Flagstone Re Reports Third Quarter 2012 Results

  Flagstone Re Reports Third Quarter 2012 Results

Business Wire

LUXEMBOURG -- October 29, 2012

Flagstone Reinsurance Holdings, S.A. (NYSE: 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        $ 4,042          $ 92,162           $ 345,420        $ 708,965
written
Premiums ceded         1,338          (30,577    )      (89,846    )    (193,736   )
Net premiums            5,380            61,585             255,574          515,229
written
Change in net          77,173         68,456           43,223         (65,515    )
unearned premiums
Net premiums earned     82,553           130,041            298,797          449,714
Net investment          6,130            6,167              15,063           27,665
income
Net realized and
unrealized gains        5,970            (19,592    )       29,438           (16,726    )
(losses) -
investments
Net realized and
unrealized gains        5,589            (18,305    )       6,982            (5,009     )
(losses) - other
Other income           2,187          1,376            6,544          4,062      
Total revenues         102,429        99,687           356,824        459,706    
                                                                             
EXPENSES
Loss and loss           60,051           131,879            181,983          531,368
adjustment expenses
Acquisition costs       21,104           31,619             65,870           95,303
General and
administrative          19,188           19,785             59,870           55,604
expenses
Interest expense        2,750            3,137              8,673            8,879
Net foreign
exchange losses        5,859          (33,981    )      6,736          3,067      
(gains)
Total expenses         108,952        152,439          323,132        694,221    
(Loss) income from
continuing
operations before
income taxes and        (6,523     )     (52,752    )       33,692           (234,515   )
interest in
earnings of equity
investments
(Provision)
recovery for income     (569       )     (668       )       (882       )     405
tax
Interest in
earnings of equity     -              (250       )      288            (706       )
investments
(Loss) income from
continuing              (7,092     )     (53,670    )       33,098           (234,816   )
operations
Income (loss) from
discontinued           5,746          (5,769     )      19,366         (4,032     )
operations, net of
taxes
Net (loss) income       (1,346     )     (59,439    )       52,464           (238,848   )
Less: Income
attributable to        -              (106       )      (1,135     )    (2,127     )
noncontrolling
interest
NET (LOSS) INCOME
ATTRIBUTABLE TO       $ (1,346     )   $ (59,545    )     $ 51,329        $ (240,975   )
FLAGSTONE
                                                                             
Net (loss) income     $ (1,346     )   $ (59,439    )     $ 52,464         $ (238,848   )
Change in currency
translation             (2,803     )     (8,677     )       (2,935     )     (4,927     )
adjustment
Change in defined
benefit pension        326            62               254            (96        )
plan obligation
Comprehensive           (3,823     )     (68,054    )       49,783           (243,871   )
(loss) income
Less: Comprehensive
income attributable    -              (106       )      (1,135     )    (2,127     )
to noncontrolling
interest
COMPREHENSIVE
(LOSS) INCOME         $ (3,823     )   $ (68,160    )     $ 48,648        $ (245,998   )
ATTRIBUTABLE TO
FLAGSTONE
                                                                             
Weighted average
common shares          71,352,487     70,380,852       71,128,790     70,041,621 
outstanding—Basic
Weighted average
common shares          71,352,487     70,380,852       71,766,808     70,041,621 
outstanding—Diluted
(Loss) income from
continuing            $ (0.10      )   $ (0.76      )     $ 0.45          $ (3.38      )
operations per
common share—Basic
Income (loss) from
discontinued          $ 0.08          $ (0.09      )     $ 0.27          $ (0.06      )
operations per
common share—Basic
Net (loss) income
attributable to       $ (0.02      )   $ (0.85      )     $ 0.72          $ (3.44      )
Flagstone per
common share—Basic
(Loss) income from
continuing
operations per        $ (0.10      )   $ (0.76      )     $ 0.45          $ (3.38      )
common
share—Diluted
Income (loss) from
discontinued
operations per        $ 0.08          $ (0.09      )     $ 0.27          $ (0.06      )
common
share—Diluted
Net (loss) income
attributable to
Flagstone per         $ (0.02      )   $ (0.85      )     $ 0.72          $ (3.44      )
common
share—Diluted
Distributions
declared per common   $ 0.04          $ 0.04            $ 0.12          $ 0.12       
share
                                                                                        

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 tolosses 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 tothe 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    $   350,262             $   1,138,435
- $349,440; 2011 - $1,135,755)
Short term investments, at fair
value (Amortized cost: 2012 -           719,294                 10,616
$719,289; 2011 - $10,620)
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                            96,355                  160,950
Assets held for sale including         16,524                461,652     
discontinued operations
Total assets                        $   2,035,835          $   2,778,496   
                                                                
LIABILITIES
Loss and loss adjustment expense    $   668,973             $   897,368
reserves
Unearned premiums                       188,010                 215,316
Insurance and reinsurance               34,982                  75,433
balances payable
Payable for investments purchased       3,248                   6,255
Long term debt                          250,456                 250,575
Other liabilities                       59,321                  54,059
Liabilities of discontinued            -                     472,957     
operations
Total liabilities                      1,204,990             1,971,963   
                                                                
EQUITY
Common voting shares, 300,000,000
authorized, $0.01 par value,
issued (2012 - 84,464,259; 2011 -       845                     845
84,464,259) and outstanding (2012
- 71,058,922; 2011 - 70,167,142)
Common shares held in treasury,
at cost (2012 - 13,405,337; 2011        (150,202    )           (160,448    )
- 14,297,117)
Additional paid-in capital              855,722                 872,819
Accumulated other comprehensive         (15,265     )           (12,584     )
loss
Retained earnings                      139,745               88,416      
Total Flagstone shareholders'           830,845                 789,048
equity
Noncontrolling interest in             -                     17,485      
subsidiaries
Total equity                           830,845               806,533     
Total liabilities and equity        $   2,035,835          $   2,778,496   
                                                                            

Cautionary Statement Regarding Forward-Looking Statements

This report may contain, and the Company may from time to time make, written
or oral “forward-looking statements” within the meaning of the U.S. Federal
securities laws, which are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All forward-looking
statements rely on a number of assumptions concerning future events and are
subject to a number of uncertainties and other factors, many of which are
outside the Company’s control, that could cause actual results to differ
materially from such statements. In particular, statements using words such as
“may”, “should”, “estimate”, “expect”, “anticipate”, “intend”, “believe”,
“predict”, “potential”, or words of similar import generally involve
forward-looking statements.

Important events and uncertainties that could cause the actual results to
differ include, but are not necessarily limited to: the ongoing impact on our
business of our net loss in 2011 and our inability to continue our return to
profitability in a timely manner, if at all; the amount of indemnification
obligations, purchase price adjustments and charges related to the
divestitures and realignment initiatives described above; the failure to
successfully implement the Company’s business strategy despite the completion
of the divestitures and realignment initiatives described above; cancellation
of our reinsurance contracts by cedents; market conditions affecting our
common share price; pricing changes in our industry; the possibility of severe
or unanticipated losses from natural or man-made catastrophes; the
effectiveness of our loss limitation methods; our dependence on principal
employees; the cyclical nature of the insurance and reinsurance business; the
levels of new and renewal business achieved and the premium environment; the
sensitivity of our business to financial strength ratings established by
independent rating agencies; the impact of our financial strength ratings and
the consequences to our business of any downgrade; the estimates reported by
cedents and brokers on pro-rata contracts and certain excess of loss contracts
in which the deposit premium is not specified; the inherent uncertainties of
establishing reserves for loss and loss adjustment expenses, and our reliance
on industry loss estimates and those generated by modeling techniques;
unanticipated adjustments to premium estimates; changes in the availability,
cost or quality of reinsurance or retrocessional coverage; our exposure to
many different counterparties in the financial service industry, and the
related credit risk of counterparty default; changes in general economic
conditions; changes in governmental regulation or tax laws in the
jurisdictions where we conduct business; our need for financial flexibility to
maintain our current level of business; the amount and timing of reinsurance
recoverables and reimbursements we actually receive from our reinsurers; the
overall level of competition, and the related demand and supply and premium
dynamics in our markets relating to growing capital levels in the insurance
and reinsurance industries; the investment environment, declining demand due
to increased retentions by cedents and other factors; and the impact of
Eurozone instability and terrorist activities on the economy.

Additionally, the proposed transaction between Flagstone and Validus described
above is subject to risks and uncertainties, including: (A) that Flagstone and
Validus may be unable to complete the proposed transaction because, among
other reasons, conditions to the completion of the proposed transaction may
not be satisfied or waived; (B) uncertainty as to the timing of completion of
the proposed transaction; (C) uncertainty as to the actual premium (if any)
that will be realized by Flagstone shareholders in connection with the
proposed transaction; (D) uncertainty as to the long-term value of Validus
common shares; (E) failure to realize the anticipated benefits of the proposed
transaction, including as a result of failure or delay in integrating
Flagstone’s businesses into Validus; and (F) the outcome of any legal
proceedings to the extent initiated against Validus, Flagstone and others
following the announcement of the proposed transaction, as well as Validus and
Flagstone management’s response to any of the aforementioned risks and
uncertainties.

Following the announcement of the proposed transaction between Validus and
Flagstone, all three of the rating agencies covering Flagstone announced
positive ratings actions. On August 31, 2012, Moody’s Investor Services
affirmed Flagstone Suisse’s financial strength rating of A3, and revised the
outlook from negative to stable. On August 31, 2012, A.M. Best Co. placed
Flagstone’s financial strength rating of A- (Excellent) under review with
developing implications. On September 4, 2012, Fitch Ratings revised the
Rating Watch on Flagstone’s A- financial strength rating to Evolving from
Negative. All three rating agencies indicated that a failure to complete the
proposed transaction between Flagstone and Validus would have negative ratings
implications.

A downgrade by any rating organization could result in a significant reduction
in the number of reinsurance contracts we write and in a substantial loss of
business as our customers, and brokers that place such business, move to other
competitors with higher financial strength ratings, as well as resulting in
negative consequences for our results of operations, cash flows, competitive
position and business prospects. Although we regularly provide financial and
other information to rating agencies to both maintain and enhance existing
financial strength ratings, we cannot assure that our financial strength
ratings will not be downgraded in the future by any of these agencies.

We seek to maintain a prudent amount of capital for our business and maintain
our overall financial flexibility. When assessing our financial position and
potential capital needs, we consider, among other things, the low investment
returns environment, our recent and potential net exposure to losses
associated with catastrophic events, the amount of and changes in our
reserves, underwriting opportunities and market conditions. We may decide to
raise additional capital in the future to continue and/or invest in our
existing businesses or write new business, although any such decision will be
dependent on then-existing market and other conditions.

These and other events that could cause actual results to differ are discussed
in more detail from time to time in our filings with the SEC. We undertake no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by U.S. Federal securities laws. Readers are cautioned not to place
undue reliance on these forward-looking statements, which are subject to
significant uncertainties and speak only as of the date on which they are
made.

Non-GAAP Financial Measures

In addition to the U.S. GAAP financial measures set forth in this Press
Release, we have presented “basic book value per common share”, “diluted book
value per common share” and “operating income”, which are non-GAAP financial
measures. Management uses growth in diluted book value per common share as a
prime measure of the value the Company is generating for its common
shareholders, as management believes that growth in the Company’s diluted book
value per common share ultimately translates into growth in the Company’s
stock price.

Basic book value per common share is defined as total Flagstone shareholders’
equity divided by the number of common shares outstanding at the end of the
period plus vested restricted share units, giving no effect to dilutive
securities. Diluted book value per common share is defined as total Flagstone
shareholders’ equity divided by the number of common shares and common share
equivalents outstanding at the end of the period including all potentially
dilutive securities such as the warrant, performance share units (“PSUs”) and
restricted share units (“RSUs”). When the effect of securities would be
anti-dilutive, these securities are excluded from the calculation of diluted
book value per common share. A warrant was anti-dilutive and was excluded from
the calculation of diluted book value per common share as at September 30,
2012 and December 31, 2011. For performance share units, the number of common
share equivalents used in the denominator of the diluted book value per common
share calculation does not include additional performance share units that
could be issued to employees as result of the change of control triggered by
the merger with Validus.

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

Book Value Per Common Share (unaudited)
As at September 30, 2012 and December 31, 2011
(Expressed in thousands of U.S. dollars, except share and per share data)
                                      
                                        As at
                                        September 30, 2012  December 31, 2011
                                                                  
                                        
                                                                  
Flagstone shareholders' equity          $    830,845         $    789,048
Potential net proceeds from assumed:
Exercise of PSU ^(1)                         -                    -
Exercise of RSU ^(1)                         -                    -
Conversion of warrant ^(2)                  -                   -
Diluted Flagstone shareholders'         $    830,845         $    789,048
equity
                                                                  
                                                                  
Cumulative distributions paid per       $    0.84            $    0.72
outstanding common share
                                                                  
Common shares outstanding - end of           71,058,922           70,167,142
period
Vested RSUs                                 293,565             233,709
Total common shares outstanding - end        71,352,487           70,400,851
of period
                                                                  
Potential shares to be issued:
PSUs expected to vest                        987,950              1,676,125
RSUs outstanding                             214,350              290,470
Conversion of warrant ^(2)                  -                   -
Common shares outstanding - diluted         72,554,787          72,367,446
                                                                  
                                                                  
Basic book value per common share       $    11.64           $    11.21
                                                                  
Diluted book value per common share     $    11.45           $    10.90
                                                                  
Basic book value per common share       $    12.48           $    11.93
plus accumulated distributions
                                                                  
Diluted book value per common share     $    12.29           $    11.62
plus accumulated distributions
                                                                  
                                                                  
Distributions per common share paid     $    0.12            $    0.16
during the period
                                                                  
^(1)No proceeds due when exercised
^(2)Below strike price - not dilutive

Contact:

Flagstone Reinsurance Holdings, S.A.
Brenton Slade, +352 2 735 1515
bslade@flagstonere.com