Best Assigns ‘A-‘ Ratings to Bermuda Start-Up Flagstone Re

December 21, 2005

A.M. Best Co. announced that it has assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to Bermuda- start-up Flagstone Reinsurance Limited, and has given the ratings a stable outlook.

“Flagstone will operate as a Bermuda-based reinsurance company primarily focused on property, property catastrophe and short-tail casualty coverage on a worldwide basis through the broker market, “said Best. “The company has been capitalized with $530 million in common equity from investors and management.

“The ratings reflect Flagstone’s strong risk-adjusted capitalization, which on a pro forma basis and after considering various stress test scenarios, remains in the excellent range over a five-year time period. This favorable capital position, enhanced by the absence of legacy issues, is further augmented by an experienced senior management team and sound business plan.”

Best also said it “expects that Flagstone will be successful in executing its business plan by attaining favorable underwriting margins; that it will adhere to disciplined underwriting in targeted businesses and markets and that the anticipated pricing improvements and broader exclusions will benefit its underwriting performance over the near term.”

The rating agency also noted that, in its opinion, “Flagstone’s risk management capability is adequate to protect its capital base from a loss outside of its planned risk tolerance.” However, Best cautioned, “as with any start-up company, systems and operational controls relating to underwriting, risk management, claims, investments and financial reporting and the dexterity to maintain underwriting discipline have yet to be fully tested, including through the inevitable softening in the property reinsurance cycle. A.M. Best also remains concerned in regard to Flagstone’s ability to recapitalize to a level which may be needed post a significant loss event.

“In addition to being susceptible to low frequency high severity events, A.M. Best anticipates that Flagstone will be challenged by increased competition from both established companies and other new start-ups seeking to enter the industry. The additional capacity brought to the market could dampen expected returns if pricing of reinsurance coverage fails to meet anticipated levels. Furthermore, the ability of Flagstone to effectively build and retain market acceptance will only be proven over time. Accordingly, A.M. Best will closely monitor the quarterly performance of Flagstone against its stated operating plan and any material negative deviations in terms of management, earnings, capitalization or risk profile could result in downward pressure on the assigned ratings.”

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