Fitch Affirms Ratings on Flagstone Re; Outlook Stable

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed its ratings on Flagstone Reinsurance Holdings, Ltd. (NYSE:FSR) and subsidiaries (collectively Flagstone). The Rating Outlook is Stable. A full list of ratings is included at the end of this release.

The ratings reflect Flagstone's record of strong underwriting profitability, solid risk-adjusted capitalization, and high-quality and liquid investment portfolio that supports the company's loss reserves. The ratings also consider the company's comparatively small market share in the global reinsurance market and exposure to earnings and capital volatility derived from its property/catastrophe reinsurance products.

Since Flagstone began operations in 2006 the company has consistently generated strong underwriting profits. Fitch attributes these results to sound underwriting processes Flagstone uses to evaluate potential insured risks' zonal aggregate limits, pricing adequacy and return characteristics on both an individual contract and portfolio basis. Fitch views these as important skills for Flagstone given the company's exposure to catastrophe-related losses that can be significant in size and sudden in occurrence. The company's calendar year combined ratios averaged a strong 71.3% from 2006 through the first nine months of 2009. While Fitch views Flagstone's underwriting profitability as more volatile than that of more diversified peers, the agency views it as comparable to those of reinsurers that, like Flagstone, write a significant amount of property/catastrophe reinsurance.

Fitch believes that Flagstone's capitalization provides solid protection for the underwriting and investment risks the company faces. Fitch views Flagstone's capitalization as characterized by strong risk-adjusted capitalization and low equity-credit adjusted financial leverage partially. Fitch's assessment of Flagstone's risk-adjusted capitalization is derived from its review of the company's internal stochastic modeling process and results of the modified version of the agency's Prism capital model, the results of both of which suggest Flagstone's capital adequacy is strongly supportive of the company's current ratings. From a qualitative perspective, the favorable aspects of these capitalization metrics are partially offset by higher than peer underwriting leverage as measured by ratios of premiums written-to-equity.

Flagstone's current investment allocation is composed primarily of high-quality and liquid fixed maturity and short term investments that carry comparatively little credit or interest rate risk. Additionally, as a reinsurer with significant property exposure and corresponding comparatively low reserve leverage, Flagstone's invested assets are a multiple of the company's gross loss reserves.

Fitch notes that Flagstone's investment policy guidelines permit investments in a variety of asset classes such as equities, commodities, and real estate, assets that Fitch views as containing more volatile risk and return characteristics than the company's current allocation. Nevertheless, Fitch's expectation is that investments in these riskier asset classes will be managed to lower levels than those Flagstone employed prior to 2008's financial market downturn, a period in which the company suffered meaningful realized investment related losses.

Factors that could put upward pressure on Flagstone's Rating Outlook or ratings include measured and profitable premium growth in the company's Lloyds' segment that Fitch believes could promote earnings and capital stability and provide evidence of an enhanced competitive position. Other factors that could put upward pressure on Flagstone's Rating Outlook or ratings include the company's ability to meet profitability and capital growth metrics outlined by its 2010 business plan.

Factors that could put downward pressure on Flagstone's Rating Outlook or ratings include a significant deterioration in risk-adjusted capitalization metrics, a material increase in underwriting leverage (measured by traditional premiums written to equity ratios) or an increase in the company's equity-credit-adjusted debt-to-capital ratio above 25%.

Fitch has affirmed the following ratings with Stable Rating Outlooks.

Flagstone Reassurance Suisse SA:

-- Insurer financial strength at 'A-'.

Flagstone Reinsurance Holdings Limited

-- Long-term Issuer Default Rating (IDR) at 'BBB+';

-- $120 million of floating rate subordinated debentures due Sept. 15, 2036 at 'BBB-';

-- Euro13 million of floating rate subordinated debentures due Sept. 15, 2036 at 'BBB-';

-- $25 million of floating rate subordinated debentures due Sept. 15, 2037 at 'BBB-'.

Flagstone Finance S.A.

-- Long-term IDR at 'BBB+';

-- $100 million of floating rate subordinated debentures due July 30, 2037 at 'BBB-'.

Additional information is available at [ www.fitchratings.com ].

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

N@N

Fitch Affirms Ratings on Flagstone Re; Outlook Stable