A.M. Best Affirms Ratings of Flagstone Alliance Insurance and Reinsurance PLC

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Flagstone Alliance Insurance and Reinsurance PLC (FAIR) (Cyprus). The outlook for both ratings is stable.

The ratings are based in part on the explicit support of Flagstone Reassurance Suisse SA (Martigny, Switzerland), which is the main operating subsidiary of Flagstone Reinsurance Holdings Limited (Hamilton, Bermuda) [NYSE:FSR] (collectively referred to as Flagstone Re).

The stable outlook reflects FAIR’s solid capitalization and the explicit parental support from a 65% quota share reinsurance treaty, with the added security of an adverse development cover (ADC) put in place for 2009 alongside the Flagstone Re group guarantee. These positive rating attributes are partially mitigated by the projected modest technical profitability and change in business profile in realignment with the Flagstone Re group strategy.

In 2008, FAIR decreased its gross premiums written (GPW) by 11% to EUR 35.24 million (USD 51.82 million). In U.S. dollars—which is the main transacting currency—this represents a decrease of only 5.23% in difficult market conditions. A.M. Best expects that in 2009, FAIR is likely to report more than a 50% decrease in GPW (in U.S. dollars) as the business is realigned with the strategic objectives of Flagstone, which has a more specific business focus. Premium income is expected to recover to the 2008 level in 2010, mostly from segmental contribution of passporting opportunities within the European Union. A.M. Best believes that this is likely to prove challenging from the medium-term macro-economic picture, although this should be at least partially offset by a gradually hardening rate environment.

FAIR reported an underwriting loss of EUR 13.68 million (USD 20.11 million) in 2008, and is likely to record a loss on its technical account in 2009 due to the significant fall in earned premiums, with acquisition costs still increasing from higher quota share business.

A.M. Best expects the company to report an underwriting profit beginning in 2011 as a result of future expected expense reductions and loss ratios from planned business developments aided by access to the Flagstone Re global platform. FAIR’s combined ratio is expected to improve over 2010 and 2011 from group synergies but is likely to remain relatively high for 2009. A.M. Best anticipates that the company’s overall earnings will continue to be modestly impacted by lower expected future investment income derived from a more conservative Flagstone Re group portfolio strategy. FAIR also strengthened its incurred but not reported (IBNR) reserves in 2008 as a one-off exercise to be in line with the U.S. GAAP standards of its parent.

In A.M. Best’s view, FAIR has good risk management and is expected to benefit significantly from the acquisition by Flagstone Re, with the 65% whole account quota share anticipated to increase by a further 10% in 2010. Risk management is to be carried out at a group level by using the Flagstone Re group risk tools and resources.

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The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.