A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Flagstone Reassurance Suisse S.A. and Flagstone Alliance Insurance and Reinsurance PLC, which is based in Limassol, Cyprus. Best also affirmed the ICR of “bbb-” of Luxembourg–based Flagstone Reinsurance Holdings S.A., collectively referred to as Flagstone Re.
At the same time Best affirmed the indicative debt ratings of “bb” on preferred stock, “bb+” on subordinated debt and “bbb-” on senior debt for securities available under Flagstone Reinsurance Holdings S.A.’s shelf registration. However, Best has revised its outlook for all of the ratings to negative from stable.
The rating affirmations reflect Flagstone Re’s “continued excellent level of risk-based capitalization, which is supportive of its current ratings,” said Best, adding that it “recognizes that catastrophe focused reinsurers will periodically suffer losses of a magnitude sufficient to significantly impact earnings.”
However, Best said that “despite the fact that the company has been negatively impacted by an unprecedented series of significant catastrophe losses since January of this year, its current overall capitalization remains more than sufficient to withstand A.M. Best’s capital stress test, which considers the potential for additional shock losses based on the probable maximum losses (PML) for future events as modeled by the company.”
Best added that Flagstone Re’s “current capital is supported by (1) an enhanced level of retrocessional support, which was in place at January 1, 2011, and (2) the proactive action of management to protect its capital position since the Japanese earthquake last month through the purchase of additional retrocessional support at competitive pricing.
“The structure of the current reinsurance program will significantly reduce Flagstone Re’s net exposure to another large catastrophe event or combination of events in 2011, and has reduced the company’s 1:100 PML from $272 million at December 31, 2010 to $135 million. The retrocessional protection is purchased on a collateralized basis or from highly rated counterparties. Flagstone Re’s ratings also continue to reflect the high-quality and liquid investment portfolio that supports the company’s loss reserves.”
Best also pointed out that its rating affirmations “recognize the significant steps that already had been underway since the last half of 2010 to streamline the operations of Flagstone Re and improve expense levels at the company. These included the de-risking of the reinsurance portfolio and significant expense reduction initiatives.” Best added that it “believes that the current leadership has the necessary capabilities to maintain as well as enhance its franchise going forward.”
In its explanation of the revised outlook to negative Best said it “reflects Flagstone Re’s limited financial flexibility, and A.M. Best’s concerns that the company’s competitive position may be somewhat compromised by these recent events (although A.M. Best does acknowledge Flagstone Re’s successful writings at the April 1, 2011 renewals) and would be unable to fully benefit from a turn in the property catastrophe reinsurance market.”
In addition Best indicated that the company’s “historical profit measures have fallen short of its peer group due to legacy issues (which are now being addressed) while up to this point its low loss ratio had been a significant strength.
“Near-term profitability also may be negatively impacted by unfavorable reserve development relating to these recent losses and any future catastrophes. However, this risk appears to be limited through the enhanced retrocessional support covering existing and potential future events and the company’s positive track record on loss reserve development. Flagstone Re also will need to demonstrate that its current risk management framework is sufficient to ensure that its global diversification strategy can be achieved within the context of its risk appetite.
“The severity of the individual losses experienced by Flagstone Re is comparable to the peer composite in terms of monetary losses. However, the accumulation of losses sustained in the first quarter of 2011 outsized its peer group as a percentage of equity.
“Resolution of the negative outlook is dependent on Flagstone Re’s ability to generate a reasonable and sustainable level of profitability, reduce its dependence on retrocessional support, bring its risk appetite in line with its available capital, continue with its expense reduction initiatives and, most importantly, improve its overall financial flexibility.”
Source: A.M. Best
Topics Trends Profit Loss Reinsurance AM Best
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