Best Affirms Flagstone Reassurance Suisse ‘A-‘ Ratings; Outlook Negative

May 21, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Flagstone Reassurance Suisse S.A. and Flagstone Alliance Insurance and Reinsurance PLC, which is based on Cyprus, as well as the ICR of “bbb-” of Luxembourg-based Flagstone Reinsurance Holdings S.A., collectively referred to as Flagstone Re.

Best has also affirmed the indicative ratings for securities available under the shelf registration of “bb” on preferred stock, “bb+” on subordinated debt and “bbb-” on the senior debt of Flagstone Holdings.

Best said the outlook for all of the ratings is negative.

The ratings of Flagstone Re “reflect its excellent level of risk-based capitalization, experienced management team and its specialty focused business profile,” Best explained. They also recognize the “significant remedial actions taken by current management to streamline the organizational structure, de-risk the balance sheet and significantly reduce overall expenses.” Best said it believes the “current leadership has the necessary capabilities to support the core operating activities of the organization as well as enhance its franchise going forward.”

Best also indicated that “as a catastrophe-focused reinsurer, periodically losses will occur of a magnitude sufficient to significantly impact earnings. Despite the fact that Flagstone Re has been negatively impacted by a series of catastrophe losses in 2011, its current overall capitalization remains more than sufficient to withstand 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 pointed out that Flagstone Re’s “current capital is supported by an enhanced level of retrocessional support. The current retrocession program adequately contains Flagstone Re’s net exposure to large catastrophe events, and in combination with underwriting initiatives, has reduced its net retained PML materially as compared to prior years. The retrocessional protection is collateralized or acquired 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.”

The negative outlook, Best explained, reflects its “opinion that Flagstone Re’s current financial flexibility and the company’s competitive position may be somewhat constrained as a result of its recent losses and smaller capital position.

“The company’s historical profit measures have fallen short of its peer group due to legacy issues and an apparent weakness in its enterprise risk management framework, which have since been addressed. It is necessary, however, for Flagstone Re to demonstrate the benefits of its recent actions by exhibiting an ability to generate sustainable earnings, organic capital growth and thereby enhance its overall business profile.”

Best said a “resolution of the negative outlook is therefore dependent on Flagstone Re’s ability to successfully execute its new business strategy by demonstrating the ability to generate a reasonable and sustainable level of profitability over the near to medium term and improve its overall financial flexibility.”

Source: A.M. Best

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