Flagstone Re to Restructure Business; Sell Lloyd’s Operation

October 26, 2011

Flagstone Reinsurance Holdings has announced a number of strategic initiatives, which it said are “designed to realign the Company’s strategy and core capabilities.” Flagstone said it “intends to refocus its underwriting strategy to leverage its existing strengths, and streamline its corporate structure to reduce expenses and enhance capital levels.”

The announcement noted that over the past 18 months, “Flagstone has undertaken a thorough analysis of its underwriting strategy and has determined to increase its focus on businesses that produce the highest returns on equity, while reducing its focus on businesses that absorb capital but produce less attractive returns.”

As a result Flagstone said that it now “intends to concentrate primarily on its property and property catastrophe business, as well as its highest margin short-tail specialty lines of reinsurance business. In addition, the Company will adjust its geographic diversification in order to decrease the threat of frequency risk.” Flagstone added that it “believes that these initiatives will significantly lower its underwriting leverage.”

In accord with the restructuring plan Flagstone said it “has commenced a formal process to divest its ownership positions in its Lloyd’s and Island Heritage operations.” It expects these “divestitures will lower its gross written premium by approximately $300 million per year, without any impact on expected return on equity, as well as produce significant expense savings through reduced infrastructure and the consequent requirement for operational support.”

The sale of these operations, along with other strategic actions, should produce another benefit, as it would “create significant additional excess capital for rating agency capital requirements,” said the bulletin.

Flagstone added that it has “retained Evercore Partners and Aon Benfield Securities, Inc respectively in relation to the Lloyd’s and Island Heritage divesture processes, which are expected to be concluded by the end of the first quarter of 2012.

“The Company intends to maintain its current investment strategy, which focuses on significant liquidity and security, to provide a stable capital base with which to underwrite.”

In addition to the Lloyd’s and Island Heritage sale, Flagstone said it “is taking a number of steps to streamline operations and to reduce its cost structure.” It has closed its offices in Dubai and Puerto Rico, and plans to divest its South Africa office by the first quarter of 2012. Its underwriting operations will continue to be centralized in Bermuda and Martigny, Switzerland.

CEO David Brown commented: “We believe this business realignment will result in a more nimble, cost-effective, and opportunistic structure, allowing the Company to react quickly to market changes. These changes will not impact our strong technical, analytical focus and we will continue to provide exemplary service for our clients.

“Moving forward, our underwriting strategy will focus on our highly successful property and property catastrophe units, leveraging existing strengths to improve performance and move Flagstone back to one of the most competitive combined ratios in the market.

“We will also continue to aggressively reduce expenses and bring expense ratios to competitive levels. By significantly streamlining our cost structure, we expect to have enhanced financial flexibility to pursue future opportunities to deliver greater value. We believe transparency is the best policy and announcing these initiatives simultaneously, rather than piecemeal, is the best approach for our clients, employees, and shareholders.”

A.M. Best has issued a bulletin indicating that the extensive changes in Flagstone’s operating structure would not result in any rating changes.

In addition to the announcement of the restructuring Flagstone also announced its preliminary estimates for losses occurring in the third quarter of 2011.

Source: Flagstone Re

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