form10-q.htm
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
þ    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2008
 
OR
 
o    Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________to _______________________
 
 
Commission file number 001-33364
 
Flagstone Reinsurance Holdings Limited
(Exact Name of Registrant as Specified in Its Charter)
 
Bermuda
  
98-0481623
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
 
 
Crawford House
23 Church Street
Hamilton HM 11
Bermuda
(Address of Principal Executive Offices)

(441) 278-4300
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Common Shares, par value 1 cent per share
Name of exchange on which registered:
New York Stock Exchange
Bermuda Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes þ     No  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or 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 o     
Non-accelerated filer þ (Do not check if a smaller reporting company)
Smaller reporting company  o    
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ
 
As of August 5, 2008 the Registrant had 85,346,325 common voting shares outstanding, with a par value of $0.01 per share.
 



 
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
INDEX TO FORM 10-Q
 
     
Page
     
       
   
       
   
 
1
       
   
 
2
       
   
 
3
       
   
 
4
       
   
 5
       
 
 
17
       
 
 35
       
 
 39
       
     
       
 
40
       
 
  40
       
 
  40
       
 
 40
       
 
41
       
 
42
       
 
42
 
 
 
 
 
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLAGSTONE REINSURANCE HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars, except share data)

   
As at June 30,
 2008
    
As at December 31, 2007
  
   
(Unaudited)
        
ASSETS
            
Investments:
            
Fixed maturities, at fair value (Amortized cost: 2008 - $803,528; 2007 - $1,099,149)
   $ 804,798     $ 1,109,105  
Short term investments, at fair value (Amortized cost: 2008 - $20,267; 2007 - $23,660)
     20,196       23,616  
Equity investments, at fair value (Cost: 2008 - $117,556; 2007 - $73,603)
     107,935       74,357  
Other investments
     464,141       293,166  
Total Investments
     1,397,070       1,500,244  
Cash and cash equivalents
     562,816       362,680  
Premium balances receivable
     314,456       136,555  
Unearned premiums ceded
     39,682       14,608  
Accrued interest receivable
     7,214       9,915  
Receivable for investments sold
     2,942       –  
Deferred acquisition costs
     51,467       30,607  
Funds withheld
     10,096       6,666  
Goodwill
     13,171       10,781  
Intangible assets
     775       775  
Other assets
     73,423       30,942  
Due from related parties
     64       –  
Total Assets
   $ 2,473,176     $ 2,103,773  
                 
LIABILITIES
                
Loss and loss adjustment expense reserves
   $ 233,596     $ 180,978  
Unearned premiums
     389,223       175,607  
Insurance and reinsurance balances payable
     33,749       12,088  
Payable for investments purchased
     6,162       41,750  
Long term debt
     255,037       264,889  
Other liabilities
     79,302       33,198  
Total Liabilities
     997,069       708,510  
                 
Minority Interest
     195,923       184,778  
                 
SHAREHOLDERS' EQUITY
                
Common voting shares, 150,000,000 authorized, $0.01 par value, issued and outstanding (2008 - 85,346,325; 2007 - 85,309,107)
     853       853  
Additional paid-in capital
     911,964       905,316  
Accumulated other comprehensive income
     2,718       7,426  
Retained earnings
     364,649       296,890  
Total Shareholders' Equity
     1,280,184       1,210,485  
                 
Total Liabilities, Minority Interest and Shareholders' Equity
   $ 2,473,176     $ 2,103,773  
                 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
 
1
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Expressed in thousands of U.S. dollars, except share and per share data)

   
 For the Three Months Ended
    
For the Six Months Ended
  
   
June 30, 2008
    
June 30, 2007
    
June 30, 2008
    
June 30, 2007
  
                         
REVENUES
                        
Gross premiums written
   $ 271,178     $ 181,345     $ 513,424     $ 388,358  
Premiums ceded
     (38,435 )     –       (54,449 )     (8,245 )
Net premiums written
     232,743       181,345       458,975       380,113  
Change in net unearned premiums
     (90,976 )     (69,503 )     (181,951 )     (167,045 )
Net premiums earned
     141,767       111,842       277,024       213,068  
Net investment income
     13,279       20,531       31,975       34,162  
Net realized and unrealized (losses) gains - investments
     (9,339 )     (3,741 )     (21,751 )     767  
Net realized and unrealized gains (losses) - other
     11,132       1,840       (1,105 )     1,846  
Other income
     2,127       251       3,851       924  
Total revenues
     158,966       130,723       289,994       250,767  
                                 
EXPENSES
                                
Loss and loss adjustment expenses
     56,298       77,257       96,065       125,005  
Acquisition costs
     27,210       14,725       51,375       27,443  
General and administrative expenses
     24,214       13,800       50,763       28,469  
Interest expense
     4,609       3,520       9,949       6,784  
Net foreign exchange losses (gains)
     1,630       (56 )     (5,069 )     (1,338 )
Total expenses
     113,961       109,246       203,083       186,363  
Income before income taxes, minority interest and interest in earnings of equity investments
     45,005       21,477       86,911       64,404  
Provision for income tax
     (442 )     (77 )     (1,307 )     (122 )
Minority interest
     (2,615 )     (7,892 )     (10,796 )     (15,625 )
Interest in earnings of equity investments
     –       1,186       –       1,647  
NET INCOME
   $ 41,948     $ 14,694     $ 74,808     $ 50,304  
                                 
Change in currency translation adjustment
     (2,766 )     (1,741 )     (4,186 )     (2,017 )
COMPREHENSIVE INCOME
   $ 39,182     $ 12,953     $ 70,622     $ 48,287  
                                 
Weighted average common shares outstanding—Basic
     85,470,205       85,139,757       85,470,043       78,479,958  
Weighted average common shares outstanding—Diluted
     85,638,506       85,198,147       85,714,196       78,529,631  
Net income per common share outstanding—Basic
   $ 0.49     $ 0.17     $ 0.88     $ 0.64  
Net income per common share outstanding—Diluted
   $ 0.49     $ 0.17     $ 0.87     $ 0.64  
Dividends declared per common share
   $ 0.04     $ –     $ 0.08     $ –  
                                 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
 
 
2
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 (Expressed in thousands of U.S. dollars, except share data)
 
   
For the Six Months Ended
  
   
June 30, 2008
    
June 30, 2007
  
Common voting shares:
            
Balance at beginning of period
     85,309,107       71,547,891  
Issued during the period, net
     37,218       13,750,000  
Balance at end of period
     85,346,325       85,297,891  
                 
Share capital:
                
Common voting shares
                
Balance at beginning of period
   $ 853     $ 715  
Issued during period, net
     –       138  
Balance at end of period
     853       853  
                 
Additional paid-in capital
                
Balance at beginning of period
     905,316       728,378  
Issue of shares, net
     (364 )     185,488  
Issuance costs (related party: 2008 - $nil  ; 2007 - $3,430)
     –       (16,839 )
Share based compensation expense
     7,012       4,252  
Balance at end of period
     911,964       901,279  
                 
Accumulated other comprehensive income (loss)
                
Balance at beginning of period
     7,426       (4,528 )
Change in currency translation adjustment
     (4,186 )     (2,017 )
Defined benefit plan - transitional obligation
     (522 )     –  
Cumulative effect adjustment from adoption of new accounting principle SFAS 159
     –       4,009  
Balance at end of period
     2,718       (2,536 )
                 
Retained earnings
                
Balance at beginning of period
     296,890       139,954  
Cumulative effect adjustment from adoption of accounting principle
     –       (4,009 )
Dividend declared
     (7,049 )     –  
Net income for the period
     74,808       50,304  
Balance at end of period
     364,649       186,249  
Total Shareholders' Equity
   $ 1,280,184     $ 1,085,845  
                 
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
 
 
3
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Expressed in thousands of U.S. dollars)

   
For the Six Months Ended
  
   
June 30, 2008
    
June 30, 2007
  
             
Cash flows provided by (used in) operating activities:
            
Net income
   $ 74,808     $ 50,304  
Adjustments to reconcile net income to net cash provided by operating activities:
          
Net realized and unrealized losses (gains)
     22,856       (2,613 )
Minority interest
     10,796       15,625  
Depreciation expense
     2,214       820  
Share based compensation expense
     6,788       4,252  
Interest in earnings of equity investments
     –       (1,647 )
Accretion/amortization on fixed maturities
     (9,736 )     (5,975 )
Changes in assets and liabilities, excluding net assets acquired:
                
Reinsurance premium receivable
     (175,080 )     (151,289 )
Unearned premiums ceded
     (24,728 )     (3,323 )
Deferred acquisition costs
     (20,439 )     (21,977 )
Funds withheld
     (3,386 )     (5,138 )
Loss and loss adjustment expense reserves
     47,063       112,627  
Unearned premiums
     210,635       170,361  
Insurance and reinsurance balances payable
     21,478       883  
Other changes in assets and liabilities, net
     4,785       3,984  
Net cash provided by operating activities
     168,054       166,894  
                 
Cash flows provided by (used in) investing activities:
                
Net cash received in acquisitions of subsidiaries
     4,729       4,581  
Purchases of fixed income securities
     (936,439 )     (838,231 )
Sales and maturities of fixed income securities
     1,230,546       574,260  
Purchases of equity securities
     (39,974 )     (25,171 )
Purchases of other investments
     (330,203 )     (69,405 )
Sales of other investments
     144,675       –  
Purchases of fixed assets
     (10,786 )     (3,666 )
Net cash provided by (used in) investing activities
     62,548       (357,632 )
                 
Cash flows (used in) provided by financing activities:
                
Issue of common shares, net of issuance costs paid
     (364 )     171,644  
Issue of notes, net of issuance costs paid
     –       98,940  
Contribution of minority interest
     (429 )     83,100  
Repurchase of minority interest
     (8,652 )     –  
Dividend paid on common shares
     (6,825 )     –  
Repayment of long term debt
     (9,195 )     –  
Other
     (4,003 )     (763 )
Net cash (used in) provided by financing activities
     (29,468 )     352,921  
                 
Effect of foreign exchange rate on cash and cash equivalents
     (998 )     (1,490 )
                 
Increase in cash and cash equivalents
     200,136       160,693  
Cash and cash equivalents - beginning of period
     362,680       261,352  
Cash and cash equivalents - end of period
   $ 562,816     $ 422,045  
                 
Supplemental cash flow information:
                
Receivable for investments sold
   $ 2,942     $ –  
Payable for investments purchased
   $ 6,162     $ 1,201  
Interest paid
   $ 10,679     $ 6,416  
                 
 The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of the unaudited condensed consolidated financial statements.
 
 
4
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
1.      Basis of Presentation and Consolidation

  These unaudited condensed consolidated financial statements include the accounts of Flagstone Reinsurance Holdings Limited (the “Company”) and its wholly owned subsidiaries, including Flagstone Reinsurance Limited (“Flagstone”) and Flagstone Réassurance Suisse SA (“Flagstone Suisse”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including those that meet the consolidation requirements of variable interest entities (“VIEs”). The Company assesses the consolidation of VIEs based on whether the Company is the primary beneficiary of the entity in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, as revised, “Consolidation of Variable Interest Entities - an interpretation of ARB No. 51” (“FIN 46(R)”).  Entities in which the Company has an ownership of more than 20% and less than 50% of the voting shares are accounted for using the equity method.  All inter-company accounts and transactions have been eliminated on consolidation.

  The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The Company's principal estimates are for loss and loss adjustment expenses, estimates of premiums written, premiums earned, acquisition costs and share based compensation.  The Company reviews and revises these estimates as appropriate based on current information. Any adjustments made to these estimates are reflected in the period the estimates are revised.

  In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented.  The results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission (the “SEC”) on March 19, 2008.

  Certain prior year balances were reclassified to conform with the current year classifications.

2.       New Accounting Pronouncements

  The Company maintains a contributory defined benefit plan that covers certain employees at Flagstone Suisse.  The Company accounts for this pension plan using the accrual method, consistent with the requirements of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statement No. 87, 88, 106 and 132” (“SFAS 158”), which was adopted by the Company on January 1, 2008.  SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in funded status through comprehensive income in the year in which the changes occur.  An unfunded transitional liability of $0.6 million was recorded in accumulated other comprehensive income at January 1, 2008 and is being amortized over the estimated average remaining service life of 12.2 years.  The net periodic pension expense for 2008 is expected to be approximately $1.2 million, of which $0.3 million and $0.6 million has been recorded as a pension expense in the three and six months ended June 30, 2008, respectively.  A pension asset of $0.8 million and a pension liability of $1.1 million were recognized in the June 30, 2008 unaudited condensed consolidated balance sheet.  The Company funds the plan at the amount required by local legal requirements.
 
  In March 2008, the FASB released Statement No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”), which expands the disclosure requirements in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) about an entity’s derivative instruments and hedging activities.  SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk related contingent features in derivative agreements.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  The adoption of SFAS 161 will not affect consolidated financial condition and results of operations, and the Company is currently assessing the impact of this statement on its disclosure requirements.
 
 
5

 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
  In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”) which identifies the sources of generally accepted accounting principles and provides a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for nongovernmental entities. This Statement makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes preparers’ responsibilities for selecting the accounting principles for their financial statements. The hierarchy of authoritative accounting guidance is not expected to change current practice but is expected to facilitate the FASB’s plan to designate as authoritative its forthcoming codification of accounting standards. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s (“PCAOB”) related amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”, to remove the GAAP hierarchy from its auditing standards.
 
          In May 2008, the FASB also issued Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts – an Interpretation of FASB Statement No. 60” (“SFAS 163”) which prescribes the accounting for premium revenue and claims liabilities by insurers of financial obligations, and requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 applies to financial guarantee insurance and reinsurance contracts issued by insurers subject to Statement No. 60 “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”). The Statement does not apply to insurance contracts that are similar to financial guarantee insurance contracts such as mortgage guaranty or trade-receivable insurance, financial guarantee contracts issued by noninsurance entities, or financial guarantee contracts that are derivative instruments within the scope of SFAS 133. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, except for certain disclosure requirements about the risk-management activities of the insurance enterprise that are effective for the first quarter beginning after the Statement was issued. Except for those disclosures, early application is prohibited. SFAS 163 is not expected to have an effect on the Company as we do not enter into financial guarantee contracts.

3.
Business Combinations

Imperial Reinsurance Company Limited

          On June 26, 2008, Flagstone Suisse purchased 3,714,286 shares (representing a 65% interest) in Imperial Reinsurance Company Limited (“Imperial Re”) for a purchase price of $18.6 million.  The Company recorded $1.1 million of goodwill on the acquisition.  The Company is in the process of determining the valuation of certain intangible assets.  The allocation of the purchase price is therefore subject to change to account for the outcome of the valuation of these intangible assets.  In July, 2008, the South Africa Registrar of Companies recorded a change of name from Imperial Re to Flagstone Reinsurance Africa Limited (“Flagstone Africa”).

          Flagstone provides technical underwriting, modeling, and actuarial support to Flagstone Africa's underwriting operations pursuant to the Technical Underwriting Agreement between Flagstone and Flagstone Africa dated October 2007.  There have been no changes to the Technical Underwriting Agreement. In addition, Flagstone also has a Quota Share arrangement with Flagstone Africa.

          Flagstone Africa is domiciled in South Africa and writes multiple lines of reinsurance in sub-Saharan Africa. This acquisition dovetails with the Company’s strategy, giving Flagstone capacity in a fast growing and technically adequate market. The Company believes that its capital and technical support will enhance Flagstone Africa’s services, increase market penetration and broaden product distribution, both by line of business and geographically within Africa.
 
Island Heritage
 
          On June 30, 2008, the Company acquired an additional 16,919 shares in Island Heritage (representing 5% of its common shares) for total consideration of $3.3 million.  The Company recorded $1.3 million of goodwill on the acquisition.

4.       Investments

Fair value disclosure

  The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.  In accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), the Company determined that its investments in U.S. government securities, equity securities and fixed income fund are stated at Level 1 fair value. Investments in corporate bonds, mortgage-backed securities, hedge funds, and asset backed securities, real estate investment trust (“REITs”) and REIT funds are stated at Level 2, whereas the Company’s investment in Alliance International Reinsurance Public Company Limited (“Alliance Re” – see Note 11) and the investment funds that are private placement investments and catastrophe bonds are stated at Level 3 fair value.  During the quarter ended June 30, 2008, the Company purchased a 14.6% interest in Alliance Re. The investment in Alliance Re has been recorded at fair value based on the recently completed arms length purchase negotiated between the Company and external third parties.
 
 
6

 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
          As at June 30, 2008 and December 31, 2007, the Company’s investments are allocated between levels as follows:
 
                         
   
Fair Value Measurement at June 30, 2008, using:
  
                         
         
 
    
Significant Other
    
Significant Other
  
   
Fair Value
    
Quoted Prices in
Active Markets
    
Observable Inputs
    
Unobservable Inputs
  
   
Measurements
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Description
                        
Fixed maturity investments
   $ 804,798     $ 409,958     $ 394,840     $ –  
Short term investments
     20,196       20,196       –       –  
Equity investments
     107,935       107,935       –       –  
      932,929       538,089       394,840       –  
Other Investments
                                
Alliance Re
     6,846       –       –       6,846  
Real estate investment trust funds
     69,679       –       69,679       –  
Investment funds
     31,268       –       19,404       11,864  
Catastrophe bonds
     40,081       –       –       40,081  
Fixed income fund
     316,267       316,267       –       –  
      464,141       316,267       89,083       58,791  
                                 
Totals
   $ 1,397,070     $ 854,356     $ 483,923     $ 58,791  
 
                                 
                                   
   
Fair Value Measurement at December 31, 2007, using:
  
                                 
           
 
    
Significant Other
    
Significant Other
  
   
Fair Value
    
Quoted Prices in
Active Markets
    
Observable Inputs
    
Unobservable Inputs
  
   
Measurements
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Description
                                
Fixed maturity investments
   $ 1,109,105     $ 471,811     $ 637,294     $ –  
Short term investments
     23,616       4,914       18,702       –  
Equity investments
     74,357       74,357       –       –  
      1,207,078       551,082       655,996       –  
Other Investments
                                
Real estate investment trusts
     12,204       –       12,204       –  
Investment funds
     31,249       –       20,041       11,208  
Catastrophe bonds
     36,619       –       –       36,619  
Fixed income fund
     212,982       212,982       –       –  
      293,054       212,982       32,245       47,827  
                                 
Totals
   $ 1,500,132     $ 764,064     $ 688,241     $ 47,827  
                                 
  For reconciliation purposes, the table above does not include an equity investment of $112,000 in which the Company is deemed to have a significant influence and as such, is not accounted for at fair value under SFAS 159.

 
7
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
          The reconciliation of the fair value for the Level 3 investments as at June 30, 2008, including net purchases and sales, realized gains and change in unrealized gains, is set out below:
 
Description
  
Investment
funds
    
Catastrophe
bonds
    
Alliance Re
  
                   
Fair value, December 31, 2007
   $ 11,208     $ 36,619     $ –  
Total unrealized gains included in earnings
     1,006       33       –  
Fair value, March 31, 2008
   $ 12,214     $ 36,652     $ –  
Total unrealized gains included in earnings
     (856 )     (71 )     –  
Net purchases and sales
     506       3,500       6,846  
Closing fair value, June 30, 2008
   $ 11,864     $ 40,081     $ 6,846  
 
5.       Derivatives

          The Company writes certain reinsurance contracts that are classified as derivatives under SFAS 133. In addition, the Company enters into derivative instruments such as interest rate futures contracts, interest rate swaps, foreign currency forward contracts and foreign currency swaps in order to manage portfolio duration and interest rate risk, borrowing costs and foreign currency exposure. The Company enters into index futures contracts and total return swaps to gain or reduce its exposure to the underlying asset or index. The Company also purchases “to be announced” mortgage-backed securities (“TBAs”) as part of its investing activities and futures options on weather indexes as part of its reinsurance activities. The Company manages the exposure to these instruments based on guidelines established by management and approved by the Board of Directors.
 
  The Company has entered into certain foreign currency forward contracts that it has designated as hedges in order to hedge its net investments in foreign subsidiaries.  The gains and losses associated with changes in fair value of the designated hedge instruments are recorded in other comprehensive income as part of the cumulative translation adjustment, to the extent that these are effective as hedges.  All other derivatives are not designated as hedges, and accordingly, these instruments are carried at fair value, with the fair value recorded in other assets or liabilities with the corresponding realized and unrealized gains and losses included in net realized and unrealized gains and losses in the unaudited condensed consolidated financial statements.
 
Interest rate swaps

  The Company uses interest rate swap contracts in the portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio.  By using interest rate swaps, the overall duration or interest rate sensitivity of the portfolio can be altered.  The Company also uses interest rate swaps to manage its borrowing costs on its long term debt.  As of June 30, 2008 and December 31, 2007, there were a total of $nil and $389.9 million of interest rate swaps in the portfolio with a total fair value of $nil and $2.3 million, respectively.  During the three months ended June 30, 2008 and 2007, the Company recorded realized and unrealized gains on interest rate swaps of $8.0 million and realized and unrealized losses of $0.2 million respectively, and for the six months ended June 30, 2008 and 2007, the Company recorded realized and unrealized gains of $0.3 million and realized and unrealized losses of $0.2 million on interest rate swaps.

  The interest rate swap agreements entered into between the Company and Lehman Brothers Special Financing Inc. on December 7, 2007, as well as the agreement entered into between the Company and Citibank N.A. on December 7, 2007, were unwound during the second quarter of 2008.
 
Foreign currency swaps
 
  The Company periodically uses foreign currency swaps to minimize the effect of fluctuating foreign currencies. In September 2006, the Company entered into a foreign currency swap, in relation to the Euro-denominated Deferrable Interest Debentures (“Deferrable Interest Debentures”). Under the terms of the foreign currency swap, the Company exchanged €13.0 million for $16.7 million, will receive Euro Interbank Offered Rate (“Euribor”) plus 354 basis points and will pay London Interbank Offering Rate (“LIBOR”) plus 371 basis points. The swap expires on September 15, 2011 and had a fair value of $4.2 million and $2.5 million as at June 30, 2008 and December 31, 2007, respectively.  During the three months ended June 30, 2008 and 2007, the Company recorded realized and unrealized gains of $0.1 million and $0.3 million, respectively. During the six months ended June 30, 2008 and 2007, the Company recorded realized and unrealized gains of $1.9 million and $0.5 million, respectively, on foreign currency swaps.
 
 
8
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
Foreign currency forwards

  The Company and its subsidiaries use foreign currency forward contracts to manage currency exposure.  The contractual amount of these contracts as at June 30, 2008 and December 31, 2007 was $481.5 million and $311.1 million, respectively, and these contracts had a fair value of $(8.3) million and $(7.1) million, respectively.  The Company has designated $427.2 million and $264.4 million of foreign currency forwards contractual value as hedge instruments, which had a fair value of $(7.8) million and $(3.4) million as at June 30, 2008 and December 31, 2007, respectively.  During the three months ended June 30, 2008 and 2007, the Company recorded $2.6 million and $1.3 million, respectively, of realized and unrealized gains on foreign currency forward contracts and for the six months ended June 30, 2008 and 2007, the Company recorded $3.0 million of realized and unrealized losses and $0.9 million of realized and unrealized gains, respectively, on foreign currency forward contracts.  During the three and six months ended June 30, 2008, the Company recorded $4.3 million of realized and unrealized gains and $25.6 million of realized and unrealized losses, respectively, directly into comprehensive income as part of the cumulative translation adjustment for the effective portion of the hedge.

Total return swaps

  The Company uses total return swaps to gain exposure to the U.S. real estate market.  The total return swaps allow the Company to earn the return of the underlying index while paying floating interest plus a spread to the counterparty.  As of June 30, 2008, there were total return swaps with a notional amount of $84.7 million and a fair value of $(4.3) million in the portfolio and as of December 31, 2007, the notional amount of the total return swaps was $14.2 million and they had a fair value of $(4.9) million.  During the three months ended June 30, 2008 and 2007, the Company recorded $4.5 million and $1.7 million of realized and unrealized losses, respectively, on total return swaps and for the six months ended June 30, 2008 and 2007, the Company recorded $4.8 million and $2.8 million of realized and unrealized losses, respectively, on total return swaps.

To be announced mortgage backed securities

  By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. At June 30, 2008 and December 31, 2007, the notional principal amount of TBAs was $69.8 million and $18.2 million and the fair value was $0.2 million and $0.2 million, respectively. During the three months ended June 30, 2008 and 2007, the Company recorded $0.7 million and $0.7 million, respectively, of realized and unrealized losses and for the six months ended June 30, 2008 and 2007, the Company recorded $0.3 million and $0.6 million, respectively, of realized and unrealized losses on TBAs.

Futures

  The Company has entered into equity index, bond index and interest rate futures. At June 30, 2008 and December 31, 2007, the notional amount of these futures was $404.1 million and $421.0 million, respectively. The net fair value of futures contracts was $(10.9) million and $(2.2) million as at June 30, 2008 and December 31, 2007, respectively. During the three months ended June 30, 2008 and 2007, the Company recorded $19.1 million and $9.6 million, respectively, of realized and unrealized gains on futures and for the six months ended June 30, 2008 and 2007, the Company recorded $0.9 million of realized and unrealized losses and $9.7 million of realized and unrealized gains, respectively, on futures.

Other reinsurance derivatives

  The Company has entered into industry loss warranty (“ILW”) transactions that may be structured as reinsurance or derivatives. For those transactions determined to be derivatives, the fair value was $(0.1) million and $(1.3) million at June 30, 2008 and December 31, 2007, respectively. During the three months ended June 30, 2008 and 2007, the Company recorded $0.5 million and $0.3 million, respectively, of realized and unrealized gains on ILWs determined to be derivatives and for the six months ended June 30, 2008 and 2007, the Company recorded $1.2 million and $0.4 million, respectively, of realized and unrealized gains on ILWs determined to be derivatives.
 
  Beginning in 2008, the Company entered into futures options contracts, both purchased and written, on major hurricane indexes that are traded on the Chicago Mercantile Exchange.  As at June 30, 2008, the notional net exposure under those weather derivatives was $4.5 million.  The net notional exposure is determined based on the futures exchange futures specifications.  The net fair value of the options were recorded on the balance sheet, with purchased options of $2.2 million recorded in other assets and written options of $3.2 million recorded in other liabilities.  The unrealized gains and losses recorded on the hurricane indexes were $nil during the three months and six months ended June 30, 2008.
 
 
9
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
Fair value disclosure

  In accordance with SFAS 157, the fair value of derivative instruments held as of June 30, 2008 and December 31, 2007 is allocated between levels as follows:

   
  Fair Value Measurement at June 30, 2008, using:
        
                         
     
Fair Value
Measurements
      Quoted Prices in Active Markets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Significant Other Unobservable Inputs
(Level 3)
  
Derivatives
                        
Futures contracts
   $ (10,914 )   $ (10,914 )   $ –     $ –  
Swaps
     (56 )     –       (56 )     –  
Forward currency contracts
     (8,334 )     –       (8,334 )     –  
Mortgage backed securities TBA
     213       –       213       –  
Other reinsurance derivatives
     (1,165 )     –       (1,038 )     (127 )
Total derivatives
   $ (20,256 )   $ (10,914 )   $ (9,215 )   $ (127 )
 

   
  Fair Value Measurement at December 31, 2007, using:
        
                         
     
Fair Value
Measurements
      Quoted Prices in Active Markets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Significant Other Unobservable Inputs
(Level 3)
  
Derivatives
                        
Futures contracts
   $ (2,228 )   $ (2,228 )   $ –     $ –  
Swaps
     (153 )     –       (153 )     –  
Forward currency contracts
     (7,067 )     –       (7,067 )     –  
Mortgage backed securities TBA
     173       –       173       –  
Other reinsurance derivatives
     (1,305 )     –       –       (1,305 )
Total derivatives
   $ (10,580 )   $ (2,228 )   $ (7,047 )   $ (1,305 )
 
  Derivatives are recorded on the balance sheet as other assets or other liabilities.

  The reconciliation of the fair value for the Level 3 derivative instruments, including net purchases and sales, realized gains and changes in unrealized gains, is as follows:
 
Other reinsurance derivatives
      
Opening fair value, December 31, 2007
   $ (1,305 )
Total unrealized gains included in earnings
     714  
Closing fair value, March 31, 2008
     (591 )
Total unrealized gains included in earnings
     464  
Closing fair value, June 30, 2008
   $ (127 )
 
6.      Debt and Financing Arrangements

Long term debt
 
  During the quarter ended June 30, 2008, the Company repurchased, in a privately negotiated transaction, $11.25 million of principal amount of its outstanding $100.0 million Floating Rate Deferrable Interest Junior Subordinated Notes (the “Notes”).  The purchase price paid for the Notes was 81% of face value, representing a discount of 19%.  The repurchase resulted in a gain of $2.0 million, net of unamortized debt issuance costs of $0.1 million that were written off.  As a result, the gain has been included as a gain on early extinguishment of debt under “Other income” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2008.
 
 
10
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
  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 they may be called by the Company.  For the three months ended June 30, 2008 and 2007, the Company incurred interest expense of $4.6 million and $3.5 million, respectively, and for the six months ended June 30, 2008 and 2007, the Company incurred interest expense of $9.9 million, and $6.8 million, respectively, on the Deferrable Interest Debentures.  Also, at June 30, 2008 and December 31, 2007, the Company had $1.4 million and $1.9 million, respectively, of interest payable included in other liabilities in the unaudited condensed consolidated balance sheets.
 
Letter of credit facility

  In August 2006, the Company entered into a $200.0 million uncommitted letter of credit facility agreement with Citibank N.A.  In April 2007, the Company increased its uncommitted letter of credit facility agreement with Citibank N.A. from $200.0 million to $400.0 million. As at June 30, 2008 and December 31, 2007, $72.1 million and $73.8 million, respectively, had been drawn under this facility, and the drawn amount of the facility was secured by $80.1 million and $82.0 million, respectively, of fixed maturity securities from the Company’s investment portfolio.

  In September 2007, the Company entered into a $200.0 million uncommitted letter of credit facility agreement with Wachovia Bank, N.A.  Although the Company has not drawn upon this facility as at June 30, 2008, if drawn upon, the utilized portion of the facility will be secured by an appropriate portion of securities from the Company’s investment portfolio.
 
  These facilities are used to provide security to reinsureds and are collateralized by the Company, at least to the extent of the letters of credit outstanding at any given time.

7.      Share Based Compensation

  The Company accounts for share based compensation in accordance with SFAS No. 123(R), “Share Based Payments” (“SFAS 123(R)”), which requires entities to measure the cost of employee services received 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 over the period during which an employee is required to provide service in exchange for the award.

Performance Share Units

  The 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 Board of the Directors, Performance Share Units (“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 June 30, 2008 and changes during the three months and six months ended June 30, 2008 is as follows:
 
   
Three Months Ended June 30, 2008
    
Six Months Ended June 30, 2008
  
   
Number
    
Weighted average grant date fair value
    
Weighted average remaining contractual term
    
Number
    
Weighted average grant date fair value
    
Weighted average remaining contractual term
  
                                     
Outstanding at beginning of period
     2,308,658     $ 12.63       1.8       1,658,700     $ 12.07       1.7  
Granted
     4,000       12.00               731,958       13.89          
Forfeited
     –       0.00               (78,000 )     12.54          
Outstanding at end of period
     2,312,658       12.63       1.5       2,312,658       12.63       1.5  
 
  As at June 30, 2008 and December 31, 2007, there was a total of $17.9 million and $11.9 million, respectively, of unrecognized compensation cost related to non-vested PSUs; that cost is expected to be recognized over a period of approximately 2.0 and 2.1 years, respectively.  Compensation expense of $2.5 million and $1.5 million has been recorded in general and administrative expenses for the three months ended June 30, 2008 and 2007, respectively, and $4.8 million and $2.8 million has been recorded in general and administrative expenses for the six months ended June 30, 2008 and 2007, respectively, in relation to the PSU Plan.
 
  No PSUs have vested or been cancelled since the inception of the PSU Plan.


11
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
Restricted Share Units
 
  Beginning July 1, 2006, the Company granted Restricted Share Units (“RSUs”) to certain employees and directors of the Company.  The purpose of the Restricted Share Unit Plan (“RSU Plan”) is to encourage employees and directors of the Company to further the development of the Company and to attract and retain the key employees for the Company’s long-term success. The RSUs granted to employees vest over a period of approximately two years while RSUs granted to directors vest on the grant date.
 
  A summary of the activity under the RSU Plan as at June 30, 2008 and changes during the three months and six months ended June 30, 2008 are as follows:
 
                                     
   
Three Months Ended June 30, 2008
    
Six Months Ended June 30, 2008
  
   
Number
    
Weighted average grant date fair value
    
Weighted average remaining contractual term
    
Number
    
Weighted average grant date fair value
    
Weighted average remaining contractual term
  
                                     
Outstanding at beginning of period
     532,558     $ 13.04       0.8       326,610     $ 12.45       0.6  
Granted
     8,600       12.15               239,315       13.82          
Forfeited
     (3,950 )     13.35               (20,900 )     13.67          
Vested in the period
     (59,700 )     10.72               (67,517 )     10.81          
Outstanding at end of period
     477,508       13.32       0.7       477,508       13.32       0.7  
 
 
  As at June 30, 2008 and December 31, 2007, there was a total of $2.3 million and $1.3 million, respectively, of unrecognized compensation cost related to non-vested RSUs; that cost is expected to be recognized over a period of approximately 1.2 and 0.9 years, respectively.  A compensation expense of $0.7 million and $1.1 million has been recorded in general and administrative expenses for the three months ended June 30, 2008 and 2007, respectively, and $2.0 million and $1.4 million has been recorded in general and administrative expenses for the six months ended June 30, 2008 and 2007, respectively, in relation to the RSU Plan.
 
  During the quarter ended June 30, 2008, 59,700 RSUs granted to employees vested.  No other RSUs granted to employees since the inception of the RSU Plan in July 2006 have vested and no RSUs granted to employees have been cancelled since the inception of the RSU Plan.  During the three months ended June 30, 2008 and 2007, respectively, nil and 61,761 RSUs and for the six months ended June 30, 2008 and 2007, respectively, 55,715 and 61,761 RSUs were granted to the directors.

8.       Earnings Per Common Share

  The computation of basic and diluted earnings per common share for the three and six months ended June 30, 2008 and 2007 is as follows:
 
                         
   
Three Months Ended
    
Six Months Ended
  
   
June 30, 2008
    
June 30, 2007
    
June 30, 2008
    
June 30, 2007
  
Basic earnings per common share
                        
Net income
   $ 41,948     $ 14,694     $ 74,808     $ 50,304  
Weighted average common shares outstanding
     85,317,247       85,050,638       85,314,637       78,408,388  
Weighted average vested restricted share units
     152,958       89,119       155,406       71,570  
Weighted average common shares outstanding—Basic
     85,470,205       85,139,757       85,470,043       78,479,958  
Basic earnings per common share
   $ 0.49     $ 0.17     $ 0.88       0.64  
                                 
Diluted earnings per common share
                                
Net income
   $ 41,948     $ 14,694     $ 74,808     $ 50,304  
Weighted average common shares outstanding
     85,317,247       85,050,638       85,314,637       78,408,388  
Weighted average vested restricted share units outstanding
     152,958       89,119       155,406       71,570  
      85,470,205       85,139,757       85,470,043       78,479,958  
Share equivalents:
                                
Weighted average unvested restricted share units
     168,301       58,390       244,153       49,673  
Weighted average common shares outstanding—Diluted
     85,638,506       85,198,147       85,714,196       78,529,631  
Diluted earnings per common share
   $ 0.49     $ 0.17     $ 0.87     $ 0.64  
 

  As at June 30, 2008 and 2007, there was a warrant outstanding which would result in the issuance of 8,585,747 common shares that were excluded from the computation of diluted earnings per common share because the effect would be anti-dilutive.  Because the number of shares contingently issuable under the PSU Plan depends on the average DROE over a three year period, the 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.  As at June 30, 2008 and 2007, there were 2,312,658 and 1,538,000 PSUs outstanding, respectively.  The maximum number of common shares that could be issued under the PSU Plan at June 30, 2008 and 2007 was 4,625,316 and 3,076,000, respectively.
 
 
12
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

 
9.       Legal Proceedings
 
  In the normal course of business, the Company may become involved in various claims litigation and legal proceedings.  As at June 30, 2008, the Company was not a party to any litigation or arbitration proceedings.

10.    Segment Reporting
 
  The Company holds a controlling interest in Island Heritage Holdings Company (“Island Heritage”), whose primary business is insurance.  As a result of the strategic significance of the insurance business to the Company, and given the relative size of revenues generated by the insurance business, the Company revised its segment structure, effective January 1, 2008, to better align the Company’s operating and reporting structure with its current strategy.  The Company determined that the allocation of resources and the assessment of performance should be reviewed separately for both segments.  The Company is currently organized into two business segments: Reinsurance and Insurance.  The Company regularly reviews its financial results and assesses performance on the basis of these two operating segments.
 
  Those segments are more fully described as follows:

Reinsurance
 
  Our Reinsurance segment has three main units:

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.  All 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.  Most short-tail specialty and casualty reinsurance is written with loss limitation provisions.  

Insurance
 
  The Company has established an Insurance segment for the six months ended June 30, 2008, as a result of the insurance business operated through Island Heritage, a property insurer based in the Cayman Islands which primarily is in the business of insuring homes, condominiums and office buildings in the Caribbean region.  The Company gained a controlling interest in Island Heritage in the third quarter of 2007, and as a result, there are no comparatives for the three or six months ended June 30, 2007.

 
 
13
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)
 
  The following tables provide a summary of gross and net written and earned premiums, underwriting results, total assets, reserves and ratios for each of our business segments for the three and six months ended June 30, 2008 and 2007:
 
                                     
   
Three Months Ended June 30, 2008
    
Three Months Ended June 30, 2007
  
   
Reinsurance
    
Insurance
    
Total
    
Reinsurance
    
Insurance
    
Total
  
Underwriting Revenues
                                    
Gross premiums written
   $ 244,505     $ 26,673     $ 271,178     $ 181,345     $ –     $ 181,345  
Premiums ceded
     (15,039 )     (23,396 )     (38,435 )     –       –       –  
Net written premiums
     229,466       3,277       232,743       181,345       –       181,345  
Change in net unearned premiums
     (95,178 )     4,202       (90,976 )     (69,503 )     –       (69,503 )
Net premiums earned
     134,288       7,479       141,767       111,842       –       111,842  
Other insurance related income
     569       (341 )     228       197       –       197  
Total underwriting revenues
     134,857       7,138       141,995       112,039       –       112,039  
Underwriting Expenses
                                                
Losses and loss adjustment expenses
     56,151       147       56,298       77,257        –       77,257  
Acquisition costs
     24,074       3,136       27,210       14,725       –       14,725  
General and administrative expenses
     22,686       1,528       24,214       13,800       –       13,800  
Total underwriting expenses
     102,911       4,811       107,722       105,782        –       105,782  
Underwriting Income
   $ 31,946     $ 2,327     $ 34,273     $ 6,257     $ –     $ 6,257  
Total Assets
   $ 2,349,458     $ 123,718     $ 2,473,176     $ 1,910,448     $ –     $ 1,910,448  
Net reserves for loss and loss adjustment expenses
   $ 230,546     $ 3,050     $ 233,596     $ 135,143     $ –     $ 135,143  
                                                 
Ratios
                                                
Loss ratio
     41.8%       2.0%       39.7%       69.1%       0.0%       69.1%  
Acquisition cost ratio
     17.9%       41.9%       19.2%       13.2%       0.0%       13.2%  
General and administrative expense ratio
     16.9%       20.4%       17.1%       12.3%       0.0%       12.3%  
Combined ratio
     76.6%       64.3%       76.0%       94.6%       0.0%       94.6%  
 
 
 
14
 
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of U.S. dollars, except for ratios, share and per share amounts)

                                     
   
Six Months Ended June 30, 2008
    
Six Months Ended June 30, 2007
  
   
Reinsurance
    
Insurance
    
Total
    
Reinsurance
    
Insurance
    
Total
  
Underwriting Revenues
                                    
Gross premiums written
   $ 467,646     $ 45,778     $ 513,424     $ 388,358     $ –     $ 388,358  
Premiums ceded
     (20,359 )     (34,090 )     (54,449 )     (8,245 )     –       (8,245 )
Net written premiums
     447,287       11,688       458,975       380,113       –       380,113  
Change in net unearned premiums
     (184,878 )     2,927       (181,951 )     (167,045 )     –       (167,045 )
Net premiums earned
     262,409       14,615       277,024       213,068       –       213,068  
Other insurance related income
     781       488       1,269       422       –       422  
Total underwriting revenues
     263,190       15,103       278,293       213,490       –       213,490  
Underwriting Expenses
                                                
Losses and loss adjustment expenses
     95,953       112       96,065       125,005       –       125,005  
Acquisition costs
     44,984       6,391       51,375       27,443       –       27,443  
General and administrative expenses
     46,819       3,944       50,763       28,469       –       28,469  
Total underwriting expenses
     187,756       10,447       198,203       180,917       –       180,917  
Underwriting Income
   $ 75,434     $ 4,656     $ 80,090     $ 32,573     $ –     $ 32,573  
Total Assets
   $ 2,349,458     $ 123,718     $ 2,473,176     $ 1,910,448     $ –     $ 1,910,448  
Net reserves for loss and loss adjustment expenses
   $ 230,546     $ 3,050