Best Affirms Flagstone Re’s Ratings

October 22, 2009

A.M. Best Co. has affirmed 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 (collectively referred to as Flagstone Re).

Best also assigned indicative ratings of “bb” on preferred stock, “bb+” on subordinated debt and “bbb-“on senior debt for securities available under Flagstone Reinsurance Holdings Limited’s shelf registration.

The outlook for all of the ratings is stable.

“The ratings reflect Flagstone Re’s supportive level of risk-adjusted capitalization, solid underwriting performance since inception, and the continued maturation of the group structure and operating platforms,” Best explained. “Furthermore, the ratings are supported by the significant investments Flagstone Re has made in infrastructure and the operational efficiencies incorporated into its organizational structure.”

However, Best also indicated that “the volatility of Flagstone Re’s overall performance due in large part to investment losses experienced in 2008 and the subsequent decline in risk-adjusted capitalization,” should be considered as offsetting factors.

The analysis also noted that Flagstone Re’ has a high “concentration in property catastrophe lines of business,” which “exposes underwriting results to low frequency, high severity events and potential fluctuations in underwriting performance from year to year depending on catastrophe loss activity.”

Best said the stable outlook reflects the “expectation that prospective overall performance will return to supportive levels given the significant reduction in risk tolerance for investment risk coupled with the favorable underwriting environment in the property catastrophe lines of business.

“Additionally, Flagstone Re significantly reduced its risk appetite and investment risk tolerance following the poor results of 2008 as evidenced by a lowered return on equity target, modeling of investment risk using a more conservative technique and a hard cap on the percentage of allocation to equity investments allowed within its investment guidelines.

“Prospectively, total returns will be primarily driven by underwriting results as investment risk has been substantially reduced. Given the demands on underwriting performance, the outlook recognizes Flagstone Re’s demonstrated underwriting acumen with loss and combined ratios that compare favorably to its peers.”

However, Best also pointed out that a “significant shift in operating or investment strategies” might influence its expectations and “could be material to future rating actions. Since inception, Flagstone Re has continued to develop its business profile by expanding its operating platforms and distribution channels while maintaining consistent and centralized controls.

“While this expansion is expected to diversify the revenue and exposure of the group over time, these benefits have yet to be fully realized given the relative immaturity of these platforms and distributions channels. Therefore, the benefit of these diversifying characteristics has yet to be fully incorporated into the evaluation of the business profile.”

Source: A.M. Best –

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