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. (Martigny, Switzerland) and Flagstone
Alliance Insurance and Reinsurance PLC (Limassol, Cyprus). A.M. Best
also has affirmed the ICR of “bbb-” of Flagstone Reinsurance Holdings
S.A. (Luxembourg) (NYSE: FSR) (collectively referred to as Flagstone
Re). Concurrently, A.M. Best has affirmed the indicative ratings for
securities available under the shelf registration of “bb” on preferred
stock, “bb+” on subordinated debt and “bbb-” on senior debt of Flagstone
Holding’s. The outlook for all 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. The ratings 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. A.M. Best 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.
A.M. Best recognizes 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
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. 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 reflects A.M. Best’s 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.
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.
The methodology used in determining these ratings is Best’s Credit
Rating Methodology, which provides a
comprehensive explanation of A.M. Best’s rating process and contains the
different rating criteria employed in the rating process. Key criteria
utilized include: “Risk Management and the Rating Process for Insurance
Companies”; “Understanding Universal BCAR”; “Catastrophe Analysis in
A.M. Best Ratings”; “Insurance Holding Company and Debt Ratings”; and
“Rating Members of Insurance Groups.” Best’s Credit Rating Methodology
can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world’s oldest and most
authoritative insurance rating and information source. For more
information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
