembourg on May 17, 2010, such distributions were in the form of dividends.
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 was filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2010, and filed with the Securities and Exchange Commission (the “SEC”) on August 3, 2010. 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 paid Mr. Byrne a lump-sum cash severance payment of $1.1 million on May 24, 2010, and agreed to pay a second lump-sum cash severance payment of $1.1 million on May 20, 2012, in respect of amounts payable to Mr. Byrne pursuant to the terms of his employment agreement and other compensation rights. All equity, equity-based, bonus or incentive compensation awards (including performance share units under the Company’s Amended and Restated Performance Share Unit Plan (the “PSU Plan”)) held by Mr. Byrne have been forfeited without payment. The Release Agreement also provides Mr. Byrne with continuation of certain benefits, including medical insurance. Pursuant to the Release Agreement, Mr. Byrne and Bermuda Holdings mutually released one another from, amongst other things, any and all existing liabilities and agreements relating to Mr. Byrne’s employment with the Company. The foregoing description does not purport to be complete and is qualified in its entirety by reference to the Release Agreement, which is included as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ending June 30, 2010, and filed with the SEC on August 3, 2010.
2. BASIS OF PRESENTATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of Flagstone and its wholly owned subsidiaries, including Flagstone Réassurance Suisse S.A. (“Flagstone Suisse”), and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. References in this Quarterly Report on Form 10-Q (this “Quarterly Report”) to “dollars” or “$” are to the lawful currency of the United States of America, unless the context otherwise requires. All amounts in the following tables, unless otherwise stated, 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 intercompany 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 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”. 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 measurements 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 update 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)
New accounting pronouncements
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, “Financial Services and Insurance (Topic 944) – Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). The objective of ASU 2010-26 is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. ASU 2010-26 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the potential impact, if any, of the adoption of ASU 2010-26 on its consolidated results of operations and financial condition.
4. INVESTMENTS
Fixed maturity, short term, equity and other investments
The cost or amortized cost, gross unrealized gains and losses and carrying values as at September 30, 2010 and December 31, 2009 are as follows:
| |
|
As at September 30, 2010
|
|
| |
|
Amortized cost or cost
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
|
|
$ |
264,748 |
|
|
$ |
8,118 |
|
|
$ |
(68 |
) |
|
$ |
272,798 |
|
|
U.S. states and political subdivision
|
|
|
1,594 |
|
|
|
11 |
|
|
|
- |
|
|
|
1,605 |
|
|
Other foreign governments
|
|
|
268,012 |
|
|
|
20,491 |
|
|
|
(1 |
) |
|
|
288,502 |
|
|
Corporates
|
|
|
581,872 |
|
|
|
32,833 |
|
|
|
(406 |
) |
|
|
614,299 |
|
|
Mortgage-backed securities
|
|
|
232,474 |
|
|
|
6,547 |
|
|
|
(320 |
) |
|
|
238,701 |
|
|
Asset-backed securities
|
|
|
144,289 |
|
|
|
3,341 |
|
|
|
(66 |
) |
|
|
147,564 |
|
| |
|
|
1,492,989 |
|
|
|
71,341 |
|
|
|
(861 |
) |
|
|
1,563,469 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
Other foreign governments
|
|
|
717 |
|
|
|
- |
|
|
|
- |
|
|
|
717 |
|
|
Corporates
|
|
|
18,536 |
|
|
|
4 |
|
|
|
(788 |
) |
|
|
17,752 |
|
| |
|
|
20,253 |
|
|
|
4 |
|
|
|
(788 |
) |
|
|
19,469 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
|
8,091 |
|
|
|
4 |
|
|
|
(7,923 |
) |
|
|
172 |
|
| |
|
|
8,091 |
|
|
|
4 |
|
|
|
(7,923 |
) |
|
|
172 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds
|
|
|
34,398 |
|
|
|
1,021 |
|
|
|
(6,947 |
) |
|
|
28,472 |
|
|
Catastrophe bonds
|
|
|
75,474 |
|
|
|
1,439 |
|
|
|
(116 |
) |
|
|
76,797 |
|
| |
|
|
109,872 |
|
|
|
2,460 |
|
|
|
(7,063 |
) |
|
|
105,269 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,631,205 |
|
|
$ |
73,809 |
|
|
$ |
(16,635 |
) |
|
$ |
1,688,379 |
|
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)
| |
|
As at December 31, 2009
|
|
| |
|
Amortized cost or cost
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Fixed maturity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
|
|
$ |
421,215 |
|
|
$ |
12,186 |
|
|
$ |
(1,686 |
) |
|
$ |
431,715 |
|
|
U.S. states and political subdivision
|
|
|
1,907 |
|
|
|
11 |
|
|
|
(15 |
) |
|
|
1,903 |
|
|
Other foreign governments
|
|
|
112,119 |
|
|
|
3,426 |
|
|
|
(1,118 |
) |
|
|
114,427 |
|
|
Corporates
|
|
|
504,855 |
|
|
|
15,763 |
|
|
|
(1,376 |
) |
|
|
519,242 |
|
|
Mortgage-backed securities
|
|
|
108,652 |
|
|
|
3,969 |
|
|
|
(554 |
) |
|
|
112,067 |
|
|
Asset-backed securities
|
|
|
49,439 |
|
|
|
253 |
|
|
|
(485 |
) |
|
|
49,207 |
|
| |
|
|
1,198,187 |
|
|
|
35,608 |
|
|
|
(5,234 |
) |
|
|
1,228,561 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
|
|
|
145,600 |
|
|
|
6 |
|
|
|
(2 |
) |
|
|
145,604 |
|
|
Other foreign governments
|
|
|
3,877 |
|
|
|
136 |
|
|
|
- |
|
|
|
4,013 |
|
|
Corporates
|
|
|
80,223 |
|
|
|
1,419 |
|
|
|
(738 |
) |
|
|
80,904 |
|
|
Asset-backed securities
|
|
|
1,909 |
|
|
|
4 |
|
|
|
- |
|
|
|
1,913 |
|
| |
|
|
231,609 |
|
|
|
1,565 |
|
|
|
(740 |
) |
|
|
232,434 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
|
8,516 |
|
|
|
124 |
|
|
|
(8,350 |
) |
|
|
290 |
|
| |
|
|
8,516 |
|
|
|
124 |
|
|
|
(8,350 |
) |
|
|
290 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds
|
|
|
13,239 |
|
|
|
- |
|
|
|
(7,753 |
) |
|
|
5,486 |
|
|
Catastrophe bonds
|
|
|
35,777 |
|
|
|
402 |
|
|
|
(51 |
) |
|
|
36,128 |
|
| |
|
|
49,016 |
|
|
|
402 |
|
|
|
(7,804 |
) |
|
|
41,614 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,487,328 |
|
|
$ |
37,699 |
|
|
$ |
(22,128 |
) |
|
$ |
1,502,899 |
|
For reconciliation purposes, other investments does not include an investment accounted for under the equity method in which the Company is deemed to have a significant influence and as such, is not accounted for at fair value under the FASB ASC guidance for financial instruments. This investment is recorded at $3.4 million and $4.3 million at September 30, 2010 and December 31, 2009, respectively.
The following table presents the contractual maturity dates of fixed maturities and short term investments as at September 30, 2010 and December 31, 2009:
| |
|
As at September 30, 2010
|
|
|
As at December 31, 2009
|
|
| |
|
Amortized cost
|
|
|
Fair value
|
|
|
Amortized cost
|
|
|
Fair value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$ |
46,059 |
|
|
$ |
46,198 |
|
|
$ |
308,865 |
|
|
$ |
312,253 |
|
|
Due after 1 through 5 years
|
|
|
826,132 |
|
|
|
865,384 |
|
|
|
577,634 |
|
|
|
588,707 |
|
|
Due after 5 through 10 years
|
|
|
173,533 |
|
|
|
185,685 |
|
|
|
311,819 |
|
|
|
324,095 |
|
|
Due after 10 years
|
|
|
90,755 |
|
|
|
99,406 |
|
|
|
71,478 |
|
|
|
72,753 |
|
|
Mortgage and asset-backed securities
|
|
|
376,763 |
|
|
|
386,265 |
|
|
|
160,000 |
|
|
|
163,187 |
|
|
Total
|
|
$ |
1,513,242 |
|
|
$ |
1,582,938 |
|
|
$ |
1,429,796 |
|
|
$ |
1,460,995 |
|
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)
Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay certain obligations with or without prepayment penalties.
The following table presents a breakdown of the credit quality of the Company’s fixed maturities and short term investments at September 30, 2010 and December 31, 2009:
| |
|
|
As at September 30, 2010
|
|
|
As at December 31, 2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fair value
|
|
|
Percentage of total
|
|
|
Fair value
|
|
|
Percentage of total
|
|
|
Rating Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$ |
991,396 |
|
|
|
62.6 |
% |
|
$ |
1,043,223 |
|
|
|
71.4 |
% |
|
AA
|
|
|
|
208,192 |
|
|
|
13.2 |
% |
|
|
111,300 |
|
|
|
7.6 |
% |
| A |
|
|
|
270,537 |
|
|
|
17.1 |
% |
|
|
214,214 |
|
|
|
14.7 |
% |
|
BBB
|
|
|
|
112,813 |
|
|
|
7.1 |
% |
|
|
91,723 |
|
|
|
6.3 |
% |
|
Below investment grade
|
|
|
|
- |
|
|
|
0.0 |
% |
|
|
535 |
|
|
|
0.0 |
% |
|
Total
|
|
|
$ |
1,582,938 |
|
|
|
100.0 |
% |
|
$ |
1,460,995 |
|
|
|
100.0 |
% |
We have included credit rating information with respect to our investments portfolio because it enhances the reader’s understanding of its composition and consistency with our investment philosophy.
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 and listed equity securities are stated at Level 1 fair value as determined by the quoted market price of these securities, as provided either by independent pricing services or exchange market prices.
Investments in U.S. government agency securities, corporate bonds, mortgage-backed securities, 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 administrator or manager of the funds on a quarterly basis and fair value adjustments where it is deemed appropriate based on analysis and discussions with the fund managers. 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.
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)
As at September 30, 2010 and December 31, 2009, the Company’s investments are allocated among fair value levels as follows:
| |
|
Fair Value Measurement at September 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
|
|
$ |
272,798 |
|
|
$ |
175,303 |
|
|
$ |
97,495 |
|
|
$ |
- |
|
|
U.S. states and political subdivisions
|
|
|
1,605 |
|
|
|
- |
|
|
|
1,605 |
|
|
|
- |
|
|
Other foreign government
|
|
|
288,502 |
|
|
|
- |
|
|
|
288,502 |
|
|
|
- |
|
|
Corporates
|
|
|
614,299 |
|
|
|
- |
|
|
|
614,299 |
|
|
|
- |
|
|
Mortgage-backed securities
|
|
|
238,701 |
|
|
|
- |
|
|
|
238,701 |
|
|
|
- |
|
|
Asset-backed securities
|
|
|
147,564 |
|
|
|
- |
|
|
|
147,564 |
|
|
|
- |
|
| |
|
|
1,563,469 |
|
|
|
175,303 |
|
|
|
1,388,166 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
1,000 |
|
|
|
- |
|
|
|
1,000 |
|
|
|
- |
|
|
Other foreign government
|
|
|
717 |
|
|
|
- |
|
|
|
717 |
|
|
|
- |
|
|
Corporates
|
|
|
17,752 |
|
|
|
- |
|
|
|
17,752 |
|
|
|
- |
|
| |
|
|
19,469 |
|
|
|
- |
|
|
|
19,469 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
172 |
|
|
|
172 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
172 |
|
|
|
172 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds
|
|
|
28,471 |
|
|
|
- |
|
|
|
- |
|
|
|
28,471 |
|
|
Catastrophe bonds
|
|
|
76,798 |
|
|
|
- |
|
|
|
76,798 |
|
|
|
- |
|
| |
|
|
105,269 |
|
|
|
- |
|
|
|
76,798 |
|
|
|
28,471 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,688,379 |
|
|
$ |
175,475 |
|
|
$ |
1,484,433 |
|
|
$ |
28,471 |
|
For the Level 3 items still held as of September 30, 2010, the total change in fair value is $1.8 million for both the three and nine months ended September 30, 2010. 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 three and nine month 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)
| |
|
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 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
- |
|
|
Equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
290 |
|
|
|
290 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
290 |
|
|
|
290 |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, other investments does not include an investment accounted for under the equity method in which the Company is deemed to have a significant influence and as such, is not accounted for at fair value under the FASB ASC guidance for financial instruments. This investment is recorded at $3.4 million and $4.3 million at September 30, 2010 and December 31, 2009, respectively.
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 nine months ended September 30, 2010, including purchases and sales and change in realized and unrealized gains (losses) in earnings, is set out below:
| |
|
For the nine months ended September 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 |
|
|
Total realized losses included in earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total unrealized gains included in earnings
|
|
|
- |
|
|
|
1,764 |
|
|
|
1,764 |
|
|
Purchases
|
|
|
- |
|
|
|
3,889 |
|
|
|
3,889 |
|
|
Sales
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Fair value, September 30, 2010
|
|
$ |
- |
|
|
$ |
28,471 |
|
|
$ |
28,471 |
|
Pledged assets
The Company holds cash and cash equivalents and fixed maturity securities that were deposited or pledged in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, Lloyd’s of London requirements and insurance laws.
The total amount of such cash and cash equivalents and fixed maturity securities as at September 30, 2010 and December 31, 2009, respectively are as follows:
| |
|
As at September 30, 2010
|
|
|
As at December 31, 2009
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
51,266 |
|
|
$ |
85,916 |
|
|
Fixed maturity securities
|
|
|
474,132 |
|
|
|
425,109 |
|
|
Total
|
|
$ |
525,398 |
|
|
$ |
511,025 |
|
Other investments
The catastrophe bonds held pay a variable and fixed interest coupon and generate investment return, and their performance is contingent upon climatological and geological events.
The Company’s investment funds consist of investments in private equity and mortgage-backed investment funds. As at September 30, 2010 and December 31, 2009, the Company had total outstanding investment commitments of $20.4 million and $3.4 million, respectively. Redemptions from these investments occur at the discretion of the general partner, board of directors or, in other cases, subject to a majority vote by the investors. The Company does not expect to redeem a significant portion of these investments prior to 2016.
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 following table presents the fair value of the Company’s investments funds as at September 30, 2010 and December 31, 2009:
| |
|
As at September 30, 2010
|
|
|
As at December 31, 2009
|
|
| |
|
Fair value
|
|
|
Fair value
|
|
| |
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
$ |
7,450 |
|
|
$ |
5,486 |
|
|
Mortgage-backed investment funds
|
|
|
21,021 |
|
|
|
- |
|
| Total |
|
$ |
28,471 |
|
|
$ |
5,486 |
|
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 gain exposure to the underlying asset or index. The Company also purchases “to be announced” mortgage-backed securities (“TBA”) 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 in order to hedge its net investments in foreign subsidiaries, and has designated these as hedging instruments. These foreign currency forward contracts are carried at fair value and the realized and unrealized gains and losses 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 September 30, 2010 and December 31, 2009 are as follows:
| |
|
As at September 30, 2010
|
|
| |
|
Asset derivatives |
|
|
Liability derivatives |
|
|
|
|
| |
|
recorded in other assets
|
|
|
recorded in other liabilities
|
|
|
Total derivatives |
|
| |
|
|
|
|
Fair value
|
|
|
Net notional exposure
|
|
|
Fair value
|
|
| |
|
Fair value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (1)
|
|
$ |
- |
|
|
$ |
230 |
|
|
$ |
42,796 |
|
|
$ |
(230 |
) |
| |
|
|
- |
|
|
|
230 |
|
|
|
|
|
|
|
(230 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purpose - risk management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency swaps
|
|
$ |
- |
|
|
$ |
670 |
|
|
$ |
17,725 |
|
|
$ |
(670 |
) |
|
Foreign currency forward contracts
|
|
|
8,615 |
|
|
|
35,784 |
|
|
|
810,159 |
|
|
|
(27,169 |
) |
|
Futures contracts
|
|
|
526 |
|
|
|
6,907 |
|
|
|
958,701 |
|
|
|
(6,381 |
) |
| |
|
|
9,141 |
|
|
|
43,361 |
|
|
|
|
|
|
|
(34,220 |
) |
|
Purpose - exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$ |
6,528 |
|
|
$ |
44 |
|
|
$ |
176,536 |
|
|
$ |
6,484 |
|
|
Mortgage-backed securities TBA
|
|
|
2 |
|
|
|
9 |
|
|
|
3,980 |
|
|
|
(7 |
) |
|
Other reinsurance derivatives
|
|
|
- |
|
|
|
66 |
|
|
|
- |
|
|
|
(66 |
) |
| |
|
|
6,530 |
|
|
|
119 |
|
|
|
|
|
|
|
6,411 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$ |
15,671 |
|
|
$ |
43,710 |
|
|
|
|
|
|
$ |
(28,039 |
) |
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)
| |
|
As at December 31, 2009
|
|
| |
|
Asset derivatives |
|
|
Liability derivatives |
|
|
|
|
| |
|
recorded in other assets
|
|
|
recorded in other liabilities
|
|
|
Total derivatives |
|
| |
|
Fair value
|
|
|
Fair value
|
|
|
Net notional exposure
|
|
|
Fair value
|
|
| |
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (1)
|
|
$ |
148 |
|
|
$ |
512 |
|
|
|