Best Says Flagstone Re’ ‘A-‘ Ratings ‘Unchanged’

December 9, 2008

A.M. Best Co. has commented that the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Flagstone Reassurance Suisse SA and the ICR of “bbb-“of Bermuda-based Flagstone Reinsurance Holdings Limited are unchanged, following the company’s recent investment losses and its acquisition of Marlborough Underwriting Agency Limited, the managing agency for Lloyd’s Syndicate 1861 from Berkshire Hathaway Inc.

Best noted that as a “result of investment losses, incurred losses from Hurricanes Gustav and Ike and expenditures made during 2008 to build out the infrastructure of the organization, Flagstone Holdings’ level of risk adjusted capitalization fell marginally below the guidelines established for a start-up property catastrophe writer. Management reacted by implementing a capital plan to address this issue using a variety of different approaches.”

Best expects negative results in 2008, “driven by realized and unrealized investment losses,” It expects a “turnaround during 2009 based on the change to the investment portfolio and the favorable rate environment expected in Flagstone Holdings’ lines of business. Future volatility of operating results or risk-adjusted capitalization may place pressure on the ratings and/or outlook of Flagstone Holdings and its subsidiaries.”

Best said that overall, the “risk management of Flagstone Holdings has been significantly tested during 2008 prompting a modification to the organization’s risk profile. The measurement of investment risk has been modified to include the most current data, which results in a significantly different allocation of invested assets. While an increased level of volatility is factored into the analysis of a relative immature company, such as Flagstone Holdings, and the economic conditions in 2008 were certainly very challenging, future material variances from expectations may place pressure on the ratings at their current levels. However, given Flagstone Holdings’ ability to address its risk profile despite unexpected investment losses, the ratings remain unchanged.”

Best also noted that during the second half of 2008, “the investment performance of Flagstone Holdings was significantly impacted by the turmoil in the global economy contributing to a decline in risk-adjusted capitalization. For the nine month period ending September 30, 2008, the total return on invested assets was a negative 6.6 percent primarily driven by realized and unrealized losses of $160 .4 million.

“Although this is comparable to other insurers with alternative investment portfolios for this period, it is outside Flagstone Holdings’ model driven expectations based on its own analysis of data from the last 30 years. As a result, the Board of Directors has decided to
revise the allocation o f invested assets to eliminate the equity linked and commodity assets and focus on cash, treasuries and highly rated debt. Since September 30, 2008 the company incurred additional realized and unrealized losses of approximately $81.2 million and the total return for investments was a negative 15.4 percent as of October 31, 2008, primarily attributable to the further declines in global equity markets in early October.”

On October 17, 2008, Flagstone Holdings announced it entered into an agreement to acquire Marlborough. Best pointed out that the “acquisition does not include the liabilities from business written in 2008 and prior [years]. The syndicate specializes in writing short-tailed insurance and reinsurance consistent with Flagstone Holdings’ other operations, while also enhancing the business profile of the Flagstone Holdings’ organization by geographically diversifying its revenue streams. The acquisition provides Flagstone Holdings access to the Lloyd’s market and the benefits associated with operating through Lloyd’s including its global licenses and strong franchise value. Senior management of Marlborough including the Managing Director, Tom Bolt, has agreed to stay with company.”

Best concluded that despite “a very active catastrophe year in 2008, Flagstone Holdings’ underwriting results have been solid on both an absolute and relative basis. Through the first nine months of 2008, Flagstone Holdings reported a 94.8 percent combined ratio, which includes approximately 25 points of catastrophe losses from Hurricanes Gustav and Ike. Although underwriting income is down approximately 70 percent from the same period in 2007, this is not surprising given the magnitude of catastrophe losses incurred as a result of Hurricane Ike, one of the costliest storms on record.

Source: A.M. Best –

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