Best Affirms Flagstone Re ‘A-‘ Ratings

December 18, 2006

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) and the issuer credit rating (ICR) of “a-” of Bermuda-based Flagstone Reinsurance Limited. It also assigned an ICR of “bbb-” to Flagstone’s parent, Flagstone Reinsurance Holdings Limited. The outlook for all the ratings is stable.

“The rating affirmations reflect Flagstone’s strong risk-based capitalization and its successful first year execution of operations within the parameters of the business plan presented to A.M. Best during the initial rating process in 2005,” said the bulletin. “In addition to meeting A.M. Best’s requirements for new company formations, the ratings also reflect Flagstone’s ability to sustain A.M. Best’s stricter risk-based capital requirements for newly formed property catastrophe companies.”

Best’s said that its “initial concerns regarding Flagstone’s establishment of systems and operational controls to underwriting, risk management, claims, investments and financial reporting have been alleviated. The company also has successfully augmented its management and staff with the addition of seasoned personnel through its first year of operations.

“Although Flagstone has deviated from its original business plan, the adjustments have been prudent and were reviewed with A.M. Best before being implemented. The adjustments made through the year were primarily to focus on pricing opportunities in certain regions while maintaining a rational risk profile. Despite these pricing opportunities, Flagstone fell below its overall premium volume plan for its first year of operation. As a result, risk-based capitalization remains strong, within A.M. Best’s initial expectations.”

The bulletin also noted that Best considers “the establishment of Flagstone Reinsurance Suisse SA, a subsidiary of Flagstone, which is to be capitalized with CHF 110 million [$90 million], with Flagstone providing reinsurance support. Through this local presence, Flagstone intends to be in a position to closely follow and respond effectively to the changing needs of the various European insurance markets.”

Best’s report indicated, however, that “In addition to being susceptible to property catastrophe events, Flagstone will continue to be challenged by increased competition from both established companies and other new start-ups in the industry. The additional capacity brought to the market will dampen expected returns over the cycle if pricing of reinsurance coverage fails to meet anticipated levels. Furthermore, the ability of Flagstone to continue to build and retain market acceptance will only be proven over time.

“As part of the new company formation monitoring process, A.M. Best will continue to closely monitor the quarterly performance of Flagstone against its stated business 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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