Flagstone Reinsurance Holdings, S.A. - FORM 8-K - EX-99.2 - THIRD QUARTER 2012 FINANCIAL SUPPLEMENT

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8-K - FORM 8-K - Flagstone Reinsurance Holdings, S.A.	form8k.htm
EX-99.1 - PRESS RELEASE - Flagstone Reinsurance Holdings, S.A.	exhibit991.htm

Exhibit 99.2

Flagstone Reinsurance Holdings, S.A.

INVESTOR FINANCIAL SUPPLEMENT

THIRD QUARTER 2012

Flagstone Reinsurance Holdings, S.A.

65 Avenue de la Gare, L-1611

Luxembourg

Grand Duchy of Luxembourg

Contact Information:

Brenton Slade

Chief Marketing Officer

+352 273 515 15

Website Information:

www.flagstonere.com

This report is for informational purposes only. It should be read in conjunction with

the documents that we file with the Securities and Exchange Commission ("SEC")

pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

FINANCIAL SUPPLEMENT TABLE OF CONTENTS

					Page(s)
Basis of Presentation and Recent Developments					1
Cautionary Statement Regarding Forward-Looking Statements					2
Regulation G - Non-GAAP Financial Measures					4
	I.	Income Statements
			a.	Consolidated Statements of Income (Loss) - Quarterly	5
			b.	Gross Premiums Written by Line of Business and Geographic Area of Risk	6
	II.	Consolidated Balance Sheets			7
	III.	Investment Portfolio Composition			8
	IV.	Loss Reserve - Paid to Incurred Analysis			9
	V.	Share Analysis
			a.	Capitalization	10
			b.	Earnings Per Common Share Information - As Reported	11
			c.	Basic and Diluted Book Value Per Common Share Analysis	12
	VI.	Non-GAAP Financial Measure Reconciliation			13

FLAGSTONE REINSURANCE HOLDINGS, S.A.

BASIS OF PRESENTATION

DEFINITIONS AND PRESENTATION

·	Unless otherwise noted, all data is in thousands, except for share amounts, per share amounts and percentages.

·	The debt to capitalization ratio is an indication of the Company’s leverage. It is calculated by dividing the Company’s long term debt by the total capital. Total capital represents the sum of Flagstone shareholders’ equity plus long term debt.

·	N/A - means not applicable.

In presenting the Company’s results, management has included and discussed certain “non-GAAP” financial measures, as such term is defined in Regulation G promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The reconciliation of such non-GAAP financial measures to their respective most directly comparable U.S. GAAP financial measures in accordance with Regulation G is included in this financial supplement.

As previously announced on April 2, 2012, and on April 3, 2012, the Company announced definitive agreements to divest its Island Heritage and Lloyd’s segments, respectively. The Island Heritage transaction closed on April 5, 2012 and the Lloyd’s transaction closed on August 20, 2012. Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to the continuing operations. All prior years presented have been reclassified to conform to this new presentation.

As previously announced on August 30, 2012, the boards of directors of both Validus Holdings, Ltd. (“Validus”) and Flagstone have approved a definitive merger agreement pursuant to which Validus will acquire all of the issued and outstanding shares of Flagstone. Under the terms of the agreement, Flagstone shareholders will receive 0.1935 Validus voting common shares and $2.00 in cash for each Flagstone share. The transaction provides Flagstone shareholders with a 19.4% premium and $8.43 of value per share based on the closing share price for each of Validus and Flagstone as of Wednesday, August 29, 2012 and represents an aggregate equity value of $623.2 million. Completion of the transaction, which is expected to occur in the fourth quarter of 2012, is subject to customary closing conditions, including obtaining regulatory approvals and the approval of Flagstone’s shareholders.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

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.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

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.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

REGULATION G

NON-GAAP FINANCIAL MEASURES

In presenting the Company’s results, management has included and discussed non-GAAP financial measures. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

BASIC BOOK VALUE PER COMMON SHARE

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

The Company has included diluted book value per common share because it takes into account the effect of dilutive securities, therefore, the Company believes it is a better measure of calculating shareholder returns than basic book value per common share. 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 and restricted share units. When the effect of securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per common share. The warrant was anti-dilutive and was excluded from the calculation of diluted book value per common share for all periods presented. 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.

ANNUALIZED NET OPERATING RETURN ON AVERAGE FLAGSTONE SHAREHOLDERS’ EQUITY

Annualized net operating return on average Flagstone shareholders’ equity is defined as operating income (loss) (income (loss) from continuing operations adjusted for net realized and unrealized gains (losses) - investments, net realized and unrealized gains (losses) – other, net foreign exchange losses (gains), and non-recurring items) divided by average Flagstone shareholders’ equity (the sum of opening and closing Flagstone shareholders’ equity divided by two). The result is then annualized (a statistical technique whereby figures covering a period of less than one year are extended to cover a 12 month period).

DILUTED OPERATING INCOME (LOSS) PER COMMON SHARE

Diluted operating income (loss) per common share is defined as income (loss) from continuing operations adjusted for net realized and unrealized gains (losses) - investments, net realized and unrealized gains (losses) – other, net foreign exchange losses (gains), and non-recurring items divided by diluted weighted average common shares outstanding.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) - QUARTERLY (Unaudited)

		Three months ended														Nine months ended						Year ended
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			September 30, 2012			September 30, 2011			December 31, 2011
REVENUES
Gross premiums written	$	4,042		$	171,150		$	170,228		$	80,732		$	92,162		$	345,420		$	708,965		$	789,697
Premiums ceded		1,338			(6,285)			(84,899)			(37,529)			(30,577)			(89,846)			(193,736)			(231,265)
Net premiums written		5,380			164,865			85,329			43,203			61,585			255,574			515,229			558,432
Change in net unearned premiums		77,173			(62,366)			28,416			78,561			68,456			43,223			(65,515)			13,046
Net premiums earned		82,553			102,499			113,745			121,764			130,041			298,797			449,714			571,478
Net investment income		6,130			3,866			5,067			6,647			6,167			15,063			27,665			34,312
Net realized and unrealized gains (losses) - investments		5,970			5,365			18,103			(4,044)			(19,592)			29,438			(16,726)			(20,770)
Net realized and unrealized gains (losses) - other		5,589			(4,990)			6,383			7,503			(18,305)			6,982			(5,009)			2,494
Other income		2,187			1,546			2,811			1,372			1,376			6,544			4,062			5,434
Total revenues		102,429			108,286			146,109			133,242			99,687			356,824			459,706			592,948

EXPENSES
Loss and loss adjustment expenses		60,051			55,483			66,449			145,167			131,879			181,983			531,368			676,535
Acquisition costs		21,104			22,113			22,653			20,022			31,619			65,870			95,303			115,325
General and administrative expenses		18,287			17,533			20,910			28,509			17,785			56,730			56,178			84,686
Stock based compensation expense		901			1,289			950			1,704			2,000			3,140			(574)			1,131
Interest expense		2,750			2,965			2,958			2,789			3,137			8,673			8,879			11,668
Net foreign exchanges losses (gains)		5,859			(3,354)			4,231			1,414			(33,981)			6,736			3,067			4,481
Total expenses		108,952			96,029			118,151			199,605			152,439			323,132			694,221			893,826
(Loss) income from continuing operations before income taxes and interest in earnings of equity investments		(6,523)			12,257			27,958			(66,363)			(52,752)			33,692			(234,515)			(300,878)
(Provision) recovery for income tax		(569)			(185)			(128)			(354)			(668)			(882)			405			51
Interest in earnings of equity investments		-			270			18			(216)			(250)			288			(706)			(922)
(Loss) income from continuing operations		(7,092)			12,342			27,848			(66,933)			(53,670)			33,098			(234,816)			(301,749)
Income (loss) from discontinued operations, net of taxes		5,746			1,148			12,472			(17,630)			(5,769)			19,366			(4,032)			(21,662)
Net (loss) income		(1,346)			13,490			40,320			(84,563)			(59,439)			52,464			(238,848)			(323,411)
Less: (Income) loss attributable to noncontrolling interest		-			-			(1,135)			(595)			(106)			(1,135)			(2,127)			(2,722)
NET (LOSS) INCOME ATTRIBUTABLE TO FLAGSTONE	$	(1,346)		$	13,490		$	39,185		$	(85,159)		$	(59,545)		$	51,329		$	(240,975)		$	(326,133)

Net (loss) income	$	(1,346)		$	13,490		$	40,320		$	(84,563)		$	(59,439)		$	52,464		$	(238,848)		$	(323,411)
Change in currency translation adjustment		(2,803)			(4,669)			4,537			(1,915)			(8,677)			(2,935)			(4,927)			(6,842)
Change in defined benefit pension plan obligation		326			136			(208)			532			62			254			(96)			436
Comprehensive (loss) income		(3,823)			8,957			44,649			(85,946)			(68,054)			49,783			(243,871)			(329,817)
Less: Comprehensive loss attributable to noncontrolling interest		-			-			(1,135)			(595)			(106)			(1,135)			(2,127)			(2,722)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO FLAGSTONE	$	(3,823)		$	8,957		$	43,514		$	(86,541)		$	(68,160)		$	48,648		$	(245,998)		$	(332,539)

KEY RATIOS
Loss ratio		72.7	%		54.1	%		58.4	%		119.2	%		101.4	%		60.9	%		118.2	%		118.4	%
Acquisition cost ratio		25.6	%		21.6	%		19.9	%		16.4	%		24.3	%		22.1	%		21.2	%		20.2	%
General and administrative expense ratio (1)		23.2	%		18.4	%		19.2	%		24.8	%		15.2	%		20.0	%		12.4	%		15.0	%
Combined ratio		121.5	%		94.1	%		97.5	%		160.4	%		140.9	%		103.0	%		151.8	%		153.6	%

PER COMMON SHARE DATA
Weighted average common shares outstanding - Basic		71,352,487			71,352,487			70,678,937			70,391,286			70,380,852			71,128,790			70,041,621			70,129,756
Weighted average common shares outstanding - Diluted (2)		71,352,487			71,763,904			71,156,700			70,391,286			70,380,852			71,766,808			70,041,621			70,129,756

Net (loss) income attributable to Flagstone per common share - Basic	$	(0.02)		$	0.19		$	0.55		$	(1.21)		$	(0.85)		$	0.72		$	(3.44)		$	(4.65)
Net (loss) income attributable to Flagstone per common share - Diluted	$	(0.02)		$	0.19		$	0.55		$	(1.21)		$	(0.85)		$	0.72		$	(3.44)		$	(4.65)

(1) The general and administrative expense ratio is inclusive of general and administrative expenses and stock based compensation expense.
(2) Dilutive share equivalents have been excluded in the weighted average common shares used for the calculation of diluted earnings per share in periods of net loss because the effect of such securities would be anti-dilutive.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

GROSS PREMIUMS WRITTEN BY LINE OF BUSINESS AND
GEOGRAPHIC AREA OF RISK (Unaudited)

	Three months ended September 30,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Line of Business
Property catastrophe	$	11,099	274.6	%	$	45,051	48.9	%
Property		(13,172)	(325.9)	%		19,898	21.6	%
Short-tail specialty and casualty		6,115	151.3	%		27,213	29.5	%
Total	$	4,042	100.0	%	$	92,162	100.0	%


	Nine months ended September 30,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Line of Business
Property catastrophe	$	244,196	70.7	%	$	417,306	58.9	%
Property		53,493	15.5	%		138,921	19.6	%
Short-tail specialty and casualty		47,731	13.8	%		152,738	21.5	%
Total	$	345,420	100.0	%	$	708,965	100.0	%


	Three months ended September 30,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Geographic area of risk insured (1)
Caribbean	$	(9,829)	(243.2)	%	$	2,006	2.2	%
Europe		17,796	440.3	%		16,220	17.6	%
Japan and Australasia		4,806	118.9	%		18,134	19.7	%
North America		(17,252)	(426.8)	%		22,154	24.0	%
Worldwide risks (2)		4,339	107.3	%		21,429	23.3	%
Other		4,182	103.5	%		12,219	13.2	%
Total	$	4,042	100.0	%	$	92,162	100.0	%


	Nine months ended September 30,
	2012				2011
	Gross premiums written		Percentage of total		Gross premiums written		Percentage of total
Geographic area of risk insured (1)
Caribbean	$	(845)	(0.2)	%	$	5,422	0.8	%
Europe		85,799	24.8	%		105,921	14.9	%
Japan and Australasia		37,867	11.0	%		88,439	12.5	%
North America		162,306	47.0	%		323,731	45.7	%
Worldwide risks (2)		47,441	13.7	%		146,761	20.7	%
Other		12,852	3.7	%		38,691	5.4	%
Total	$	345,420	100.0	%	$	708,965	100.0	%

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

FLAGSTONE REINSURANCE HOLDINGS, S.A.

CONSOLIDATED BALANCE SHEETS (Unaudited)

	As at
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011
ASSETS
Investments:
Fixed maturity investments, at fair value	$	350,262		$	333,674		$	1,132,101		$	1,138,435		$	1,211,335
Short term investments, at fair value		719,294			696,838			7,473			10,616			9,452
Other investments		101,796			142,504			131,590			125,534			127,815
Total investments		1,171,352			1,173,016			1,271,164			1,274,585			1,348,602
Cash and cash equivalents		307,499			186,251			217,050			249,424			214,052
Restricted cash		22,629			17,823			22,144			17,538			25,155
Premium balances receivable		209,344			273,744			254,948			236,375			323,549
Unearned premiums ceded		29,934			58,679			82,904			30,550			55,517
Reinsurance recoverable		126,003			232,784			251,207			271,183			221,662
Accrued interest receivable		2,452			2,607			9,914			12,950			12,565
Receivable for investments sold		-			2,435			4,060			18			3,964
Deferred acquisition costs		29,372			50,144			39,735			38,155			43,739
Funds withheld		24,371			25,983			20,680			25,116			28,570
Goodwill		-			-			-			-			3,108
Other assets		96,355			110,919			120,569			160,950			214,933
Assets held for sale including discontinued operations		16,524			439,641			540,123			461,651			495,862
Total assets	$	2,035,835		$	2,574,026		$	2,834,498		$	2,778,496		$	2,991,278

LIABILITIES
Loss and loss adjustment expense reserves	$	668,973		$	682,329		$	849,975		$	897,368		$	857,873
Unearned premiums		188,010			292,109			242,341			215,316			320,407
Insurance and reinsurance balances payable		34,982			45,454			104,266			75,433			80,145
Payable for investments purchased		3,248			2,494			44,781			6,255			20,986
Long term debt		250,456			250,202			251,088			250,575			251,167
Other liabilities		59,321			70,964			52,702			54,059			76,101
Liabilities of discontinued operations held for sale		-			393,814			441,409			472,957			490,711
Total liabilities		1,204,990			1,737,366			1,986,562			1,971,963			2,097,390

EQUITY
Common voting shares		845			845			845			845			845
Common shares held in treasury, at cost		(150,202)			(150,202)			(150,202)			(160,448)			(161,701)
Additional paid-in capital		855,722			857,714			859,327			872,819			875,481
Accumulated other comprehensive loss		(15,265)			(12,788)			(8,255)			(12,584)			(11,201)
Retained earnings		139,745			141,091			127,601			88,416			173,574
Total Flagstone shareholders' equity		830,845			836,660			829,316			789,048			876,998
Noncontrolling interest in subsidiaries (1)		-			-			18,620			17,485			16,890
Total equity		830,845			836,660			847,936			806,533			893,888
Total liabilities and equity	$	2,035,835		$	2,574,026		$	2,834,498		$	2,778,496		$	2,991,278

Basic book value per common share	$	11.64		$	11.73		$	11.62		$	11.21		$	12.46
Diluted book value per common share	$	11.45		$	11.52		$	11.42		$	10.90		$	12.11
Debt to total capitalization (2)		23.2	%		23.0	%		23.2	%		24.1	%		22.3	%

(1)Prior to June 30, 2012, noncontrolling interest in subsidiaries included Island Heritage.
(2)Comprises long term debt divided by the sum of long term debt plus Flagstone shareholders' equity.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

INVESTMENT PORTFOLIO COMPOSITION (Unaudited)

		As at
TYPE OF INVESTMENT		September 30, 2012				June 30, 2012				March 31, 2012				December 31, 2011				September 30, 2011
U.S. government and agency securities		$	-	0.0	%	$	-	0.0	%	$	318,230	25.0	%	$	323,781	25.5	%	$	200,375	14.9	%
Other foreign governments			21,712	1.8	%		21,356	1.8	%		77,485	6.1	%		109,515	8.6	%		245,272	18.2	%
Corporates			-	0.0	%		-	0.0	%		402,720	31.7	%		472,346	37.1	%		500,961	37.1	%
Mortgage-backed securities			137,967	11.8	%		131,644	11.2	%		180,211	14.2	%		175,090	13.7	%		195,974	14.5	%
Asset-backed securities			190,583	16.3	%		180,674	15.4	%		153,455	12.1	%		57,703	4.5	%		68,753	5.1	%
	Total fixed maturities		350,262	29.9	%		333,674	28.4	%		1,132,101	89.1	%		1,138,435	89.4	%		1,211,335	89.8	%
Short term investments			719,294	61.4	%		696,838	59.5	%		7,473	0.6	%		10,616	0.8	%		9,452	0.7	%
	Total		1,069,556	91.3	%		1,030,512	87.9	%		1,139,574	89.7	%		1,149,051	90.2	%		1,220,787	90.5	%
Other investments			101,796	8.7	%		142,504	12.1	%		131,590	10.3	%		125,534	9.8	%		127,815	9.5	%
	Total	$	1,171,352	100.0	%	$	1,173,016	100.0	%	$	1,271,164	100.0	%	$	1,274,585	100.0	%	$	1,348,602	100.0	%

CREDIT QUALITY OF FIXED MATURITIES AND SHORT TERM INVESTMENTS
AAA		$	1,039,268	97.2	%	$	1,002,469	97.3	%	$	732,603	64.3	%	$	695,931	60.6	%	$	720,226	59.0	%
AA			268	0.0	%		2,678	0.3	%		115,641	10.1	%		92,299	8.0	%		152,066	12.5	%
A			30,020	2.8	%		24,998	2.4	%		194,924	17.1	%		231,143	20.1	%		222,127	18.2	%
BBB			-	0.0	%		367	0.0	%		96,406	8.5	%		129,678	11.3	%		126,368	10.3	%
	Total	$	1,069,556	100.0	%	$	1,030,512	100.0	%	$	1,139,574	100.0	%	$	1,149,051	100.0	%	$	1,220,787	100.0	%

MATURITY PROFILE OF FIXED MATURITIES AND SHORT TERM INVESTMENTS
Within one year		$	719,294	67.2	%	$	696,838	67.6	%	$	11,638	1.0	%	$	29,663	2.6	%	$	37,793	3.1	%
From one to five years			6,077	0.6	%		4,269	0.4	%		759,018	66.6	%		754,709	65.6	%		788,310	64.6	%
From five to ten years			7,020	0.7	%		9,062	0.9	%		26,477	2.3	%		107,461	9.4	%		90,674	7.4	%
Above ten years			8,615	0.8	%		8,025	0.8	%		8,775	0.8	%		24,425	2.1	%		39,284	3.2	%
Asset-backed and mortgage-backed securities			328,550	30.7	%		312,318	30.3	%		333,666	29.3	%		232,793	20.3	%		264,726	21.7	%
	Total	$	1,069,556	100.0	%	$	1,030,512	100.0	%	$	1,139,574	100.0	%	$	1,149,051	100.0	%	$	1,220,787	100.0	%

Average credit quality			AAA				AAA				AA+				AA				AA+

OTHER INVESTMENTS
Investment funds		$	70,951			$	68,235			$	66,507			$	59,278			$	60,846
Catastrophe bonds			28,354				71,762				62,827				64,016				64,485
Equity securities			45				61				81				82				110
Other investments			2,446				2,446				2,175				2,158				2,374
	Total	$	101,796			$	142,504			$	131,590			$	125,534			$	127,815

FLAGSTONE REINSURANCE HOLDINGS, S.A.

RESERVE FOR LOSSES AND LOSS EXPENSES: PAID TO INCURRED ANALYSIS (Unaudited)

	Three months ended September 30, 2012									Three months ended June 30, 2012									Three months ended March 31, 2012
Loss and loss adjustment expense reserves	Gross			Recoveries			Net			Gross			Recoveries			Net			Gross			Recoveries			Net

Beginning of period	$	682,329		$	(232,784)		$	449,545		$	849,975		$	(251,207)		$	598,768		$	897,368		$	(271,183)		$	626,185

Incurred		60,793			(742)			60,051			54,583			900			55,483			58,570			7,879			66,449

Other (1)		8,549			(14)			8,535			(8,033)			37			(7,996)			6,961			(43)			6,918

Paid		(82,698)			107,537			24,839			(214,196)			17,486			(196,710)			(112,924)			12,140			(100,784)

End of period	$	668,973		$	(126,003)		$	542,970		$	682,329		$	(232,784)		$	449,545		$	849,975		$	(251,207)		$	598,768

Paid to incurred percentage		136.0	%		14,492.9	%		(41.4)	%		392.4	%		(1,942.9)	%		354.5	%		192.8	%		(154.1)	%		151.7	%


	Three months ended December 31, 2011									Three months ended September 30, 2011
Loss and loss adjustment expense reserves	Gross			Recoveries			Net			Gross			Recoveries			Net

Beginning of period	$	857,873		$	(221,662)		$	636,211		$	877,090		$	(168,407)		$	706,683

Incurred		201,910			(56,743)			145,167			191,446			(59,567)			131,879

Other (1)		6,768			(355)			6,413			(44,897)			568			(44,329)

Paid		(169,183)			7,577			(161,606)			(165,766)			5,744			(160,022)

End of period	$	897,368		$	(271,183)		$	626,185		$	857,873		$	(221,662)		$	636,211

Paid to incurred percentage		83.8	%		13.4	%		111.3	%		86.6	%		9.6	%		121.3	%

(1) This amount represents the movement in reserves as a result of foreign exchange movements. As well in the three months ended June 30, 2012 and the three months ended September 30, 2012, the movement of reserves from intercompany to third party following the disposal of Island Heritage and Lloyds is also included.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

CAPITALIZATION (Unaudited)

	As at
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011

Long term debt	$	250,456		$	250,202		$	251,088		$	250,575		$	251,167
Flagstone shareholders’ equity		830,845			836,660			829,316			789,048			876,998
Total capitalization	$	1,081,301		$	1,086,862		$	1,080,404		$	1,039,623		$	1,128,165

Leverage ratio:
Debt to total capitalization		23.2	%		23.0	%		23.2	%		24.1	%		22.3	%

				September 30, 2012						September 30, 2011
				Debt or Facility Principal			Outstanding			Debt or Facility Principal			Outstanding
Debt and financing arrangements
Junior Subordinated Deferrable Interest Notes (a)				$	25,000		$	25,000		$	25,000		$	25,000
Junior Subordinated Deferrable Interest Notes (b)				$	100,000		$	88,750		$	100,000		$	88,750
Deferrable Interest Debentures (c)				$	120,000		$	120,000		$	120,000		$	120,000
Deferrable Interest Debentures (d)				€	13,000		€	13,000		€	13,000		€	13,000
Letter of credit facility (e)				$	550,000		$	371,653		$	550,000		$	427,200
Letter of credit facility (f)				$	200,000		$	5,133		$	200,000		$	30,277

Notes:
(a) The Junior Subordinated Deferrable Interest Notes have a floating rate equal to LIBOR plus 310 basis points per annum reset quarterly. The notes mature on September 15, 2037, and may be called at par by the Issuer at any time after September 15, 2012.

(b) The Junior Subordinated Deferrable Interest Notes have a floating rate equal to LIBOR plus 300 basis points per annum reset quarterly. The notes mature on July 30, 2037, and may be called at par by the Issuer at any time after July 30, 2012.

(c) The Deferrable Interest Debentures have a floating rate equal to LIBOR plus 354 basis points per annum reset quarterly. The notes mature on September 15, 2036, and may be called at par by the Issuer at any time after September 15, 2011.

(d) The Deferrable Interest Debentures have a floating rate equal to EURIBOR plus 354 basis points per annum reset quarterly. The notes mature on September 15, 2036 and may be called at par by the Issuer at any time after September 15, 2011.

(e) On December 21, 2010, Flagstone Suisse and Flagstone Capital Management Luxembourg SICAF – FIS entered into a secured $550.0 million standby letter of credit facility with Citibank Europe Plc. The drawn amount of the facility at September 30, 2012, was secured by $406.2 million of fixed maturity securities from the Company's investment portfolio. This replaces a $450 million facility with Citibank previously in place with Flagstone Suisse.

(f) On August 31, 2011, Flagstone Suisse and Flagstone Capital Management Luxembourg SICAF - FIS entered into a $200.0 million secured committed letter of credit facility with Barclays Bank Plc. The drawn amount of the facility at September 30, 2012, was secured by $5.4 million of fixed maturity securities from the Company's investment portfolio. This replaces a $200 million facility with Barclays Bank Plc which commenced on March 5, 2009.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

EARNINGS PER COMMON SHARE INFORMATION - AS REPORTED, GAAP (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011

Net (loss) income attributable to Flagstone	$	(1,346)	$	(59,545)	$	51,329	$	(240,975)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Weighted average common shares outstanding - Basic (1)		71,352,487		70,380,852		71,128,790		70,041,621

Dilutive share equivalents:
Weighted average unvested restricted share units (2)		-		-		151,567		-
Weighted average unvested performance share units		-		-		486,451		-
Weighted average common shares outstanding - Diluted		71,352,487		70,380,852		71,766,808		70,041,621

EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(0.02)	$	(0.85)	$	0.72	$	(3.44)
Diluted	$	(0.02)	$	(0.85)	$	0.72	$	(3.44)


(1) Includes weighted average vested restricted share units.
(2) Dilutive share equivalents have been excluded in the weighted average common shares used for the calculation of diluted earnings per share in periods of net loss because the effect of such securities would be anti-dilutive.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NON-GAAP FINANCIAL MEASURES RECONCILIATION
BASIC AND DILUTED BOOK VALUE PER COMMON SHARE (Unaudited)

	As at
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011
DILUTIVE COMMON SHARES AS IF OUTSTANDING
Flagstone shareholders’ equity	$	830,845		$	836,660		$	829,316		$	789,048		$	876,998
Cumulative distributions paid per outstanding common share		0.84			0.80			0.76			0.72			0.68
Common shares outstanding		71,058,922			71,058,922			71,058,922			70,167,142			70,058,168
add in:
vested restricted share units		293,565			293,565			293,565			233,709			322,684
Total common shares and common share equivalents outstanding		71,352,487			71,352,487			71,352,487			70,400,851			70,380,852

Basic book value per common share	$	11.64		$	11.73		$	11.62		$	11.21		$	12.46

Basic book value per common share plus accumulated distributions (1)	$	12.48		$	12.53		$	12.38		$	11.93		$	13.14

Diluted book value on an "as if converted basis"
Flagstone shareholders' equity	$	830,845		$	836,660		$	829,316		$	789,048		$	876,998
add in:
proceeds on exercise of warrant (2)		-			-			-			-			-
Adjusted Flagstone shareholders' equity	$	830,845		$	836,660		$	829,316		$	789,048		$	876,998

Cumulative distributions paid per outstanding common share	$	0.84		$	0.80		$	0.76		$	0.72		$	0.68

As if converted diluted shares outstanding
Common shares and share equivalents outstanding		71,352,487			71,352,487			71,352,487			70,400,851			70,380,852
add in:
vesting of performance share units		987,950			1,010,800			1,016,050			1,676,125			1,762,442
vesting of restricted share units		214,350			250,950			260,050			290,470			275,320
Diluted common shares outstanding		72,554,787			72,614,237			72,628,587			72,367,446			72,418,614

Diluted book value per common share	$	11.45		$	11.52		$	11.42		$	10.90		$	12.11

Diluted book value per common share plus accumulated distributions (1)	$	12.29		$	12.32		$	12.18		$	11.62		$	12.79

Change in diluted book value per common share: Quarter		(0.6)	%		0.9	%		4.7	%		(10.1)	%		(7.4)	%
Change in diluted book value per common share adjusted for distributions: Quarter (3)		(0.3)	%		1.3	%		5.1	%		(9.6)	%		(7.1)	%
Change in diluted book value per common share adjusted for distributions: Rolling 12 months (3)		6.1	%		6.4	%		5.1	%		(28.7)	%		(21.2)	%
Annualized change in diluted book value per common share adjusted for distributions since inception		3.3	%		3.5	%		3.4	%		2.8	%		4.6	%

(1) Basic and diluted book value per common share plus accumulated distributions is calculated by dividing the sum of Flagstone shareholders' equity and cumulative distributions declared by diluted common shares outstanding.
(2) Diluted book value per common share incorporates the assumption that the warrant would not be exercised at the end of any period where the share price is less than the strike price.
(3) Change in diluted book value per common share adjusted for distributions is the internal rate of return of the increase in diluted book value per common share plus accumulated distributions declared in the period.

FLAGSTONE REINSURANCE HOLDINGS, S.A.

NON-GAAP FINANCIAL MEASURE RECONCILIATION

NET OPERATING INCOME (LOSS) (Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011

(Loss) income from continuing operations	$	(7,092)		$	(53,670)		$	33,098		$	(234,816)

ADJUSTMENTS FOR:
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
Net foreign exchange losses (gains)		5,859			(33,981)			6,736			3,067


NET OPERATING (LOSS) INCOME	$	(12,792)		$	(49,754)		$	3,414		$	(210,014)


AVERAGE FLAGSTONE SHAREHOLDERS’ EQUITY	$	833,753		$	911,951		$	809,947		$	1,005,866


ANNUALIZED NET OPERATING RETURN ON AVERAGE FLAGSTONE SHAREHOLDERS’ EQUITY		(6.1)	%		(21.8)	%		0.6	%		(27.8)	%

Flagstone Reinsurance Holdings, S.A. - FORM 8-K - EX-99.2 - THIRD QUARTER 2012 FINANCIAL SUPPLEMENT - October 30, 2012

Attached files

Flagstone Reinsurance Holdings, S.A. Reports