þ
Quarterly Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
quarterly period ended September 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
November 6, 2008 the Registrant had 84,685,896 common voting shares outstanding,
with a par value of $0.01 per share.
(Expressed
in thousands of U.S. dollars, except share data)
As
at September 30, 2008
As
at December 31, 2007
(Unaudited)
ASSETS
Investments:
Fixed
maturities, at fair value (Amortized cost: 2008 - $710,100; 2007 -
$1,099,149)
$
697,839
$
1,109,105
Short
term investments, at fair value (Amortized cost: 2008 - $29,896; 2007 -
$23,660)
29,888
23,616
Equity
investments, at fair value (Cost: 2008 - $84,301; 2007 -
$73,603)
78,426
74,357
Other
investments
423,144
293,166
Total
Investments
1,229,297
1,500,244
Cash
and cash equivalents
635,623
362,680
Premium
balances receivable
275,778
136,555
Unearned
premiums ceded
41,789
14,608
Reinsurance
recoverable
14,599
1,355
Accrued
interest receivable
5,854
9,915
Receivable
for investments sold
31,749
-
Deferred
acquisition costs
52,502
30,607
Funds
withheld
11,915
6,666
Goodwill
13,068
10,781
Intangible
assets
775
775
Other
assets
101,974
29,587
Due
from related parties
293
-
Total
Assets
$
2,415,216
$
2,103,773
LIABILITIES
Loss
and loss adjustment expense reserves
$
392,462
$
180,978
Unearned
premiums
350,786
175,607
Insurance
and reinsurance balances payable
32,984
12,088
Payable
for investments purchased
4,944
41,750
Long
term debt
252,838
264,889
Other
liabilities
104,772
33,198
Total
Liabilities
1,138,786
708,510
Minority
Interest
192,011
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
899,920
905,316
Accumulated
other comprehensive income
8,608
7,426
Retained
earnings
175,038
296,890
Total Shareholders'
Equity
1,084,419
1,210,485
Total
Liabilities, Minority Interest and Shareholders' Equity
$
2,415,216
$
2,103,773
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE (LOSS) INCOME
(Expressed
in thousands of U.S. dollars, except share and per share data)
For
the Three Months Ended
For
the Nine Months Ended
September
30, 2008
September
30, 2007
September
30, 2008
September
30, 2007
REVENUES
Gross
premiums written
$
173,219
$
123,704
$
686,643
$
512,062
Premiums
ceded
(21,984
)
(32,572
)
(76,433
)
(40,817
)
Net
premiums written
151,235
91,132
610,210
471,245
Change
in net unearned premiums
37,406
47,667
(144,545
)
(119,378
)
Net
premiums earned
188,641
138,799
465,665
351,867
Net
investment income
16,056
17,022
48,031
51,184
Net
realized and unrealized (losses) gains - investments
(138,677
)
17,980
(160,428
)
18,747
Net
realized and unrealized losses - other
(1,039
)
(9,682
)
(2,144
)
(7,836
)
Other
income
1,418
1,961
5,269
2,885
Total
revenues
66,399
166,080
356,393
416,847
EXPENSES
Loss
and loss adjustment expenses
199,768
37,439
295,833
162,444
Acquisition
costs
27,452
28,795
78,827
56,238
General
and administrative expenses
16,271
19,763
67,034
48,232
Interest
expense
3,722
5,873
13,671
12,657
Net
foreign exchange losses (gains)
8,331
(1,842
)
3,262
(3,180
)
Total
expenses
255,544
90,028
458,627
276,391
(Loss)
income before income taxes, minority interest and interest in
earnings of equity investments
(189,145
)
76,052
(102,234
)
140,456
Provision
for income tax
(585
)
(229
)
(1,892
)
(351
)
Minority
interest
3,657
(9,317
)
(7,139
)
(24,942
)
Interest
in earnings of equity investments
(475
)
(257
)
(475
)
1,390
NET
(LOSS) INCOME
$
(186,548
)
$
66,249
$
(111,740
)
$
116,553
Change
in currency translation adjustment
5,833
8,310
1,647
6,293
Change
in defined benefit pension plan - transitional obligation
57
-
(465
)
-
COMPREHENSIVE
(LOSS) INCOME
$
(180,658
)
$
74,559
$
(110,558
)
$
122,846
Weighted
average common shares outstanding—Basic
85,499,283
85,413,479
85,479,861
80,816,529
Weighted
average common shares outstanding—Diluted
85,499,283
85,491,561
85,479,861
80,937,061
Net
(loss) income per common share outstanding—Basic
$
(2.18
)
$
0.78
$
(1.31
)
$
1.44
Net
(loss) income per common share outstanding—Diluted
$
(2.18
)
$
0.77
$
(1.31
)
$
1.44
Dividends
declared per common share
$
0.04
$
0.04
$
0.12
$
0.04
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
Defined
benefit pension plan - transitional obligation
(465
)
-
Cumulative
effect adjustment from adoption of new accounting principle SFAS
159
-
4,009
Balance
at end of period
8,608
5,774
Retained
earnings
Balance
at beginning of year
296,890
139,954
Cumulative
effect adjustment from adoption of accounting principle
-
(4,009
)
Dividend
declared
(10,112
)
(3,412
)
Net
(loss) income for the period
(111,740
)
116,553
Balance
at end of period
175,038
249,086
$
1,084,419
$
1,158,933
The
accompanying notes to the unaudited condensed consolidated financial statements
are an integral part of the unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed
in thousands of U.S. dollars)
For
the Nine Months Ended
September
30, 2008
September
30, 2007
Cash flows provided by (used
in) operating activities:
Net
(loss) income
$
(111,740
)
$
116,553
Adjustments to reconcile net
(loss) income to net cash provided by operating
activities:
Net
realized and unrealized (losses) gains
162,572
(10,911
)
Minority
interest
7,139
24,942
Depreciation
expense
3,515
1,508
Share
based compensation expense
(4,780
)
6,193
Interest
in earnings of equity investments
475
(1,390
)
Accretion/amortization
on fixed maturities
(16,524
)
(7,720
)
Changes
in assets and liabilities, excluding net assets acquired:
Reinsurance
premium receivable
(139,756
)
(105,334
)
Unearned
premiums ceded
(29,610
)
(18,024
)
Deferred
acquisition costs
(22,619
)
(20,128
)
Funds
withheld
(5,208
)
(6,606
)
Loss
and loss adjustment expense reserves
212,087
136,436
Unearned
premiums
179,650
135,126
Insurance
and reinsurance balances payable
21,560
16,391
Reinsurance
recoverable
(11,652
)
-
Other
changes in assets and liabilities, net
2,337
5,085
Net
cash provided by operating activities
247,446
272,121
Cash flows provided by (used
in) investing activities:
Net
cash received in acquisitions of subsidiaries
4,855
5,302
Purchases
of fixed income securities
(885,082
)
(1,182,347
)
Sales
and maturities of fixed income securities
1,245,168
841,636
Purchases
of equity securities
(120,950
)
(25,171
)
Sales
of equity securities
81,122
3,723
Purchases
of other investments
(492,260
)
(211,107
)
Sales
of other investments
246,316
(5,116
)
Purchases
of fixed assets
(21,063
)
(6,558
)
Sale
of fixed asset under a sale lease-back transaction
-
18,500
Net
cash provided by (used in) investing activities
58,106
(561,138
)
Cash flows (used in) provided
by financing activities:
Issue
of common shares, net of issuance costs paid
(491
)
171,644
Issue
of notes, net of issuance costs paid
-
123,684
Contribution
of minority interest
(166
)
83,100
Repurchase
of minority interest
(8,652
)
(14,353
)
Dividend
paid on common shares
(10,239
)
(3,412
)
Repayment
of long term debt
(9,840
)
-
Amortization
of financing costs
-
(17,063
)
Other
(3,406
)
1,263
Net
cash (used in) provided by financing activities
(32,794
)
344,863
Effect
of foreign exchange rate on cash and cash equivalents
185
5,570
Increase
in cash and cash equivalents
272,943
61,416
Cash
and cash equivalents - beginning of year
362,680
261,352
Cash
and cash equivalents - end of period
$
635,623
$
322,768
Supplemental cash flow
information:
Receivable
for investments sold
$
31,749
$
-
Payable
for investments purchased
$
4,944
$
8,248
Interest
paid
$
13,486
$
10,165
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)
These
unaudited condensed consolidated financial statements include the accounts of
Flagstone Reinsurance Holdings Limited (the “Company”) and its wholly owned
subsidiaries, including Flagstone Réassurance Suisse SA (“Flagstone Suisse”) and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements. 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.
These
interim 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. Prior to 2008, the Company operated through one
reportable segment, consisting of Reinsurance. Following a review of its
operating segments in 2008, the Company revised its reportable business segments
and is currently organized into two reportable business segments: Reinsurance
and Insurance. Prior periods have been re-segmented to conform with the
current presentation.
2.
New Accounting Pronouncements
New
accounting pronouncements issued during 2008 impacting the Company are as
follows:
The
Company maintains a contributory defined benefit pension plan (the “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 $0.8 million has been recorded as a pension expense in
the three and nine months ended September 30, 2008, respectively. A
pension asset of $0.7 million and a pension liability of $1.3 million were
recognized in the September 30, 2008 unaudited condensed consolidated balance
sheet. The Company funds the Plan at the amount required by local
legal 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 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 have no impact on the
Company’s results of operations or consolidated financial condition but it is
expected to change the Company’s current disclosures regarding its derivative
instruments.
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. SFAS 162 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 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 and reinsurance 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”). SFAS 163 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 which are effective for
the first quarter beginning after SFAS 163 was issued. Except for those
disclosures, early application is prohibited. SFAS 163 is not expected to have
an effect on the Company as the Company does not enter into financial guarantee
contracts.
On
October 10, 2008, the FASB also issued a FASB staff position No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” (“SFAS
157-3”) to clarify the application of FASB Statement No. 157, “Fair Value
Measures” (“SFAS 157”) in a market that is not active. SFAS 157-3 provides that
determination of fair value in a dislocated market depends on facts and
circumstances and may require the use of significant judgment about whether
individual transactions are forced liquidations or distressed sales. The use of
a reporting entity’s own assumptions about future cash flows and appropriately
risk-adjusted discount rates is acceptable when relevant observable inputs are
not available. Regardless of the valuation technique used, an entity must
include appropriate risk adjustments that market participants would make for
nonperformance and liquidity risks. SFAS 157-3 is effective immediately,
including prior periods for which financial statements have not been issued. The
Company has considered the provisions of SFAS 157-3 on the current quarter and
determined that the application of SFAS 157-3 does not have an effect
on the Company’s current financial position.
3.
Reorganization
On
September 30, 2008, the Company completed the restructuring of its global
reinsurance operations by merging its two wholly-owned subsidiaries, Flagstone
Reinsurance Limited and Flagstone Suisse into one succeeding entity, Flagstone
Suisse with its existing Bermuda branch. The merger consolidated the Company’s
underwriting capital into one main operating entity. Because both companies were
wholly-owned subsidiaries of the Company, the merger did not result in any
changes in the previously recorded carrying values of assets or liabilities of
the merged entities. Total costs associated with the reorganization were $2.1
million which were expensed in the period incurred.
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)
Alliance International Reinsurance
Public Company Limited (“Alliance Re”)
On April
28, 2008, the Company announced its intent to acquire up to 30.0% of Alliance Re
from current shareholders. The Company completed its acquisition on August
12, 2008, through the purchase of 10,498,164 shares (representing 15.4% of
its common shares) for $6.8 million. The acquisition was partially
completed in the second quarter of 2008 through the purchase of 9,977,664 shares
(representing 14.6% of its common shares) for $6.8 million. Alliance Re,
domiciled in the Republic of Cyprus and publicly traded on the Cyprus Stock
Exchange (ALL), is a specialist property and casualty reinsurer writing multiple
lines of business in Europe, Asia, and the Middle East & North Africa
regions.
On August
13, 2008, Flagstone Suisse announced its decision to submit a Voluntary Public
Offer (the “Offer”) for the acquisition of up to 100% of the 68,347,215 issued
and outstanding common share capital of Alliance Re. The consideration for the
Offer is €0,48 per share, payable in cash to all accepting shareholders. During
September 2008, the Company acquired 4,427,189 Alliance Re shares on the open
market for total consideration of $3.0 million, bringing the Company’s total
ownership interest to 24,903,017 shares or 36.4% at September 30,
2008.
Following
additional share purchases in the open market and a successful acceptance of the
Offer, as of October 27, 2008, the Company owned 63,436,487 shares or 92.8%
of the share capital of Alliance Re. According to the Offer terms, if the
Company were to acquire more than 90% of the share capital of Alliance Re, it
would exercise its right pursuant to Part VIII, article 36(4)(a) of the Cyprian
Public Offering and Acquisition Law 2007, to acquire the remaining outstanding
shares at €0,48 cash per share, so as to acquire 100% of the shares of Alliance
Re. This right must be exercised within three months from the expiry of the
period of acceptance of the Offer. On October 29, 2008, the Company
exercised its right under article 36 to acquire the remaining 7.2% of the
Alliance Re shares at €0,48 cash per share, the same amount as the
Offer.
5.
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, listed equity
securities and fixed income fund are stated at Level 1 fair value. Investments
in corporate bonds, mortgage-backed securities, equity exchange traded
funds, investment funds that are hedge funds, asset backed securities, real
estate investment trust (“REITs”) and REIT funds are stated at Level 2,
whereas the investment funds that are private equity investments and
catastrophe bonds are stated at Level 3 fair value. The investment in
Alliance Re is now accounted for as an equity investment and is not accounted
for at fair value under SFAS 159 (see Note 4).
The
Company has reviewed its Level 3 investments and the valuation methods are as
follows: Catastrophe bonds are stated at fair value as determined by reference
to broker indications. Those indications are based on current market
conditions, including liquidity and transactional history, recent issue price of
similar catastrophe bonds and seasonality of the underlying
risks. The private equity investments are valued by the investment
fund managers using the valuations and financial statements provided by the
general partners of the funds on a quarterly basis. These valuations
are then adjusted by the investment fund managers for cash flows since the most
recent valuation. The valuation methodology used for investment funds
is consistent with the methodology that is generally employed in the investment
industry.
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)
As at
September 30, 2008 and December 31, 2007, the Company’s investments are
allocated between levels as follows:
Fair Value Measurement
at September 30, 2008, using:
Quoted
Prices in
Significant
Other
Significant
Other
Fair
Value
Active
Markets
Observable
Inputs
Unobservable
Inputs
Description
Measurements
(Level
1)
(Level
2)
(Level
3)
Fixed
maturity investments
$
697,839
$
343,800
$
354,039
$
-
Short
term investments
29,888
29,888
-
-
Equity
investments
78,426
3,946
74,480
-
806,153
377,634
428,519
-
Other
Investments
Real
estate investment trust funds
56,308
-
56,308
-
Investment
funds
30,237
-
18,461
11,776
Catastrophe
bonds
39,888
-
-
39,888
Fixed
income fund
281,662
281,662
-
-
408,095
281,662
74,769
51,664
Totals
$
1,214,248
$
659,296
$
503,288
$
51,664
For
reconciliation purposes, the table above does not include an equity investment
in Alliance Re of $15.0 million in which the Company is deemed to have a
significant influence and is accounted for under the equity method and as such,
this investment is not accounted for at fair value under SFAS 159.
Fair Value Measurement at
December 31, 2007, using:
Quoted
Prices in
Significant
Other
Significant
Other
Fair
Value
Active
Markets
Observable
Inputs
Unobservable
Inputs
Description
Measurements
(Level
1)
(Level
2)
(Level
3)
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
is accounted for under the equity method and as such, is not accounted for at
fair value under SFAS 159.
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)
The
reconciliation of the fair value for the Level 3 investments for the three and
nine months ended September 30, 2008, including net purchases and sales,
realized gains and change in unrealized gains, is set out below:
For
the Three Months Ended September 30, 2008
Investment
Catastrophe
Alliance
Description
funds
bonds
Re
Fair
value, June 30, 2008
$
11,864
$
40,081
$
6,846
Total
realized gains included in earnings
644
278
-
Total
unrealized losses included in earnings
(1,532
)
(471
)
-
Net
purchases and sales
800
-
6,805
Transfers
to equity investment
-
-
(13,651
)
Fair
value, September 30, 2008
$
11,776
$
39,888
$
-
For
the Nine Months Ended September 30, 2008
Investment
Catastrophe
Alliance
Description
funds
bonds
Re
Fair
value, December 31, 2007
$
11,208
$
36,619
$
-
Total
realized gains included in earnings
644
278
-
Total
unrealized losses included in earnings
(1,382
)
(509
)
-
Net
purchases and sales
1,306
3,500
13,651
Transfers
to equity investment
-
-
(13,651
)
Fair
value, September 30, 2008
$
11,776
$
39,888
$
-
The
Company purchased a 14.6% interest in Alliance Re during the quarter ended
June 30, 2008, and had recorded the investment in Alliance Re at fair value
based on the recently completed arms length purchase negotiated between the
Company and external third parties. On August 12, 2008, the Company purchased an
additional 10,498,164 shares of Alliance Re (15.4%) for $6.8 million. The
investment in Alliance Re is now accounted for as an equity investment and is
not accounted for at fair value under SFAS 159.
6.
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.
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)
The
Company has previously used 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 has also used interest rate swaps to manage its
borrowing costs on its long term debt. As of September 30, 2008, the
Company did not have any interest rate swaps and as of December 31, 2007, there
were a total of $389.9 million of interest rate swaps in the portfolio with a
total fair value of $2.3 million. During the three months ended
September 30, 2008 and 2007, the Company recorded realized and unrealized losses
on interest rate swaps of $0.1 million and $nil, respectively, and for the
nine months ended September 30, 2008 and 2007, the Company recorded realized and
unrealized gains of $0.2 million and realized and unrealized losses of $0.2
million on interest rate swaps, respectively.
Foreign
currency swaps
The
Company periodically uses foreign currency swaps to minimize the effect of
fluctuating foreign currencies. The Company has 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 $18.4 million, will
receive Euro Interbank Offered Rate (“Euribor”) plus 354 basis points and will
pay London Interbank Offering Rate (“LIBOR”) plus 367 basis points. The swap
expires on September 15, 2011 and had a fair value of $(0.2) million and $2.5
million as at September 30, 2008 and December 31, 2007, respectively.
During the three months ended September 30, 2008 and 2007, the Company
recorded realized and unrealized losses of $2.7 million and realized and
unrealized gains of $1.0 million, respectively. During the nine months ended
September 30, 2008 and 2007, the Company recorded realized and unrealized
losses of $0.7 million and realized and unrealized gains of $1.5 million,
respectively, on foreign currency swaps.
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
September 30, 2008 and December 31, 2007 was $561.3 million and $311.1
million, respectively, and these contracts had a fair value of $5.6 million
and $(7.1) million, respectively. The Company has designated $494.6
million and $264.4 million of foreign currency forwards contractual value as
hedge instruments, which had a fair value of $11.7 million and $(3.4) million as
at September 30, 2008 and December 31, 2007, respectively. During the
three months ended September 30, 2008 and 2007, the Company recorded $0.1
million and $11.4 million, respectively, of realized and unrealized losses on
foreign currency forward contracts and for the nine months ended September 30,
2008 and 2007, the Company recorded $3.1 million and $10.4 million of realized
and unrealized losses, respectively, on foreign currency forward
contracts. During the three and nine months ended September 30, 2008,
the Company recorded $31.3 million and $5.7 million of realized and unrealized
gains, 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 September 30, 2008, there were total return swaps
with a notional amount of $85.4 million and a fair value of $(0.5) 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 September 30, 2008 and 2007,
the Company recorded $0.5 million and $0.1 million of realized and unrealized
losses, respectively, on total return swaps and for the nine months ended
September 30, 2008 and 2007, the Company recorded $5.3 million and $2.9 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 September 30, 2008 and
December 31, 2007, the notional principal amount of TBAs was $50.9 million and
$18.2 million and the fair value was $(0.4) million and $0.2 million,
respectively. During the three months ended September 30, 2008 and 2007, the
Company recorded $0.9 million of realized and unrealized gains and $nil,
respectively. During the nine months ended September 30, 2008 and 2007, the
Company recorded $0.6 million of realized and unrealized gains and $0.6
million, respectively, of realized and unrealized losses on
TBAs.
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)
The
Company has entered into equity index, commodity index, bond index and interest
rate futures. At September 30, 2008 and December 31, 2007, the notional amount
of these futures was $362.1 million and $421.0 million, respectively. The net
fair value of futures contracts was $(24.1) million and $(2.2) million as at
September 30, 2008 and December 31, 2007, respectively. During the three
months ended September 30, 2008 and 2007, the Company recorded $69.8 million of
realized and unrealized losses and $2.6 million of realized and unrealized
gains, respectively, on futures. During the nine months ended September 30,
2008 and 2007, the Company recorded $70.7 million of realized and unrealized
losses and $12.3 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 $(1.3) million and $(1.3) million at
September 30, 2008 and December 31, 2007, respectively. During the three
months ended September 30, 2008 and 2007, the Company recorded $1.5
million and $0.6 million, respectively, of realized and unrealized gains on
ILWs determined to be derivatives and for the nine months ended September 30,
2008 and 2007, the Company recorded $2.6 million and $1.0 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. The net notional exposure is determined based on the futures
exchange futures specifications. The net fair value of the options
was recorded on the balance sheet, with purchased options of $0.8 million
recorded in other assets and written options of $3.0 million recorded in other
liabilities. The realized and unrealized gains recorded on the
hurricane indexes were $0.4 million and $0.4 million, respectively, during the
three months and nine months ended September 30, 2008.
Fair
value disclosure
In
accordance with SFAS 157, the fair value of derivative instruments held as of
September 30, 2008 and December 31, 2007 is allocated between levels as
follows:
Fair Value Measurement at
September 30, 2008, using:
Quoted
Prices in
Significant
Other
Significant
Other
Fair
Value
Active
Markets
Observable
Inputs
Unobservable
Inputs
Measurements
(Level
1)
(Level
2)
(Level
3)
Derivatives
Futures
contracts
$
(24,116
)
$
(24,116
)
$
-
$
-
Swaps
(642
)
-
(642
)
-
Forward
currency forwards
5,555
-
5,555
-
Mortgage
backed securities TBA
(379
)
-
(379
)
-
Other
reinsurance derivatives
(3,433
)
-
(2,148
)
(1,285
)
Total
derivatives
$
(23,015
)
$
(24,116
)
$
2,386
$
(1,285
)
Derivatives
are recorded in other assets and other liabilities with balances as at September
30, 2008 of $40.2 million and $63.2 million, respectively.
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)
Fair
Value Measurement at December 31, 2007, using:
Quoted
Prices in
Significant
Other
Significant
Other
Fair
Value
Active
Markets
Observable
Inputs
Unobservable
Inputs
Measurements
(Level
1)
(Level
2)
(Level
3)
Derivatives
Futures
contracts
$
(2,228
)
$
(2,228
)
$
-
$
-
Swaps
(153
)
-
(153
)
-
Forward
currency forwards
(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
)
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:
Three
Months Ended
Nine
Months Ended
September
30, 2008
September
30, 2008
Other
reinsurance derivatives
Opening
fair value
$
(127
)
$
(1,305
)
Total
unrealized gains included in earnings
1,453
2,631
Net
purchases and sales
(2,611
)
(2,611
)
Fair
value, September 30, 2008
$
(1,285
)
$
(1,285
)
7. Debt
and Financing Arrangements
Long
term debt
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”) during the quarter ended June
30, 2008. 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.
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 September 30, 2008 and 2007, the Company incurred interest expense
of $3.7 million and $5.9 million, respectively, and for the nine months
ended September 30, 2008 and 2007, the Company incurred interest expense of
$13.7 million and $12.7 million, respectively, on the Deferrable Interest
Debentures. Also, at September 30, 2008 and December 31, 2007, the
Company had $1.4 million and $1.9 million, respectively, of interest payable
included in other liabilities.
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 September 30, 2008 and
December 31, 2007, $72.6 million and $73.8 million, respectively, had been drawn
under this facility, and the drawn amount of the facility was secured
by $80.6 million and $82.0 million, respectively, of fixed maturity
securities from the Company’s investment portfolio.
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)
In
September 2007, the Company entered into a $200.0 million uncommitted
secured letter of credit facility agreement with Wachovia Bank,
N.A. (“Wachovia”). While the Company has not drawn upon this facility
as at September 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. Given the recently announced merger of Wachovia and Wells
Fargo Inc., there is some uncertainty as to our ability to access this facility,
however we believe that our inability to access this facility would have no
material impact on our business.
These
facilities are used to provide security to reinsureds and are collateralized by
the Company, at least to the extent of the letters of credit outstanding at any
given time.
8. Stock
Transaction of Subsidiary
On July
1, 2008, Island Heritage Holdings Company (“Island Heritage”), in which the
Company holds a controlling interest, issued 1,789 shares to certain of its
employees under a performance share unit plan. Prior to this transaction,
the Company held an ownership interest in Island Heritage of 59.6% and now holds
an interest of 59.2%.
The
Company accounts for the issuance of a subsidiary’s stock in accordance with SEC
Staff Accounting Bulletin Topic 5H “Accounting for sales of stock by a
subsidiary”, which requires that the difference between the carrying amount of
the parent’s investment in a subsidiary and the underlying net book value of the
subsidiary after the issuance of stock by the subsidiary be reflected as either
a gain or loss in the statement of operations or reflected as an equity
transaction. The Company has elected to record gains and losses resulting from
the issuance of subsidiary’s stock as an equity transaction. Accordingly,
the Company recorded a loss of $0.1 million as a decrease to additional
paid-in capital.
9. 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 the Board of 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 September 30, 2008, and changes during
the three months and nine months ended September 30, 2008, is as
follows:
Three
Months Ended September 30, 2008
Nine
Months Ended September 30, 2008
Number
expected to vest
Weighted
average grant date fair value
Weighted
average remaining contractual term
Number
expected to vest
Weighted
average grant date fair value
Weighted
average remaining contractual term
Outstanding
at beginning of period
2,312,658
$
12.63
1.5
1,658,700
$
12.07
1.7
Granted
83,000
11.79
814,958
13.68
Forfeited
(17,000
)
12.76
(95,000
)
12.58
Change
in assumptions
(2,272,836
)
12.71
(2,272,836
)
12.71
Outstanding
at end of period
105,822
10.19
0.3
105,822
10.19
0.3
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
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.
Considering the net loss incurred in the nine months ended September 30, 2008,
the Company reviewed is DROE estimates for the applicable performance periods
and accordingly revised the number of PSUs expected to vest. As a result,
compensation expense of $(11.9) million and $(7.1) million has been recorded in
general and administrative expenses in relation to the PSU Plan for the three
and nine months ended September 30, 2008, respectively. For the three and
nine months ended September 30, 2007, respectively, $1.6 million and $4.4
million has been recorded in general and administrative expenses in relation to
the PSU Plan. As at September 30, 2008 and December 31, 2007, there was a total
of $0.1 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 0.3 years and 2.1 years,
respectively.
No PSUs
have vested or been cancelled since the inception of the PSU Plan.
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
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 September 30, 2008 and changes during
the three and nine months ended September 30, 2008 is as follows:
Three
Months Ended September 30, 2008
Nine
Months Ended September 30, 2008
Number
expected to vest
Weighted
average grant date fair value
Weighted
average remaining contractual term
Number
expected to vest
Weighted
average grant date fair value
Weighted
average remaining contractual term
Outstanding
at beginning of period
477,508
$
13.32
0.7
326,610
$
12.45
0.6
Granted
16,046
11.98
255,361
13.71
Forfeited
(38,850
)
13.68
(59,750
)
13.67
Vested
in the period
-
-
(67,517
)
10.81
Outstanding
at end of period
454,704
13.24
0.5
454,704
13.24
0.5
As at
September 30, 2008 and December 31, 2007, there was a total of $1.6 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 1.0 year and 0.9 years, respectively. A
compensation expense of $0.3 million and $0.4 million has been recorded in
general and administrative expenses for the three months ended September 30,
2008 and 2007, respectively, and $2.4 million and $1.8 million has been recorded
in general and administrative expenses for the nine months ended September 30,
2008 and 2007, respectively, in relation to the RSU Plan.
Since the
inception of the RSU Plan in July 2006, 59,700 RSUs granted to employees
have vested and no RSUs granted to employees have been cancelled. During
the three months ended September 30, 2008 and September 30, 2007, no RSUs were
granted to the directors. During the nine months ended September 30, 2008
and September 30, 2007, respectively, 55,715 and 61,761 RSUs were granted to the
directors.
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)
The
computation of basic and diluted earnings per common share for the three and
nine months ended September 30, 2008 and 2007 is as follows:
Three
Months Ended
Nine
Months Ended
September
30, 2008
September
30, 2007
September
30, 2008
September
30, 2007
Basic (loss) earnings per
common share
Net
(loss) income
$
(186,548
)
$
66,249
$
(111,740
)
$
116,553
Weighted
average common shares outstanding
85,346,325
85,297,891
85,325,277
80,730,125
Weighted
average vested restricted share units
152,958
115,588
154,584
86,404
Weighted
average common shares outstanding—Basic
85,499,283
85,413,479
85,479,861
80,816,529
Basic
(loss) earnings per common share
$
(2.18
)
$
0.78
$
(1.31
)
$
1.44
Diluted (loss) earnings per
common share
Net
(loss) income
$
(186,548
)
$
66,249
$
(111,740
)
$
116,553
Weighted
average common shares outstanding
85,346,325
85,297,891
85,325,277
80,730,125
Weighted
average vested restricted share units outstanding
152,958
115,588
154,584
86,404
85,499,283
85,413,479
85,479,861
80,816,529
Share
equivalents:
Weighted
average unvested restricted share units
-
78,082
-
120,532
Weighted
average common shares outstanding—Diluted
85,499,283
85,491,561
85,479,861
80,937,061
Diluted
(loss) earnings per common share
$
(2.18
)
$
0.77
$
(1.31
)
$
1.44
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 have been excluded in the computation of
diluted earnings per share for the three and nine months ended September 30,
2008, were 130,891and 236,876 respectively. Also at September 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 September 30, 2008
and 2007, there were 105,822 and 1,538,000 PSUs outstanding,
respectively. The maximum number of common shares that could be
issued under the PSU Plan at September 30, 2008 and 2007 was 4,757,316 and
3,076,000, respectively.
11.
Legal Proceedings
In the
normal course of business, the Company may become involved in various claims
litigation and legal proceedings. As at September 30, 2008, the Company
was not a party to any litigation or arbitration proceedings.
15
FLAGSTONE
REINSURANCE HOLDINGS LIMITED
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in tables expressed in thousands of U.S. dollars, except for ratios, share and
per share amounts)
The
Company holds a controlling interest in 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 reportable business segments: Reinsurance and Insurance. The 2007
comparative information below reflects our current segment structure. The
Company regularly reviews its financial results and assesses performance on the
basis of these two reportable business 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 nine months ended September
30, 2008, as a result of the insurance business operated through Island
Heritage, a property insurer based in the Cayman Islands which is primarily 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, the comparatives
for the nine months ended September 30, 2007 include the results of Island
Heritage for the quarter ended September 30, 2007 only.
The
following tables provide a summary of gross and net written and earned premiums,
underwriting results, a reconciliation of underwriting income to income before
income taxes, minority interest and interest in earnings of equity investments,
total assets, reserves and ratios for each of our business segments for the
three and nine months ended September 30, 2008 and 2007:
16
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)
