Flagstone Re Reports Third Quarter 2012 Results

Flagstone Re Reports Third Quarter 2012 Results

LUXEMBOURG--(BUSINESS WIRE)-- Flagstone Reinsurance Holdings, S.A. (NYS: FSR) today announced third quarter 2012 basic book value per share of $11.64 and diluted book value per share of $11.45, down 0.4% and 0.3%, respectively, for the quarter (percentages inclusive of dividends). Net loss attributable to Flagstone's common shareholders for the three months ended September 30, 2012, was $1.3 million, or $0.02 loss per diluted share, compared to a net loss of $59.5 million or $0.85 loss per diluted share for the three months ended September 30, 2011. Net income attributable to Flagstone's common shareholders for the nine months ended September 30, 2012, was $51.3 million, or $0.72 earnings per diluted share, compared to a net loss of $241.0 million, or $3.44 loss per diluted share for the nine months ended September 30, 2011. Net loss from continuing operations for the three months ended September 30, 2012, was $7.1 million, or $0.10 loss per diluted share, compared to a net loss from continuing operations of $53.7 million, or $0.76 loss per diluted share, for the three months ended September 30, 2011. Net income from continuing operations for the nine months ended September 30, 2012, was $33.1 million, or $0.45 earnings per diluted share, compared to a net loss from continuing operations of $234.8 million, or $3.38 loss per diluted share, for the nine months ended September 30, 2011.

On August 30, 2012, the Company and Validus Holdings, Ltd. ("Validus") jointly announced that the boards of directors of both Validus and Flagstone have approved a definitive merger agreement pursuant to which Validus will acquire all of the issued and outstanding shares of Flagstone. As of the announcement date, the transaction represented an aggregate equity value of $623.2 million and is currently expected to be completed in the fourth quarter of 2012, subject to customary closing conditions, including obtaining regulatory approvals and the approval of Flagstone's shareholders.


Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate only to Flagstone's continuing operations. All prior years presented have been reclassified to conform to this new presentation.

David Brown, Flagstone's Chief Executive Officer, stated, "Flagstone's results in the third quarter were generally in line with our expectations. We were pleased to announce our agreement to combine with Validus Holdings on August 30, 2012. The transaction, which presents a significant premium and immediate value to our shareholders, was the culmination of a robust process in which our Board carefully considered a broad range of strategic alternatives. We look forward to working with Validus and anticipate completing the transaction in the fourth quarter."

Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income (Loss)

For the three and nine months ended September 30, 2012 and 2011

(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,

September 30,

2012

2011

2012

2011

REVENUES

Gross premiums written

$

4,042

$

92,162

$

345,420

$

708,965

Premiums ceded

1,338

(30,577

)

(89,846

)

(193,736

)

Net premiums written

5,380

61,585

255,574

515,229

Change in net unearned premiums

77,173

68,456

43,223

(65,515

)

Net premiums earned

82,553

130,041

298,797

449,714

Net investment income

6,130

6,167

15,063

27,665

Net realized and unrealized gains (losses) - investments

5,970

(19,592

)

29,438

(16,726

)

Net realized and unrealized gains (losses) - other

5,589

(18,305

)

6,982

(5,009

)

Other income

2,187

1,376

6,544

4,062

Total revenues

102,429

99,687

356,824

459,706

EXPENSES

Loss and loss adjustment expenses

60,051

131,879

181,983

531,368

Acquisition costs

21,104

31,619

65,870

95,303

General and administrative expenses

19,188

19,785

59,870

55,604

Interest expense

2,750

3,137

8,673

8,879

Net foreign exchange losses (gains)

5,859

(33,981

)

6,736

3,067

Total expenses

108,952

152,439

323,132

694,221

(Loss) income from continuing operations before income taxes and interest in earnings of equity investments

(6,523

)

(52,752

)

33,692

(234,515

)

(Provision) recovery for income tax

(569

)

(668

)

(882

)

405

Interest in earnings of equity investments

-

(250

)

288

(706

)

(Loss) income from continuing operations

(7,092

)

(53,670

)

33,098

(234,816

)

Income (loss) from discontinued operations, net of taxes

5,746

(5,769

)

19,366

(4,032

)

Net (loss) income

(1,346

)

(59,439

)

52,464

(238,848

)

Less: Income attributable to noncontrolling interest

-

(106

)

(1,135

)

(2,127

)

NET (LOSS) INCOME ATTRIBUTABLE TO FLAGSTONE

$

(1,346

)

$

(59,545

)

$

51,329

$

(240,975

)

Net (loss) income

$

(1,346

)

$

(59,439

)

$

52,464

$

(238,848

)

Change in currency translation adjustment

(2,803

)

(8,677

)

(2,935

)

(4,927

)

Change in defined benefit pension plan obligation

326

62

254

(96

)

Comprehensive (loss) income

(3,823

)

(68,054

)

49,783

(243,871

)

Less: Comprehensive income attributable to noncontrolling interest

-

(106

)

(1,135

)

(2,127

)

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO FLAGSTONE

$

(3,823

)

$

(68,160

)

$

48,648

$

(245,998

)

Weighted average common shares outstanding—Basic

71,352,487

70,380,852

71,128,790

70,041,621

Weighted average common shares outstanding—Diluted

71,352,487

70,380,852

71,766,808

70,041,621

(Loss) income from continuing operations per common share—Basic

$

(0.10

)

$

(0.76

)

$

0.45

$

(3.38

)

Income (loss) from discontinued operations per common share—Basic

$

0.08

$

(0.09

)

$

0.27

$

(0.06

)

Net (loss) income attributable to Flagstone per common share—Basic

$

(0.02

)

$

(0.85

)

$

0.72

$

(3.44

)

(Loss) income from continuing operations per common share—Diluted

$

(0.10

)

$

(0.76

)

$

0.45

$

(3.38

)

Income (loss) from discontinued operations per common share—Diluted

$

0.08

$

(0.09

)

$

0.27

$

(0.06

)

Net (loss) income attributable to Flagstone per common share—Diluted

$

(0.02

)

$

(0.85

)

$

0.72

$

(3.44

)

Distributions declared per common share

$

0.04

$

0.04

$

0.12

$

0.12

Results of Operations

All amounts in the following tables are expressed in thousands of U.S. dollars, except percentages or unless otherwise stated.

Three months ended September 30, 2012, compared to three months ended September 30, 2011

  • The decrease in net underwriting loss is the result of fewer significant loss events during the third quarter of 2012 (U.S. drought) compared to losses recorded in the same period in 2011 (hurricane Irene, Danish cloudburst, and Melbourne floods), offset by a significant reduction in gross premiums written and net premiums earned, which is in line with our current underwriting strategy.

  • During the third quarter we recorded premium portfolio transfers in the amount of $45.8 million related to the reduced participation in and non renewal of certain large proportional property treaties. The impact on net premiums earned of such decrease in gross premiums written was offset by a change in unearned premiums and therefore, net premiums earned for the current quarter were not impacted by the reduced participation in or non renewals of those large proportional treaties.

  • The decrease in the loss ratio in the three months ended September 30, 2012 is primarily the result of fewer significant loss events, which included the U.S. drought of $19.8 million, compared to losses recorded in the same period in 2011, which included hurricane Irene of $21.0 million, Danish cloudburst of $10.2 million, Melbourne floods of $16.8 million and net adverse developments on earlier 2011 known events of $43.4 million. Losses are net of retrocession but exclude reinstatement premiums.

  • The expenses in the current period include one-time items such as an impairment charge on assets held for sale of approximately $1.8 million as well as severance costs of approximately $1.0 million associated with the execution of our strategic realignment. These one-time items are offset by expense reduction initiatives in accordance with our overall decrease in underwriting activities.

Nine months ended September 30, 2012, compared to nine months ended September 30, 2011

  • The increase in net underwriting results is the result of fewer significant loss events in 2012 (U.S. drought) compared to the same period in 2011 (Australian floods, cyclone Yasi, New Zealand earthquakes of February 2011 and June 2011, Japan earthquake and tsunami, U.S. tornadoes, hurricane Irene, Danish cloudburst, and Melbourne floods), offset by a significant reduction in gross premiums written and net premiums earned, which is in line with our current underwriting strategy.

  • The decrease in gross written premiums for all lines of business is a result of an overall decrease in our risk appetite and in our shareholder's equity following the significant worldwide losses we sustained in 2011. During the nine months ended September 30, 2012, we recorded $15.3 million of gross reinstatement premiums compared to $25.5 million recorded for the same period in 2011. The decrease in reinstatements premiums was due to lower catastrophe losses in the current period.

  • The decrease in the loss ratio is the result of reduced losses from fewer significant loss events, which included U.S. drought losses ($19.8 million), compared to the same period in 2011, which included net incurred losses related to the Australian floods ($30.8 million), cyclone Yasi ($33.2 million), New Zealand earthquake of February 2011 ($117.4 million), the Japan earthquake and tsunami ($100.4 million), New Zealand earthquake of June 2011 ($18.5 million), U.S. tornadoes ($36.0 million), hurricane Irene ($21.0 million), Danish cloudburst ($10.2 million) and Melbourne floods ($16.8 million). Losses are net of retrocession but exclude reinstatement premiums.

Income from Discontinued Operations

The sale of the Company's ownership position in Lloyd's was completed on August 20, 2012, for total proceeds of $50.2 million. Our letter of credit for Funds at Lloyd's in the amount of $159.0 million was also released on the same day. The divestiture has been recorded in the third quarter results and resulted in a gain on disposal of $5.7 million, net of deal-related expenses.

Income from discontinued operations includes the financial results of our former reportable segments, Lloyd's (for all periods presented) and Island Heritage (for all periods presented up to and including March 31, 2012). Included in income from discontinued operations for the nine months ended September 30, 2012 is underwriting income of $19.4 million, compared to underwriting losses of $4.0 million for the same period in 2011. The $23.4 million increase in underwriting income is primarily attributable to more significant catastrophic events during 2011 compared to 2012. There will be no future income from discontinued operations as the disposals of the Island Heritage and Lloyd's segments have both been completed.

As of September 30, 2012, we had no remaining assets or liabilities associated with discontinued operations. Although we account for the business comprising our former Lloyd's and Island Heritage reportable segments as discontinued operations, we ceased to own the Island Heritage business after completing its sale on April 5, 2012, and we ceased to own the Lloyd's business after completing its sale on August 20, 2012.

Investment Results

The decrease in net investment income on the nine months ended September 30, 2012, is primarily due to lower investment assets, the change in asset allocation and interest rates during the period, which was partially offset by the positive performance of the investment funds, compared to the same period in 2011.

The increase in the net realized and unrealized gains and losses - investments, for the nine months ended September 30, 2012, is primarily due to the better performance of fixed maturity investments and investment funds, and the reduced exposure to future contracts during 2012, compared to the same period in 2011.

Additional information

The Company, through its operating subsidiaries, is a global reinsurance company that employs a focused and technical approach to the property, property catastrophe, and short-tail specialty and casualty reinsurance businesses. The Company is traded on the New York Stock Exchange under the symbol "FSR" and the Bermuda Stock Exchange under the symbol "FSR BH". Additional financial information and other items of interest are available on the Company's website located at www.flagstonere.com.

For more detailed financial information, please refer to the unaudited September 30, 2012, Financial Supplement, which will be posted on the Company's website.

Unaudited Consolidated Condensed Balance Sheets

As at September 30, 2012 and December 31, 2011

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

As at September 30,

As at December 31,

2012

2011

ASSETS

Investments:

Fixed maturity investments, at fair value (Amortized cost: 2012 - $349,440; 2011 - $1,135,755)

$

350,262

$

1,138,435

Short term investments, at fair value (Amortized cost: 2012 - $719,289; 2011 - $10,620)

719,294

10,616

Other investments

101,796

125,534

Total investments

1,171,352

1,274,585

Cash and cash equivalents

307,499

249,424

Restricted cash

22,629

17,538

Premium balances receivable

209,344

236,375

Unearned premiums ceded

29,934

30,550

Reinsurance recoverable

126,003

271,183

Accrued interest receivable

2,452

12,950

Receivable for investments sold

-

18

Deferred acquisition costs

29,372

38,155

Funds withheld

24,371

25,116

Other assets