Edgar Filing: Flagstone Reinsurance Holdings, S.A.

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

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.)

65 Avenue de la Gare

L-1611 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer þ
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 4, 2012, the Registrant had 71,058,922 common voting shares outstanding, net of treasury shares with a par value of $0.01 per share.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

INDEX TO FORM 10-Q

		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as at March 31, 2012 and December 31, 2011	1

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011	2

	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011	3

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	5

	Notes to the Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	44

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 1B.	Unresolved Staff Comments	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchase of Equity Securities	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosure	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

Index

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 March 31,		As at December 31,
		2012		2011
ASSETS
Investments:
Fixed maturity investments, at fair value (Amortized cost: 2012 - $1,113,457; 2011 - $1,135,755)	$	1,132,101	$	1,138,435
Short term investments, at fair value (Amortized cost: 2012 - $7,475; 2011 - $10,620)		7,473		10,616
Equity investments, at fair value (Amortized cost: 2012 - $249; 2011 - $245)		81		82
Other investments		131,509		125,452
Total investments		1,271,164		1,274,585
Cash and cash equivalents		217,050		249,424
Restricted cash		22,144		17,538
Premium balances receivable		254,948		236,375
Unearned premiums ceded		82,904		30,550
Reinsurance recoverable		251,207		271,183
Accrued interest receivable		9,914		12,950
Receivable for investments sold		4,060		18
Deferred acquisition costs		39,735		38,155
Funds withheld		20,680		25,116
Other assets		120,569		160,950
Assets held for sale including discontinued operations		540,123		461,652
Total assets	$	2,834,498	$	2,778,496

LIABILITIES
Loss and loss adjustment expense reserves	$	849,975	$	897,368
Unearned premiums		242,341		215,316
Insurance and reinsurance balances payable		104,266		75,433
Payable for investments purchased		44,781		6,255
Long term debt		251,088		250,575
Other liabilities		52,702		54,059
Liabilities of discontinued operations held for sale		441,409		472,957
Total liabilities		1,986,562		1,971,963

EQUITY
Common voting shares, 300,000,000 authorized, $0.01 par value, issued (2012 - 84,464,259; 2011 - 84,464,259) and outstanding (2012 - 71,058,922; 2011 - 70,167,142)		845		845
Common shares held in treasury, at cost (2012 - 13,405,337; 2011 - 14,297,117)		(150,202)		(160,448)
Additional paid-in capital		859,327		872,819
Accumulated other comprehensive loss		(8,255)		(12,584)
Retained earnings		127,601		88,416
Total Flagstone shareholders’ equity		829,316		789,048
Noncontrolling interest in subsidiaries		18,620		17,485
Total equity		847,936		806,533
Total liabilities and equity	$	2,834,498	$	2,778,496

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

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Expressed in thousands of U.S. dollars, except share and per share data)

	For the three months ended March 31,
		2012		2011

REVENUES
Gross premiums written	$	170,228	$	352,675
Premiums ceded		(84,899)		(118,750)
Net premiums written		85,329		233,925
Change in net unearned premiums		28,416		(32,872)
Net premiums earned		113,745		201,053
Net investment income		5,067		9,198
Net realized and unrealized gains - investments		18,103		10,771
Net realized and unrealized gains (losses) - other		6,383		(690)
Other income		2,811		1,132
Total revenues		146,109		221,464

EXPENSES
Loss and loss adjustment expenses		66,449		302,999
Acquisition costs		22,653		38,071
General and administrative expenses		21,860		16,075
Interest expense		2,958		2,850
Net foreign exchange losses		4,231		9,603
Total expenses		118,151		369,598
Income (loss) from continuing operations before income taxes and interest in earnings of equity investments		27,958		(148,134)
(Provision) recovery for income tax		(128)		246
Interest in earnings of equity investments		18		(285)
Income (loss) from continuing operations		27,848		(148,173)
Income (loss) from discontinued operations, net of taxes		12,472		(12,223)
Net income (loss)		40,320		(160,396)
Less: Income attributable to noncontrolling interest		(1,135)		(824)
NET INCOME (LOSS) ATTRIBUTABLE TO FLAGSTONE	$	39,185	$	(161,220)

Net income (loss)	$	40,320	$	(160,396)
Change in currency translation adjustment		4,537		2,877
Change in defined benefit pension plan obligation		(208)		-
Comprehensive income (loss)		44,649		(157,519)
Less: Comprehensive income attributable to noncontrolling interest		(1,135)		(824)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO FLAGSTONE	$	43,514	$	(158,343)

Weighted average common shares outstanding—Basic		70,678,937		69,351,852
Weighted average common shares outstanding—Diluted		71,156,700		69,351,852
Income (loss) from continuing operations per common share—Basic	$	0.38	$	(2.15)
Income (loss) from discontinued operations per common share—Basic	$	0.17	$	(0.17)
Net income (loss) attributable to Flagstone per common share—Basic	$	0.55	$	(2.32)
Income (loss) from continuing operations per common share—Diluted	$	0.38	$	(2.15)
Income (loss) from discontinued operations per common share—Diluted	$	0.17	$	(0.17)
Net income (loss) attributable to Flagstone per common share—Diluted	$	0.55	$	(2.32)
Distributions declared per common share	$	0.04	$	0.04

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

Index

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 three months ended March 31, 2012	Total equity		Retained earnings		Accumulated other comprehensive loss		Common voting shares			Treasury shares	Additional paid-in capital		Noncontrolling interest in subsidiaries

Beginning balance	$	806,533	$	88,416	$	(12,584)	$	845	$	(160,448)	$	872,819	$	17,485
Net income		40,320		39,185										1,135
Change in currency translation adjustment		4,537				4,537
Defined benefit pension plan obligation		(208)				(208)
Stock based compensation		950										950
Stock compensation exercised from treasury		-								10,246		(10,246)
Distributions declared per common share		(2,842)										(2,842)
Other		(1,354)										(1,354)
Ending balance	$	847,936	$	127,601	$	(8,255)	$	845	$	(150,202)	$	859,327	$	18,620

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

Index

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 three months ended March 31, 2011	Total equity		Retained earnings		Accumulated other comprehensive loss		Common voting shares			Treasury shares	Additional paid-in capital		Noncontrolling interest in subsidiaries

Beginning balance	$	1,196,595	$	414,549	$	(6,178)	$	845	$	(178,718)	$	904,235	$	61,862
Redemption of preferred shares		(46,488)												(46,488)
Net loss		(160,396)		(161,220)										824
Change in currency translation adjustment		2,877				2,877
Stock based compensation		(3,005)										(3,005)
Stock compensation exercised from treasury		-								16,572		(16,572)
Distributions declared per common share		(2,801)										(2,801)
Other		(1,791)										(1,791)
Ending balance	$	984,991	$	253,329	$	(3,301)	$	845	$	(162,146)	$	880,066	$	16,198

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

Index

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

	For the three months ended March 31,
		2012		2011

Cash flows provided by (used in) operating activities:
Net income (loss)	$	40,320	$	(160,396)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized and unrealized gains		(25,902)		(10,214)
Net unrealized foreign exchange losses		6,158		1,683
Depreciation and amortization expense		980		1,637
Share based compensation expense (recovery)		950		(3,005)
Interest in earnings of equity investments		(18)		285
Accretion/amortization on fixed maturity investments		2,863		1,110
Changes in assets and liabilities, excluding net assets acquired:
Premium balances receivable		(29,042)		(120,238)
Unearned premiums ceded		(63,752)		(78,795)
Reinsurance recoverable		16,132		(61,430)
Deferred acquisition costs		(3,698)		(8,061)
Funds withheld		4,440		684
Loss and loss adjustment expense reserves		(42,843)		324,560
Unearned premiums		38,272		114,200
Insurance and reinsurance balances payable		31,117		58,692
Other changes in assets and liabilities, net		(13,293)		(18,744)
Net cash (used in) provided by operating activities		(37,316)		41,968

Cash flows (used in) provided by investing activities:
Purchases of fixed maturity investments		(345,343)		(308,812)
Sales and maturities of fixed maturity investments		420,981		394,147
Purchases of other investments		(1,418)		(3,486)
Sales and maturities of other investments		(2,115)		(9,068)
Purchases of fixed assets		(1,621)		(2,246)
Sales of fixed asset		39		-
Change in restricted cash		(70,011)		(12,458)
Net cash provided by investing activities		512		58,077

Cash flows (used in) provided by financing activities:
Repurchase of noncontrolling interest		-		(46,488)
Distributions paid per common share		(2,842)		(2,801)
Other		(1,292)		(361)
Net cash used in financing activities		(4,134)		(49,650)

Effect of foreign exchange rate on cash		(892)		990

(Decrease) increase in cash and cash equivalents		(41,830)		51,385
Decrease (increase) in cash and cash equivalents from discontinued operations		9,456		(17,117)
Cash and cash equivalents - beginning of year		249,424		223,033
Cash and cash equivalents - end of period	$	217,050	$	257,301

Supplemental cash flow information:
Receivable for investments sold	$	4,060	$	75,574
Payable for investments purchased	$	44,781	$	18,919
Interest paid	$	2,450	$	2,318

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

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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

Flagstone Reinsurance Holdings, S.A. (“Flagstone” or the “Company”) is a holding company incorporated as a société anonyme under the laws of Luxembourg. On May 14, 2010, the Company’s shareholders approved the redomestication to change the Company’s jurisdiction of incorporation from Bermuda to Luxembourg and the Company 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 (the “Redomestication”). As a result of the Redomestication, the Company changed its name from Flagstone Reinsurance Holdings Limited to Flagstone Reinsurance Holdings, S.A. The Company was originally incorporated on October 4, 2005 under the laws of Bermuda.

On October 24, 2011, the Company announced its plans to undertake a number of strategic initiatives, including its decision to divest its ownership positions in its former Lloyd’s and Island Heritage reportable segments in order to address changing business conditions, refocus the Company’s underwriting strategy on its property catastrophe reinsurance business and reduce its focus on reportable segments that absorb capital and produce lower returns. As part of this strategy, the Company is adjusting its geographic diversification in order to decrease the threat of frequency risk

The Company has classified the assets and liabilities associated with its former Lloyd’s and Island Heritage reportable segments as held for sale and the associated financial results have been presented in the Company’s consolidated financial statements as “discontinued operations” for all periods presented. See Note 4 “Assets Held for Sale and Discontinued Operations” for more information.

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 (the “U.S.”), 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, percentages or unless otherwise stated. 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 U.S. 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, except as otherwise required under discontinued operations treatment.

Except as discussed in Note 4 “Assets Held for Sale and Discontinued Operations” and unless otherwise noted, the notes to the unaudited condensed consolidated financial statements reflect the Company’s continuing operations. These financial statements contain certain reclassifications of prior period amounts to be consistent with the current period presentation with no effect on net income or loss.

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.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

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, 2011 (the “2011 Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 13, 2012.

3. NEW ACCOUNTING PRONOUNCEMENTS

The Company describes its significant accounting policies in the 2011 Annual Report. There has been no change to our significant accounting policies since December 31, 2011.

4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

On October 24, 2011, the Company announced its plan to undertake a number of strategic initiatives designed to realign the Company’s strategy and core capabilities. As a result of this realignment, the Company has commenced a formal process to divest its ownership positions in its former Lloyd’s and Island Heritage reportable segments. The sale of our ownership position in Island Heritage was completed on April 5, 2012, for total proceeds of approximately $68.0 million, of which the Company received approximately $40.8 million for its approximate 60% interest, which is subject to a purchase price adjustment based on a final March 31, 2012 balance sheet. The divestiture will be recorded in the second quarter results. On April 3, 2012, the Company announced that it had entered into a definitive agreement to divest its former Lloyd’s reportable segment for total proceeds of approximately $48.0 million. The Lloyd’s divestiture is expected to be complete by the end of the second quarter of 2012, subject to the satisfaction of regulatory approvals and certain other customary closing conditions and subject to a purchase price adjustment based on a final March 31, 2012 balance sheet.

The Company has classified the assets and liabilities associated with its former Lloyd’s and island Heritage reportable segments as held for sale and the assets and liabilities have been recorded at the lower of the carrying value or fair value less costs to sell. The financial results for these operations have been presented as discontinued operations in the Company’s consolidated statements of operations for all periods presented.

The Company does not anticipate losses on these divestitures.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

Details of the assets and liabilities of discontinued operations held for sale as at March 31, 2012 and December 31, 2011 are as follows:

	As at March 31,		As at December 31,
	2012		2011
Assets of discontinued operations held for sale
Fixed maturity investments, at fair value	$	91,804	$	94,422
Short term investments, at fair value		1,400		4,444
Total investments		93,204		98,866
Cash and cash equivalents		82,338		91,794
Restricted cash		95,712		30,307
Premium balances receivable		110,079		99,075
Unearned premiums ceded		38,440		27,042
Reinsurance recoverable		21,831		17,934
Deferred acquisition costs		29,160		26,949
Goodwill and intangible assets		45,159		44,161
Other assets		14,518		15,836
Total assets of discontinued operations held for sale	$	530,441	$	451,964

Liabilities of discontinued operations held for sale
Loss and loss adjustment expense reserves	$	240,335	$	233,290
Unearned premiums		154,466		142,713
Insurance and reinsurance balances payable		29,827		27,400
Amounts due to affiliates		-		46,682
Other liabilities		16,781		22,872
Total liabilities of discontinued operations held for sale	$	441,409	$	472,957

Net assets (liabilities) of discontinued operations held for sale	$	89,032	$	(20,993)

The increase in net assets of discontinued operations during the quarter ended March 31, 2012, is primarily the result of amounts due to affiliates being capitalized and letters of credit being extinguished by placing funds directly with Lloyd’s of London.

The Company has reclassified the results of operations of the discontinued operations to income (loss) from discontinued operations in its consolidated statements of operations. Details of the income from discontinued operations for the three months ended March 31, 2012 and 2011 are as follows:
	For the three months ended March 31,
	2012		2011
Revenues
Gross premiums written	$	86,925	$	69,476
Premiums ceded		(27,866)		(21,241)
Net premiums written		59,059		48,235
Net premiums earned	$	59,163	$	49,437
Other reinsurance income		122		3,943
Loss and loss adjustment expenses		(24,430)		(46,750)
Acquisition costs		(13,867)		(13,684)
General and administrative expenses		(9,372)		(9,018)
Underwriting income (loss)		11,616		(16,072)
Other income (expenses)		722		(537)
Recovery for income tax		134		4,386
Income (loss) from discontinued operations	$	12,472	$	(12,223)

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

Assets held for sale

During the year ended December 31, 2011, the Company decided to dispose of its one remaining aircraft as well as corporate apartments, which will no longer be required due to the divestiture plans discussed above. These assets are reflected in assets held for sale including discontinued operations on the consolidated balance sheet as at March 31, 2012, at a carrying value of $9.7 million. The sale of the corporate apartments was completed on April 13, 2012, for total proceeds of approximately $1.3 million and will be recorded in the second quarter results. The Company does not anticipate a significant gain or loss on disposal of these assets.

5. INVESTMENTS

Fixed maturity, short term, equity and other investments

The amortized cost or cost, gross unrealized gains and losses, and fair values as at March 31, 2012 and December 31, 2011 are as follows:

		As at March 31, 2012
	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses		Fair value
Fixed maturity investments
U.S. government and agency securities	$	313,078	$	5,249	$	(97)	$	318,230
Other foreign governments		75,685		2,196		(396)		77,485
Corporates		390,884		13,565		(1,729)		402,720
Mortgage-backed securities		181,218		1,837		(2,844)		180,211
Asset-backed securities		152,592		1,172		(309)		153,455
		1,113,457		24,019		(5,375)		1,132,101

Short term investments
Corporates		7,475		-		(2)		7,473
		7,475		-		(2)		7,473

Equity investments		249		-		(168)		81
		249		-		(168)		81

Other investments
Investment funds		68,964		4,033		(6,490)		66,507
Catastrophe bonds		63,000		148		(321)		62,827
		131,964		4,181		(6,811)		129,334

Totals	$	1,253,145	$	28,200	$	(12,356)	$	1,268,989

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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, 2011
	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses		Fair value
Fixed maturity investments
U.S. government and agency securities	$	320,666	$	3,352	$	(237)	$	323,781
Other foreign governments		102,116		7,874		(475)		109,515
Corporates		471,025		11,362		(10,041)		472,346
Mortgage-backed securities		182,610		384		(7,904)		175,090
Asset-backed securities		59,338		7		(1,642)		57,703
		1,135,755		22,979		(20,299)		1,138,435

Short term investments
U.S. government and agency securities		3,023		1		(1)		3,023
Other foreign governments		496		-		-		496
Corporates		7,101		-		(4)		7,097
		10,620		1		(5)		10,616

Equity investments		245		-		(163)		82
		245		-		(163)		82

Other investments
Investment funds		67,661		-		(8,383)		59,278
Catastrophe bonds		63,000		1,016		-		64,016
		130,661		1,016		(8,383)		123,294

Totals	$	1,277,281	$	23,996	$	(28,850)	$	1,272,427

Other investments do not include an investment accounted for under the equity method in which the Company has significant influence and accordingly, is not accounted for at fair value under the FASB ASC guidance for financial instruments. This investment was recorded at $2.2 million at both March 31, 2012 and December 31, 2011.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 country composition of the other foreign government classifications including the amortized cost or cost, gross unrealized gains and losses, and fair values as at March 31, 2012 and December 31, 2011 are as follows:

			As at March 31, 2012
				Amortized		Gross unrealized		Gross unrealized		Fair
				cost or cost		gains		losses		value
Other foreign governments
Sovereign Debt
	Eurozone
		Portugal, Ireland, Italy, Greece & Spain	$	-	$	-	$	-	$	-
	Other (excluding Eurozone)			47,442		1,297		(357)		48,382
				47,442		1,297		(357)		48,382

Financial institutions
	Eurozone
		Portugal, Ireland, Italy, Greece & Spain		-		-		-		-
		Other		3,013		-		(20)		2,993
	Total			3,013		-		(20)		2,993
	Other (excluding Eurozone)			25,230		899		(19)		26,110
				28,243		899		(39)		29,103

Totals			$	75,685	$	2,196	$	(396)	$	77,485

			As at December 31, 2011
				Amortized		Gross unrealized		Gross unrealized		Fair
				cost or cost		gains		losses		value
Other foreign governments
Sovereign debt
	Eurozone
		Portugal, Ireland, Italy, Greece & Spain	$	-	$	-	$	-	$	-
	Other (excluding Eurozone)			49,667		4,527		(46)		54,148
				49,667		4,527		(46)		54,148

Financial institutions
	Eurozone
		Portugal, Ireland, Italy, Greece & Spain		-		-		-		-
		Other		7,740		149		(403)		7,486
	Total			7,740		149		(403)		7,486
	Other (excluding Eurozone)			45,205		3,198		(26)		48,377
				52,945		3,347		(429)		55,863

Totals			$	102,612	$	7,874	$	(475)	$	110,011

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 contractual maturity dates of fixed maturity and short term investments and their respective amortized cost and fair values as at March 31, 2012 and December 31, 2011.

	As at March 31, 2012				As at December 31, 2011
	Amortized cost		Fair value		Amortized cost		Fair value

Due within one year	$	11,352	$	11,638	$	29,294	$	29,663
Due after 1 through 5 years		740,782		759,018		746,610		754,709
Due after 5 through 10 years		26,400		26,477		106,287		107,461
Due after 10 years		8,588		8,775		22,236		24,425
Mortgage and asset-backed securities		333,810		333,666		241,948		232,793
Total	$	1,120,932	$	1,139,574	$	1,146,375	$	1,149,051

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 maturity and short term investments as at March 31, 2012 and December 31, 2011:

	As at March 31, 2012				As at December 31, 2011
	Fair value		Percentage of total		Fair value		Percentage of total
Rating Category
AAA	$	732,603	64.3	%	$	695,931	60.6	%
AA		115,641	10.1	%		92,299	8.0	%
A		194,924	17.1	%		231,143	20.1	%
BBB		96,406	8.5	%		129,678	11.3	%
Total	$	1,139,574	100.0	%	$	1,149,051	100.0	%

The Company has included credit rating information with respect to the Company’s investment portfolio to supplement the reader’s understanding of its composition and the consistency of the Company’s investment portfolio with the Company’s 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 has classified its investments in U.S. government treasury securities and listed equity securities as Level 1 in the fair value hierarchy. The fair value of these securities is 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 classified as Level 2 in the fair value hierarchy. 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 classified as Level 2 in the fair value hierarchy as determined by reference to independent pricing services. 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.

Investments in investment funds are classified as Level 3 in the fair value hierarchy. The fair value of the private equity funds is determined by the investment fund managers using the net asset value provided by the administrator or manager of the funds and adjusted based on analysis and discussions with the fund managers. The fair value of the mortgage-backed and distressed debt investment funds 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.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 March 31, 2012 and December 31, 2011, the Company’s investments are allocated among fair value levels as follows:

	Fair Value Measurement at March 31, 2012 using:
			Quoted prices in		Significant other		Significant other
	Fair value		active markets		observable inputs		unobservable inputs
	measurements		(Level 1)		(Level 2)		(Level 3)
Fixed maturity investments
U.S. government and agency securities	$	318,230	$	265,652	$	52,578	$	-
Other foreign governments		77,485		-		77,485		-
Corporates		402,720		-		402,720		-
Residential mortgage-backed securities		180,211		-		180,211		-
Asset-backed securities		153,455		-		153,455		-
		1,132,101		265,652		866,449		-

Short term investments
Corporates		7,473		-		7,473		-
		7,473		-		7,473		-

Equity investments
Financial services		81		81		-		-
		81		81		-		-

Other investments
Investment funds		66,507		-		-		66,507
Catastrophe bonds		62,827		-		62,827		-
		129,334		-		62,827		66,507

Totals	$	1,268,989	$	265,733	$	936,749	$	66,507

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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, 2011 using:
			Quoted prices in		Significant other		Significant other
	Fair value		active markets		observable inputs		unobservable inputs
	measurements		(Level 1)		(Level 2)		(Level 3)
Fixed maturity investments
U.S. government and agency securities	$	323,781	$	264,096	$	59,685	$	-
Other foreign government		109,515		-		109,515		-
Corporates		472,346		-		472,346		-
Residential mortgage-backed securities		175,090		-		175,090		-
Asset-backed securities		57,703		-		57,703		-
		1,138,435		264,096		874,339		-

Short term investments
U.S. government and agency securities		3,023		-		3,023		-
Other foreign government		496		-		496		-
Corporates		7,097		-		7,097		-
		10,616		-		10,616		-

Equity investments
Financial services		82		82		-		-
		82		82		-		-

Other investments
Investment funds		59,278		-		-		59,278
Catastrophe bonds		64,016		-		64,016		-
		123,294		-		64,016		59,278

Totals	$	1,272,427	$	264,178	$	948,971	$	59,278

The reconciliation of the fair value for the Level 3 investments for the period ended March 31, 2012, including purchases and sales and change in realized and unrealized gains (losses) in earnings, is set out below:

		For the three months ended
		March 31, 2012

Fair value, December 31, 2011	$	59,278
Total realized losses included in earnings		-
Total unrealized gains included in earnings		5,926
Purchases		1,420
Sales		(117)
Fair value, March 31, 2012	$	66,507

For the Level 3 items still held as of March 31, 2012, the total change in fair value for the three months ended March 31, 2012 was $5.9 million. Transfers between levels, if necessary, are done as of the actual date of the event or change in circumstance that caused the transfer. There were no transfers between levels during the three months ended March 31, 2012.

Other investments

The Catastrophe bonds pay a variable and fixed interest coupon and generate investment return, and their performance is contingent upon climatological and geological events.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 Company’s investment funds consist of investments in private equity, distressed debt and mortgage-backed investment funds. As at March 31, 2012 and December 31, 2011, the Company had total outstanding investment commitments of $9.3 million and $10.7 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 is not able to redeem a significant portion of these investments prior to 2017.

The following table presents the fair value of the Company’s investment funds as at March 31, 2012 and December 31, 2011:

	As at
	March 31, 2012		December 31, 2011

Distressed debt funds	$	17,606	$	14,876
Mortgage-backed funds		38,553		33,789
Private equity funds		10,348		10,613
Total	$	66,507	$	59,278

Pledged assets

The Company holds cash and cash equivalents and fixed maturity investments 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 deposited or pledged cash and cash equivalents and fixed maturity investments as at March 31, 2012 and December 31, 2011 are as follows:

	As at
	March 31, 2012		December 31, 2011

Cash and cash equivalents	$	22,144	$	17,538
Fixed maturity investments		648,236		659,243
Total	$	670,380	$	676,781

6. 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 to gain exposure to the underlying asset or index and enters into foreign currency forward contracts and foreign currency futures contracts to gain exposure to currency movements against the U.S. dollar. 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 in accordance with guidelines established by management and approved by the Company’s Board of Directors (the “Board”).

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 Company has entered into certain foreign currency forward contracts for the purpose of hedging 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.

The details of the derivatives held by the Company as at March 31, 2012 and December 31, 2011 are as follows:

		As at March 31, 2012
		Asset derivatives		Liability derivatives
		record in		recorded in
		other assets		other liabilities		Total derivatives
		Fair value		Fair value		Net notional exposure		Fair value
		Fair value		Fair value		Net notional exposure		Fair value
Derivatives designated as hedging instruments
	Foreign currency forward contracts(1)	$	-	$	243	$	55,041	$	(243)
			-		243				(243)

Derivatives not designated as hedging instruments
	Purpose - risk management
	Currency swaps	$	-	$	571	$	17,335	$	(571)
	Foreign currency forward contracts		14,439		16,011		715,288		(1,572)
			14,439		16,582				(2,143)
	Purpose - exposure
	Foreign currency forward contracts	$	87	$	49	$	7	$	38
			87		49				38

			14,526		16,631				(2,105)

Total derivatives		$	14,526	$	16,874			$	(2,348)

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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, 2011
		Asset derivatives recorded in other assets		Liability derivatives recorded in other liabilities		Total derivatives
		Fair value		Fair value		Net notional exposure		Fair value
		Fair value		Fair value		Net notional exposure		Fair value
Derivatives designated as hedging instruments
	Foreign currency forward contracts (1)	$	-	$	498	$	51,564	$	(498)
			-		498				(498)

Derivatives not designated as hedging instruments
	Purpose - risk management
	Currency swaps	$	-	$	999	$	16,825	$	(999)
	Foreign currency forward contracts		15,196		7,685		648,556		7,511
	Futures contracts		-		4,820		426,362		(4,820)
			15,196		13,504				1,692
	Purpose - exposure
	Futures contracts	$	-	$	206	$	7,685	$	(206)
	Foreign currency forward contracts		7		-		4,993		7
			7		206				(199)

			15,203		13,710				1,493

Total derivatives		$	15,203	$	14,208			$	995

Designated
	Amount of Gain or (Loss) on Derivatives Recognized in
	Comprehensive income (loss)					Net income (loss)
	(Effective portion)					(Ineffective portion)
Derivatives designated as hedging instruments	For the three months ended March 31,					For the three months ended March 31,
		2012		2011	Location		2012		2011
Foreign currency forward contracts(1)	$	(2,159)	$	(1,209)	Net realized and unrealized gains (losses) - other	$	34	$	(225)
	$	(2,159)	$	(1,209)		$	34	$	(225)

(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 March 31,
as hedging instruments	Location	2012		2011
Futures contracts	Net realized and unrealized gains - investments	$	253	$	7,568
Currency swaps	Net realized and unrealized gains - other		428		1,080
Foreign currency forward contracts	Net realized and unrealized losses - investments		(12,558)		(33,976)
Foreign currency forward contracts	Net realized and unrealized gains (losses) - other		5,921		(1,786)
Mortgage-backed securities TBA	Net realized and unrealized losses - investments		-		(2)
Other reinsurance derivatives	Net realized and unrealized gains - other		-		241
		$	(5,956)	$	(26,875)

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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 recorded as designated hedges. Foreign currency forward contracts are also entered into for the purpose of hedging the Company’s foreign currency fixed maturity investments, select investment funds and the Company’s net foreign currency operational assets and liabilities. Foreign currency forward contracts are also entered into for the purpose of gaining exposure to currency movements against the U.S. dollar.

Futures contracts

The Company uses futures contracts to gain exposure to U.S. equity, global equity, emerging market equity and commodities. The Company uses interest rate futures contracts to manage the duration of the fixed maturity investments and foreign currency futures contracts to gain exposure to currency movements against the U.S. dollar.

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

Derivative instruments are stated at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC as determined by the quoted market price for futures contracts and based on observable market inputs for foreign currency forward contracts, currency swaps and TBAs. The Company fair values reinsurance derivative contracts, which are under one year in duration, by approximating the present value of cash flows as the carrying value equal to the unearned premium.

In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC, the fair value of derivative instruments held as at March 31, 2012 and December 31, 2011 is allocated between levels as follows:

	Fair Value Measurement at March 31, 2012, using:
			Quoted prices		Significant other		Significant other
	Fair value		in active markets		observable inputs		unobservable inputs
	measurements		(Level 1)		(Level 2)		(Level 3)
Description
Swaps		(571)		-		(571)		-
Foreign currency forward contracts		(1,777)		-		(1,777)		-
Total derivatives	$	(2,348)	$	-	$	(2,348)	$	-

For the Level 3 items still held as of March 31, 2012, the total change in fair value for the three months ended March 31, 2012, recorded in net realized and unrealized gains (losses) – other, was $nil.

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE 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, 2011, using:
			Quoted prices		Significant other		Significant other
	Fair value		in active markets		observable inputs		unobservable inputs
	measurements		(Level 1)		(Level 2)		(Level 3)
Description
Futures contracts	$	(5,026)	$	(5,026)	$	-	$	-
Swaps		(999)		-		(999)		-
Foreign currency forward contracts		7,020		-		7,020		-
Total derivatives	$	995	$	(5,026)	$	6,021	$	-

At March 31, 2012 and December 31, 2011, there were no Level 3 derivative instruments held. 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 months ended March 31, 2012.

7. DEBT AND FINANCING ARRANGEMENTS

Long term debt

Interest expense includes interest payable and amortization of debt offering expenses. The debt offering expenses are amortized over the period from the issuance of the Deferrable Interest Debentures to the earliest date that they may be called by the Company. For the three months ended March 31, 2012, the Company incurred interest expense of $2.5 million on the Deferrable Interest Debentures compared to $2.6 million for the same period in 2011. The Company had $0.8 million of interest payable included in other liabilities at both March 31, 2012 and December 31, 2011.

The Company does not carry its long term debt at fair value on its consolidated balance sheets. At March 31, 2012, the Company estimated the fair value of its long term debt to be approximately $216.7 million compared to $192.7 million at December 31, 2011.

Letter of credit facilities

On August 31, 2011, Flagstone Suisse and Flagstone Capital Management Luxembourg SICAF – FIS (“FCML”) entered into a $200.0 million secured committed letter of credit facility with Barclays Bank Plc (the “Barclays Facility”). The Barclays Facility is for letters of credit with a maximum tenor of 15 months and is used to support the reinsurance obligations of the Company. As of March 31, 2012, $52.3 million had been drawn under the Barclays Facility, and the drawn amount was secured by $61.6 million of fixed maturity investments from the Company’s investment portfolio. The Barclays Facility replaced a $200.0 million credit facility with Barclays Bank Plc which commenced on March 5, 2009.

On April 28, 2010, Flagstone Suisse and FCML entered into a secured $450.0 million standby letter of credit facility with Citibank Europe Plc (the “Citi Facility”). The Citi Facility comprised a $225.0 million facility for letters of credit with a maximum tenor of 15 months, to be used to support reinsurance obligations of the Company, and a $225.0 million facility for letters of credit drawn in respect of Funds at Lloyd’s with a maximum tenor of 60 months. On December 21, 2010, the Citi Facility was amended to increase the amount available under the facility by $100.0 million to $550.0 million, with all the terms and conditions remaining unchanged. The Citi Facility now comprises a $240.0 million facility for letters of credit with a maximum tenor of 15 months, to be used to support reinsurance obligations of the Company, and a $310.0 million facility for letters of credit drawn in respect of Funds at Lloyd’s with a maximum tenor of 60 months. As at March 31, 2012, $497.9 million had been drawn under the Citi Facility, and the drawn amount of the facility was secured by $586.6 million of fixed maturity investments from the Company’s investment portfolio. The Citi Facility replaced a $450.0 million credit facility with Citibank Europe Plc which commenced on January 22, 2009.

These facilities are used to provide security to reinsureds and for Funds at Lloyd’s, and they are fully collateralized by the Company, to the extent of the letters of credit outstanding at any given time.

8. SHARE BASED COMPENSATION

The Company accounts for share based compensation in accordance with the Compensation – Stock Compensation Topic of the FASB ASC which requires entities to measure the cost of services received from employees and directors in exchange for an award of equity instruments based on the grant date fair value of the award. The cost of such services will be recognized as compensation expense over the period during which an employee or director is required to provide service in exchange for the award. The Company’s share based compensation plans consist of Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”).

Index

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

Performance Share Units

The Company’s Performance Share Unit Plan (“PSU Plan”) is the Company’s shareholder approved primary executive long term incentive scheme. Pursuant to the terms of the PSU Plan, at the discretion of the Compensation Committee of the Board, PSUs may be granted to executive officers and certain other key employees and vesting is contingent upon the Company meeting certain diluted return-on-equity (“DROE”) goals.

A summary of the activity under the PSU Plan as at March 31, 2012, and changes during the three months ended March 31, 2012, is as follows:

	For the three months ended March 31, 2012
				Weighted
	Number	Weighted		average
	expected	average grant		remaining
	to vest	date fair value		contractual term

Outstanding at beginning of period	1,676,125	$	10.83	0.7
Granted	300,000		8.29
Forfeited	(93,750)		11.54
Performance factor changes	23,375		9.93
Exercised	(889,700)		9.98
Outstanding at end of period	1,016,050		10.73	1.7

The Company reviews its assumptions in relation to the PSUs on a quarterly basis. The issuance of shares with respect to the PSUs is contingent upon the attainment of certain levels of average DROE over a three year period. Taking into account the results to date and the expected results for the remainder of the performance periods, the Company has established the most probable factor as the minimum for each series, with the exception of one series which has been established to have a probable factor of 60%. For the three months ended March 31, 2012, $0.3 million of compensation expense related to the PSU Plan has been recorded in general and administrative expenses compared to $(4.2) million for the same period in 2011. As at March 31, 2012 and December 31, 2011, there was a total of $5.9 million and $4.8 million, respectively, of unrecognized compensation cost related to non−vested PSUs; that cost is expected to be recognized over periods of approximately 1.9 years and 1.6 years, respectively.

Since the inception of the PSU Plan, 2,363,026 PSUs have vested and 2,368,658 PSUs have been cancelled.

Restricted Share Units

The purpose of the Company’s Restricted Share Unit Plan (the “RSU Plan”) is to encourage certain employees and directors of the Company to further the development of the Company and to attract and retain key employees for the Company’s long term success. The RSUs granted to employees vest over a period of approximately two years and RSUs granted to directors vest on the grant date.

A summary of the activity under the RSU Plan as at March 31, 2012, and changes during the three and three months ended March 31, 2012, is as follows:

	For the three months ended March 31, 2012
	Number		Weighted average	Weighted average
	expected to		grant date	remaining
	vest		fair value	contractual term

Outstanding at beginning of period	524,179	$	11.40	0.3
Granted	217,706		8.28
Forfeited	(41,250)		10.79
Exercised	(147,020)		10.68
Outstanding at end of period	553,615		10.40	1.3

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FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

Unrecognized compensation cost related to non-vested RSUs was $1.6 million and $1.0 million at March 31, 2012 and December 31, 2011, respectively, and is expected to be recognized over a period of approximately 1.4 years and 1.0 year, respectively. Compensation expenses related to the RSU Plan of $0.7 million were recorded in general and administrative expenses for the three months ended March 31, 2012 compared to $1.2 million for the same period in 2011.

Since the inception of the RSU Plan in July 2006, 707,262 RSUs granted to employees have vested and no RSUs granted to employees have been cancelled. During the three months ended March 31, 2012, 59,856 RSUs were granted to the directors, compared to 63,964 RSUs granted to directors during the same period in 2011. During both the three months ended March 31, 2012 and 2011, no RSUs granted to directors were converted into common shares of the Company as elected by the directors.

The Company uses a nil forfeiture assumption for its PSUs and RSUs. The intrinsic value of both PSUs and RSUs outstanding as at March 31, 2012 was $8.0 million and $4.4 million, respectively.

9. EARNINGS (LOSS) PER COMMON SHARE

The computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2012 and 2011 is as follows:

	For the three months ended March 31,
	2012		2011

Basic earnings per common share
Net income (loss) attributable to Flagstone	$	39,185	$	(161,220)
Weighted average common shares outstanding		70,422,864		69,025,875
Weighted average vested restricted share units		256,073		325,977
Weighted average common shares outstanding—Basic		70,678,937		69,351,852
Basic earnings (loss) per common share	$	0.55	$	(2.32)

Diluted earnings per common share
Net income (loss) attributable to Flagstone	$	39,185	$	(161,220)
Weighted average common shares outstanding		70,422,864		69,025,875
Weighted average vested restricted share units outstanding		256,073		325,977
		70,678,937		69,351,852
Share equivalents:
Weighted average unvested restricted share units		120,616		-
Weighted average unvested performance share units		357,147		-
Weighted average common shares outstanding—Diluted		71,156,700		69,351,852
Diluted earnings (loss) per common share	$	0.55	$	(2.32)

Dilutive share equivalents have been excluded in the weighted average common shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive. The number of anti-dilutive share equivalents that were excluded in the computation of diluted earnings per share for the three months ended March 31, 2011, was 895,610. Because the number of shares above a minimum threshold are contingently issuable under the PSU Plan depends on the average DROE over a two or three year period, those contingently issuable PSUs are excluded from the calculation of diluted earnings per common share until the end of the performance period, at which time the number of shares issuable under the PSU Plan will be known. Only the minimum number of PSUs that will vest under each grant are included in the calculation of diluted earnings in a period of net income. As at March 31, 2012 and 2011, there were 1,016,950 and 1,965,091 PSUs expected to vest, respectively. The maximum number of common shares that could be issued under the PSU Plan at March 31, 2012 and 2011 was 2,331,950 and 4,962,078, respectively. There was a warrant outstanding which would result in the issuance of 630,194 common shares at both March 31, 2012 and 2011, that were excluded from the computation of diluted earnings per common share because the effect would be anti-dilutive.

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FLAGSTONE REINSURANCE HOLDINGS, S.A.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in tables expressed in thousands of U.S. dollars, except for share amounts, per share amounts and percentages)

10. SHAREHOLDERS’ EQUITY

Common shares

At March 31, 2012, the total authorized common voting shares of the Company were 300,000,000, with a par value of $0.01 per common share (December 31, 2011 – 300,000,000).

The following table is a summary of the common shares issued and outstanding for the periods ending March 31, 2012 and December 31, 2011:

	For the periods ended
	March 31, 2012	December 31, 2011
Common voting shares:
Balance at beginning of period	70,167,142	68,585,588
Conversion of performance share units (1)	782,179	1,359,378
Conversion of restricted share units (1)	109,601	222,176
Balance at end of period	71,058,922	70,167,142

(1)Conversion of performance share units and restricted share units are net of shares withheld for the payment of tax on the employee's behalf.

11. LEGAL PROCEEDINGS

In the normal course of business, the Company may become involved in various claims litigation and legal proceedings. Such proceedings often involve reinsurance contract disputes which are typical for the insurance and reinsurance industry. As at March 31, 2012, the Company was not a party to any material litigation or arbitration proceedings.

12. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through to the date the financial statements were available to be issued and has determined that there were no subsequent events that require disclosure, except in connection with the divestiture processes relating to the former Island Heritage and Lloyd’s reportable segments. Refer to Note 4 “Assets Held for Sale and Discontinued Operations” for more information.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition as at March 31, 2012 and December 31, 2011, and our results of operations for the three months ended March 31, 2012 and 2011, including, as specified, our discontinued operations. The historical results presented in this Quarterly Report are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results expected for a full year. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the audited consolidated financial statements and notes thereto, presented under Item 7 and Item 8, respectively, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (our “2011 Annual Report”), filed with the SEC on March 13, 2012. Some of the information contained in this discussion and analysis is included elsewhere in this document, including information with respect to our plans and strategy for our business, and includes forward-looking statements that involve risks and uncertainties. Please see the “Cautionary Statement Regarding Forward-Looking Statements” for more information. You should review the information described under “Recent Developments”, the risks described in this Quarterly Report and in Item 1A, “Risk Factors” contained in the 2011 Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.

References in this Quarterly Report to the “Company”, “Flagstone”, “we”, “us”, and “our” refer to Flagstone Reinsurance Holdings, S.A. and/or its subsidiaries, including Flagstone Réassurance Suisse SA, its wholly-owned Switzerland reinsurance company, Flagstone Alliance Insurance & Reinsurance PLC, its wholly-owned Cyprus insurance and reinsurance company, Flagstone Reinsurance Africa Limited, its wholly-owned South African reinsurance company, Mont Fort Re Ltd., its wholly-owned Bermuda reinsurance company, and any other direct or indirect wholly-owned subsidiary, but not including its United Kingdom Lloyd's managing agency Flagstone Syndicate Management Limited, or Island Heritage Holdings Ltd., each of which are discontinued operations, unless the context suggests otherwise. On October 24, 2011, we announced a strategic decision to divest our ownership positions in our former Lloyd’s and Island Heritage reportable segments. On April 5, 2012, the Company completed the sale of the business comprising its former Island Heritage reportable segment. On April 3, 2012, the Company announced that it had entered into definitive agreements to divest the business comprising its former Lloyd’s reportable segment. The Company has classified the assets and liabilities associated with its former Lloyd’s and Island Heritage reportable segments as held for sale and the assets and liabilities have been recorded at the lower of the carrying value or fair value less costs to sell. The financial results for these operations have been presented as discontinued operations in the Company’s consolidated statements of operations for all periods presented. Unless otherwise noted, all discussions and amounts presented in this Quarterly Report relate to our business without giving effect to our discontinued operations. References to “Flagstone Suisse” refer to Flagstone Réassurance Suisse SA, its wholly-owned subsidiaries and its Bermuda branch. References to “FSML” refer to Flagstone Syndicate Management Limited, its wholly-owned subsidiaries and Syndicate 1861. References to “Island Heritage” refer to Island Heritage Holdings Ltd. and its subsidiaries. References to “Flagstone Africa” refer to Flagstone Reinsurance Africa Limited. References to “Mont Fort” refer to Mont Fort Re Ltd. References in this Quarterly Report to “dollars” or “$” are to the lawful currency of the United States of America (the “U.S.”), 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, percentages or unless otherwise stated. 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 U.S. or whose primary transactions are in foreign currency.

Executive Overview

On October 24, 2011, we announced a strategic business decision to divest our ownership positions in our former Lloyd’s and Island Heritage reportable segments. Our goal was to free up underwriting capital for our core business, substantially reducing risk while retaining acceptable return on equity levels, to continue to lower costs and to return to profitability. We have achieved these goals in the first quarter, and have started 2012 with a return to profitability, despite the ongoing challenging environment in the industry. Our improved performance this quarter reflects the benefits of improving rates in our core business, which partially offset the reduction in income as we pare back our risk levels. It also begins to demonstrate the benefits of our expense saving initiatives, as well as the avoidance of significant exposure to first quarter 2012 loss events.

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As previously announced on April 2, 2012, and April 3, 2012, the Company entered into definitive agreements to divest its former Island Heritage and Lloyd’s reportable segments, respectively. The Island Heritage transaction was completed on April 5, 2012, as previously announced. The Lloyd’s segment transaction is expected to be completed before the end of the second quarter of 2012. These divestitures are part of a strategic business realignment to address changing business conditions, refocus the Company’s underwriting strategy on its property catastrophe reinsurance business and reduce its focus on operating segments that absorb capital and produce lower returns. Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations. See Note 4, “Assets Held for Sale and Discontinued Operations” in our unaudited condensed consolidated financial statements (Item 1 above) for additional information related to discontinued operations. All prior years presented have been reclassified to conform to this new presentation.

We continue to make significant progress on our business realignment as we establish a more nimble, cost-effective and opportunistic business. We remain focused on leveraging the existing strengths in our core businesses in order to deliver enhanced value for our shareholders.

We are a global reinsurance company. Our management views the operations and management of our continuing operations as one reportable segment and does not differentiate our lines of business into separate reportable segments. Our continuing operations provide reinsurance primarily through our property and property catastrophe business as well as short-tail specialty and casualty reinsurance lines of business. We diversify our risks across business lines by risk zones, each of which combines a geographic zone with one or more types of peril (for example, Texas Windstorm, Florida Hurricane or California Earthquake). The majority of our reinsurance contracts contain loss limitation provisions such as fixed monetary limits to our exposure and per event caps. We specialize in underwriting where we believe sufficient data exists to analyze effectively the risk/return profile, and where we are subject to legal systems we believe are reasonably fair and reliable. Previously, the underwriting results associated with our discontinued operations were included in our former Lloyd’s and Island Heritage reportable segments.

Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S (“U.S. GAAP”) and our fiscal year ends on December 31. Because a substantial portion of the insurance and reinsurance we write in our discontinued operations and reinsurance we write in our continuing operations provides protection from damages relating to natural and man-made catastrophes, our results depend to a large extent on the frequency and severity of such catastrophic events, and the specific coverages we offer to clients affected by these events. This has resulted and may continue to result in volatility in our results of operations, cash flows and financial condition. In addition, the amount of premiums written with respect to any particular line of business may vary from quarter to quarter and year to year as a result of available capital and retrocessional support and market and other conditions.

We measure our financial success through long term growth in diluted book value per share plus accumulated distributions measured over intervals of three years. We believe this is the most appropriate measure of our performance, a measure that focuses on the return provided to our common shareholders. Diluted book value per share is obtained by dividing Flagstone shareholders’ equity by the number of common shares and common share equivalents outstanding including all potentially dilutive securities such as a warrant, Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”).

Our continuing operations derive revenues primarily from net premiums earned on the reinsurance policies we write, net of any retrocessional or reinsurance coverage purchased, income from our investment portfolio, and fees for services provided. Premiums are generally a function of the number and type of contracts we write, as well as prevailing market prices. Premiums are normally due in installments and earned over the contract term, which ordinarily is 12 or 24 months.

Income from our investment portfolio primarily comprises interest on fixed maturity, short term investments and cash and cash equivalents and net realized and unrealized gains (losses) on our investment portfolio including our derivative positions, net of investment expenses.

Our expenses consist primarily of the following: loss and loss adjustment expenses (“LAE”) incurred on the policies of reinsurance that we sell; acquisition costs which typically represent a percentage of the premiums that we write; general and administrative expenses which primarily consist of salaries, benefits and related costs, including costs associated with awards under our Performance Share Unit Plan (“PSU Plan”) and Restricted Share Unit Plan (“RSU Plan”), and other general operating expenses; interest expense related to our debt obligations; and noncontrolling interest, which represents the interest of external parties with respect to the net income of Mont Fort (on March 25, 2011 there were no longer third party investors in Mont Fort) and our Island Heritage discontinued operations. We are also subject to taxes in certain jurisdictions in which we operate; however, since the majority of our income to date has been earned in Bermuda, a non-taxable jurisdiction, the tax impact on our operations has historically been minimal. The Company is a Luxembourg tax resident entity due to its change of jurisdiction of incorporation from Bermuda to Luxembourg effective May 17, 2010 (the “Redomestication”); therefore, it is subject to Luxembourg corporate income tax, municipal business tax, withholding tax, and net wealth tax. The Company minimizes the income tax impact on the Company through effective tax planning.

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Recent Developments

On April 2, 2012, the Company announced that it had entered into a definitive share purchase agreement with BF&M Limited (“BF&M”), and certain other parties, under which BF&M acquired Island Heritage for approximately $68 million in cash. The divesture process for Island Heritage was completed on April 5, 2012, for total proceeds of approximately $68.0 million, of which, the Company received approximately $40.8 million for its approximate 60% interest, which is subject to a purchase price adjustment based on a final March 31, 2012 balance sheet. The divestiture will be recorded in the second quarter result and is not expected to result in a significant gain or loss on disposal.

On April 3, 2012, the Company announced that it had entered into a definitive agreement with a wholly-owned subsidiary of ANV Holdings BV (“ANV”), under which ANV, with capital support from Ontario Teachers’ Pension Plan Board, will acquire the Company’s Lloyd’s operations for approximately $48 million in cash, subject to a purchase price adjustment based on a final March 31, 2012 balance sheet. As a result of the transaction, the Company will release approximately $162 million of underwriting capital currently supporting its Lloyd’s operation. This transaction is expected to be completed before the end of the second quarter of 2012, subject to the satisfaction of customary regulatory approvals and certain other customary closing conditions, and is not expected to result in a significant gain or loss on disposal.

You should review all the information in this Quarterly Report in conjunction with the information under this “Recent Developments.”

Critical Accounting Policies

Our critical accounting policies are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the 2011 Annual Report. Our critical accounting policies at March 31, 2012 have not changed compared to December 31, 2011.

It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements contain certain amounts that are inherently subjective in nature and have required our management to make assumptions and best estimates to determine the reported values. If events or other factors, including those described herein and in Item 1A, “Risk Factors,” of the 2011 Annual Report, cause actual events or results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our results of operations, financial condition and liquidity.

Results of Operations - For the Three Months Ended March 31, 2012 and 2011

Our reporting currency is the U.S. dollar. Our subsidiaries have one of the following functional currencies: U.S. dollar, Swiss franc, Euro, British pound sterling, Canadian dollar, Indian rupee, and South African rand. As a significant portion of our operations are transacted in foreign currencies, fluctuations in foreign exchange rates may affect period-to-period comparisons. To the extent that fluctuations in foreign currency exchange rates affect comparisons, their impact has been quantified, when possible, and discussed in each of the relevant sections. See Note 2 “Significant Accounting Policies” to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data”, in the 2011 Annual Report for a discussion on translation of foreign currencies.

	For the three months ended
U.S. dollar (weakened) strengthened against:	March 31, 2012

Canadian dollar	(2.1)	%
Swiss franc	(4.1)	%
Euro	(3.0)	%
British pound sterling	(3.0)	%
Indian rupee	(4.2)	%
South African rand	(5.2)	%

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Summary Overview

The following table sets forth selected key financial information for the three months ended March 31, 2012 and 2011:

	For the three months ended March 31,
	2012			2011			$ Change		% Change

Underwriting income (loss)	$	4,618		$	(155,819)		$	160,437	103.0	%
Net investment income	$	5,067		$	9,198		$	(4,131)	(44.9)	%
Net realized and unrealized gains - investments	$	18,103		$	10,771		$	7,332	68.1	%
Net realized and unrealized gains (losses) - other	$	6,383		$	(690)		$	7,073	1,025.1	%
Income (loss) from continuing operations	$	27,848		$	(148,173)		$	176,021	118.8	%

Income (loss) from continuing operations per common share - Basic	$	0.38		$	(2.15)		$	2.53
Income (loss) from continuing operations per common share - Diluted(1)	$	0.38		$	(2.15)		$	2.53
Loss ratio		58.4	%		150.7	%
Expense ratio		39.1	%		26.9	%
Combined ratio		97.5	%		177.6	%

The following table sets forth selected key non-GAAP financial measures as at March 31, 2012 and December 31, 2011:

	As at
	March 31,			December 31,
	2012			2011				$ Change	% Change
Basic book value per common share	$	11.62		$	11.21		$	0.41	3.7	%
Diluted book value per common share	$	11.42		$	10.90		$	0.52	4.8	%
Diluted book value per common share plus accumulated distributions	$	12.18		$	11.62		$	0.56	4.8	%

(1)Income (loss) from continuing operations per common share - Diluted for the three months ended March 31, 2012 and 2011 does not contain the effect of:
a. a warrant conversion as this would be anti-dilutive for U.S. GAAP purposes
b. the PSU conversion until the end of the performance period, when the number of shares issuable under the PSU Plan will be known. There were 1,016,050 and 1,965,091 PSU's expected to vest under the PSU plan as at March 31, 2012 and 2011, respectively . Only the minimum number of PSUs that will vest under each grant are included in the calculation of diluted earnings in a period of net income.

The increase in underwriting income in the three months ended March 31, 2012, is primarily due to the lack of significant catastrophe losses (net of reinsurance and reinstatements) in the period compared to the same period last year, which included Australian floods ($34.4 million), cyclone Yasi ($31.0 million), New Zealand earthquake of February 2011 ($81.5 million) and the Japan earthquake and tsunami ($109.7 million).

The increase in the net realized and unrealized gains and losses – investments, for the three months ended March 31, 2012, is primarily associated with the foreign currency forward contracts and is related to the currency hedges on non-U.S. dollar bonds, offset by net realized and unrealized gains on the fixed maturity investments.

The increase in the net realized and unrealized gains and losses – other, for the three months ended March 31, 2012, is primarily associated with currency swaps and foreign currency forward contracts are due to currency fluctuations which is partially offset by losses recorded through balance sheet currency revaluations and are attributable to operational hedges on reinsurance balances.

These items are discussed in more detail in the following sections.

Non-GAAP Reconciliation

In addition to the U.S. GAAP financial measures set forth in this Quarterly Report, we have presented “basic book value per common share” and “diluted book value per common share”, which are non-GAAP financial measures. Our management uses growth in diluted book value per common share as a prime measure of the value we are generating for our common shareholders, as we believe that growth in our diluted book value per common share ultimately translates into growth in our stock price.

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Basic book value per common share is defined as total Flagstone shareholders’ equity divided by the number of common shares outstanding at the end of the period plus vested RSUs, giving no effect to dilutive securities. Diluted book value per common share is defined as total Flagstone shareholders’ equity divided by the number of common shares and common share equivalents outstanding at the end of the period including all potentially dilutive securities such as a warrant, PSUs and RSUs. When the effect of securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per common share. The warrant was anti-dilutive and was excluded from the calculation of diluted book value per common share as at March 31, 2012 and December 31, 2011.

While we believe that these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of these non-GAAP financial measures. Basic book value per common share does not reflect the number of common shares that may be issued upon vesting or exercise of dilutive securities. On the other hand, by giving effect to dilutive securities, diluted book value per common share takes into account common share equivalents and not just the number of common shares actually outstanding. These non-GAAP financial measures are not prepared in accordance with GAAP, are not based on any comprehensive set of accounting rules or principles, are not reported by all of our competitors and may not be directly comparable to similarly titled measures of our competitors due to potential differences in the exact method of calculation. In light of these limitations, we use these non-GAAP financial measures only as supplements to GAAP financial measures and provide a reconciliation of the non-GAAP financial measures to their most comparable GAAP financial measures.

	As at
	March 31, 2012		December 31, 2011



Flagstone shareholders' equity	$	829,316	$	789,048
Potential net proceeds from assumed:
Exercise of PSU (1)		-		-
Exercise of RSU (1)		-		-
Conversion of warrant (2)		-		-
Diluted Flagstone shareholders' equity	$	829,316	$	789,048


Cumulative distributions paid per outstanding common share	$	0.76	$	0.72

Common shares outstanding - end of period		71,058,922		70,167,142
Vested RSUs		293,565		233,709
Total common shares outstanding - end of period		71,352,487		70,400,851

Potential shares to be issued:
PSUs expected to vest		1,016,050		1,676,125
RSUs outstanding		260,050		290,470
Conversion of warrant (2)		-		-
Common shares outstanding - diluted		72,628,587		72,367,446


Basic book value per common share	$	11.62	$	11.21

Diluted book value per common share	$	11.42	$	10.90

Basic book value per common share plus accumulated distributions	$	12.38	$	11.93

Diluted book value per common share plus accumulated distributions	$	12.18	$	11.62


Distributions per common share paid during the period	$	0.04	$	0.16

(1)No proceeds due when exercised
(2)Below strike price - not dilutive

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Outlook and Trends

Market Outlook

At the important January 1, 2012 renewal period, North American rates increased approximately 10-15% from rates a year ago, averaging high single digit increases in loss-free regions and ranging from 15-40% increases in loss-affected regions. Looking forward toward the next major North American renewal period at mid-year, we expect a similar level of increases and a strong renewal. Many clients are now out with their submissions early, with several looking for modest increases in programs and recognizing the potential of price increases. On average, clients are buying more and therefore more capacity is needed, however we anticipate that reinsurers will also be willing to extend more capacity to meet this need in a measured approach. Furthermore, the Florida market looks to be more orderly at the upcoming renewal, due in part to the successful cat bond placement by Citizens Property Insurance Corporation of Florida, which lessens the amount of capacity required of the private market. As such, we do not expect any significant dislocation in the Florida market at the upcoming renewal. However, we believe there will be more financial flexibility in the system with Florida companies finally seeing the rate increases from last year earn through, and most have filed for, and expect to receive, another round of double digit price increases. As such, we are expecting less resistance to rate increases from cedents who in the past have been squeezed by the rate environment in Florida.

The International market saw January 1, 2012 rates up 5% on average for European business, and loss-affected areas such as Australia showing more significant rate increases of 50-100%, which were expected given the recent catastrophic events in the region. At April 1, 2012, renewals were primarily focused on Japan and saw strong pricing increases in these Japanese programs. Overall price increases averaged over 20%. Comparing 2012 prices with pre-Tohoku pricing, loss affected Japanese earthquake programs paid 80-140% increases. Non-loss affected programs saw 40-75% increases and Japanese wind programs were up 15-25%. The few European accounts that renewed in April were flat on a risk-adjusted basis. Caribbean accounts had to increase pricing by 10-20% to receive the required capacity. With the Caribbean competing for capacity with the U.S. wind accounts overall capacity was tight. In summary, outside of the Caribbean, capacity was generally abundant, and looking forward to the next major International renewal period at January 1, 2013, we expect the level of International loss activity to dictate the direction of rates.

Regarding the specialty lines, rates in the marine business, aviation, and aerospace and satellite have been flat since the January 1 renewal period and as these lines renew throughout the year we expect a similar pattern to continue. Rates have generally failed to increase materially and the modest profitability has been primarily due to a lack of loss activity.

This information should be read in conjunction with the other information in the 2011 Annual Report, including “Risk Factors— Risks Related to our Business”.

Underwriting Results

Our management views our operations and management of our continuing operations as one reportable segment and does not differentiate its lines of business into separate reportable segments. We provide reinsurance through our property and property catastrophe business as well as high-margin short-tail specialty and casualty reinsurance lines of business. We regularly review our financial results and assess our performance on the basis of our single reportable segment in accordance with the Segment Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

Those lines of business are more fully described as follows:

(1)

Property Catastrophe Reinsurance. Property catastrophe reinsurance contracts are typically “all risk” in nature, meaning that they protect against losses from earthquakes and hurricanes, as well as other natural and man-made catastrophes such as tornados, wind, fires, winter storms, and floods (where the contract specifically provides for coverage). Losses on these contracts typically stem from direct property damage and business interruption. To date, property catastrophe reinsurance has been our most important product. We write property catastrophe reinsurance primarily on an excess of loss basis. In the event of a loss, most contracts of this type require us to cover a subsequent event and generally provide for a premium to reinstate the coverage under the contract, which is referred to as a “reinstatement premium”. These contracts typically cover only specific regions or geographical areas, but may be on a worldwide basis.

(2)

Property Reinsurance. We also provide reinsurance on a pro rata share basis and per risk excess of loss basis. Per risk reinsurance protects insurance companies on their primary insurance risks on a single risk basis, for example, covering a single large building. Generally, our property per risk and pro rata business is written with loss limitation provisions, such as per occurrence or per event caps, which serve to limit exposure to catastrophic events.

(3)

Short-tail Specialty and Casualty Reinsurance. We also provide short-tail specialty and casualty reinsurance for risks such as aviation, energy, accident and health, satellite, marine and workers’ compensation catastrophe. Generally, our short-tail specialty and casualty reinsurance is written with loss limitation provisions.

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Gross Premiums Written

Details of the consolidated gross premiums written by line of business and geographic area of risk insured for our continuing operations are provided below:


	For the three months ended March 31,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Line of business
Property catastrophe	$	106,341	62.5	%	$	201,862	57.2	%
Property		37,885	22.3	%		65,799	18.7	%
Short-tail specialty and casualty		26,002	15.2	%		85,014	24.1	%
Total	$	170,228	100.0	%	$	352,675	100.0	%

	For the three months ended March 31,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Geographic area of risk insured (1)
Caribbean	$	1,500	0.9	%	$	1,793	0.5	%
Europe		49,259	28.9	%		76,514	21.7	%
Japan and Australasia		11,097	6.5	%		42,500	12.0	%
North America		71,419	42.0	%		124,020	35.2	%
Worldwide risks (2)		29,610	17.4	%		92,627	26.3	%
Other		7,343	4.3	%		15,221	4.3	%
Total	$	170,228	100.0	%	$	352,675	100.0	%

(1)Except as otherwise noted, each of these categories includes contracts that cover risks located primarily in the designated geographic area.
(2)Includes contracts that cover risks in two or more geographic zones.

Premiums Ceded

In the normal course of our business, we purchase reinsurance in order to manage our exposures. The amount and type of reinsurance that we enter into is dependent on a variety of factors, including the cost of a particular reinsurance cover, our appetite and capacity to write certain risks and the nature of our gross premiums written during a particular period.

The majority of these contracts are excess-of-loss contracts covering one or more lines of business or quota share reinsurance with respect to specific lines of business. We also purchase protection through catastrophe bond structures, Montana Re, and industry loss warranty (“ILW”) policies which provide coverage for certain losses provided they are triggered by events exceeding a specified industry loss size. Reinsurance purchases to date have represented prospective cover; that is, ceded reinsurance purchased to protect against the risk of future losses as opposed to covering losses that have already been incurred but have not been paid.

Various factors will continue to affect our appetite and capacity to write and retain risk. These include the impact of changes in frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, capital levels, evolving industry-wide capital requirements, increased competition, and other considerations.

Index

Below is a summary of the underwriting results and ratios for the three months ended March 31, 2012 and 2011:

	For the three months ended March 31,
	2012		2011		$ Change		% Change

Property catastrophe reinsurance	$	106,341	$	201,862	$	(95,521)	(47.3)	%
Property reinsurance		37,885		65,799		(27,914)	(42.4)	%
Short tail specialty and casualty reinsurance		26,002		85,014		(59,012)	(69.4)	%
Gross premiums written		170,228		352,675		(182,447)	(51.7)	%
Premiums ceded		(84,899)		(118,750)		33,851	(28.5)	%
Net premiums written		85,329		233,925		(148,596)	(63.5)	%
Net premiums earned		113,745		201,053		(87,308)	(43.4)	%
Other related income