def14a.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A
 
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Definitive Proxy Statement
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Soliciting Material Pursuant to 240.14a-12


Flagstone Reinsurance Holdings Limited
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
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PROXY STATEMENT
Flagstone Reinsurance Holdings Limited
Crawford House
23 Church Street
Hamilton HM 11, Bermuda
 
ANNUAL GENERAL MEETING – May 14, 2009
 
April 14, 2009
 
To the Shareholders of Flagstone Reinsurance Holdings Limited:
 
You are cordially invited to attend the Annual General Meeting of your company to be held at 8:30 a.m. local time on Thursday, May 14, 2009 at The Tuckers Point Hotel and Spa, Tuckers Town, Smith’s, Bermuda.
 
A report of the current affairs of Flagstone Reinsurance Holdings Limited will be presented at the Annual General Meeting and shareholders will have an opportunity for questions and comments.
 
We request that you complete, sign, and mail the enclosed form of proxy in the enclosed business reply envelope, whether or not you plan to physically attend the Annual General Meeting.
 
The attached Proxy Statement, accompanying proxy card, Notice of Annual General Meeting, Annual Report and Form 10-K are first being mailed to shareholders on or about April 14, 2009.
 
Sincerely yours,
 
/s/ David A. Brown
 
David A. Brown
 
Chief Executive Officer
 
 


 
Flagstone Reinsurance Holdings Limited
Crawford House
23 Church Street
Hamilton HM 11, Bermuda
 
NOTICE OF ANNUAL GENERAL MEETING
To be held on May 14, 2009
 
NOTICE IS HEREBY GIVEN that the Annual General Meeting of shareholders of Flagstone Reinsurance Holdings Limited (the “Company” or “we”) will be held on Thursday, May 14, 2009, at 8:30 a.m. local time for the following purposes:
 
 
1.
To elect four (4) Class A directors to hold office until the 2012 Annual General Meeting of shareholders or until their respective successors have been duly elected.
 
 
2.
To approve the appointment of Deloitte & Touche to serve as the Company’s independent auditor for the fiscal year 2009 until our 2010 Annual General Meeting and to refer the determination of the auditor’s remuneration to the Board of Directors.
 
 
3.
To approve amendments to the Bye-Laws.
 
 
4.
To approve the list of Designated Company Directors for certain subsidiaries of the Company.
 
 
5.
To approve amendments to the Restricted Share Unit Plan.
 
 
6.
To approve the Amended and Restated Long-Term Incentive Plan for Island Heritage Holdings, Ltd.
 
 
7.
To approve the form of Stock Appreciation Rights Plan for Island Heritage Holdings, Ltd.
 
 
8.
To approve the form of Restricted Share Unit Plan for Flagstone Reinsurance Africa Limited.
 
 
9.
To approve and increase the authorized share capital of the Company.
 
In addition, we will consider any other business as may properly come before the 2009 Annual General Meeting or any adjournment(s) thereof.  The Company’s audited financial statements for the fiscal year ended December 31, 2008 will be presented at the 2009 Annual General Meeting.  At the Annual General Meeting, shareholders may also be asked to consider and take action with respect to such other matters as may properly come before the Annual General Meeting or any adjournment(s) thereof.
 
The Board of Directors has fixed the close of business March 23, 2009 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual General Meeting. This Proxy Statement, the Notice of Annual General Meeting, the accompanying proxy card, the Annual Report and Form 10-K for year ended December 31, 2008 are first being mailed to shareholders on or about April 14, 2009.  Although the Annual Report and Proxy Statement are being mailed together, the Annual Report should not be deemed to be part of the Proxy Statement.
 
Shareholders are encouraged to complete, sign, date and return the enclosed proxy card in the return envelope furnished for that purpose.  Please sign the accompanying proxy card exactly as your name appears on your share certificate(s).  Signing and returning a proxy card will not prohibit you from attending the 2009 Annual General Meeting.  If you later decide to revoke your proxy for any reason, you may do so in the manner described in the attached Proxy Statement.
 
By order of the Board of Directors.
 
/s/ Jean-Paul Dyer
 
Jean-Paul Dyer
Corporate Secretary
Hamilton, Bermuda
 
 

 
 
Flagstone Reinsurance Holdings Limited
2009 Proxy Statement
Table of Contents
 

Page
 
 
 

 

 
GENERAL INFORMATION
 
Persons Making the Solicitation
 
Proxies in the form enclosed are being solicited by the Board of Directors. The persons named in the accompanying proxy card have been designated as proxies by the Board. Such persons designated as proxies serve as officers of the Company.
 
Persons Entitled to Vote and Voting Procedures
 
The Board of Directors has set March 23, 2009 as the record date for the Annual General Meeting. If you were an owner of our common shares at the close of business on that date, you are entitled to notice of, and may vote at, the Annual General Meeting.
 
As of March 23, 2009, 84,804,844 common shares were issued and outstanding. The presence, in person or by proxy, of holders of more than 50% of the common shares outstanding and entitled to vote on the matters to be considered at the Annual General Meeting is required to constitute a quorum for the transaction of business at the Annual General Meeting. Holders of common shares are entitled to vote on each matter to be voted upon by the shareholders at the Annual General Meeting in accordance with the voting rights afforded under bye-laws 4 and 30 of the Company.
 
If you are entitled to vote at the Annual General Meeting, you may do so in person at the Annual General Meeting or by proxy without attending the meeting. To vote by proxy, you must fill out the enclosed proxy card, date and sign it, and return it in the enclosed postage-paid envelope. If you receive more than one proxy card, sign and return each proxy card in order to ensure that all of your shares are voted.
 
If no instructions are provided in an executed proxy, it will be voted “FOR” each of the proposals, and, as to any other business as may properly come before the Annual General Meeting, in accordance with the proxyholder’s judgment as to such business.
 
Broker non-votes occur when nominees, such as banks and brokers holding shares on behalf of beneficial owners, do not receive voting instructions from the beneficial holders at least ten days before the Annual General Meeting. Member brokerage firms of The New York Stock Exchange, Inc. that hold shares in street name for beneficial owners may, to the extent that such beneficial owners do not furnish voting instructions with respect to any or all proposals submitted for shareholder action, vote in their discretion upon all of the proposals. Any broker non-votes and abstentions will not be counted as shares present in connection with proposals with respect to which they are not voted.
 
The Board of Directors has not proposed for consideration at the Annual General Meeting any transaction for which the laws of Bermuda entitle shareholders to appraisal rights.
 
Solicitation and Revocation
 
In accordance with our bye-laws the nominees for election as directors at the Annual General Meeting who receive the highest number of “FOR” votes will be elected as directors. This is called plurality voting. All common shares represented by properly executed proxies that are returned and not revoked will be voted in accordance with the instructions, if any, given thereon.  Unless you indicate otherwise on your proxy card, or if no instructions are given, the persons named as your proxies will vote your shares “FOR” all the nominees for director named in this Proxy Statement. All other proposals require the affirmative “FOR” vote of a majority of those shares present at the meeting and entitled to vote on the proposal. A hand vote will be taken unless a poll is requested pursuant to the bye-laws. You may revoke your voted proxy at any time prior to the Annual General Meeting or vote in person if you attend.
 
The Company will bear the cost of this solicitation of proxies. Solicitation may be made by our directors, officers and employees personally, by telephone, internet or otherwise, but such persons will not be specifically compensated for such services. We may also make, through bankers, brokers or other persons, a solicitation of proxies of beneficial holders of the common shares. Upon request, we will reimburse brokers, dealers, banks or similar entities acting as nominees for reasonable expenses incurred in forwarding copies of the proxy materials relating to the Annual General Meeting to the beneficial owners of common shares which such persons hold of record.
 
 
1


 
OUR DIRECTORS
 
Directors
 
The table below sets forth the names, ages and positions of the current directors of the Company:
 

Name
Age
Positions
 
Mark J. Byrne
47
Executive Chairman of the Board of Directors
David A. Brown
51
Chief Executive Officer, Deputy Chairman and Director
Gary Black
63
Director
Stephen Coley
64
Director
Thomas Dickson
46
Director
Stewart Gross
49
Director
E. Daniel James
44
Director
Anthony P. Latham
58
Director
Dr. Anthony Knap
59
Director
Jan Spiering
57
Director
Wray T. Thorn
37
Director
Peter F. Watson
66
Director
__________________________
 
The Board of Directors consists of twelve (12) directors and is divided into three equal classes (A, B and C). At each Annual General Meeting, certain directors shall be elected or appointed for a full three-year term to succeed those whose terms expire at such meeting. Each director shall hold office for the term for which he is elected or until his successor is elected or appointed or until his office is otherwise vacated.
 
Class A Directors with terms expiring at the 2009 Annual General Meeting
 
Mark J. Byrne has been our Executive Chairman since October 2005. Mr. Byrne also serves as Chairman of Haverford (Bermuda) Ltd. (“Haverford”), an affiliate of the Company due to common ownership (see “Certain Relationships and Related Transactions” below), and Chairman of Island Heritage Holdings Ltd. (“Island Heritage”), an indirect majority-owned subsidiary of the Company. Mr. Byrne founded Flagstone Capital Management (Bermuda) Limited (formerly known as West End Capital Management (Bermuda) Limited and referred to herein as “Flagstone Capital Management”), a wholly-owned subsidiary of the Company, in 1998. Prior to starting Flagstone Capital Management, Mr. Byrne served as Managing Director at Credit Suisse First Boston, responsible for Global Fixed Income Arbitrage in London and Tokyo. Mr. Byrne also held management positions at PIMCO and Salomon Brothers and has 20 years experience in the fixed income and derivative business. Mr. Byrne has invested at early stages in several insurance companies and has served on the boards of directors of several insurance companies, including three public companies: White Mountains Insurance Group Ltd., Terra Nova Bermuda Holding Ltd. and Markel Corp. He holds a Bachelors degree from Dartmouth College and an M.B.A. from the Tuck School of Business at Dartmouth.
 
Stewart Gross has been a director since January 2006. Mr. Gross is a Managing Director and member of the Investment Committee of Lightyear Capital, a private equity firm investing in companies in the financial services industry. Prior to joining Lightyear in April 2005, Mr. Gross spent 17 years at Warburg Pincus where he was a Managing Director and member of the Executive Management Group. Mr. Gross has been a primary investor in many highly successful companies, including RenaissanceRe Holdings Ltd. Mr. Gross is currently a director of SkillSoft Corporation, and several private companies. Mr. Gross received an A.B., magna cum laude, from Harvard College and an M.B.A. from Columbia Business School where he was elected to Beta Gamma Sigma.
 
E. Daniel James has been a director since December 2005. Mr. James is a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc. He joined the Lehman Brothers Merchant Banking Group in 1995. Prior to joining the Merchant Banking Group, he was a member of the Lehman Brothers M&A Group, based in London and New York. In 1988, Mr. James joined Lehman Brothers’ Financial Institutions Group. He is currently a director of Blount International, Inc. and Phoenix Brands LLC. He holds a B.A. in chemistry, with honors, from the College of the Holy Cross.
 
 
2

 
 
Anthony P. Latham has been a director since November 2008.  Mr. Latham currently serves as Chairman of the board of directors of Pool Reinsurance Limited, the U.K. government-backed terrorism damage reinsurer. He also serves as the Chairman of the board of directors of Pool Reinsurance (Nuclear) Limited. He is Deputy Chairman of the board of directors of Codan A/S and Codan Forsikring A/S in Denmark where he chairs the audit committee. He is also a Director of Realty Insurance Limited, of Ecclesiastical Insurance Group plc and Ecclesiastical Insurance Office plc as well as a Director of Torus Insurance (U.K.) Limited.  Mr. Latham is a former member of the Group Executive of RSA Group plc where he held a variety of senior executive roles over a period of 17 years. RSA Group plc is an international insurance group, listed on the London Stock Exchange. Prior to his employment at RSA Group plc, Mr. Latham worked for an international insurance brokerage firm for 19 years.
 
Class C Directors with terms expiring at the 2010 Annual General Meeting
 
David Brown has served as Chief Executive Officer of Flagstone since October 2005. Mr. Brown is also a director of Island Heritage, an indirect majority-owned subsidiary of the Company and Haverford. From September 2003 until October 2005, Mr. Brown served as the Chief Executive Officer of Haverford and as the Chief Operating Officer of Flagstone Capital Management, a wholly-owned subsidiary of the Company. Mr. Brown joined Centre Solutions (Bermuda) Limited (“Centre Solutions”) in 1993, and was its President and Chief Executive Officer at the time of his retirement in 1998. Prior to joining Centre Solutions, Mr. Brown was a Partner with Ernst & Young in Bermuda. Mr. Brown is the non-executive Chairman of the Bermuda Stock Exchange and a Director and Trustee for the Schroder Family Trusts. Mr. Brown led the team which analyzed, structured and negotiated the acquisition of Merastar Insurance Company in 2004. As Chairman of Merastar, Mr. Brown led the board’s oversight of the successful turn-around strategy. At Centre Solutions, Mr. Brown was responsible for the global operations of a group with over $7 billion in assets and offices in several countries. During his ten years with Ernst & Young, Mr. Brown specialized in insurance and was involved in the liquidation of numerous insurance companies in Bermuda, the U.K. and the U.S. Mr. Brown is a Fellow of the Institute of Chartered Accountants in England & Wales and a Member of both the Institute of Chartered Accountants of Bermuda and the Canadian Institute of Chartered Accountants.
 
Stephen Coley has been a director since January 2006. Mr. Coley is a Director Emeritus of McKinsey & Company. During his more than 28 years of active client service with McKinsey, Mr. Coley led a wide variety of successful business strategy and organization efforts, principally serving technology and basic industrial clients, and led McKinsey’s corporate growth practice. In addition, Mr. Coley served for 10 years on McKinsey’s Investment Committee, which oversees employee profit sharing investments and partner alternative investment vehicles, and served as the committee’s chairman from 2000 to 2004. Mr. Coley received an M.B.A., with distinction, from Harvard Business School, where he was named a Loeb Fellow in finance. Mr. Coley has a B.S. in electrical engineering from Duke University. Mr. Coley currently serves on the boards of directors of Dycom Industries and Underwriters Laboratories. He also serves on the Duke University Pratt School of Engineering Board of Visitors.
 
Dr. Anthony Knap, Ph.D., has been a director since December 2005. Dr. Knap serves as President, Director and Senior Research Scientist of the Bermuda Institute of Ocean Sciences, which he joined in 1978. In 1994, Dr. Knap founded the Risk Prediction Initiative, a partnership between the science community and the reinsurance industry providing essential information between natural disasters and changing climate. Dr. Knap’s principal research interests are climate change, environmental science, atmosphere/ocean interactions, effects of chemicals on the marine environment as well as relationships between ocean health and human health. Dr. Knap holds a number of professorships, and serves on numerous expert panels and committees in his field. Dr. Knap received his Ph.D. in oceanography in 1978 from the University of Southampton, U.K.
 
Peter F. Watson was appointed director in September 2007.  Mr. Watson was most recently a consultant to Attorney’s Liability Assurance Society (Bermuda) Ltd. (“ALAS”), a mutual insurance company formed in Bermuda to provide professional liability insurance for large U.S. law firms.  Mr. Watson served as President and Chief Executive Officer of ALAS from 2002 to December 31, 2007.  Prior to joining ALAS in 1998, Mr. Watson’s career was with Price Waterhouse, initially in London and Montreal and, since 1975, in Bermuda where he also served as senior partner of the firm.  In his later years with Price Waterhouse, Mr. Watson was responsible for managing the worldwide professional indemnity program for the firm.  Mr. Watson is a past president and a Fellow of the Institute of Chartered Accountants of Bermuda and a member of the Institute of Chartered Accountants of Ontario and of the Ordre des compatables agree du Quebec.
 
Class B Directors with terms expiring at the 2011 Annual General Meeting
 
Gary Black has been a director since June 2006. He was Chief Claims Executive and Senior Vice President of OneBeacon Insurance Company, a subsidiary of White Mountains Insurance Group, until his retirement in 2006. Prior to joining OneBeacon in January of 2004, Mr. Black spent 35 years with Fireman’s Fund Insurance Companies where he was an Executive Vice President and President of the Claims Division. At Fireman’s Fund his responsibilities included claims, corporate administration, general counsel, staff counsel and systems. He received his B.A. degree from Southwest Baptist University and is a Chartered Property Casualty Underwriter.
 
 
3

 
Thomas Dickson has been a director since December 2005. Mr. Dickson is Chief Executive Officer and Founder of Meetinghouse LLC, a private firm that provides investment advisory and management services and advice and support to management for underwriting, ratings, capital management and actuarial functions. Mr. Dickson currently serves as President and Chief Executive Officer of Haverford Capital Partners (Cayman) Limited (“HCP”), a private equity fund specializing in investments in insurance, reinsurance and specialty finance started in August 2005. Mr. Dickson served as President and Chief Executive Officer of The Centre Group and as its Chief Underwriting Officer. At the time, The Centre Group held assets in excess of $9 billion and capital in excess of $1 billion. He joined The Centre Group at the time of its establishment in 1988 and, prior to assuming responsibilities as Chief Underwriting Officer, served in a variety of business production and underwriting capacities in Bermuda and New York. Mr. Dickson holds a bachelor’s degree with honors from Stanford University and a Masters Degree from the Johns Hopkins School of Advanced International Studies.
 
Jan Spiering has been a director since December 2005. From February 1979 to June 2002, Mr. Spiering served as a member of Ernst & Young, becoming the Chairman and Managing Partner of Ernst & Young Bermuda. During his tenure at Ernst & Young, Mr. Spiering was a member of the firm’s Global Advisory Counsel, founding member of the International Investment Committee, and was Chairman of the firm’s Offshore Fund’s Group. He retired from Ernst & Young in 2002, and currently serves on the board of directors for WP Stewart & Co Ltd. and various private companies. Mr. Spiering is a Fellow of the Institute of Chartered Accountants in England & Wales and the Institute of Chartered Accountants of Bermuda and is a Member of the Canadian Institute of Chartered Accountants.
 
Wray T. Thorn has been a director since October 2006. Mr. Thorn is a Senior Managing Director at Marathon Asset Management, LP, a global alternative investment and asset management company, where he has worked since 2005. Mr. Thorn is a senior member of the investment management team responsible for identifying, evaluating, structuring and managing private debt and equity investments for Marathon’s family of investment funds. Mr. Thorn has spent the majority of his career identifying, financing and investing in private equity transactions, including management buyout transactions, acquisition and expansion strategies, growth programs, shareholder transitions and financial restructurings.  Prior to joining Marathon, Mr. Thorn was a Director with Fox Paine & Company, LLC, and had also been a Principal and founding member of Dubilier & Company, LLC. Mr. Thorn began his career in the financial analyst program at Chemical Bank, where he worked in the acquisition finance group, arranging and structuring senior and subordinated debt financings for the firm’s private equity clients. Mr. Thorn is a graduate of Harvard University with an A.B. in Government, cum laude.
 
 
4

 
 
OUR EXECUTIVE OFFICERS
 
Name
Age
Positions
 
Mark J. Byrne(1)
47
Executive Chairman of the Board of Directors
David A. Brown(2)
51
Chief Executive Officer, Deputy Chairman and Director
Patrick Boisvert
35
Chief Financial Officer
Thomas Bolt
52
Managing Director UK Operations
Khader Hemsi
59
Chief Executive Officer MENA Operations
William Fawcett
46
General Counsel
David Flitman
38
Chief Actuary
Venkateswara Rao Mandava
47
Chief Information Officer and Chief Investment Officer
Gary Prestia
47
Chief Underwriting Officer – Flagstone Réassurance Suisse SA – Bermuda Branch
James O’Shaughnessy
45
Chief Financial Officer (ex)
Brenton Slade
38
Chief Marketing Officer
Guy Swayne
45
Chief Executive Officer – Flagstone Réassurance Suisse SA
Frédéric Traimond
39
Chief Operating Officer

 
   ______________________________
 
(1)           See biography of Mr. Byrne under “Our Directors”.
 
(2)           See biography for Mr. Brown under “Our Directors”.
 
Patrick Boisvert was appointed as Chief Financial Officer in November 2008.  Prior to his appointment as Chief Financial Officer, Mr. Boisvert had previously served various roles within the Flagstone Group: CFO and Group Finance Director of Flagstone Reassurance Suisse SA, a subsidiary of the Company, since July 2008, and Group Chief Accounting Officer and Treasurer from February 2006 until July 2008.  From February 2005 to February 2006, he was CFO of Flagstone Capital Management which was acquired by the Company in March 2006, where he had responsibility for all finance aspects of a hedge fund manager with approximately $1 billion dollars under management. Prior to joining Flagstone, he was Vice President Fund Administration for BISYS Hedge Fund Services (now part of Citigroup). Mr. Boisvert began his career with Ernst & Young in Montreal, Canada.  He holds a Bachelor in Accounting from Universite du Quebec a Trois-Rivieres, is a member of the C.F.A. Institute and a member of the Canadian Institute of Chartered Accountants.
 
Thomas Bolt was appointed as our Managing Director of UK Operations in November, 2008. Mr. Bolt is also the Chief Executive Officer of Marlborough Underwriting Agency Limited.  Previously he was Managing Director of the European Division of Berkshire Hathaway Insurance Group, Berkshire Hathaway International Insurance Limited, Marlborough Underwriting Agency Limited, Tenecom Ltd. (formerly Yasuda Fire & Marine Insurance Company of Europe) and Transfercom Limited.  Prior to this position, he was Managing Director of the Insurance Derivatives business at Bankers Trust and involved in the activities of the various Bankers Trust Insurance Companies.  Before that Mr. Bolt held various positions within Berkshire Hathaway, including President of the Cyprus Insurance Company and the Redwood Insurance Company, as well as being involved as a Senior Vice President in the Reinsurance Division.  On March 26, 2009 the Company announced that Mr. Bolt would amicably leave Marlborough on August 1, 2009 to take over the role of Underwriting Performance Director at Lloyds.
 
Khader Hemsi has served as our Chief Executive Officer MENA Operations since November, 2008.  Prior to joining Flagstone, Mr. Hemsi founded Alliance International Reinsurance Public Company Limited, now known as Flagstone Alliance Insurance and Reinsurance PLC where he also serves as Deputy Chairman & Chief Executive Officer.  Mr. Hemsi has twenty-six years of experience in the insurance and reinsurance industry involved in all aspects of management, administration and underwriting.
 
William Fawcett has served as our General Counsel since June 2008.  A US and UK qualified attorney with over twenty years of international experience, Mr. Fawcett is responsible for the oversight and management of legal functions throughout the Flagstone Group.  Prior to joining Flagstone, he served as the Chief Legal Officer of AXA’s North American P&C operations. He holds a Bachelor of Arts degree from Colgate University and a Juris Doctor from the University of the Pacific, McGeorge School of Law.
 
 
 
 
David Flitman joined Flagstone as Chief Actuary in early 2006.  Mr. Flitman has worked in the reinsurance industry for over 15 years offering a depth of experience in risk management.  Prior to joining us he was Chief Actuary and Senior Vice President for ACE Tempest Reinsurance where he managed Actuarial, Claims, Development, and Infrastructure.  He began his career in 1993 as an Actuarial Analyst with Insurance Services Office.  Moving on to WR Berkley Group where he became Assistant Vice President and Chief Actuary for Berkley Mid-Atlantic Group managing the department responsible for Actuarial, Information Management, and Reporting and Regulatory Filing.  Mr. Flitman also worked at XL Reinsurance America as an Assistant Vice President and Senior Pricing Actuary where he priced all lines of Property and Casualty.  Mr. Flitman earned his Bachelor’s of Science from St. John School of Actuarial Science, Risk Management, and Insurance in New York.  He is an Associate of the Society of Actuaries, a Member of the American Academy of Actuaries, and a Fellow of the Casualty Actuarial Society.
 
Venkateswara Rao Mandava joined Flagstone Capital Management April, 2004. He is currently the Group Chief Information Officer, and also has a primary responsibility for our India operations. Over the past 25 years, Mr. Mandava held multi-disciplinary roles between Research, Analytics & Development, Technology Management, Fixed Income Trading and Investment Management at various organizations globally, including Vanderbilt, Credit Suisse, Barclays Capital, E*Trade, and American Century. Mr. Mandava received a Ph.D. in Computer Science from Vanderbilt University, Nashville, TN.
 
Gary Prestia served as our Chief Underwriting Officer—North America since December 2005 and as of May, 2008, currently serves as Chief Underwriting Officer – Flagstone Réassurance Suisse SA (Bermuda). Mr. Prestia has more than 21 years’ experience in the insurance and reinsurance industry in senior underwriting and executive management positions successfully navigating across the underwriting cycles. From 1998 through 2004, Mr. Prestia served as an executive officer of Converium AG (“Converium”), becoming President of Converium North America, with responsibility for all legal entities and staff in the U.S. and Canada. As Senior Vice President and Chief Underwriting Officer of Converium, he was responsible for property catastrophe, property non-catastrophe, motor, marine and third-party liability (excluding professional liability and workers’ compensation). In early 2005, Mr. Prestia joined Alea North America as Chief Executive Officer of the North American Reinsurance Division. Prior to 1998, Mr. Prestia held senior underwriting positions at Transatlantic Re. Mr. Prestia received his CPCU and ARe professional designations from the American Institute for Chartered Property and Casualty Underwriters and Bachelor of Business Administration undergraduate degree and graduate work at St. Johns University School of Risk Management and Insurance in New York.
 
James O’Shaughnessy joined the Company as Chief Financial Officer in May 2006 and continued in such capacity until November 21, 2008.  Mr. O’Shaughnessy now serves as the Chief Financial Officer - Bermuda. Prior to joining the Company, he was the Chief Accounting Officer and Senior Vice President at Scottish Reinsurance Group Limited where he was responsible for group internal and external reporting as well as various finance functions and research into accounting issues. Prior to joining Scottish Re in 2005, Mr. O’Shaughnessy was Chief Financial Officer and Senior Vice President at XL Re Ltd., and before that he served for four years at Centre Solutions as Controller and Vice President. Before joining Centre Solutions, he spent four years at ACE Tempest Reinsurance Ltd., where his last position was Vice President of Finance. He began his career in Ireland at PricewaterhouseCoopers before moving to KPMG Peat Marwick in Bermuda. Mr. O’Shaughnessy holds a Bachelor of Commerce degree from University College, Cork, Ireland and is both a Fellow of the Institute of Chartered Accountants of Ireland and an Associate Member of the Chartered Insurance Institute of the U.K.
 
Brenton Slade is the Chief Marketing Officer of Flagstone, responsible for investor relations, capital market initiatives, and firm marketing. Mr. Slade has been at Flagstone since its founding in 2005 assisting in the formation. Prior to Flagstone, Mr. Slade worked with several members of the Executive Management at West End Capital Management in the role of Director of Business Development, beginning in 2003. Before joining West End Capital, Mr. Slade was a Vice President at Agora Capital (an XL Capital affiliate). Mr. Slade has a degree in Economics and Politics from the University of Western Ontario.
 
Guy Swayne has been our Chief Underwriting Officer—International since December 2005 and on September 1, 2007 was appointed as the Chief Executive Officer of Flagstone Réassurance Suisse SA, a wholly-owned subsidiary of the Company.  Mr. Swayne has extensive experience in the industry worldwide and brings a depth of expertise in underwriting, business development, and leadership to the Company. Prior to joining the Company, Mr. Swayne was Chief Underwriting Officer—International with ACE Tempest Reinsurance Ltd. where he managed the International Catastrophe underwriting unit. Mr. Swayne joined Ace in January 2000 and has held senior positions including Executive Vice President, ACE Financial Solutions International (AFSI)—Bermuda where he managed AFSI offices in London, Dublin, and Melbourne. In London he became President of ACE Financial Solutions Europe (AFSE) where he established and developed the European office reporting directly to the President and Chief Executive Officer in Bermuda. Mr. Swayne was instrumental in many key elements associated with a start-up operation, including business plan and budget development, hiring underwriting teams, business production and program completion.
 
Frédéric Traimond was appointed Group Chief Operating Officer of the Company on November 14, 2008. Prior to his appointment as Group COO, since August 2007, Mr. Traimond had served as COO of Flagstone Reassurance Suisse SA.  Mr. Traimond is also a member of the Boards of Directors of various entities within the Flagstone Group.  Before joining Flagstone Group, Mr. Traimond worked for 15 years for AXA Group, primarily in Switzerland. His last position was Chief Risk Officer of AXA-Winterthur, where most notably he was responsible for the Economic Capital studies, including Swiss Solvency Test, Asset-Liability Management, reinsurance strategy and reserve review.  For the 8 years preceding holding that position, he was the chief management officer for the Non-Life subsidiary of AXA Switzerland. Mr. Traimond is a full member of the IAF (Institut des Actuaires Français) and SAA (Swiss Association of Actuaries).
 
 
6

 
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
We describe below the transactions we entered into with parties that are related to our Company during the year ended December 31, 2008. We believe that each of the transactions described below was on terms no less favorable to us than we could have obtained from unrelated parties.
 
Policies and Procedures for Related Party Transactions
 
The Company adopted a written Code of Conduct and Ethics on June 16, 2006 which specifies the Company’s policy relating to conflicts of interest. The Code of Conduct and Ethics defines a “conflict of interest” as any situation in which the private interest of any director, board observer or employee of the Company interferes in any way (or even appears to interfere) with the interests of the Company as a whole. Under the Code of Conduct and Ethics, an individual who becomes aware of a potential conflict of interest must report this conflict to the Chairman of the Audit Committee for consideration by the Audit Committee. The Audit Committee will determine whether a conflict of interest exists on a case-by-case basis and will memorialize its determinations and the reasons behind such determinations. The Audit Committee will ensure that the directors voting on an issue are informed, disinterested and independent with respect to that issue. If the Audit Committee determines that a conflict of interest exists, then the director, board observer or employee shall not participate, directly or indirectly, in the matter or activity that has given rise to such conflict of interest unless expressly approved by the Audit Committee. The Audit Committee Charter requires the Audit Committee to review and discuss with management the reasonableness of the price, terms and conditions for all related party transactions.  Each of the transactions described below has been reviewed by Audit Committee in accordance with this mandate.
 
 
In connection with the three closings of the private placement of our common shares in December 2005, January 2006 and February 2006, we issued a Warrant to Haverford to purchase 8,585,747 common shares of the Company (which equaled 12.0% of the issued share capital of the Company through the completion of the private placement in February 2006) at an exercise price of $14.00 per share (subject to adjustment for share subdivisions, share dividends, stock splits and similar events). Our Executive Chairman, Mr. Byrne, and our Chief Executive Officer, Mr. Brown, control and may be deemed to have an interest in Haverford.  See “Security Ownership of Certain Beneficial Owners, Management and Directors” below.
 
 
The Warrant was granted in recognition of the efforts of Mr. Byrne and Mr. Brown in creating the Company, assembling the resources and taking financial risk by covering all of the start-up costs in advance of the Company being funded by additional investors. In accordance with U.S. GAAP we have recognized the Warrant as a compensation expense.
 
 
The fair value of the Warrant when issued in December 2005 was $12.2 million, and this amount was included as compensation expense for the period ended December 31, 2005.  We amended the Warrant in connection with the additional closings of the private placement in February 2006 to increase the number of shares for which the Warrant is exercisable in proportion to the amount of additional capital raised in the private placement. The increase in the fair value of the Warrant as a result of this amendment was $3.4 million, and this amount was included as a compensation expense for the year ended December 31, 2006.
 
 
At a meeting of the Board of Directors held on November 14, 2008, the Warrant was amended to change the exercise dates from December 1, 2010 to December 31, 2010, to December 1, 2013 to December 31, 2013, change the strike price to $14.80 from $14.00 and include a provision that amends the strike price for all dividends paid by the Company from the issuance of the Warrant to its exercise date.  The increase in the fair value of the Warrant as a result of these amendments was $3.6 million, and this amount was included as compensation expense for the year ended December 31, 2008.
 
 
LB I, an affiliate of Lehman Brothers Inc., has invested $50.0 million in Mont Fort Re Ltd. (“Mont Fort”) in respect of its segregated account “ILW” (“Mont Fort ILW”) and owns 50.0 million, or 90.9%, of the Mont Fort ILW preferred shares. LB I invested $55.0 million in Mont Fort Re Ltd. in respect of its segregated account “ILW 2” (“Mont Fort ILW2”) and which owned 55.0 million, or 100.0%, of the Mont Fort ILW 2 preferred shares. In August 2007, LBI transferred 5,000,000 preferred shares in Mont Fort ILW2 to its affiliate, Lehman Brothers PEP Investments L.P. (“Lehman PEP”). On February 8, 2008, at the request of Lehman PEP, Mont Fort redeemed the 5,000,000 preferred shares held by Lehman PEP. We own all of the common shares of Mont Fort and have 100% control of its board of directors. E. Daniel James, who is a director of the Company, is also a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc. Lehman Brothers Inc. acted as an underwriter of the Company’s IPO. In addition, Lehman Brothers Inc. provided additional investment banking services to the Company. The total fee received by Lehman Brothers Inc. in connection with our IPO was $3.4 million.  On September 15, 2008, Lehman Brothers Holdings, Inc. filed for Chapter 11 bankruptcy protection.  The Lehman entities identified above continue as ongoing enterprises; none of them have filed for bankruptcy protection nor are they included in the LBHI bankruptcy estate.
 
 
7

 
 
 
The Company entered into a foreign currency swap with Lehman Brothers Inc. to hedge the Euro-denominated Deferrable Interest Debentures recorded as long term debt.  Under the original terms of the foreign currency swap, the Company exchanged €13.0 million for $16.7 million, will receive Euribor plus 354 basis points and pay LIBOR plus 371 basis points.  The swap, which was to expire on September 15, 2011, had a fair value of $2.5 million as at December 31, 2007.  The agreement was terminated, as per the terms of the swap agreement, on September 15, 2008 due to the bankruptcy of Lehman Brothers Inc. E. Daniel James, who is a director of the Company, is also a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc.
 
 
Further, on December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $25.0 million, will receive interest at three month LIBOR and will pay 4.096% interest. The agreement will terminate on September 15, 2012. Also on December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $120.0 million, will receive interest at three month LIBOR and will pay 3.962% interest. The fair value of the two swaps was $0.2 million as at December 31, 2007.  The agreement was terminated, as per the terms of the swap agreement, on September 15, 2008 due to the bankruptcy of Lehman Brothers Inc.
 
COMPENSATION DISCUSSION AND ANALYSIS
 
Overview
 
The named executive officers, Messrs. Byrne, Brown, Boisvert, Flitman, Prestia and O’Shaughnessy, are compensated according to the terms of their employment contracts, which are described below. The Compensation Committee of the Board of Directors has determined that these six officers are the “Named Executive Officers.”
 
Our executive compensation programs are designed to encourage our executive officers to think and act like, and over time to themselves become, shareholders of the Company. We want our executive officers to take appropriate risks with our capital in order to generate returns for our shareholders but at the same time to share the downside risk if those risks cause poor performance or even loss. Through our performance management and rewards processes and programs, we endeavor to create an environment that fosters and rewards:
 
 
finding and assuming attractively priced risk;
 
 
managing our overall risk exposure to mitigate loss;
 
 
ensuring we have optimal capital to run our business;
 
 
working hard and cooperating with colleagues; and
 
 
providing excellent service to clients and colleagues.
 
We foster an attitude of shared risk-taking between our executive officers and our shareholders by providing a significant portion of our executive officers’ incentive compensation through equity-based awards. We emphasize “at risk” pay tied to performance as the majority of total compensation potential. We evaluate and reward our executive officers based on dynamic factors such as whether they are willing and able to challenge existing processes, adapt to sudden or frequent changes in priorities and capitalize on “windows of opportunity.”
 
Our Compensation Committee reviews and approves all of our compensation policies.
 
 
8

 
 
Executive Compensation Policy
 
Overview
 
The Company’s performance-driven compensation policy consists of the following three components:
 
 
base salary (and, in some cases, housing allowance or mortgage subsidy);
 
 
annual cash bonuses; and
 
 
long-term incentive awards (in the form of Performance Share Units or “PSUs”).
 
We use short-term compensation (base salaries and annual cash bonuses) and long-term compensation (PSUs) to achieve our goal of driving long-term growth in diluted book value per share. The long-term compensation element, the PSUs, are designed to emphasize the performance measures our executive officers need to address in order to deliver shareholder value. The PSUs awarded to our Named Executive Officers (other than our Executive Chairman, who does not participate in the Amended and Restated Performance Share Unit Plan (the “PSU Plan”)) vest over three years (except for the special 2009-2010 series discussed below). PSUs issued prior to December, 2008 may have converted into a quantity of shares ranging from zero to two based upon the Company’s achievement of diluted return on equity goals over the three-year period. The factor with respect to the PSUs granted in December 2008 and January 2009 range between 0.5 and 1.5, depending on the diluted return on equity goals achieved during the vesting period. In the future, the Company may award to Named Executive Officers PSUs which have a different index with a portion of the award tied more closely to the performance of a specific business unit for which a Named Executive Officer is responsible. However, a portion would also remain tied to the Company’s achieving diluted return on equity goals. The Compensation Committee of the Board of Directors of the Company reviews its assumptions in relation to the PSUs on a quarterly basis. During 2008, the Company issued PSUs of the 2006-2008, and 2007-2009, and 2008-2010 series. At a meeting of the Compensation Committee of the Board of Directors on November 13, 2008 the members of the Compensation Committee voted to cancel the PSUs previously granted to the Named Executive Officers in light of the Company's then current diluted return on equity estimates, subject to receiving such Named Executive Officer’s consent. On December 8, 2008, the Named Executive Officers each consented to this cancellation and all PSUs previously granted in 2006, 2007 and 2008 were cancelled.   In lieu of this cancellation, two special series, 2009-2010 and 2009-2011, were issued as replacement PSUs to those employees who were holders of the cancelled series. The diluted return on equity goals in respect of the previous 2006-2008, 2007-2009 and 2008-2010 series are different from those issued for the 2009-2010 and 2009-2011 special series. See “―Long-Term Incentive Awards” below.  The Company may also issue in the future PSUs whose diluted return on equity goals are different from those issued for the 2009-2010 and 2009-2011 series.

We carefully determine the percentage mix of compensation structures we think is appropriate for each of our Named Executive Officers. This is not a mechanical process, and we use our judgment and experience and work with our Named Executive Officers to determine the appropriate mix of compensation for each individual. The number of PSUs each Named Executive Officer (other than our Executive Chairman) receives is based on the expectations we have for the individual and, over time, on their performance against those expectations. The mix of short-term and long-term compensation may sometimes be adjusted to reflect an individual’s need for current cash compensation. While we expect all Named Executive Officers to receive the majority of their compensation in PSUs, family size or geographical location could mean an executive officer needs a larger and more predictable amount of current cash compensation than a peer. In such circumstances, instead of issuing PSUs the Company typically pays cash compensation equal to approximately one-third to two-thirds of the product of the number of PSUs foregone and the fair value per share of the Company’s common shares at the time of the grant. This practice is designed to reward the executive officer for shared risk-taking.
 
During fiscal 2008, none of the Named Executive Officers participated in the Amended and Restated Flagstone Reinsurance Holdings Limited Restricted Share Unit Plan (the “RSU Plan”).
 
Base salary typically will constitute a minority portion of the total compensation of our Named Executive Officers. We set salary to provide adequate cash compensation to support a reasonable standard of living, so that our Named Executive Officers are prepared to have “at risk” the portion of their compensation received in PSUs. We anticipate that if the Company meets its diluted return on equity goals the Named Executive Officers will receive significantly more long-term value (in some cases a multiple) from their PSUs than from their annual cash bonuses.
 
Base salary
 
Base salary is used to recognize particularly the experience, skills, knowledge and responsibilities required of the executive officers in their roles. When establishing the 2008 base salaries of the Named Executive Officers, the Compensation Committee and management considered a number of factors, including the seniority of the individual, the functional role of the individual’s position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at his prior employment and the limited number of well-qualified candidates available in Bermuda and Switzerland. For purposes of determining competitive compensation levels for our Named Executive Officers in Bermuda, we subscribed to the PricewaterhouseCoopers Bermuda International Compensation Survey in 2008, an independent local market annual survey.  In addition, we informally consider competitive market practices with respect to the salaries of our Named Executive Officers. We speak with recruitment agencies and review annual reports on Form 10-K, proxy statements or similar information of other Bermuda and Swiss reinsurance companies with market capitalizations greater than $500.0 million and less than $3.0 billion, in particular Aspen Insurance Holdings Ltd., Endurance Specialty Holdings Ltd., Allied World Assurance Company Holdings, Ltd, Montpelier Re Holdings Ltd. and Platinum Underwriters Holding Ltd. We do not use compensation consultants at this time, however, in the future we may seek such advice.
 
 
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The salaries of the Named Executive Officers are reviewed on an annual basis, as well as at the time of promotion or other changes in responsibilities. The leading factor in determining increases in salary level is the employment market in Bermuda and, solely in respect of Mr. Boisvert, Switzerland for senior executives of insurance and reinsurance companies. We expect the salaries of our Named Executive Officers to stay relatively constant, increasing when the insurance and reinsurance market moves or when an executive officer assumes a larger role within the Company.
 
Annual cash bonuses
 
Annual cash bonuses are intended to reward individual performance during the year and can therefore be highly variable from year to year. These bonuses are determined on a discretionary basis. Our Executive Chairman and our Chief Executive Officer agree with each of the other executive officers upon short-term and long-term goals as part of an evaluation process, and then subsequently rate each executive officer in writing against those goals before deciding the bonus. Such goals include but are not limited to finding and assuming attractively-priced risk; managing our overall risk exposure to mitigate loss; ensuring we have optimal capital to run our business; working hard and cooperating with colleagues; and providing excellent service to clients and colleagues.  In the case of the Chief Executive Officer, these goals are established by the Compensation Committee in consultation with the Executive Chairman, and in the case of the Executive Chairman, these goals are established by the Compensation Committee. The Named Executive Officer’s performance of non-goal specific items is also taken into account in determining the Named Executive Officer’s bonus. Awards for the subject year are based on the financial statements for that year, and are based on an assessment of each Named Executive Officer’s achievement of the established goals and non-goal specific items. This range is based on the seniority of the position and our view of the degree to which the Named Executive Officer’s performance could affect the Company’s overall results. The employment agreements for Messrs. Byrne and Brown do not limit the amount of their annual bonuses. The bonus allocation to executive officers, other than Named Executive Officers, are set by the Executive Chairman in consultation with the Chief Executive Officer and approved by the Compensation Committee. Messrs. Byrne and Brown play no role in setting their own bonuses. Instead, the bonuses for each of them are set and approved independently by the Compensation Committee. Bonuses for the Named Executive Officers are accrued quarterly in the consolidated financial statements and are updated based on the amounts approved by the Compensation Committee.
 
The Compensation Committee approves the bonus of all Named Executive Officers.  Bonuses for all Named Executive Officers were paid in the first quarter of 2009. 
 
Long-Term Incentive Awards
 
PSUs.  The Company has adopted the PSU Plan to provide PSUs as incentive compensation to certain key employees (including the Named Executive Officers) of the Company. Our Executive Chairman does not participate in the PSU Plan but is responsible for recommending grants under the PSU Plan to the Compensation Committee.
 
The PSUs are designed to align management’s performance objectives with the interests of our shareholders. We believe that PSUs (which are based on diluted return on equity) align the compensation of our Named Executive Officers more closely to shareholder value than other alternatives such as options (which place 100% weight on growth in market value). The Compensation Committee has exclusive authority to select the persons to be awarded PSUs. At the time of each award, the Compensation Committee determines the terms of the award, including the performance period (or periods) and the performance objectives relating to the award.
 
Following the final performance period of a PSU, the Compensation Committee determines whether the performance objectives were met in whole or in part, and the payment due on the PSU as a result. The Compensation Committee has no discretion to change the growth in diluted return on equity goals for PSUs which have already been granted.
 
The PSU grants made entitle the recipient to receive the number of common shares of the Company (or cash equivalent or combination of cash and common shares) equal to the product of the number of PSUs granted times a “multiplier”. The applicable multiplier for each series of PSUs is determined as follows:
 
(i)  
Cancelled PSU grants, see “– Executive Compensation Policy – Overview” above, are as follows:
 
 
10

 
 
 
2006-2008 (all series): The multiplier is determined based on the geometric average return on equity of the Company during the fiscal years 2006-2008 measured in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) on a fully diluted basis.  The multiplier is 100% if return on equity is 17%, 200% if return on equity is 27% or greater, and 0% if return on equity is 7% or less.  The multiplier scales ratably between return on equity endpoints of 7% and 27%.
 
 
2007-2009 (all series): The multiplier is determined based on the arithmetic average return on equity of the Company during the fiscal years 2007-2009 measured in accordance with U.S. GAAP on a fully diluted basis.  The multiplier is 100% if return on equity is 16%, 200% if return on equity is 26% or greater, and 0% if return on equity is 8% or less.  The multiplier scales ratably between a return on equity endpoint of 8% and a midpoint of 16%, and between a return on equity midpoint of 16% and an endpoint of 26%.
 
 
2008-2010 (Series A): The multiplier is determined based on the geometric average return on equity of the Company during the fiscal years 2008-2010 measured in accordance with U.S. GAAP on a fully diluted basis.  The multiplier is 100% if return on equity is 16%, 200% if return on equity is 26% or greater, and 0% if return on equity is 8% or less. The multiplier scales ratably between a return on equity endpoint of 8% and a midpoint of 16%, and between a return on equity midpoint of 16% and an endpoint of 26%.
 
 
2008-2010 (Series B): The multiplier is determined based on the geometric average return on equity of the Company during the fiscal years 2008-2010 measured in accordance with U.S. GAAP on a fully diluted basis.  The multiplier is 100% if return on equity is 17%, 200% if return on equity is 24% or greater, and 0% if return on equity is 10% or less.  The multiplier scales ratably between return on equity endpoints of 10% and 24%.
 
(ii)  
Current PSU grants, see “– Executive Compensation Policy – Overview” above, are as follows:
 
·
 
2009-2011 (Series A, B, C and D): The multiplier is determined based on the arithmetic average return on equity of the Company during the fiscal years 2009-2011 measured in accordance with U.S. GAAP on a fully diluted basis.  The multiplier is 100% if return on equity is 13.5%, 150% if return on equity is 18.5% or greater, and 50% if return on equity is 8.5% or less.  The multiplier scales ratably between return on equity endpoints of 8.5% and 18.5%.
 
·
 
2009-2010 (Special Series F): The multiplier is determined based on the arithmetic average return on equity of the Company during the fiscal years 2009 and 2010 measured in accordance with U.S. GAAP on a fully diluted basis.  The multiplier is 100% if return on equity is 13.5%, 150% if return on equity is 18.5% or greater, and 50% if return on equity is 8.5% or less.  The multiplier scales ratably between return on equity endpoints of 8.5% and 18.5%.
 
In the future, the Company may award to Named Executive Officers PSUs which have a different index with a portion of the award tied more closely to the performance of a specific business unit for which a Named Executive Officer is responsible. However, a portion would also remain tied to the Company achieving its diluted return on equity goals.
 
The Company has no policy to recover payments if the relevant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of a payment. With the exception of the special 2009-2010 series which vest in two years, the PSUs vest over a period of three years. To enhance retention, PSUs generally will be cancelled without value by the Company if the participant’s continuous employment terminates prior to the end of the performance period.
 
Settlement of a PSU may be made in cash or by issuance of common shares or a combination of both, at the discretion of the Compensation Committee. The Company expects generally to settle the PSUs in common shares. As of April 14, 2009, the maximum number of common shares that may be issued under the PSU Plan is 11,200,000 common shares, subject to adjustment for share subdivisions, share dividends, stock splits and similar events. Our long-term expectation is that PSU grants equal in number to approximately 1% of outstanding common shares will be made each year. Thus, an increase in the maximum number of common shares that may be issued under the PSU Plan will need to be authorized in due course. 
 
We generally grant PSU awards annually, prior to the commencement of the performance period they track. In the case of new hires, we generally award PSUs that have a performance period commencing at the beginning of the year of hire.
 
Warrant.  In connection with the three closings of the private placement of our common shares in December 2005, January 2006 and February 2006, we issued a Warrant to Haverford to purchase 8,585,747 common shares of the Company (which equaled 12.0% of the issued share capital of the Company through the completion of the private placement in February 2006) at an exercise price of $14.00 per share (subject to adjustment for share subdivisions, share dividends, stock splits and similar events). Our Executive Chairman, Mr. Byrne, and our Chief Executive Officer, Mr. Brown, control and may be deemed to have an interest in Haverford.  See “Security Ownership of Certain Beneficial Owners, Management and Directors” below.
 
 
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The Warrant was granted in recognition of the efforts of Mr. Byrne and Mr. Brown in creating the Company, assembling the resources and taking financial risk by covering all of the start-up costs in advance of the Company being funded by additional investors. In accordance with U.S. GAAP we have recognized the Warrant as a compensation expense.
 
The fair value of the Warrant when issued in December 2005 was $12.2 million, and this amount was included as compensation expense for the period ended December 31, 2005.  We amended the Warrant in connection with the additional closings of the private placement in February 2006 to increase the number of shares for which the Warrant is exercisable in proportion to the amount of additional capital raised in the private placement. The increase in the fair value of the Warrant as a result of this amendment was $3.4 million, and this amount was included as a compensation expense for the year ended December 31, 2006.
 
At a meeting of the Board of Directors held on November 14, 2008, the Warrant was amended to change the exercise date from December 1, 2010 to December 31, 2010, to December 1, 2013 to December 31, 2013, change the strike price to $14.80 from $14.00 and include a provision that amends the strike price for all dividends paid by the company from the issuance of the Warrant to its exercise date. The increase in the fair value of the Warrant as a result of these amendments was $3.6 million, and this amount was included as compensation expense for the year ended December 31, 2008.  The Company does not expect to further amend the Warrant.
 
The Company does not currently intend to grant any options or additional awards to purchase common shares of the Company.
 
Competitive Market Review
 
We consider competitive market practices with respect to the salaries and total compensation of our Named Executive Officers. For purposes of determining competitive compensation levels for our Named Executive Officers in Bermuda, we subscribed to the PricewaterhouseCoopers Bermuda International Compensation Survey in 2008, an independent local market annual survey. We review the market practices by speaking to recruitment agencies and reviewing annual reports on Form 10-K, proxy statements or similar information of other Bermuda and Swiss reinsurance companies with market capitalizations greater than $500.0 million and less than $3.0 billion, in particular Aspen Insurance Holdings Ltd., Endurance Specialty Holdings Ltd., Allied World Assurance Company Holdings, Ltd, Montpelier Re Holdings Ltd. and Platinum Underwriters Holding Ltd. We do not use compensation consultants at this time, however, in the future we may seek such advice.
 
Common Share Ownership Requirements
 
The Company seeks to weight its compensation scheme to ownership of our common shares. The Company believes that broad-based stock ownership by its employees (including the Named Executive Officers) enhances its ability to deliver superior shareholder returns by increasing the alignment between the interests of our employees and our shareholders. The goal of the PSU program is to engage all of our Named Executive Officers as partners in the Company’s success and help the Company realize the maximum gain from its strategy. The Company does not have a formal requirement for share ownership by any group of employees.
 
Change in Control and Severance
 
Upon termination of employment, the Named Executive Officers may receive payments under the Company’s PSU Plan and severance payments under their employment agreements.
 
PSUs.  The PSU Plan has a “double trigger”: PSUs held by any participant may settle in full if: (i) the Company undergoes a transaction that is deemed to be a change of control and (ii) the participant is terminated, constructively terminated or the PSU Plan is changed adversely. If the change of control is “hostile,” meaning that it is opposed by our Executive Chairman and our Chief Executive Officer, all PSUs held by a participant will become fully payable in shares or cash, or a mixture of both, at the discretion of the Compensation Committee immediately upon any termination of the employment of the participant by the Company. If the double trigger occurs, the Named Executive Officer may receive all or a portion of the maximum award under the PSU Plan.
 
We believe this double trigger requirement maximizes shareholder value because it prevents an unintended windfall to management in the event of a friendly (non-hostile) change in control. Under this structure, unvested PSUs would continue to incentivize the Named Executive Officers to remain with the Company after the friendly change in control.
 
If, by contrast, the PSU plan had only a “single trigger,” and a friendly change of control occurred, management’s PSUs would all vest immediately creating a windfall, and the new owner would then likely find it necessary to replace the compensation with fresh unvested compensation in order to retain management. This is why we believe a “double-trigger” is more shareholder-friendly, and thus more appropriate, than a single trigger.
 
 
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Severance.  The Named Executive Officers’ employment agreements entitle each officer to compensation if such officer’s employment is terminated without cause. Severance payments include a cash payment equal to one year’s annual salary and a bonus calculated by averaging the sum of the most recent three bonuses paid to the Named Executive Officer. In the event a Named Executive Officer has been employed with the Company for fewer than three years and is terminated without cause, the bonus will be calculated by averaging the sum of such lesser number of bonuses paid to the Named Executive Officer.
 
David Brown’s employment agreement provides that, in the event he is terminated without cause, Mr. Brown generally shall be entitled to a lump sum cash payment of the greater of: (i) one year’s annual salary and a bonus calculated by averaging the sum of the three most recent bonuses paid to him (or such lesser number of bonuses if fewer than three bonuses have been paid since the commencement of his employment agreement), or (ii) the cash value mark-to-market per the Company’s books and records for the most recently ended quarter of the PSUs he lost due to termination, pro-rated for the portion of the performance period served under the PSUs. However, if he is terminated without cause following a change of control of the Company, Mr. Brown will be entitled to a cash payment equal to one year’s annual salary and a bonus calculated by averaging the sum of the three most recent bonuses (or such lesser number of bonuses if fewer than three bonuses have been paid since the commencement of his employment agreement) paid to him.
 
Severance payments for each Named Executive Officer under his employment agreement are in addition to the Company’s obligation to pay such officer’s salary during the requisite notice period. The severance payments are in addition to each Named Executive Officer’s rights to payment under the PSU Plan discussed above.
 
Each employment agreement includes a covenant by the Named Executive Officer not to solicit employees of the Company during a period following notice of termination, and, except for a termination of Mr. Brown without cause following a change of control of the Company, provides for these severance payments in a lump sum only after the officer shall have complied with such non-solicitation requirement (in the reasonable judgment of the Company).  In the case of Messrs. Byrne and Brown, that period is 730 days.  In the case of the other Named Executive Officers, that period is 545 days.
 
The level of severance payments determined as follows: prior to the commencement of our IPO process the level of severance payments was determined as follows: (i) all executive officer contracts were terminable by either party upon 90 days’ notice; (ii) there were no restrictions on the executive officer, following the termination of his employment with the Company, from soliciting employees of the Company; (iii) and there were no severance payments other than payment of salary during the notice period. It was determined by the Compensation Committee, in conjunction with our advisors in the IPO process, that these provisions were generally less protective of the Company’s interest than the provisions adopted by comparable public firms. It was thus decided, in conjunction with the relevant executive officers, to amend the employment agreements in two ways beneficial to the Company (longer notice and the addition of non-solicitation provisions) and two ways beneficial to the employee (severance arrangements and use of the Company’s aircraft at marginal cost). It was considered by the Compensation Committee that, given the lengthy notice period to which the Named Executive Officers are now committed, a decision to resign would effectively freeze such executive officer’s career for at least a year. Thus the payment of one year’s pay, in the event the Company decided to terminate the Named Executive Officer without cause, was considered roughly proportionate.
 
Mr. Brown’s severance provisions are more generous than those of the other Named Executive Officers and reflect the high opportunity costs he would bear if the Company decided to change its Chief Executive Officer.
 
Role of Executive Officers in Executive Compensation
 
The Compensation Committee approves the final determination of compensation for Messrs. Boisvert, Flitman, Prestia and O’Shaughnessy acting on the recommendation of our Executive Chairman, Mr. Byrne, with advice from our Chief Executive Officer, Mr. Brown. The Compensation Committee determines the compensation (excluding the annual bonus) of Mr. Brown acting with advice from Mr. Byrne. The Compensation Committee determines the compensation (excluding the annual bonus) of Mr. Byrne acting with advice from Mr. Brown.  Messrs. Brown and Byrne do not play a role in determining their own bonuses. Instead, the bonuses for each of them are set independently by the Compensation Committee. Our Executive Chairman does not receive PSUs but is responsible for recommending grants under the PSU Plan to the Compensation Committee.
 
Conclusion
 
The Company’s compensation policies are designed to retain and motivate our senior executive officers, align their performance objectives with the interests of our shareholders and ultimately reward them for outstanding performance.

 
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Summary Compensation Table
 
The following Summary Compensation Table summarizes the total compensation awarded to our Named Executive Officers as of December 31, 2008 for services rendered by them to the Company and to its subsidiaries.
 

Name and
Principal Position
Year
 
Salary
($)
   
Bonus
($) (1)
   
Stock
awards(2)
($)
   
Option
awards(3)
($)
   
All other
compensation(4)
 ($)
   
Total
($)
 
Mark J. Byrne
Executive Chairman
2008
    650,000       422,500             3,303,793       97,950       4,474,243  
 
2007
    600,000       750,000                   72,469       1,422,469  
David A. Brown
Chief Executive Officer
2008
    650,000       422,500       -2,425,404       261,708       46,958       1,381,166  
 
2007
    600,000       750,000       1,797,277             46,958       3,194,235  
Patrick Boisvert
Chief Financial Officer (5)
2008
    246,336       200,000       -227,872             91,221       537,557  
 
2007
    200,000       50,000       177,896             72,000       499,896  
David Flitman
Chief Actuary
2008
    500,000       280,000       -612,499             120,000       900,000  
 
2007
    383,333       325,000       538,705             103,333       1,350,371  
Gary Prestia
Chief Underwriting Officer
Flagstone Réassurance Suisse SA – Bermuda Branch
2008
    520,000       292,500       -778,135             51,600       864,100  
 
2007
    460,000       369,200       602,068             60,494       1,491,762  
James O’Shaughnessy
Chief Financial Officer (ex)
2008
    330,000       50,000       -415,545             70,869       450,869  
 
2007
    315,000       165,000       342,235             78,750       900,985  
 
_______________________
 
(1)
The amounts shown in this column are bonuses paid in fiscal year 2008 and reflecting performance in fiscal year 2007, and bonuses paid in fiscal year 2009 reflecting performance in fiscal year 2008.
 
(2)
The amounts shown in this column are based on the dollar amount recognized for financial statement reporting purposes for the 2008 fiscal year in accordance with SFAS No. 123(R), “Share-Based Payments” (“SFAS 123(R)”). All share awards are expensed ratably over the vesting period and thus the amounts shown reflect the portion of stock awards granted in the 2006, 2007 and 2008 fiscal years. At a meeting of the Compensation Committee of the Board of Directors on November 13, 2008, the members of the Compensation Committee voted to cancel the PSUs previously granted to the Named Executive Officers in light of the Company's then current diluted return on equity estimates, subject to receiving such executive officer’s consent. On December 8, 2008, the executive officers each consented to this cancellation and the PSUs previously granted in 2006, 2007 and January 2008 were cancelled. In lieu of this cancellation, two special series, 2009-2010 and 2009-2011, were issued as replacement PSUs to those employees who were holders of the cancelled series.  The value of the stock awards noted above reflects the reversal of  the expense previously recognized for the prior fiscal years in relation to the cancelled awards pursuant to SFAS No. 123(R), and takes into account the replacement PSUs from December 8, 2008 through December 31, 2008.
 
(3)
The amounts shown in this column are based on the dollar amount recognized for financial statement reporting purposes for the 2008 fiscal year in accordance with SFAS 123(R). The amounts shown in this column represent the respective interests of Mr. Byrne and Mr. Brown in the fair value of the amendment to the Warrant during 2008, based upon their respective contributions to the capital of Haverford.
 
(4)
The amounts shown in this column represent housing allowances, school subsidies and mortgage subsidies provided to the Named Executive Officers. During 2008, on flights of Company aircraft, the Company allowed employees and their family members to occupy seats that otherwise would have been vacant. This benefit had no incremental cost to the Company as each Named Executive Officer reimbursed the marginal cost to the Company for any such personal use.
 
(5)
Mr. Boisvert received his salary and a portion of his housing allowance in U.S. dollars from January 1, 2008 until June 30, 2008.  Mr. Boisvert then received his salary and a portion of his housing allowance in Swiss francs beginning July 1, 2008.  The Swiss franc amounts were converted in U.S. dollars at an average foreign exchange rate for the period of $0.89871.  Prior to his relocation to Switzerland in July 2008, Mr. Boisvert was paid a bonus of $120,000 relating to his performance up to that date for fiscal year 2008.
 
 
 
 
Grants of Plan-Based Awards
 
The Compensation Committee makes awards to all of our Named Executive Officers, except our Executive Chairman. Our Executive Chairman does not participate in the PSU Plan because he contributed the significant majority of capital to Haverford and we therefore consider him to have sufficient indirect interest in the value of the Company’s equity, and because this allows him to participate meaningfully in the allocation of PSU grants to others without conflict of interest.
 
At a meeting of the Compensation Committee of the Board of Directors on November 13, 2008, the members of the Compensation Committee voted to cancel the PSUs previously granted to the Named Executive Officers in light of the Company's then current diluted return on equity estimates, subject to receiving such executive officer’s consent. On December 8, 2008, the executive officers each consented to this cancellation and the PSUs previously granted in 2006, 2007 and January 2008 were cancelled. In lieu of this cancellation, two special series, 2009-2010 and 2009-2011, were issued as replacement PSUs to those employees who were holders of the cancelled series.  On January 1, 2009 the Compensation Committee awarded PSUs for the 2009-2011 performance period. Under the non-discretionary formula set forth in the PSUs, upon vesting, the executive officers holding PSUs shall be entitled to receive a number of common shares of the Company (or the cash equivalent, or a combination of both, in each case at the election of the Compensation Committee) equal to the product of the number of PSUs granted multiplied by a factor. The factor will range between 0.5 and 1.5, depending on the diluted return on equity achieved during the vesting period. The PSUs vest over a period of approximately three years. If the diluted return on equity goals are not met, no compensation cost is recognized.
 
To enhance retention, if the participant’s continuous employment terminates prior to the end of the performance period, PSU grants generally will be cancelled without value by the Company at the end of the next performance period.
 
In the event of a hostile takeover termination, the Compensation Committee would have the option to pay the maximum award due to the participant in either cash or by the issuance of common shares in the cash value of the common shares based on market value rather than net asset value as of the date of the hostile takeover termination. Under the PSU Plan, a hostile takeover termination would occur if an employee is terminated or there is an adverse change in the PSU Plan, following a change in control of the Company that was opposed by the Executive Chairman and the Chief Executive Officer.
 
 
15


 
Grants of Plan-Based Awards Table
 
The following Grants of Plan-Based Awards Table summarizes all grants made to the Named Executive Officers under any plan during the fiscal 2008 year.
 
               
Estimated future
payouts under equity
incentive plan awards (1)
       
Name
 
Grant dates
   
Date of
Compensation Committee Action
   
Threshold
(#)
   
Target
(#)(2)
   
Maximum
(#)
   
Grant Date Fair Value of Stock
and  Option
Awards (3)
($)
 
Mark Byrne
 
   
n/a
     
n/a
      n/a       n/a       n/a        
David Brown
 
January 1, 2008
   
October 25, 2007
            189,000       378,000        
   
December 8, 2008
   
November 13, 2008
            547,587       821,381       5,541,580  
Patrick Boisvert
 
 
January 1, 2008
   
October 25, 2007
            23,000       46,000          
   
July 1, 2008
   
October 25, 2007
            19,174       38,348        
   
December 8, 2008
   
November 13, 2008
            89,735       134,603       908,118  
David Flitman
 
 
January 1, 2008
   
October 25, 2007
            67,500       135,000        
   
December 8, 2008
   
November 13, 2008
            169,551       254,327       1,715,856  
Gary Prestia
 
January 1, 2008
   
October 25, 2007
            70,000       140,000        
   
December 8, 2008
   
November 13, 2008
            188,390       282,585       1,906,507  
James O’Shaughnessy
 
January 1, 2008
   
October 25, 2007
            32,000       64,000        
   
December 8, 2008
   
November 13, 2008
            97,962       146,943       991,375  

(1)  
There is no minimum, or “threshold,” number of common shares of the Company payable under a PSU Plan award. “Target” means the number of common shares issuable if the performance objectives of the award were met in full (factor of one), and “maximum” means maximum number of shares issuable under the award (factor of 2 with respect to PSUs issued prior to December 8, 2008 and factor of 1.5 in respect of PSUs issued on December 8, 2008).
 
(2)  
At a meeting of the Compensation Committee of the Board of Directors on November 13, 2008, the members of the Compensation Committee voted to cancel the PSUs previously granted to the Named Executive Officers in light of the Company's then current diluted return on equity estimates, subject to receiving such executive officer’s consent. On December 8, 2008, the executive officers each consented to this cancellation and the PSUs previously granted in 2006, 2007 and January 2008 were cancelled. The issuance of shares with respect to the PSUs is contingent upon the attainment of certain levels of average diluted return on equity over a three year period. Considering the net loss incurred in the nine months ended September 30, 2008, the Company reviewed is diluted return on equity estimates for the applicable performance periods and accordingly revised the number of PSUs expected to vest. The impact of this revision was that the PSU’s issued on January 1, 2008 were valued at Nil.
 
(3)  
The amounts shown in this column are based on the fair value at time of grant of the PSUs. It assumes the performance objectives of the PSU grant were met in full (factor of one). The ultimate value of the PSUs is highly dependent on the Company’s diluted return on equity. See “―Long Term Incentive Awards.” The value of the stock awards noted above reflects the reversal of prior fiscal years’ income on the cancelled awards and the income on the replacement PSUs from December 8, 2008 through December 31, 2008.
 

16

 
 
Employment Agreements
 
The following paragraphs summarize the employment-related agreements for our Named Executive Officers. The employment agreements for Messrs. Boisvert, Flitman, O’Shaughnessy and Prestia provide that either party may terminate the agreement upon 6 month’s advance written notice to the other party and do not otherwise specify a termination date.  The employment agreements for Messrs. Byrne and Brown provide that either party may terminate the agreement upon 365 days’ advanced written notice to the other party and do not otherwise specify a termination date. The employment agreement for each Named Executive Officer provide for a discretionary annual bonus to be paid to each Named Executive Officer. The employment agreement for each of Messrs. Boisvert and Flitman specifies that the annual bonus shall not exceed 50% and 60%, respectively, of each of their annual salaries.  The employment agreement for each of Messrs. O’Shaughnessy and Prestia specifies that the annual bonus shall not exceed 75% of such Named Executive Officer’s annual salary. The employments agreements for Messrs. Byrne and Brown do not limit the amount of their annual bonuses.
 
The employment agreements for each of the Named Executive Officers specify that each Named Executive Officer shall have the right to personal use of the Company aircraft, provided that each Named Executive Officer shall reimburse the marginal cost to the Company for this personal use. This amount does not include fixed costs which do not change based on usage, such as pilot salaries, the lease costs of the Company aircraft, and the cost of maintenance not related to trips on the aircraft.
 
Mark Byrne.  We have entered into an employment agreement with Mr. Byrne, dated October 18, 2006, under which he has agreed to serve as our Executive Chairman. Pursuant to this agreement, Mr. Byrne was paid an annual salary of $650,000 for the year ended December 31, 2008. The agreement further provides that Mr. Byrne shall receive a housing allowance through a mortgage subsidy, which will lower the effective cost of financing on his Bermuda residence to 3% per annum. The maximum financing to which this applies is an amount equal to five times Mr. Byrne’s annual salary as amended from time to time. Mr. Byrne has agreed terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately $650,000.
 
David Brown.  We have entered into an employment agreement with Mr. Brown, dated October 15, 2006, under which he has agreed to serve as our Chief Executive Officer. Pursuant to this agreement, Mr. Brown was paid an annual salary of $650,000 for the year ended December 31, 2008. The agreement further provides that Mr. Brown shall receive a housing allowance through a mortgage subsidy, which will lower the effective cost of financing on his Bermuda residence to 3% per annum. The maximum financing to which this applies is an amount equal to five times Mr. Brown’s annual salary as amended from time to time.  Mr. Brown has agreed terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately $650,000.
 
Patrick Boisvert. We have restated the employment agreement with Mr. Boisvert, on March 31, 2009, under which he has agreed to serve as our Chief Financial Officer.  This employment agreement replaced the prior agreements dated July 1, 2008 and April 9, 2008 between Flagstone Reinsurance Limited and Mr. Boisvert.  Pursuant to the latter agreement, Mr. Boisvert was paid an annual salary of CHF270,000 for the year ended December 31, 2008. The agreement further provides that Mr. Boisvert shall receive a housing allowance of CHF 6,000 per month until July 31, 2010.  Mr. Boisvert has agreed terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately CHF410,000.
 
David Flitman.  We have restated the employment agreement with Mr. Flitman, on March 31, 2009, under which he has agreed to serve as our Chief Actuary.  This employment agreement replaced the prior employment agreements with the Company dated August 25, 2008 and January 5, 2006 between Flagstone Reinsurance Limited and Mr. Flitman.  Pursuant to the latter agreement, Mr. Flitman was paid an annual salary of US$ 500,000 for the year ended December 31, 2008. The agreement further provides that Mr. Flitman shall receive a housing allowance of up to $120,000 per annum. Mr. Flitman has agreed to terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately $525,000.
 
James O’Shaughnessy.  We have restated the employment agreement with Mr. O’Shaughnessy, on March 31, 2009, under which he has agreed to serve as our Chief Financial Officer - Bermuda. This employment agreement replaced the prior agreements with the Company dated September 24, 2008 and October 18, 2006 between Flagstone Reinsurance Holdings Limited and Mr. O’Shaughnessy.  Pursuant to the 2008 agreement, Mr. O’Shaughnessy was paid an annual salary of $330,000 for the year ended December 31, 2008. The agreement further provides that Mr. O’Shaughnessy shall receive a housing allowance through a mortgage subsidy, which will lower the effective cost of financing on his Bermuda residence to 3% per annum. The maximum financing to which this applies is an amount equal to five times Mr. O’Shaughnessy’s annual salary as amended from time to time.  Mr. O’Shaughnessy has agreed terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately $330,000.
 
Gary Prestia.  We have restated the employment agreement with Mr. Prestia, on March 31, 2009, under which he has agreed to serve as our Chief Underwriting Officer - Flagstone Réassurance Suisse SA - Bermuda Branch. This employment agreement replaced the prior agreements with the Company dated October 18, 2006 and August 26, 2008 between the Flagstone Reinsurance Limited and Mr. Prestia.  Pursuant to the latter agreement, Mr. Prestia was paid an annual salary of $520,000 for the year ended December 31, 2008. The agreement further provides that Mr. Prestia shall receive a housing allowance of up to $60,000 per annum.  Mr. Prestia has agreed terms with the Company such that his annual salary for the year ending December 31, 2009 will be approximately $546,000.
 
 
17

 
 
Compensation Mix
 
We use short-term compensation (base salaries and annual cash bonuses) and long-term compensation (PSUs) to achieve our goal of driving long-term growth in book value per share. The long-term compensation element (the PSUs) are designed to emphasize the performance measures executive officers need to address in order to deliver shareholder value.
 
The cumulative number of outstanding PSUs granted to each of the Named Executive Officers as at December 31, 2008 was as follows: (i) Mr. Byrne (none); (ii) Mr. Brown 547,587; (iii) Mr. Boisvert 89,735; (iv) Mr. Flitman 169,551; (v) Mr. Prestia 188,390; and (vi) Mr. O’Shaughnessy 97,962.
 
The cumulative number of outstanding PSUs granted to each of the Named Executive Officers as at January 1, 2009 was as follows: (i) Mr. Byrne (none); (ii) Mr. Brown 722,587; (iii) Mr. Boisvert 139,735; (iv) Mr. Flitman 244,551; (v) Mr. Prestia 263,390; and (vi) Mr. O’Shaughnessy 109,962.
 
The amount of annual base salary for each of the Named Executive Officers in fiscal 2008 was as follows: (i) Mr. Byrne $650,000; (ii) Mr. Brown $650,000; (iv) Mr. Boisvert $246,336; (iv) Mr. Flitman $500,000; (v) Mr. Prestia $520,000; and (vi) Mr. O’Shaughnessy $330,000.
 
For the Named Executive Officers, no PSUs vested during 2008.  The Compensation Committee of the Board of Directors of the Company reviews its assumptions in relation to the PSUs on a quarterly basis. At a meeting of the Compensation Committee of the Board of Directors on November 13, 2008, the members of the Compensation Committee voted to cancel the PSUs previously granted to the Named Executive Officers in light of the Company's then current diluted return on equity estimates, subject to receiving such executive officer’s consent. On December 8, 2008, the executive officers each consented to this cancellation and the PSUs previously granted in 2006, 2007 and January 2008 were cancelled.
 
Base salary typically will constitute a minority portion of the total compensation of our Named Executive Officers. We set salary to provide adequate cash compensation to support a reasonable standard of living, so that our Named Executive Officers are prepared to have “at risk” the portion of their compensation received in PSUs. We anticipate that if the Company meets its diluted return on equity goals the Named Executive Officers will receive significantly more long-term value (in some cases a multiple) from their PSUs than from their annual cash bonuses, the other form of incentive compensation.
 
We maintain a defined contribution pension plan in accordance with the National Pension Scheme (Occupational Pensions Act) 1998, as amended, for the benefit of employees that are Bermudians or spouses of Bermudians.
 
We maintain a defined contribution pension plan in accordance with the Occupational Pensions Act in Switzerland for the benefit of employees that are resident in Switzerland.
 
The named executive officers do not participate in any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified, except for those contributions to the Swiss social pension plan, or l’Assurance-Vieillesse et Survivant.
 
Compensation Committee Interlocks and Insider Participation
 
 
The Compensation Committee is comprised of four non-executive directors, Messrs. Gross, James, Knap and Thorn, and Mr. James serves as Chairman. No member has ever been an officer or employee of the Company or of any of its subsidiaries. As discussed above under “Certain Relationships and Related Transactions,” E. Daniel James, who is a director of the Company, is also a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc. LB I, an affiliate of Lehman Brothers Inc., has invested $50.0 million in Mont Fort Re Ltd. (“Mont Fort”) in respect of its segregated account “ILW” (“Mont Fort ILW”) and owns 50.0 million, or 90.9%, of the Mont Fort ILW preferred shares. LB I invested $55.0 million in Mont Fort Re Ltd. in respect of its segregated account “ILW 2” (“Mont Fort ILW2”) and which owned 55.0 million, or 100.0%, of the Mont Fort ILW 2 preferred shares. In August 2007, LBI transferred 5,000,000 preferred shares in Mont Fort ILW2 to its affiliate, Lehman Brothers PEP Investments L.P. (“Lehman PEP”). In March 2008, at the request of Lehman PEP, Mont Fort redeemed the 5,000,000 preferred shares held by Lehman PEP. We own all of the common shares of Mont Fort and have 100% control of its board of directors.
 
 
18

 
 
 
The Company entered into a foreign currency swap with Lehman Brothers Inc. to hedge the Euro-denominated Deferrable Interest Debentures recorded as long term debt.  Under the original terms of the foreign currency swap, the Company exchanged €13.0 million for $16.7 million, will receive Euribor plus 354 basis points and pay LIBOR plus 371 basis points.  The swap, which was to expire on September 15, 2011, had a fair value of $2.5 million as at December 31, 2007.  The agreement was terminated, as per the terms of the swap agreement, on September 15, 2008 due to the bankruptcy of Lehman Brothers Inc. E. Daniel James, who is a director of the Company, is also a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc. As discussed above, Lehman Brothers Inc. acted as an underwriter of the Company’s IPO. In addition, Lehman Brothers Inc. provided additional investment banking services to the Company. The total fee received by Lehman Brothers Inc. in connection with our IPO was $3.4 million.
 
 
Further, on December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $25.0 million, will receive interest at three month LIBOR and will pay 4.096% interest. The agreement will terminate on September 15, 2012. Also on December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $120.0 million, will receive interest at three month LIBOR and will pay 3.962% interest. The fair value of the two swaps was $0.2 million as at December 31, 2007.  The agreement was terminated, as per the terms of the swap agreement, on September 15, 2008 due to the bankruptcy of Lehman Brothers Inc.
 
Outstanding Equity Awards at Fiscal Year-End Table
 
 
The following table summarizes the number of securities underlying the Warrant and the Company’s PSU Plan awards for each Named Executive Officer as at December 31, 2008.
 

Name
 
Outstanding Equity Awards at Fiscal Year-End
 
   
Option Awards
   
Stock Awards
 
   
Number of
securities
underlying
unexercised
options
exercisable
(#)
   
Number of
securities
underlying
unexercised
options
unexercisable (1)
(#)
   
Equity incentive plan awards: number of securities underlying unexercised unearned options (#)
   
Option
exercise
price
($)
   
Option
expiration
date
   
Equity incentive plan awards: number of unearned shares, units or other rights that have not vested
(#) (2)
   
Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested (3)
($)
 
Mark Byrne
   
n/a
     
7,955,553
     
    $
14.80
   
December 31, 2013
     
     
 
David Brown
   
n/a
     
630,194
     
    $
14.80
   
December 31, 2013
     
547,587
    $
5,349,925
 
Patrick Boisvert
   
n/a
     
n/a
   
 
n/a
     
n/a
     
n/a
     
  89,735
    $
   876,711
 
David Flitman
   
n/a
     
n/a
     
n/a
     
n/a
     
n/a
     
169,551
    $
1,656,513
 
Gary Prestia
   
n/a
     
n/a
     
n/a
     
n/a
     
n/a
     
188,390
    $
1,840,570
 
James O’Shaughnessy
   
n/a
     
n/a
   
 
n/a
     
n/a
     
n/a
     
  97,962
    $
   957,089
 

__________________

(1)
The amounts shown in this column represent the respective interests of Mr. Byrne and Mr. Brown in the Warrant, based upon their respective contributions to the capital of Haverford.
 
(2)
The number of common shares shown in this column assumes the performance objectives of the PSU grant were met in full (factor of one). The number of common shares issuable in respect of the PSUs could increase by a factor of 1.5 depending on diluted return on equity. See “―Long Term Incentive Awards.”
 
 
 
 
(3)
Valuation of the stock awards replacement PSUs issued on December 8, 2008 assumed a market price of $9.77 as at December 31, 2008. 
 
Potential Payments Upon Termination or Change-in-Control
 
The following summarizes potential payments payable to our Named Executive Officers upon termination of their employment or a change in control of the Company under their current employment agreements and our PSU Plan.
 
Employment Agreements
 
The employment agreement of each Named Executive Officer entitles him to a severance payment if the Company terminates his employment without cause.
 
As used in these employment agreements, “cause” means:
 
 
a material breach by the Named Executive Officer of any contract between such executive officer and the Company;
 
 
the willful and continued failure or refusal by such executive officer to perform any duties reasonably required by the Company, after notification by the Company of such failure or refusal, and failing to correct such behavior within 20 days of such notification; 
 
 
commission by the executive officer of a criminal offence or other offence of moral turpitude;
 
 
perpetration by the executive officer of a dishonest act or common law fraud against the Company or a client thereof; or
 
 
the Named Executive Officer’s willful engagement in misconduct which is materially injurious to the Company, including without limitation the disclosure of any trade secrets, financial models, or computer software to persons outside the Company without the consent of the Company.
 
The employment agreement of Mr. Byrne provides for cash payment equal to one year’s annual salary and a bonus calculated by averaging the sum of the most recent three bonuses paid to the Named Executive Officer. In the event that Mr. Byrne has been employed with the Company for fewer than three years and is terminated without cause, the bonus will be calculated by averaging the sum of such lesser number of bonuses paid to Mr. Byrne. The amounts the Company would pay to Mr. Byrne under this provision for a termination as of December 31, 2008 would be $1,233,333.
 
David Brown’s employment agreement provides that, in the event Mr. Brown is terminated without cause, Mr. Brown generally shall be entitled to a lump sum cash payment of the greater of: (i) one year’s annual salary and a bonus calculated by averaging the sum of the three most recent bonuses (or such lesser number of bonuses if fewer than three bonuses have been paid since the commencement of his employment agreement) paid to him, or (ii) the cash value determined on a mark-to-market basis per the Company’s books and records for the most recently ended quarter, of the PSUs he lost due to termination, pro-rated for the portion of the performance period served under the PSUs. Under this provision, for a termination as of December 31, 2008, the Company would be obligated to pay $1,233,333 to Mr. Brown.
 
If the Company terminates Mr. Brown’s employment without cause following a change of control of the Company, the Company will be obligated immediately to pay Mr. Brown a lump sum cash payment equal to one year’s annual salary and a bonus calculated by averaging the sum of three most recent bonuses (or such lesser number of bonuses if fewer than three bonuses have been paid since the commencement of his employment agreement) paid to him. Under this provision, for a termination as of December 31, 2008, the Company would be obligated to pay $1,300,000 to Mr. Brown.
 
Prior to the commencement of our IPO process the level of severance payments was determined as follows: (i) all executive officer contracts were terminable by either party upon 90 days’ notice; (ii) there were no restrictions on the executive officer, following the termination of his employment with the Company, from soliciting employees of the Company; (iii) and there were no severance payments other than payment of salary during the notice period. It was determined by the Compensation Committee, in conjunction with our advisors in the public offering process, that these provisions were generally less protective of the Company’s interest than those provisions at comparable public firms. It was thus decided, in conjunction with Messrs. Byrne and Brown, to amend the employment agreements in two ways beneficial to the Company (longer notice and the addition of non-solicitation provisions) and two ways beneficial to the employee (severance arrangements and use of the Company’s aircraft at marginal cost). It was considered by the Compensation Committee that, given the lengthy notice period to which the executive officers are now committed, a decision to resign would effectively freeze such an executive officer’s career for at least a year. Thus the payment of one year’s pay, in the event the Company decided to terminate the executive officer without cause, was considered roughly proportionate.
 
 
 
 
Mr. Brown’s severance provisions are slightly more generous than those of the other Named Executive Officers and reflect the high opportunity costs he would bear if the Company decided to change its Chief Executive Officer.
 
Severance payments for each Named Executive Officer under his employment agreement are in addition to the Company’s obligation to pay such Named Executive Officer’s salary during the requisite notice period, and are in addition to the Company’s obligations under the PSU Plan.
 
Each employment agreement includes a covenant by the Named Executive Officer not to solicit employees of the Company during a period following notice of termination, and, except for a termination of Mr. Brown without cause following a change of control of the Company, provides for these severance payments in a lump sum only after the officer shall have complied with such non-solicitation requirement (in the reasonable judgment of the Company).  In the case of Messrs. Byrne and Brown, that period is 730 days.  In the case of the other Named Executive Officers, that period is 545 days.
 
PSU Plan
 
Within 24 months following a change of control, and prior to the end of the performance period, the PSU Plan provides for payment in the event of a termination without cause, constructive termination or adverse change in the plan. As used in the PSU Plan:
 
 
A “change of control” means any person or group, other than the initial subscribers of the Company, becomes the beneficial owner of 50% or more of the Company’s then outstanding shares, or the business of the Company for which the participant’s services are principally performed is disposed of by the Company pursuant to a sale or other disposition of all or substantially all of the business or business related assets of the Company (including shares of a subsidiary of the Company).
 
 
 “Cause” has the meaning set forth above under “—Employment Agreements.”
 
 
 A participant who terminates employment at his own initiative may, by prior written notice to the Company, declare the termination to be a “constructive termination” if it follows (a) a material decrease in his salary or (b) a material diminution in the authority, duties or responsibilities of his position with the result that the participant makes a determination in good faith that he cannot continue to carry out his job in substantially the same manner as it was intended to be carried out immediately before such diminution. The Company has 30 days to cure the circumstances that would constitute a constructive termination.
 
 
 An “adverse change in the plan” principally includes a termination of the plan, an amendment that materially diminishes the value of PSU grants, or a material diminution of the rights of the holder of the PSU.
 
In these circumstances, if the Compensation Committee shall have determined, prior to the change in control and based on the most recent performance status reports, that the performance objectives for the particular grant were being met at the date of the determination, the participant shall receive the maximum award for those PSUs, which is a number of common shares equal to 1.5 times the number of his PSUs. If the Compensation Committee shall have determined that the performance objectives were not being met, the participant shall receive a portion of the maximum award to be determined by the Compensation Committee at its discretion, but not less than the pro-rated portion of the maximum award based on the number of full months which have elapsed since the date of the PSU grant plus half of the difference between that amount and the maximum award. For all PSU awards to date, the sole performance objective has been stated as a target diluted return on equity of the Company.
 
If the change of control is “hostile,” meaning that it was opposed by our Executive Chairman and our Chief Executive Officer, immediately upon any termination of the employment of the participant by the Company, each participant shall be entitled to receive common shares equal to two times the number of his unvested PSUs or, in the discretion of the Company, the cash value of those shares based on the market price per share at the date of termination.
 
The number of common shares issuable under these provisions for a termination event as of December 31, 2008 would be 821,381 shares to Mr. Brown, 134,603 shares to Mr. Boisvert, 254,327 shares to Mr. Flitman, 282,585 shares to Mr. Prestia, and 146,943 shares to Mr. O’Shaughnessy. Based on the price per common share of $9.77 at December 31, 2008, the value of those shares would be $8,024,887, $1,315,066, $2,484,770, $2,760,855, and $1,435,633 respectively.
 
Each of these provisions of the PSU Plan provides for payment only upon a change of control and another triggering event, such as a termination without cause. We believe this “double trigger” requirement maximizes shareholder value because this structure would prevent an unintended windfall to management in the event of a friendly (non-hostile) change in control, which could be a transaction maximizing shareholder value. Under this structure, shareholders would have the ability to sell their common shares since the unvested PSUs would continue to incentivize the Named Executive Officers to remain with the Company after the friendly change in control.
 
 
 
 
If, by contrast, the PSU plan had only a “single trigger,” and a friendly change of control occurred, management’s PSUs would all vest immediately creating a windfall, and the new owner would then likely find it necessary to replace the compensation with fresh unvested compensation, in order to retain management. This is why we believe a double trigger is more shareholder-friendly, and thus more appropriate, than a single trigger.
 
The PSU Plan also provides for payment in specified circumstances if the participant shall retire under an approved retirement program of the Company. The Company currently has no retirement program.
 
Director Compensation Table
 
The following table summarizes the fees or other compensation that our directors earned for services as members of the Board of Directors or any committee of the Board of Directors during 2008.

Name
 
Fees earned
or paid in
cash ($)
   
Stock
awards (1)
($)
   
Total
($)
 
Gary Black
   
19,000
     
78,000
     
          97,000
 
Stephen Coley
   
33,000
     
83,000
     
116,000
 
Thomas Dickson(2)
   
74,125
     
41,500
     
115,625
 
Stewart Gross(3)
   
       108,000
     
15,000
     
123,000
 
E. Daniel James(4)
   
30,000
     
86,000
     
116,000
 
Dr. Anthony Knap
   
46,000
     
84,000
     
130,000
 
Anthony P. Latham
   
11,125
     
     —
     
          11,125
 
Marc Roston(5)
   
20,000
     
81,000
     
101,000
 
Jan Spiering
   
43,000
     
       184,000
     
227,000
 
Wray T. Thorn(6)
   
50,000
     
87,000
     
137,000
 
Peter F. Watson
   
72,000
     
35,000
     
107,000
 

__________________

(1)
The amounts shown in this column are based on the dollar amount recognized for financial statement reporting purposes for the 2008 fiscal year in accordance with SFAS No. 123(R). The amounts shown in this column also represent the fair value at time of grant of the Restricted Share Units (“RSUs”) granted to each director during 2008. The aggregate number of RSUs issued to each director during 2008 (all of which remained outstanding as at December 31, 2008, with the exception of Mr. Roston whose RSUs were settled on December 19, 2008) was as follows: Mr. Black—5,611 RSUs; Mr. Coley—5,971 RSUs; Mr. Dickson—2,985 RSUs; Mr. Gross—1,079 RSUs; Mr. James—6,187 RSUs; Dr. Knap—6,043 RSUs; Mr. Latham—nil RSUs; Mr. Roston— 5,827 RSUs Mr. Spiering—13,237 RSUs; Mr. Thorn—6,258 RSUs; and Mr. Watson—2,517 RSUs.
 
(2)
As noted in “Our Directors” above, Thomas Dickson is Chief Executive Officer and Founder of Meetinghouse LLC.  The Company authorized the issuance of such RSUs in consideration of Mr. Dickson’s service as a director.  The RSUs were granted in favor of Meetinghouse, LLC.
 
(3)
As noted in “Our Directors” above, Stewart Gross is a Managing Director of Lightyear Capital. The Company authorized the issuance of such RSUs in consideration of Mr. Stewart’s service as a director. The RSUs were granted in favor of Lightyear Capital, LLC. Mr. Gross does not beneficially own these RSUs.
 
(4)
As noted in “Our Directors” above, E. Daniel James is a Managing Director of Lehman Brothers Inc. and a senior manager of Lehman Brothers Merchant Banking Group. As part of his compensation for serving as a director of the Company, Mr. James has received, and it is expected that he will in the future from time to time receive, common shares, RSUs or options to purchase our common shares. Under the terms of Mr. James’ employment with Lehman Brothers Inc., he is required to surrender to Lehman Brothers Inc. any compensation (including common shares, RSUs and options) received in his capacity as a director of the Company. Mr. James disclaims beneficial ownership of all RSUs granted to him and all common shares beneficially owned by the Lehman entities. See “Security Ownership of Certain Beneficial Owners, Management and Directors” below.
 
(5)
Mr. Roston resigned from the Board of Directors on September 29, 2008.
 
 
 
 
(6)
As noted in “Our Directors” above, Wray Thorn is  Senior Managing Director at Marathon Asset Management, LP (formerly known as Marathon Asset Management, LLC) (“Marathon”). Mr. Thorn does not individually or otherwise beneficially own any common shares of the Company. Mr. Thorn is an employee of Marathon, which serves as the investment manager (the “Manager”) of Marathon Special Opportunity Master Fund, Ltd. and Marathon Special Opportunity Liquidating Fund, Ltd. (together, the “Marathon Funds”). The Marathon Funds own certain common shares of the Company, all of which are subject to the sole voting and investment authority of the Manager. Thus, for purposes of Regulation 13d-3 of the Exchange Act, the Manager is deemed to beneficially own the securities of the Company held by the Marathon Funds, and Mr. Thorn disclaims beneficial ownership of the common shares of the Company held by the Marathon Funds. The Manager, in its capacity as the holder of sole voting and investment authority of more than 5% of the common shares of the Company pursuant to Regulation 13d-3 of the Exchange Act, separately files statements pursuant to Section 13 of the Exchange Act. Mr. Thorn’s interest in the securities noted herein is limited to the extent of his pecuniary interest in the Marathon Funds, if any.
 
Directors who are also employees are not paid any fees or other compensation for services as members of the Board of Directors or of any committee of the Board of Directors. Directors who are not employees of the Company are paid an annual fee of $75,000. The Company pays a minimum of $15,000 of the annual fee in RSUs under the RSU Plan. Each RSU will be valued at the market price of the common shares as at January 1 of each fiscal year. Directors receive the remaining portion of the annual fee in cash, or may, at their election, receive RSUs instead of cash for any amount of their annual fee. Some of our directors represent institutions that require them to assign over to the institution any compensation that they receive for serving as directors. The table above includes these amounts.
 
Each director receives cash in the amount of $2,000 for each Board of Director or committee meeting attended in person, and $1,000 for each meeting attended by telephone. Each director receives cash in the amount of $3,000 per year for each committee the director serves upon. In addition, committee chairs (other than the Audit Committee Chair) receive an annual fee of $2,000 for each committee chaired. The Audit Committee Chair receives an annual fee of $100,000. This fee is greater than that received by the other committee chairs due to the substantially greater time and responsibility demands made upon the Audit Committee Chair.
 
 
23


 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND DIRECTORS
 
The following table sets forth information as at March 23, 2009 regarding beneficial ownership of common shares and the applicable voting rights attached to such share ownership in accordance with our bye-laws by:
 
 
each person known by us to beneficially own 5% or more of our outstanding common shares;
 
 
each of our directors;
 
 
each of our named executive officers; and
 
 
all of our executive officers and directors as a group.
 

Name of beneficial owner
 
Number of
Common
Shares
Percentage of
voting rights
(1)
     
Lehman entities(2)
15,830,000
18.7%
Silver Creek entities(3)
11,208,946
13.2
Mark J. Byrne(4)
9,838,795
11.6
Lightyear entities(5)
6,000,000
7.1
QVT entities(6)
5,741,532
6.8
Marathon Special Opportunity Master Fund, Ltd. and Marathon Special Opportunity Liquidating Fund, Ltd. (7)
5,439,391
6.4
Gary Black
David A. Brown(8)
301,205
*
Stephen Coley
Thomas Dickson(9)
2,510,802
3.0
Stewart Gross(10)
E. Daniel James(11)
15,830,000
18.7
Dr. Anthony Knap(12)
1,300
*
Marc Roston(13)
Anthony P. Latham
Jan Spiering
10,000
*
Wray T. Thorn(14)
5,439,391
6.4
Peter F. Watson
Patrick Boisvert
3,500
*
Thomas Bolt
Khader Hemsi
William Fawcett
David Flitman
Venkateswara Rao Mandava
James O’Shaughnessy
8,000
*
Gary Prestia(15)
500
*
Brenton Slade
Guy Swayne(16)
10,000
*
Frédéric Traimond
All directors and executive officers as a group (24 persons) (see notes (7) through (16))
56,903,971
67.1%
__________________
 
*
Represents less than 0.1% of the outstanding common shares.
 
(1)
Our bye-laws reduce the total voting power of any shareholder who is a U.S. person controlling more than 9.9% of our common shares to less than 9.9% of the voting power of our common shares. Under this provision, the voting power of the Lehman entities and the Silver Creek entities, each of which is a U.S. person which controls more than 9.9% of our common shares, has been reduced to less than 9.9% of the voting power of our common shares. The voting power of the Lehman entities and the Silver Creek entities will, to the extent necessary, be adjusted so that such entities possess less than 9.9% of the voting power of our common shares.
 
 
24

 
 
(2)
Of the common shares beneficially owned by the Lehman entities, 5,117,509 are held by Lehman Brothers Merchant Banking Partners III L.P.; 1,127,932 are held by Lehman Brothers Merchant Banking Fund III L.P.; 1,359,223 are held by Lehman Brothers Merchant Banking Fund (B) III L.P.; 2,147,199 are held by LB I Group Inc; 172,182 are held by Lehman Brothers Co-Investment Capital Partners L.P.; 122,081 are held by Lehman Brothers Co-Investment Group L.P.; 4,705,737 are held by Lehman Brothers Co-Investment Partners L.P.; 430,000 are held by Lehman Brothers Fund of Funds XVIII—Co-Investment Holding, LP; 248,137 are held by Lehman Brothers Merchant Banking Capital Partners V L.P.; and 400,000 are held by Lehman Crossroads Series XVII Master Holding Fund 66, LP. The address of the Lehman entities is 399 Park Avenue, 9th Floor New York, NY 10022.
 
(3)
Of the common shares beneficially owned by the Silver Creek entities, 3,503,225 are held by Silver Creek Low Vol Strategies Holdings, LLC; 5,417,827 are held by Silver Creek Low Vol Fund A, LLC; and 2,287,894 are held by Silver Creek Special Opportunities Holdings I, LLC. Silver Creek Capital Management LLC serves as the managing member of the Silver Creek entities and as such exercises all management and control of the business affairs of the Silver Creek entities. The managing members of Silver Creek Capital Management LLC are Eric Dillon and Timothy Flaherty. The address of the Silver Creek entities is 1301 Fifth Avenue, 40th Floor, Seattle, WA 98101.
 
(4)
Mr. Byrne has provided capital to Haverford (Bermuda) Ltd., and he may be deemed to have investment or voting control and may be deemed to beneficially own 2,633,639 common shares of the Company held of record by Haverford (Bermuda) Ltd. These shares represent the indirect proportionate interest of Mr. Byrne in the 2,842,409 common shares of the Company held of record by Haverford (Bermuda) Ltd. These shares are held through a trust for the benefit of others and Mr. Byrne therefore disclaims beneficial ownership of these common shares. IAL FSR Limited owns 7,155,156 common shares of the Company, which it holds for the benefit of a company which is owned by a trust for which Mr. Byrne acts as the settlor. Mr. Byrne disclaims beneficial ownership of these shares. Rebecca Byrne, Mr. Byrne’s wife, is the record holder of 50,000 common shares of the Company which were purchased through the Directed Share Program in connection with the initial public offering of common shares of the Company. Mr. Byrne disclaims beneficial ownership of these shares.  The address of Mr. Byrne is Crawford House, 23 Church Street, Hamilton HM 11, Bermuda.

(5)
Of the common shares beneficially owned by the Lightyear entities, 5,982,000 are held by Lightyear Fund II (Cayman), L.P., and 18,000 are held by Lightyear Co-Invest Partnership II (Cayman), L.P. As the sole general partner of each of Lightyear Fund II (Cayman), L.P. and Lightyear Co-Invest Partnership II (Cayman), L.P., Lightyear Fund II (Cayman) GP, L.P. may be deemed to have voting and/or investment power over such securities. As the sole general partner of Lightyear Fund II (Cayman) GP, L.P., Lightyear Fund II (Cayman) GP, Ltd. may also be deemed to have voting and/or investment power over such securities.  As the sole Class A shareholder of Lightyear Fund II (Cayman) GP, Ltd., Marron & Associates, LLC (“Marron & Associates”) may also be deemed to have voting and/or investment power over such securities, although the Class A shareholder holds only a 7.69% vote with respect to the voting power over such securities.  As the sole member of Marron & Associates, Chestnut Venture Holdings, LLC may also be deemed to have voting and/or investment power over such securities.  As the managing member of Chestnut Venture Holdings, LLC, Donald B. Marron may also be deemed to have voting and/or investment power over such securities. Each of Lightyear Fund II (Cayman) GP, L.P., Lightyear Fund II (Cayman) GP, Ltd., Marron & Associates, Chestnut Venture Holdings, LLC, and Donald B. Marron disclaims beneficial ownership of the common shares held by Lightyear Fund II (Cayman), L.P. and Lightyear Co-Invest Partnership II (Cayman), L.P., except to the extent of its or his pecuniary interest in such common shares. The address of the Lightyear entities and Donald B. Marron is 375 Park Avenue, 11th Floor, New York, NY 10152.

(6)
Of the common shares beneficially owned by the QVT entities, 4,147,009 are held by QVT Fund LP; 1,229,325 are held by Quintessence Fund L.P.; 365,198 are held by Deutsche Bank which manages a separate discretionary account the investment manager of which is QVT Financial LP Management of QVT Fund LP is vested in its general partner, QVT Associates GP LLC. QVT Associates GP LLC is also the general partner of Quintessence Fund L.P. QVT Financial LP is the investment manager for QVT Fund LP and shares voting and investment control over the Company securities held by QVT Fund LP. QVT Financial GP LLC is the general partner of QVT Financial LP and as such has complete discretion in the management and control of the business affairs of QVT Financial LP. The managing members of QVT Financial GP LLC are Daniel Gold, Lars Bader, Tracy Fu and Nicholas Brumm. Each of QVT Financial LP, QVT Financial GP LLC, Daniel Gold, Lars Bader, Tracy Fu and Nicholas Brumm disclaims beneficial ownership of the Company’s securities held by QVT Fund LP. The address of QVT Fund L.P. is c/o QVT Financial LP, 1177 Avenue of the Americas, 9th Floor, New York, NY 10036.
 
 
25

 
 
(7)
Marathon Asset Management, LP (formerly known as Marathon Asset Management, LLC) (“Marathon”) serves as the investment manager of Marathon Special Opportunity Master Fund, Ltd. and Marathon Special Opportunity Liquidating Fund, Ltd. (together the “Funds”) pursuant to an Investment Management Agreement between Marathon and the Funds. Marathon, in its capacity as the investment manager of the Funds, has sole power to vote and direct the disposition of all common shares held by the Funds. Bruce Richards and Louis Hanover are the managing members of Marathon. As managing members of Marathon, Messrs. Richards and Hanover may also be deemed to have voting and/or investment power over the common shares held by the Funds. However, each of Mr. Richards and Mr. Hanover disclaims beneficial ownership of the common shares held by the Funds, except to the extent of his pecuniary interest in such common shares. The address of Marathon Special Opportunity Master Fund, Ltd. and Marathon Special Opportunity Liquidating Fund, Ltd. is 461 Fifth Avenue, 10th Floor, New York, NY 10017.
 
(8)
Mr. Brown has provided capital to Haverford (Bermuda) Ltd., and he may be deemed to have investment or voting control and may be deemed to beneficially own 208,770 common shares of the Company held of record by Haverford (Bermuda) Ltd. These common shares represent the indirect proportionate interest of Mr. Brown in the 2,842,409 common shares of the Company held of record by Haverford (Bermuda) Ltd. These common shares are held through a trust for the benefit of others and Mr. Brown therefore disclaims beneficial ownership of these common shares. In addition, Mr. Brown acts as the settlor of a trust that is the owner of Leyton Limited, and Leyton Limited is the record holder of 80,000 common shares of the Company which were purchased through the Directed Share Program in connection with the initial public offering of common shares of the Company, as well as 2,435 common shares of the Company which were paid to Leyton Limited from Haverford (Bermuda) Ltd on November 12, 2008 as a dividend in specie. Mr. Brown disclaims beneficial ownership of the shares held by Leyton Limited. 10,000 of these shares are owned directly by Mr. Brown.
 
(9)
Includes 2,500,000 shares held of record by HCP. Mr. Dickson disclaims beneficial ownership of the shares held by HCP.
 
(10)
Mr. Gross does not beneficially own the shares owned by certain Lightyear entities as described in note 4 above.
 
(11)
Represents shares held by certain Lehman entities as described in note 2 above. Mr. James disclaims beneficial ownership of all common shares owned by Lehman entities.
 
(12)
Represents shares purchased through the Directed Share Program in connection with the IPO of common shares of the Company by Philippa Knap, Dr. Knap’s wife. Dr. Knap disclaims beneficial ownership of shares held by his wife.
 
(13)
Mr. Roston does not beneficially own the shares held by certain funds managed by Silver Creek Capital Management LLC as described in note 3 above.
 
(14)
Represents shares held by Marathon Special Opportunity Master Fund, Ltd. and Marathon Special Opportunity Liquidating Fund, Ltd. as described in note 7 above.  Mr. Thorn does not individually or otherwise beneficially own any shares of the Company.
 
(15)
Represents shares purchased through the Directed Share Program in connection with the IPO of common shares of the Company by Donna Prestia, Mr. Prestia’s wife. Mr. Prestia disclaims beneficial ownership of shares held by his wife.
 
(16)
Represents shares purchased through the Directed Share Program in connection with the IPO of common shares of the Company by Larissa Swayne, Mr. Swayne’s wife. Mr. Swayne disclaims beneficial ownership of shares held by his wife.
 

26

 
 
CORPORATE GOVERNANCE
 
The Board of Directors and its Committees
 
Our bye-laws provide for a Board of Directors of no less than ten and no more than twelve directors. The Board of Directors met a total of eight (8) times in fiscal 2008 and all incumbent directors attended at least 81% of such meetings and of meetings held by the committees of the Board of Directors of which they were members.  The Company expects directors to attend the Annual General Meeting and all of the Company’s then-directors attended the 2008 Annual General Meeting.
 
Our Board of Directors is divided into three classes: four Class A directors whose initial term will expire at the 2009 Annual General Meeting of our shareholders, four Class C directors whose initial term will expire at the 2010 Annual General Meeting of our shareholders, and four Class B directors whose initial term will expire at the 2011 Annual General Meeting of our shareholders. Thereafter, directors will hold office until the next Annual General Meeting at which the term of that class of directors expires or until their successors are duly elected or appointed or their office is otherwise vacated.
 
Our Board of Directors has established corporate governance measures in compliance with the requirements of the New York Stock Exchange. These include a set of Corporate Governance Guidelines, Independence Guidelines, and charters for each of the Audit Committee, Compensation Committee and Governance Committee and a Code of Conduct and Ethics for directors, officers and employees. Our Board of Directors has also adopted a Code of Business Practices for the Company’s principal executive, financial and accounting officers. These documents have been published on the Company’s website, www.flagstonere.bm, and will be provided upon written request to the Company’s Corporate Secretary at its registered office address, Crawford House, 23 Church Street, Hamilton HM 11, Bermuda.
 
Our Board of Directors has reviewed the materiality of any relationship that each of the twelve directors of the Company has with the Company either directly or indirectly through another organization. The criteria applied included the director independence requirements set forth in the Company’s Independence Guidelines, the independence requirements of the New York Stock Exchange with respect to the Company’s Audit Committee, and the audit committee independence rules of the Securities and Exchange Commission (the “SEC”). In conducting this review of the directors’ independence, the Board of Directors considered any managerial, familial, professional, commercial or affiliated relationship between a director and the Company or another director. In particular, the Board of Directors considered the following arrangements of certain directors before determining that each is independent under the New York Stock Exchange independence requirements and the Company’s Independence Guidelines:
 
 
Mr. Black, a director of the Company since June 2006, formerly served as Chief Claims Executive and Senior Vice President of One Beacon Insurance Company, a part of the White Mountains Insurance Group.
 
 
Mr. Coley, a director of the Company since January 2006 is Director Emeritus of McKinsey & Company, a group which owns common stock of the Company.
 
 
Mr. Thomas Dickson, a director of the Company since December 2005, controls the investment manager of HCP.  Haverford has an investment in HCP. HCP pays a performance-based fee to its investment manager.  HCP owns approximately 3.0% of the common stock of the Company.
 
 
Mr. Gross, a director of the Company since January 2006, is the Managing Director of Lightyear Capital LLC, a group which accounts for approximately 7.1% of the common stock of the Company.
 
 
Mr. E. Daniel James, a director of the Company since December 2005, is a senior manager of the Merchant Banking Group and managing director of Lehman Brothers Inc.  On December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $25.0 million, will receive interest at three month LIBOR and will pay 4.096% interest. The agreement will terminate on September 15, 2012. Also on December 7, 2007, the Company entered into an interest rate swap agreement with Lehman Brothers Special Financing Inc. Under the terms of the agreement, the Company exchanged interest on a notional amount of $120.0 million, will receive interest at three month LIBOR and will pay 3.962% interest. The fair value of the two swaps was $0.2 million as at December 31, 2007.  The agreement was terminated, as per the terms of the swap agreement, on September 15, 2008 due to the bankruptcy of Lehman Brothers Inc. Affiliates of Lehman Brothers Inc. are shareholders of the Company, and Mr. James is a managing director at Lehman Brothers Inc. Lehman Brothers Inc. acted as an underwriter and provided additional investment banking services to the Company in connection with its IPO, for which it received fees of $3.4 million.
 
 
 
 
 
LB I, an affiliate of Lehman Brothers Inc., has invested $50.0 million in Mont Fort in respect of Mont Fort ILW and owns 50.0 million, or 90.9%, of the Mont Fort ILW preferred shares. LB I invested $55.0 million in Mont Fort in respect of Mont Fort ILW2 and which owned 55.0 million, or 100.0%, of the Mont Fort ILW 2 preferred shares. In August 2007, LBI transferred 5,000,000 preferred shares in Mont Fort ILW2 to its affiliate, Lehman Brothers PEP. In March 2008, at the request of Lehman PEP, Mont Fort redeemed the 5,000,000 preferred shares held by Lehman PEP. We own all of the common shares of Mont Fort and have 100% control of its board of directors. E. Daniel James, who is a director of the Company, is also a senior manager of the Merchant Banking Group and a managing director of Lehman Brothers Inc. As discussed above, Lehman Brothers Inc. acted as an underwriter of the Company’s IPO. In addition, Lehman Brothers Inc. provided additional investment banking services to the Company. The total fee received by Lehman Brothers Inc. in connection with our IPO was $3.4 million.
 
 
Dr. Anthony Knap, Ph.D., a director of the Company since December 2005, is the President and Director and Senior Research Scientist of the Bermuda Institute of Ocean Sciences.  The Company has made charitable contributions to Bermuda Institute of Ocean Sciences, a tax-exempt organization.
 
 
Mr. Anthony P. Latham, a director of the Company since November 2008, is a former member of the Group Executive of RSA Group plc where he held a variety of senior executive roles ending December 31, 2007.  RSA Group plc is an international insurance group, listed on the London Stock Exchange.
 
 
Mr. Roston was formerly the Senior Portfolio Manager for Silver Creek Capital, a group which accounts for approximately 13.2% of the common stock of the Company.  Mr. Roston resigned from the Board of Directors on September 29, 2008.
 
 
Mr. Spiering, a director of the Company since December 2005, served as the Chairman and Managing Partner of Ernst & Young Bermuda until 2002.  The Company has engaged Ernst & Young Bermuda as a consultant and uses Ernst & Young for other projects for the Company.
 
 
Mr. Thorn, a director of the Company since October 2006, has served as a Managing Director of Private Equity at Marathon Asset Management, LLC since 2005 a group which accounts for approximately 6% of the common stock of the Company.
 
 
Mr. Watson, a director of the Company since September 2007, served as a consultant to Attorney’s Liability Assurance Society (Bermuda) Ltd. until 2008.
 
Based on this review, the Board of Directors has determined that Messrs. Black, Coley, Dickson, Gross, James, Knap, Latham, Roston (resigned from the Board of Directors on September 29, 2008), Spiering, Thorn and Watson are independent directors. Therefore, the Board of Directors has concluded that the Audit Committee, Compensation Committee and Governance Committee consist only of independent directors, and the Board of Directors consists of a majority of independent directors.
 
Committees of the Board of Directors
 
As of April 14, 2009, the standing committees of the Board of Directors and their members are:
 
 
Audit  Committee
Compensation
Committee
Governance
Committee
Finance
Committee
 
Underwriting
Committee
           
 
Jan Spiering*
E. Daniel James*
Stephen Coley*
Mark Byrne*
Thomas Dickson*
 
Stephen Coley
Stewart Gross
E. Daniel James
David Brown
Gary Black
 
Thomas Dickson
Dr. Anthony Knap
 Jan Spiering
E. Daniel James
David Brown
 
Stewart Gross
Wray T. Thorn
Wray T. Thorn
Jan Spiering
Mark Byrne
 
Dr. Anthony Knap
   
Wray T. Thorn
Stewart Gross
 
Wray T. Thorn
     
Dr. Anthony Knap
 
Peter F. Watson
     
Anthony P. Latham
         
Peter F. Watson
 
*Chairman
 
 
28

 
 
Audit Committee
 
The Audit Committee met a total of nine (9) times during fiscal 2008.  The Audit Committee has general responsibility for the oversight and surveillance of our accounting, reporting and financial control practices. Among its functions, the Audit Committee:
 
 
reviews and discusses the audited financial statements with management, reviews the audit plans and findings of the independent auditor, reviews the audit plans and findings of our internal audit and risk review staff, reviews the results of regulatory examinations and tracks management’s corrective actions plans where necessary;
 
 
reviews our accounting policies and controls, compliance programs, and significant tax and legal matters;
 
 
is directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor;
 
 
receive and consider reports from internal auditors on risk assessment, work completed against annual audit plan and other areas proposed by the committee.
 
 
reviews our risk assessment and management processes; and
 
 
performs other tasks in accordance with the terms of its charter.
 
Mr. Spiering, who is an independent director, is the Chairman of the Audit Committee, and the Board of Directors has designated him as an “audit committee financial expert” as that term is defined in Item 401(k) of Regulation S-K under the Securities Act of 1933, as amended.
 
Compensation Committee
 
The Compensation Committee oversees our compensation and benefit plans, including administration of annual bonus awards and long-term incentive plans and reports their findings and opinions to the Board of Directors.  The Compensation Committee met four (4) times during fiscal 2008.
 
Governance Committee
 
The Governance Committee has responsibility for identifying individuals qualified to become members of the Board of Directors consistent with the criteria approved by the Board of Directors, recommending director nominees to the Board of Directors, recommending Corporate Governance Guidelines to the Board of Directors and overseeing an evaluation of the Board of Directors and management. The Governance Committee met four (4) times during fiscal 2008.
 
The Board of Directors has accorded to the Governance Committee the responsibility to consider the effectiveness and composition of the Board of Directors, to nominate candidates for election by our shareholders, and to fill vacancies on the Board of Directors that emerge from time to time. The Governance Committee will consider potential nominees to the Board of Directors recommended for election by shareholders. Any such recommendation must be sent to the Corporate Secretary of the Company not less than 120 days prior to the scheduled date of the annual meeting and must set forth for each nominee: (i) the name, age, business address and residence address of the nominee; (ii) the principal occupation or employment of the nominee; (iii) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by the nominee; and (iv) any other information relating to the nominee that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act and the rules and regulations promulgated thereunder. The written notice must also include the following information with regard to the shareholders giving the notice: (1) the name and record address of such shareholders; (2) the number of common shares of the Company which are owned beneficially or of record by such shareholders; (3) a description of all arrangements or understandings between such shareholders and each proposed nominee and any other person (including his or her name and address) pursuant to which the nomination(s) are to be made by such shareholders; (4) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and (5) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other required filing. Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. The Governance Committee may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.
 
 
29


 
Assuming that the shareholder suggesting a nomination follows the procedure outlined above, the Governance Committee will evaluate those candidates by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by members of the Board of Directors or by other persons. In considering whether to recommend any candidate for inclusion in the Board of Director’s slate of recommended director nominees, including candidates recommended by shareholders, the Governance Committee would expect to apply the same criteria which it applies to its own nominations. These criteria typically include the candidate’s integrity, business acumen, leadership qualities, experience in the reinsurance, insurance and risk-bearing industries and other industries in which the Company may participate, independence, judgment, mindset, vision, record of accomplishment, ability to work with others and potential conflicts of interest. The Governance Committee does not assign specific weight to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Our Board of Directors believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board of Directors to fulfill its responsibilities.
 
Underwriting Committee
 
The Underwriting Committee met a total of four (4) times during fiscal 2008.  The Underwriting Committee oversees the Company’s underwriting policies and approves any exceptions thereto. Among its functions, the Underwriting Committee:
 
 
reviews aggregate underwritten exposures;
 
 
reviews performance targets, including loss ratio targets, combined ratio targets, return on equity targets or other measurement devices employed by the Company to monitor its underwriting performance;
 
 
reviews projected potential aggregate losses in excess of amounts the Committee shall determine and revise from time to time; and
 
 
advises the Audit Committee and Board of Directors regarding loss reserves.
 
Finance Committee
 
The Finance Committee met a total of five (5) times during fiscal 2008.   Among its functions, the Finance Committee:
 
 
reviews matters relating to liabilities, hedging practices, and other aspects of the Company’s financial affairs beyond asset management;
 
 
formulates the Company’s investment policy; and
 
 
oversees all of the Company’s significant investing activities.
 
 
30

 
 
AUDIT COMMITTEE REPORT
 
The Audit Committee met a total of nine (9) times during fiscal 2008 and discussed amongst other things the Company’s quarterly results.  The Audit Committee also discussed with Deloitte & Touche the overall scope and plans for their audit and the results of such audits.  At the end of each meeting the auditor was given the opportunity to meet with the Audit Committee members without the presence of management.  The Audit Committee conducted an annual self-assessment in November 2008 in accordance with the terms of its charter.
 
The Audit Committee has reviewed and discussed the Company’s system of internal controls over financial reporting.  The Audit Committee recommended to the Board of Directors that the Company’s audited financial statements for the fiscal year ended December 31, 2008 be included in the Company’s Annual Report on Form 10-K for such fiscal year.  The recommendation was based on the Audit Committee’s (i) review of the audited financial statements, (ii) its discussion with management regarding the audited financial statements, (iii) its receipt of written disclosures and the letter from Deloitte & Touche required by applicable requirements of the Public Company Accounting Oversight Board regarding Deloitte & Touche’s communications with the Audit Committee concerning independence, (iv) its discussions with Deloitte & Touche regarding its independence, the audited financial statements, the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T, Deloitte & Touche’s communications with respect to their audit and (v) other matters the Audit Committee deemed relevant and appropriate,
 
Audit Committee
 
Jan Spiering, Chairman
 
Stephen Coley
 
Thomas Dickson
 
Stewart Gross
 
Dr. Anthony Knap
 
Wray T. Thorn
 
Peter F. Watson
 
 
31

 
 
COMPENSATION COMMITTEE REPORT
 
The Compensation Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis (“CD&A”).  Based on such review and discussions referred to below, the Compensation Committee recommended to the Board that the CD&A be included in this Proxy Statement.
 
In November 2008, the Compensation Committee conducted an annual self-assessment in accordance with the terms of its charter.
 
Compensation Committee
 
E. Daniel James, Chairman
 
Stewart Gross
 
Dr. Anthony Knap
 
Wray T. Thorn
 
 
 
 
 
 
 
32


 
Significant Board Practices
 
Executive Session
 
At the majority of physical meetings of the Board of Directors there is an executive session during which Mr. Byrne, our Executive Chairman, and Mr. Brown, our Chief Executive Officer, are excused.  In 2008 there were four (4) such sessions.  The non-management members of the Board of Directors are at liberty to raise such issues as they deem necessary.  The executive session is chaired by Mr. Stephen Coley.
 
Advance Materials
 
Information and related materials necessary to provide the directors with an understanding of the topics to be discussed at the Board of Director and committee meetings are, where practicable, circulated in advance of each meeting.  The directors are given sufficient time to allow careful review the Board of Director materials.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Under the Exchange Act, our directors and executive officers, and any persons holding more than 10% of the outstanding common shares, are required to report their initial ownership of common shares and any subsequent changes in that ownership to the SEC. Specific filing dates for these reports have been established by the SEC, and we are required to disclose in this Proxy Statement any failure by such persons to file these reports in a timely manner during the 2008 fiscal year. Based upon our review of copies of such reports furnished to us, we believe that during the 2008 fiscal year our executive officers and directors and the holders of more than 10% of the outstanding common shares complied with all reporting requirements of Section 16(a) of the Exchange Act except that Messrs. Byrne and Brown each inadvertently did not timely file one Form 4 for one transaction.
 
 
33

 
 
PROPOSAL 1 – ELECTION OF THE BOARD OF DIRECTORS
 
Our bye-laws provide for a classified Board of Directors, divided into three (3) classes of equal size.  Each director will serve a three-year term.  At the Annual General Meeting, our shareholders will elect the Class A directors, who will serve until 2012 Annual General Meeting.  Our incumbent Class B and Class C directors will serve until the 2011 and 2010 Annual General Meetings, respectively.
 
The Board of Directors will nominate Messrs. Byrne, Gross, James and Latham for re-election at the Annual General Meeting.  Each of these directors has indicated that he will offer himself for re-election to the Board of Directors.
 
If any nominee shall, prior to the Annual General Meeting, become unavailable for election as a director, the persons named in the accompanying proxy card will vote for such other nominee, if any, in their discretion as may be recommended to the Board of Directors.
 
NOMINEES
 
Mark Byrne
Stewart Gross
E. Daniel James
Anthony P. Latham
 
The respective ages, business experience, directorships and committee memberships for the nominees are set out in “Our Directors” above.  All of the nominees currently serve as directors.
 
 
 
 
 

 

 

 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION
OF THE FOUR DIRECTORS NAMED ABOVE
 
 
34

 
 
 
PROPOSAL 2 – THE AUDITOR’S PROPOSAL
 
Upon recommendation of the Audit Committee, the Board of Directors propose that the shareholders approve the appointment of Deloitte & Touche to serve as our independent auditor for the 2009 fiscal year until the 2010 Annual General Meeting.  Deloitte & Touche have served as our independent auditor since October 2005.  A representative from Deloitte & Touche will attend the Annual General Meeting and will be available to respond to any questions and make a statement if he or she so desires.  Shareholders at the Annual General Meeting will also be asked to vote to defer the determination of the auditor’s remuneration to the Board of Directors.
 
The following sets forth the fees billed to us by Deloitte & Touche during the 2008 fiscal year:
 
Audit Fees
 
Aggregate audit fees billed to us by Deloitte & Touche for the fiscal years ended December 31, 2008 and 2007 were $3,612,671and $1,606,121, respectively.  Audit fees were for (a) the audit of our annual financial statements, (b) review of our quarterly financial statements, (c) statutory audits and (d) assistance with and review of documents filed with the SEC (including comfort letters and consents).
 
Audit-Related Fees
 
Audit-related fees billed to us by Deloitte & Touche for the fiscal years ended December 31, 2008 and 2007 were $98,640 and $73,491, respectively, for assurance and related services that are related to the audit and review of the financial statements which are not reported as audit fees above.
 
Tax Fees
 
Fees billed to us by Deloitte & Touche for all tax-related services for the fiscal years ended December 31, 2008 and 2007 were $18,890 and $44,520, respectively.  These fees were for professional services rendered for tax compliance.
 
All Other Fees
 
The aggregate fees billed by Deloitte & Touche for products and services rendered to the Company, other than the services described above under “Audit Fees”, “Audit-Related Fees” and “Tax Fees”, for the fiscal years ended December 31, 2008 and 2007 were $157,927 and $ nil, respectively, which relate to technical consultations and services provided in relation to securities offerings.  The Audit Committee has considered whether any information technology and non-audit consulting services provided by Deloitte & Touche could impair the independence of Deloitte & Touche. No such services were provided by Deloitte & Touche during 2008 and thus the Audit Committee concluded that such services did not impair the auditor’s independence.
 
The Audit Committee must pre-approve all audit services and permitted non-audit services performed for the Company by our auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the Audit Committee prior to the completion of the audit. All engagements of Deloitte & Touche to provide audit, audit-related and tax services to the Company during 2008 and 2007 were pre-approved by the Audit Committee.
 
As noted above, the Audit Committee is responsible for managing our relationship with our independent auditor. The Audit Committee has the sole authority to hire and employ our auditor. The Audit Committee regularly reviews the auditor’s work plan, bills and work product. Accordingly, it is our policy that all proposed engagements by our current audit firm must be approved in advance by the Audit Committee.
 

 

 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE REAPPOINTMENT OF DELOITTE & TOUCHE
AS OUR INDEPENDENT AUDITOR FOR THE 2009 FISCAL YEAR UNTIL THE 2010 ANNUAL GENERAL MEETING.
 

35

 
 
PROPOSAL 3 – BYE-LAW AMENDMENTS
 
With a view to modernizing the Companies Act 1981 (as amended) (the “Companies Act”) to take into account various company law reform initiatives in various jurisdictions, the Companies Amendment Act 2006 (the “Amendment Act”), which came into force on December 29, 2006, made a number of important changes to Bermuda’s primary company legislation.

A.           Treasury Shares

The Amendment Act permits a company to acquire its own shares to be held as treasury shares provided this is permitted by the company's memorandum of association or its bye-laws. Treasury shares generally represent shares that were issued to shareholders but which have since been reacquired by the issuing company and are available for retirement or later reissuance. Prior to this amendment, such purchased shares would be cancelled.  Generally, the rights attaching to treasury shares such as voting and dividend rights are in abeyance while they are held as treasury shares.  It is a requirement under the Amendment Act that any company wishing to take advantage of the treasury shares facility will need to change its memorandum or bye-laws to permit this.

Our Bye-laws and Memorandum of Association do not currently authorize the Company to acquire its own shares and subsequently hold them as treasury shares.  We believe that having the ability to hold reacquired Common Shares in treasury affords us valuable corporate financial flexibility under various circumstances, and is in our best interest and in the best interests of our shareholders. The recommended amendments to the Bye-laws to accommodate the ability of the Company to acquire its own shares and either cancel such shares or hold them in treasury.

B.           Provision for electronic record delivery

The SEC’s “Internet availability of Proxy Materials” rule is known as Notice & Access. It provides the option for corporations to publish proxy materials on a publicly-available website and then mail shareholders a notice of where they can access these materials. Participation in Notice & Access is required by the Company.

Pursuant to the Amendment Act, a company may use electronic delivery to deliver documents required to be provided by the Companies Act or the bye-laws unless the bye-laws of the company preclude this.  An electronic record may be delivered by communicating it by electronic means (for example, by e-mail) to an address provided by the recipient for that purpose.  An electronic record is also deemed to have been delivered if it is published on a website and the person to whom the document is to be provided has agreed to that method and been given access to the necessary webpage.

We believe that it is in the best interest of the Company our shareholders to amend the Bye-laws to accommodate such changes as it may help to reduce expenses incurred by the Company in the production and mailing of our annual mailing material.

C.           Corporate Seals No Longer required by the Companies Act

Our Bye-laws currently require the use of the Company seal.  The Companies Act no longer requires that deeds or other documents be executed under seal to be effective as a matter of Bermuda law.  The requirements for issuing share certificates under seal have also been amended to provide enhanced flexibility. While the corporate seal still has a role, that role is now limited.  We believe it is in the best interest of the Company to amend our Bye-laws to take advantage of the enhanced flexibility of the Amended Act.


D.           Ability of a company to Indemnify Directors and Officers Clarified

For the avoidance of doubt, the Companies Act expressly clarifies that we may indemnify our Directors and Officers not only from an eventual award against them, but also against defense costs on the condition that, if fraud or dishonesty is proved, the particular Directors and Officers will be required to repay funds so provided for their defense.   The proposed amendment to our Bye-laws seeks only to incorporate such clarifying language in the corporate documents of the Company.


THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO APPROVE AMENDMENTS TO THE BYE-LAWS OF THE COMPANY.

 

 



AS AMENDED 14TH MAY 2009 20TH JULY, 2007
 





 
 
 
 
 

 



BYE-LAWS
 
OF
 
FLAGSTONE REINSURANCE HOLDINGS LIMITED
 



 
TABLE OF CONTENTS
 
INTERPRETATION
 
32.
Power to Demand a Vote on a Poll
 
CORPORATE RECORDS
1.
Definitions
 
33.
Voting by Joint Holders of Shares
 
64.
Minutes
SHARES
 
34.
Instrument of Proxy
 
65.
Place Where Corporate Records Kept
2.
Power to Issue Shares
 
35.
Representation of Corporate Member
 
66.
Form and Use of Seal
3.
Power of the Company to Purchase its Shares
 
36.
Adjournment of General Meeting
 
ACCOUNTS
4.
Rights Attaching to Shares
 
37.
Written Resolutions
 
67.
Books of Account
5.
Calls on Shares
 
38.
Directors Attendance at General Meetings
 
68.
Financial Year End
6.
Prohibition on Financial Assistance
 
DIRECTORS AND OFFICERS
 
AUDITS
7.
Forfeiture of Shares
 
39.
Election of Directors
 
69.
Annual Audit
8.
Share Certificates
 
40.
Classification of Directors
 
70.
Appointment of Auditor
9.
Fractional Shares
 
41.
Term of Office of Directors
 
71.
Remuneration of Auditor
REGISTRATION OF SHARES
42.
Removal of Directors
 
72.
Duties of Auditor
10.
Register of Members
 
43.
Vacancy in the Office of Director and appointment
 
73.
Access to Records
11.
Registered Holder Absolute Owner
   
of alternate Directors
 
74.
Financial Statements
12.
Transfer of Registered Shares and the Warrant
 
44.
Remuneration of Directors
 
75.
Distribution of Auditor’s Report
 
and restrictions on transfer
 
45.
Defect in Appointment of Director
 
76.
Vacancy in the Office of Auditor
13.
Transmission of Registered Shares
 
46.
Directors to Manage Business
 
VOLUNTARY WINDING-UP AND DISSOLUTION
ALTERATION OF SHARE CAPITAL
 
47.
Powers of the Board of Directors
 
77.
Winding-Up
14.
Power to Alter Capital
 
48.
Register of Directors and Officers
 
CHANGES TO CONSTITUTION
15.
Variation of Rights Attaching to Shares
 
49.
Officers
 
78.
Changes to Bye-laws
DIVIDENDS AND CAPITALISATION
 
50.
Appointment of Officers
 
79.
Changes to the Memorandum of Association
16.
Dividends
 
51.
Duties of Officers
 
80.
Discontinuance
17.
Power to Set Aside Profits
 
52.
Remuneration of Officers
     
18.
Method of Payment
 
53.
Conflicts of Interest
     
19.
Capitalisation
 
54.
Indemnification and Exculpation of Directors and Officers    
MEETINGS OF MEMBERS
 
MEETINGS OF THE BOARD OF DIRECTORS
 
20.
Annual General Meetings
 
55.
Board Meetings
     
21.
Special General Meetings
 
56.
Notice of Board Meetings
     
22.
Requisitioned General Meetings
 
57.
Participation in Meetings by Telephone
     
23.
Notice
 
58.
Quorum at Board Meetings
     
24.
Giving Notice
 
59.
Special Business
     
25.
Postponement of General Meeting
 
60.
Board to Continue in the Event of Vacancy
     
26.
Attendance at  Meetings
 
61.
Chairman to Preside
     
27.
Quorum at General Meetings
 
62.
Written Resolutions
     
28.
Chairman to Preside
 
63.
Validity of Prior Acts of the Board
     
29.
Voting on Resolutions
           
30.
Limitation on Voting Rights of Controlled Shares
           
30A
Requirement to provide Information and Notice
           
31.
Certain Subsidiaries
           
 
 
 
 
INTERPRETATION

1.
Definitions

 
1.1
In these Bye-laws, the following words and expressions shall, where not inconsistent with the context, have the following meanings, respectively:
 
 
Act
the Companies Act 1981 as amended from time to time;
 
 
Affiliate
means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with such Person;
 
 
Auditor
includes an individual or partnership appointed as the independent registered public accounting firm of the Company in accordance with Bye-Law 70;
 
 
Board
the board of Directors appointed or elected pursuant to these Bye-laws and acting by resolution in accordance with the Act and these Bye-laws or the directors present at a meeting of directors at which there is a quorum;
 
 
Book Value
the book value of the shares of the Company determined in accordance with GAAP as set forth in the Company’s most recent audited consolidated balance sheet;
 
 
Bye-laws
means the bye-laws of the Company as from time to time altered or amended;
 
 
Business Plan
means the business plan of Flagstone submitted to the Insurers’ Admission Committee on November 7, 2005;
 
 
Cause
shall be deemed to exist only if (i) the Director whose removal is proposed has been charged with or convicted of an indictable offence or a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for fraud or dishonesty in the performance of such Director’s duty to the Company or (ii) the Director whose removal is proposed suffers from any physical or mental disability that substantially impairs the ability of such Director to function in that capacity;
 
 
Code
means the United States Internal Revenue Code of 1986, as amended;
 
 
Company
means the company named Flagstone Reinsurance Holdings Limited, incorporated in Bermuda on October 4, 2005 for which these Bye-laws are approved and confirmed;
 
 
 
 
 
Confidential Information
has the meaning attributed thereto in Bye-law 30A(2);
 
 
Common Share
means the common shares of the Company of US$ 0.01 par value per share;
 
 
Control
“Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and “Controlling” and “Controlled” shall have meanings correlative to the foregoing;
 
 
Controlled Shares
in reference to any Person means all shares of the Company directly, indirectly or constructively owned by such Person within the meaning of Section 958 of the Code;
 
 
Designated Company
has the meaning attributed thereto in Bye-law 31.1;
 
 
Designated Company Director
means the person elected to the office of Designated Company Director in accordance with Bye-law 31;
 
 
Director
a director of the Company;
 
 
Equity Securities
means any shares of the share capital of the Company, any securities convertible into or exchangeable for shares of the share capital of the Company, and any options, warrants, and other rights to purchase or otherwise acquire from the Company shares of such share capital, or securities convertible into or exchangeable for shares of such share capital;
 
 
Exchange Act
means the US Securities Exchange Act of 1934, as amended;
 
 
Fair Market Value
means, with respect to a repurchase of any shares of the Company in accordance with these Bye-laws (a) if such shares are listed on a securities exchange (or quoted in a securities quotation system), the average closing sale price of such shares on such exchange (or in such quotation system), or, if such shares are listed on (or quoted in) more than one exchange (or quotation system),  the average closing sale price of the shares on the principal securities exchange (or quotation system) on which such shares are then traded, or, if such shares are not then listed on a securities exchange (or quotation system) but are traded in the over-the-counter market, the average of the latest bid and asked quotation for such shares in such market, in each case for the last five trading days immediately preceding the day on which notice of the repurchase of such shares is sent pursuant to these Bye-laws, or (b) (i) with respect to a repurchase, if no such closing sales or prices are available because such shares are not publicly traded, the value per Common Share as determined by an independent valuation and approved by the Board;
 
 
 
 
 
Flagstone
means Flagstone Reinsurance Limited, a Bermuda exempted company licensed as a Class 4 reinsurer under the Insurance Act 1978 as amended from time to time and its related regulations;
 
 
GAAP
means United States generally accepted accounting principles, as in effect from time to time, applied on a consistent basis;
 
 
Haverford
means Haverford (Bermuda) Ltd., a Bermuda exempted company;
 
 
Initial Public Offering
means the initial public offering of the shares pursuant to a registration statement filed pursuant to the Securities Act (Registration No. 333-138182);
 
 
Member
the person registered in the Register of Members as the holder of shares in the Company and, when two or more persons are so registered as joint holders of shares, means the person whose name stands first in the Register of Members as one of such joint holders or all of such persons, as the context so requires;
 
 
Memorandum of Association
means the memorandum of association of the Company as from time to time altered or amended;
 
 
9.9% U.S. Shareholder
of the Company means a U.S. Person that owns shares (within the meaning of Section 958(a) of the Code) and is considered a “United States shareholder” of the Company (as defined in Section 951(b) of the Code); provided, that for these purposes, “more than 9.9 percent” shall be substituted for “10 percent” wherever such term appears in Section 951(b) of the Code;
 
 
Notice
written notice as further provided in these Bye-laws unless otherwise specifically stated;
 
 
Officer
any person appointed by the Board to hold an office in the Company;
 
 
Person
means an individual, company, corporation, limited liability company, firm, partnership, trust, estate, unincorporated association, other entity or body of Persons;
 
 
PSU Plan
means the Company’s performance share unit plan as from time to time altered or amended;
 
 
 
 
 
PSU Shares
means the common shares of the Company issuable pursuant to the PSU Plan;
 
 
RSU Plan
means the Company’s employee restricted share unit plan as from time to time altered or amended;
 
 
Register of Directors and Officers
the register of directors and officers referred to in these Bye-laws;
 
 
Register of Members
the register of Members referred to in these Bye-laws;
 
 
Removed Company Director
has the meaning attributed thereto at Bye-law 31.1;
 
 
Resident Representative
any person appointed to act as resident representative and includes any deputy or assistant resident representative;
 
 
Rule 144
means Rule 144 under the Securities Act, or any successor rule thereto;
 
 
Secretary
the person appointed to perform any or all of the duties of secretary of the Company and includes any deputy or assistant secretary and any person appointed by the Board to perform any of the duties of the Secretary;
 
 
Securities Act
means the U.S. Securities Act of 1933, as amended, or any U.S. federal statute then in effect which has replaced such statute, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such replacement U.S. federal statute;
 
 
Shareholders Agreement
means the agreement dated as of December 19, 2005 as amended from time to time by and among the Company and the Members listed therein;
 
 
share
means a share in the share capital of the Company and includes the Common Shares;
 
 
Subsidiary
means any entity of which a majority of the Voting Power (under ordinary circumstances) in electing the board of directors or equivalent body are, at the time as of which any determination is being made, owned by the Company, either directly or indirectly through Subsidiaries;
 
 
Treasury Share
means a share of the Company that was or is treated as having been acquired and held by the Company and has been held continuously by the Company since it was so acquired and has not been cancelled;
 
 
 
 
 
U.S. Person
means (i) an individual who is a citizen or resident of the United States, (ii) a corporation, partnership or other entity treated as a corporation or partnership for U.S. federal tax purposes that is created in, or organised under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate that is subject to U.S. federal income tax on its income regardless of its source, (iv) any trust if (A)(1) a court within the United States is able to exercise primary supervision over the administration of the trust and (2) one or more US Persons have the authority to control all substantial decisions of the trust or (B) such trust validly elects to be treated as a U.S. Person or (v) any entity treated as one of the foregoing under any provision of the Code (e.g., a Bermuda insurance company that elects under Section 953(d) of the Code to be treated as a domestic corporation);
 
 
United States or U.S.
means the United States of America including the states thereof, its territories and possessions and the District of Columbia;
 
 
Voting Power
of any Person means the total number of votes which may be cast by the Members or shareholders of the total number of issued and outstanding shares of such Person carrying the right to vote; and
 
 
Warrant
means the warrant dated as of December 19, 2005 to purchase Common Shares issued to Haverford, as amended from time to time.
 
 
1.2
In these Bye-laws, where not inconsistent with the context:
 
 
(a)
words denoting the plural number include the singular number and vice versa;
 
 
(b)
words denoting the masculine gender include the feminine and neuter genders;
 
 
(c)
words importing persons include companies, associations or bodies of persons whether corporate or not;
 
 
(d)
the words:
 
 
(i)
"may" shall be construed as permissive; and
 
 
(ii)
"shall" shall be construed as imperative; and
 
 
(e)
unless otherwise provided herein, words or expressions defined in the Act shall bear the same meaning in these Bye-laws.
 
 
1.3
In these Bye-laws expressions referring to writing or written shall, unless the contrary intention appears, include facsimile, printing, lithography, photography, electronic mail and other modes of representing words in visible form.
 
 
1.4
Headings used in these Bye-laws are for convenience only and are not to be used or relied upon in the construction hereof.
 
 
 
 
 
1.5
The incorporation or application of provisions of the Shareholders Agreement in or to these Bye-laws shall terminate upon the termination of the Shareholders Agreement in accordance with its terms.  For this purpose, a certificate from the secretary and any director of the Company stating that the Shareholders Agreement has terminated shall be conclusive evidence of such termination.  Upon delivery of such certificate to the Company, a copy of such certificate shall be appended to these Bye-laws by the Secretary and included in every copy of these Bye-laws published by the Company and these Bye-laws shall thenceforth not include any provision of the Shareholders Agreement.
 
SHARES

2.
Power to Issue Shares

 
2.1
Subject to these Bye-laws and to any resolution of the Members to the contrary, and without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, the Board shall have the power to issue any unissued shares of the Company on such terms and conditions as it may determine and any shares or class of shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital, or otherwise.
 
 
2.2
Subject to the provisions of the Act, any preference shares may be issued or converted into shares that (at a determinable date or at the option of the Company or the holder) are liable to be redeemed on such terms and in such manner as may be determined by the Board (before the issue or conversion).
 
3.
Power of the Company to Purchase its Shares

 
3.1
Subject to these Bye-laws, the Company may purchase its own shares for cancellation or to acquire them as Treasury Shares in accordance with the provisions of the Act on such terms as the Board shall think fit.  Subject to these Bye-laws, the Board may exercise all the powers of the Company to purchase or acquire all or any part of its own shares in accordance with the Act.

 
3.2
Without limiting Bye-law 3.1, subject to Section 42A of the Act and the approval of the Bermuda Monetary Authority or other applicable governmental or regulatory body (such approval restriction being applicable to all this Bye-law 3.2), if the Board reasonably determines in good faith based on an opinion of counsel that share ownership, directly, indirectly or constructively, by any Member is likely to result in adverse tax consequences or materially adverse legal or regulatory treatment to the Company, any of its subsidiaries or any of its Members, the Company will have the option, but not the obligation, to purchase the minimum number of shares which is necessary to avoid or cure such adverse consequences or treatment (but only to the extent the Board reasonably determines in good faith that such action would avoid or cure such adverse consequences or treatment) with immediately available funds in an amount equal to the Fair Market Value of such shares on the date the Company repurchases such shares (the “Purchase Price”), subject to the provisions of this Bye-law 3.2.

 
The Board shall notify such Member promptly that it has determined that the provisions of this Bye-law 3.2 may apply to such Member, and shall provide such Member with seventy-five (75) days (subject to any extension reasonably necessary to obtain regulatory approvals necessary in connection with any proposed sale by the Member, if being diligently pursued, but in any event not more than an additional ninety (90) days), prior to and in lieu of such repurchase, to remedy the circumstances pursuant to which the ownership of shares by such Member may result in adverse tax consequences or materially adverse legal or regulatory treatment to the Company, any of its subsidiaries or any of its Members (including by such Member selling such shares to a third party, subject to Bye-law 12 and any other relevant provisions of these Bye-laws); provided, that, for the avoidance of doubt, this Bye-law 3.2 does not release such Member from any contractual restriction on transfer to which such Member is subject and, if applicable, to select an investment bank to determine the Fair Market Value of such shares.
 
 
 
 
 
If a Member subject to application of this Bye-law 3 does not remedy the consequences or treatment described in the preceding two paragraphs within the period referred to above, the Company shall have the right, but not the obligation, to purchase such shares at the Fair Market Value thereof. If the Company shall determine not to purchase such shares at the Fair Market Value pursuant to this Bye-law 3, the Company shall notify each other Member thereof, and shall permit the other Members to purchase such shares at the Fair Market Value in its stead, pro rata, to the number of shares then held by each such Member, and then, to the extent that any Members shall fail to accept such offer, to the other Members who have elected to purchase their portion of such shares. After offering the shares to be repurchased to the other Members in accordance with the preceding sentence, the Company will also be entitled to assign its purchase right to a third party which may purchase such shares at the Fair Market Value. Each Member shall be bound by the determination by the Company to purchase or assign its right to purchase such Member’s shares and, if so required by the Company, shall sell the number of shares that the Company requires it to sell.

 
The Board will use all reasonable efforts to exercise this option equitably and, to the extent possible, equally among similarly situated Members (to the extent possible under the circumstances).

 
In the event that the Member(s) or the Company or its assignee(s) determine to purchase any such shares, the Company shall provide each Member concerned with written notice of such determination (a “Purchase Notice”) at least five (5) calendar days prior to such purchase or such shorter period as each such Member may authorise, specifying the date on which any such shares are to be purchased and the Purchase Price. The Company may revoke the Purchase Notice at any time before the Member(s), the Company or its assignee(s) pay for the shares. The Board may authorise any person to sign, on behalf of any Member who is the subject of a Purchase Notice, an instrument of transfer relating to any of such Member’s shares which the Company has an option to purchase. Payment of the Purchase Price by the Member(s), the Company or its assignee(s) shall be by wire transfer or certified check and made at a closing to be held no less than five (5) calendar days after receipt of the Purchase Notice by the selling Member.

4.
Rights Attaching to Shares

 
4.1
Subject to any resolution of the Members to the contrary (and without prejudice to any special rights conferred thereby on the holders of any other shares or class of shares), the share capital of the Company shall be divided into Common Shares the holders of which shall, subject to the provisions of these Bye-laws:
 

 
(a)
be generally entitled to one vote per share, (but the exercise of any voting right shall be subject to the provisions of Bye-law 30 hereof);
 
 
(b)
be entitled to such dividends as the Board may from time to time declare;
 
 
(c)
in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for the purpose of a reorganisation or otherwise or upon any distribution of capital, be entitled to the surplus assets of the Company; and
 
 
(d)
generally be entitled to enjoy all of the rights attaching to shares.
 
 
4.2
All the rights attaching to a Treasury Share shall be suspended and shall not be exercised by the Company while it holds such Treasury Shares and, except where required by the Act, all Treasury Shares shall be excluded from the calculation of any percentage or fraction of the share capital or shares of the Company.
 
 
 

5.
Calls on Shares

 
5.1
The Board may make such calls as it thinks fit upon the Members in respect of any monies (whether in respect of nominal value or premium) unpaid on the shares allotted to or held by such Members and, if a call is not paid on or before the day appointed for payment thereof, the Member may at the discretion of the Board be liable to pay the Company interest on the amount of such call at such rate as the Board may determine, from the date when such call was payable up to the actual date of payment.  The Board may differentiate between the holders as to the amount of calls to be paid and the times of payment of such calls.
 
 
5.2
The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof.
 
 
5.3
The Company may accept from any Member the whole or a part of the amount remaining unpaid on any shares held by him, although no part of that amount has been called up.
 
6.
Prohibition on Financial Assistance

The Company shall not give, whether directly or indirectly, whether by means of loan, guarantee, provision of security or otherwise, any financial assistance for the purpose of the acquisition or proposed acquisition by any person of any shares in the Company, but nothing in this Bye-law shall prohibit transactions permitted under the Act.
 
7.
Forfeiture of Shares

 
7.1
If any Member fails to pay, on the day appointed for payment thereof, any call in respect of any share allotted to or held by such Member, the Board may, at any time thereafter during such time as the call remains unpaid, direct the Secretary to forward such Member a notice in writing in the form, or as near thereto as circumstances admit, of the following:
 
Notice of Liability to Forfeiture for Non-Payment of Call
Flagstone Reinsurance Holdings Limited (the "Company")
 
You have failed to pay the call of [amount of call] made on the [ ] day of [ ], 200[ ], in respect of the [number] share(s) [number in figures] standing in your name in the Register of Members of the Company, on the [ ] day of [ ], 200[ ], the day appointed for payment of such call.  You are hereby notified that unless you pay such call together with interest thereon at the rate of [ ] per annum computed from the said [ ]  day of [ ], 200[ ] at the registered office of the Company the share(s) will be liable to be forfeited.
 
Dated this [ ] day of [ ], 200[ ]
 

________________________________
 
[Signature of Secretary] By Order of the Board
 
 
 
 
 
7.2
If the requirements of such notice are not complied with, any such share may at any time thereafter before the payment of such call and the interest due in respect thereof be forfeited by a resolution of the Board to that effect, and such share shall thereupon become the property of the Company and may be disposed of as the Board shall determine.  Without limiting the generality of the foregoing, the disposal may take place by sale, repurchase, redemption or any other method of disposal permitted by and consistent with these Bye-laws and the Act.
 
 
7.3
A Member whose share or shares have been forfeited as aforesaid shall, notwithstanding such forfeiture, be liable to pay to the Company all calls owing on such share or shares at the time of the forfeiture and all interest due thereon.
 
 
7.4
The Board may accept the surrender of any shares which it is in a position to forfeit on such terms and conditions as may be agreed.  Subject to those terms and conditions, a surrendered share shall be treated as if it had been forfeited.
 
8.
Share Certificates

 
8.1
Every Member shall be entitled to a certificate under the seal of the Company or bearing the signature (or a facsimile thereof) of a Director or the Secretary or a person expressly authorised to sign specifying the number and, where appropriate, the class of shares held by such Member and whether the same are fully paid up and, if not, specifying the amount paid on such shares.  The Board may by resolution determine, either generally or in a particular case, that any or all signatures on certificates may be printed thereon or affixed by mechanical means.
 
 
8.2
The Company shall be under no obligation to complete and deliver a share certificate unless specifically called upon to do so by the person to whom the shares have been allotted.
 
 
8.3
If any share certificate shall be proved to the satisfaction of the Board to have been worn out, lost, mislaid, or destroyed the Board may cause a new certificate to be issued and request an indemnity for the lost certificate if it sees fit.
 
9.
Fractional Shares

The Company may issue its shares in fractional denominations and deal with such fractions to the same extent as its whole shares and shares in fractional denominations shall have in proportion to the respective fractions represented thereby all of the rights of whole shares including (but without limiting the generality of the foregoing) the right to vote, to receive dividends and distributions and to participate in a winding-up.
 
REGISTRATION OF SHARES

10.
Register of Members

 
10.1
The Board shall cause to be kept in one or more books a Register of Members and shall enter therein the particulars required by the Act.
 
 
10.2
The Register of Members shall be open to inspection without charge at the registered office of the Company on every business day, subject to such reasonable restrictions as the Board may impose, so that not less than two hours in each business day be allowed for inspection.  The Register of Members may, after notice has been given in accordance with the Act, be closed for any time or times not exceeding in the whole thirty days in each year.
 
11.
Registered Holder Absolute Owner

The Company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not be bound to recognise any equitable claim or other claim to, or interest in, such share on the part of any other person.
 
 
 
 
12.
Transfer of Registered Shares and Warrants and Restrictions on Transfer

 
12.1
Subject to the Act and to such of the restrictions contained in these Bye-laws as may be applicable, any Member may transfer all or any part of his shares or warrants by an instrument of transfer as specified herein.
 
 
12.2
An instrument of transfer shall be in writing in the form of the following, or as near thereto as  circumstances admit, or in such other form as the Board may accept:
 
Transfer of a Share or Shares
 
Flagstone Reinsurance Holdings Limited (the "Company")
 
FOR VALUE RECEIVED………………..[amount], I, [name of transferor] hereby sell, assign and transfer unto [transferee] of [address], [number] of shares of the Company.
 
                                
DATED this [ ] day of [ ], 200[ ]
 
   
 
Signed by:
 
In the presence of:
 
 
 
Transferor
 
 
Witness
 
 
 
Transferee
 
 
Witness
 
 
12.3
Such instrument of transfer shall be signed by or on behalf of the transferor and transferee, provided that, in the case of a fully paid share, the Board may accept the instrument signed by or on behalf of the transferor alone.  The transferor shall be deemed to remain the holder of such share until the same has been transferred to the transferee in the Register of Members.
 
 
12.4
The Board may refuse to recognise any instrument of transfer unless it is accompanied by the certificate in respect of the shares to which it relates and by such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer.
 
 
12.5
The restrictions on transfer authorised or imposed by these Bye-laws shall not be imposed in any circumstances in any way that would interfere with the settlement of trades or transactions entered into through the facilities of a stock exchange or automatic quotation system on which the shares are listed or traded from time to time; provided, that the Company may decline to register transfers in accordance with these Bye-laws and resolutions of the Board after a settlement has taken place.
 
 
12.6
The joint holders of any share may transfer such share to one or more of such joint holders, and the surviving holder or holders of any share previously held by them jointly with a deceased Member may transfer any such share to the executors or administrators of such deceased Member.
 
 
12.7
The Board may in its absolute discretion and without assigning any reason therefor refuse to register the transfer of a share.  The Board shall refuse to register a transfer unless all applicable consents, authorisations and permissions of any governmental or regulatory body or agency in Bermuda, the United States or any other applicable jurisdiction required to be obtained shall have been obtained.  For the avoidance of doubt, the Directors may decline to register the transfer of a share if the Board has determined in good faith that such transfer would result in adverse tax or regulatory treatment to the Company and its subsidiaries or any of its shareholders.
 
 
 
 
 
12.8
The Board may decline to register the transfer of any shares or warrants if the Board reasonably determines in good faith that, based on an opinion of counsel, (i) in the case of a transfer other than (a) pursuant to an effective registration statement under the Securities Act, (b) after an Initial Public Offering of shares pursuant to such a registration statement, in a sale by a Member in accordance with Rule 144 or (c) in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated quotation system on which the shares are listed or traded from time to time, such transfer is likely to expose the Company, any subsidiary thereof, any Member or any subsidiary of the Company, any Member or Person ceding insurance to the Company or any subsidiary of the Company to adverse tax consequences or materially adverse legal or regulatory treatment in any jurisdiction or (ii) registration of such transfer under the Securities Act or under any blue sky or other U.S.  state securities laws or under the laws of any jurisdiction is required and such registration has not been duly effected; provided, however, that in this case (ii) the Board shall be entitled to request and rely on an opinion of counsel (such counsel to be reasonably satisfactory to the Board) to the transferor or the transferee (and the Company shall not be obliged to pay any expenses of such counsel), in form and substance reasonably satisfactory to the Board, that no such registration is required, and the Board shall be obliged to register such transfer upon the receipt of such an opinion.  A proposed transferee will be permitted to dispose of any shares or warrants purchased that violate these restrictions and as to which registration of the transfer is refused.  The transferor of such shares or warrants shall be deemed to own such shares or warrants for dividend, voting and reporting purposes until a transfer of such shares has been registered on the Register of Members or such warrants have been registered in the applicable register of warrants.
 
 
12.9
Except in connection  with an effective registration statement, a sale in accordance with Rule 144 of the shares of the Company after an Initial Public Offering or in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated quotation system on which the shares are listed or traded from time to time, the Board may require any Member, or any Person proposing to acquire shares or warrants of the Company, to provide the information required by Bye-law 30A.  If any such Member or proposed acquiror does not provide such information, or if the Company has reason to believe that any certification or other information provided pursuant to any such request is inaccurate or incomplete, the Board may decline to register any transfer or to effect any issue or purchase of shares or warrants to which such request related.
 
 
12.10
If the Board refuses to register a transfer of any share the Secretary shall, within three months after the date on which the transfer was lodged with the Company, send to the transferor and transferee notice of the refusal.
 
 
12.11
Any purported transfer (except by operation of law) of any shares in contravention of any of the restrictions on transfer contained in the Shareholders Agreement or these Bye-laws shall be void and of no effect.
 
13.
Transmission of Registered Shares

 
13.1
In the case of the death of a Member, the survivor or survivors where the deceased Member was a joint holder, and the legal personal representatives of the deceased Member where the deceased Member was a sole holder, shall be the only persons recognised by the Company as having any title to the deceased Member's interest in the shares.  Nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by such deceased Member with other persons.  Subject to the provisions of the Act, for the purpose of this Bye-law, legal personal representative means the executor or administrator of a deceased Member or such other person as the Board may, in its absolute discretion, decide as being properly authorised to deal with the shares of a deceased Member.
 
 
 
 
 
13.2
Any person becoming entitled to a share in consequence of the death or bankruptcy of any Member may be registered as a Member upon such evidence as the Board may deem sufficient or may elect to nominate some person to be registered as a transferee of such share, and in such case the person becoming entitled shall execute in favour of such nominee an instrument of transfer in writing in the form, or as near thereto as circumstances admit, of the following:
 
Transfer by a Person Becoming Entitled on Death/Bankruptcy of a Member
Flagstone Reinsurance Holdings Limited (the "Company")
 
I/We, having become entitled in consequence of the [death/bankruptcy] of [name and address of deceased/bankrupt Member] to [number] share(s) standing in the Register of Members of the Company in the name of the said [name of deceased/bankrupt Member] instead of being registered myself/ourselves, elect to have [name of transferee] (the "Transferee") registered as a transferee of such share(s) and I/we do hereby accordingly transfer the said share(s) to the Transferee to hold the same unto the Transferee, his or her executors, administrators and assigns, subject to the conditions on which the same were held at the time of the execution hereof; and the Transferee does hereby agree to take the said share(s) subject to the same conditions.
 
 
                                
DATED this [ ] day of [ ], 200[ ]
 
 
 
 
   
 
Signed by:
 
In the presence of:
 
 
 
Transferor
 
 
Witness
 
 
 
Transferee
 
 
Witness
 
 
13.3
On the presentation of the foregoing materials to the Board, accompanied by such evidence as the Board may require to prove the title of the transferor, the transferee shall be registered as a Member.  Notwithstanding the foregoing, the Board shall, in any case, have the same right to decline or suspend registration as it would have had in the case of a transfer of the share by that Member before such Member's death or bankruptcy, as the case may be.
 
 
13.4
Where two or more persons are registered as joint holders of a share or shares, then in the event of the death of any joint holder or holders the remaining joint holder or holders shall be absolutely entitled to the said share or shares and the Company shall recognise no claim in respect of the estate of any joint holder except in the case of the last survivor of such joint holders.
 
ALTERATION OF SHARE CAPITAL

14.
Power to Alter Capital
 
 
 

 
14.1
The Company may, subject to these Bye-laws, increase, divide, consolidate, subdivide, change the currency denomination of, diminish or otherwise alter or reduce its share capital in any manner permitted by the Act.
 
 
14.2
Where, on any alteration or reduction of share capital, fractions of shares or some other difficulty would arise, the Board may deal with or resolve the same in such manner as it thinks fit.
 
15.
Variation of Rights Attaching to Shares

Subject to Bye-law 59, if, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being w