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Flagstone Re Reports Second Quarter 2012 Results

Stocks in this article: FSR

Flagstone is, in all material respects, nearing the completion of the business realignment as we announced in October 2011. The Company remains focused on leveraging the existing strengths in Flagstone’s core businesses in order to deliver enhanced value for its shareholders. Flagstone’s written premium for the second quarter, inclusive of reinstatements, was $171.2 million, which represents a decrease of 35.2% over the same period in 2011, as Flagstone continues to execute on its plan to decrease operating leverage and lower overall risk. This decrease was primarily attributed to risk reduction both in limits sold and a shift upward in attachment levels, as well as a reduction in business that was not considered appropriate within the re-focused portfolio.

For the second quarter, Flagstone produced a loss ratio of 54.1% and a combined ratio of 94.1%. This resulted in an increase in diluted book value per share of 1.3% during the second quarter.

Results of Operations

As a result of the announced divestitures of Lloyd’s and Island Heritage, the Company revised its reportable segments. The Company regularly reviews its financial results and assesses performance on the basis of its single reportable segment. All amounts in the following tables are expressed in thousands of U.S. dollars, except percentages or unless otherwise stated.

Underwriting Results

Below is a summary of our underwriting results and ratios for the three months ended June 30, 2012 and 2011:
  For the three months ended June 30,
2012   2011   $ Change     % Change
 
Property catastrophe reinsurance $ 126,755 $ 170,394 $ (43,639 ) (25.6 ) %
Property reinsurance 28,781 53,224 (24,443 ) (45.9 ) %
Short tail specialty and casualty reinsurance   15,614       40,510       (24,896 ) (61.5 ) %
Gross premiums written 171,150 264,128 (92,978 ) (35.2 ) %
Premiums ceded   (6,285 )     (44,409 )     38,124   (85.8 ) %
Net premiums written   164,865       219,719       (54,854 ) (25.0 ) %
Net premiums earned 102,499 118,620 (16,121 ) (13.6 ) %
Other related income 909 731 178 24.4 %
Loss and loss adjustment expenses (55,483 ) (96,490 ) 41,007 (42.5 ) %
Acquisition costs (22,113 ) (25,613 ) 3,500 (13.7 ) %
General and administrative expenses   (18,822 )     (19,744 )     922   (4.7 ) %
Underwriting income (loss) $ 6,990     $ (22,496 )   $ 29,486   131.1 %
 
Loss ratio 54.1 % 81.3 %
Acquisition cost ratio 21.6 % 21.6 %
General and administrative expense ratio   18.4   %   16.6   %
Combined ratio   94.1   %   119.5   %
  • The increase in net underwriting results is the result of the lack of significant loss events during the second quarter of 2012 compared to the same period in 2011 (New Zealand earthquake of June 2011 and U.S. tornadoes), 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 premiums written 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 three months ended June 30, 2012, we recorded $3.9 million of gross reinstatement premiums compared to $5.8 million recorded for the same period in 2011.
  • The decrease in ceded premiums is primarily related to higher reinstatement premiums incurred in 2011 on our ceded reinsurance due to loss activity and the increased level of reinsurance purchases after the loss events during the first quarter of 2011.
  • The decrease in the loss ratio compared to the same period in 2011 is primarily due to more significant losses from catastrophic events in the prior period, which included the New Zealand earthquake of $18.5 million and U.S. tornadoes of $19.4 million. Losses are net of retrocession but exclude reinstatement premiums.
  • Each quarter we revisit our loss estimates for previous catastrophe events. During the quarter ended June 30, 2012, based on updated estimates provided by clients and brokers, we recorded net favorable developments of $1.4 million for prior accident years. During the second quarter of 2011, the net positive developments for prior catastrophe events were $12.8 million.
  • The acquisition cost ratio compared to the same period in 2011 has remained stable.
  • The decrease in general and administrative expenses is primarily the result of expense reduction initiatives in accordance with our overall decrease in underwriting activities, partially offset by lower staff compensation accrual in the same period in 2011 as a result of the significant underwriting loss.

Below is a summary of the underwriting results and ratios for the six months ended June 30, 2012 and 2011:

    For the six months ended June 30,
2012   2011  

$ Change

  % Change
 
Property catastrophe reinsurance $ 233,096 $ 372,256 $ (139,160 ) (37.4 )

%

Property reinsurance 66,666 119,023 (52,357 ) (44.0 )

%

Short tail specialty and casualty reinsurance   41,616       125,524       (83,908 ) (66.8 )

%

Gross premiums written 341,378 616,803 (275,425 ) (44.7 )

%

Premiums ceded   (91,184 )     (163,159 )     71,975   (44.1 )

%

Net premiums written   250,194       453,644       (203,450 ) (44.8 )

%

Net premiums earned 216,244 319,673 (103,429 ) (32.4 )

%

Other related income 2,744 1,003 1,741 173.6

%

Loss and loss adjustment expenses (121,932 ) (399,489 ) 277,557 (69.5 )

%

Acquisition costs (44,766 ) (63,684 ) 18,918 (29.7 )

%

General and administrative expenses   (40,683 )     (35,819 )     (4,864 ) 13.6

%

Underwriting income (loss) $ 11,607     $ (178,316 )   $ 189,923   106.5

%

 
Loss ratio 56.4 % 125.0 %
Acquisition cost ratio 20.7 % 19.9 %
General and administrative expense ratio   18.8   %   11.2   %
Combined ratio   95.9   %   156.1   %
  • The increase in net underwriting results is the result of the lack of significant loss events in 2012 compared to the same period in 2011 (Australian floods, cyclone Yasi, New Zealand earthquakes of February 2011 and June 2011, Japan earthquake and tsunami, and U.S. tornadoes), 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 six months ended June 30, 2012, we recorded $11.3 million of gross reinstatement premiums compared to $17.8 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 ceded premiums is primarily related to higher reinstatement premiums incurred in 2011 on our ceded reinsurance due to loss activity and the increased level of reinsurance purchases after the loss events during the first quarter of 2011.
  • The decrease in the loss ratio compared to the same period in 2011 is primarily due to more significant losses from catastrophic events in the prior period, including net incurred losses related to the Australian floods ($27.2 million), cyclone Yasi ($29.8 million), New Zealand earthquake of February 2011 ($100.8 million), the Japan earthquake and tsunami ($99.1 million), New Zealand earthquake of June 2011 ($18.5 million) and the U.S. tornadoes ($19.4 million). Losses are net of retrocession but exclude reinstatement premiums.
  • Each quarter we revisit our loss estimates for previous catastrophe events. During the six months ended June 30, 2012, based on updated estimates provided by clients and brokers, we recorded net adverse developments of $6.1 million, related to cumulative prior accident years. In addition, we undertook our scheduled first quarter review of actuarial reserving assumptions. As a result of revised development factors for non-cat business based in part on experience, we recorded $7.0 million of negative reserves development.
  • The increase in general and administrative expenses is primarily the result of staff compensation accrual and performance based compensation returning to more typical levels in the current period as compared to levels in the same period in 2011, which were adjusted downward as a result of the significant underwriting loss.

Income from Discontinued Operations

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 six months ended June 30, 2012 is underwriting income of $8.6 million, compared to underwriting losses of $3.6 million for the same period in 2011. The $12.2 million increase in underwriting income is primarily attributable to more significant catastrophic events during 2011 compared to 2012.

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