Business & Finance
Business and Finance
Business and Finance
Thu, March 31, 2011 Fitch Affirms Ratings on Flagstone Re; Outlook to Negative
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed its ratings on Flagstone Reinsurance Holdings, S.A. (NYSE: FSR) and subsidiaries (collectively Flagstone) following the company's announcement that it expects its losses from the March 2011 earthquake and tsunami in the Tohoku region of Japan to total between $80 million-$130 million, bringing expected first quarter catastrophe loss levels to between $200 million and $300 million. The Rating Outlook has been revised to Negative from Stable. A full list of ratings is included at the end of this release.
The affirmation recognizes that despite the high level of first-quarter losses, Fitch expects capital ratios (such as net premium to equity) to remain within tolerances for the current rating level, albeit at the high end of expectations. Flagstone's ratings also continue to reflect the company's high-quality and liquid investment portfolio that supports the company's loss reserves.
Fitch's affirmation of Flagstone's ratings also recognizes that catastrophe-focused reinsurers will periodically suffer losses of a magnitude sufficient to significantly impact earnings, and reduce capital.
The Outlook revision considers Fitch's opinion that the first quarter 2011 catastrophe losses (also including New Zealand Earthquake and Australian flood losses) are at the high end of expectations for the current rating level. The expected losses represent between 22% and 26% of beginning of period shareholders equity. Such loss levels in aggregate are material for a property catastrophe reinsurer with nine months remaining in the calendar year, including hurricane season.
The Negative Outlook therefore reflects the heightened vulnerability of Flagstone's ratings over the remainder of the year, particularly in light of factors that could constrain Flagstone's financial flexibility if the company were to experience additional losses of an unexpected magnitude over the near to medium term. In addition to capital ratios being at the high end of ratings tolerances, Fitch notes that the company's stock price is currently trading at a significant discount to book value. This could make it difficult for the company to raise new capital, if needed.
Favorably, Fitch notes that the structure of Flagstone's current retrocessional reinsurance program appears likely to significantly reduce Flagstone's net exposure if another large catastrophe event were to occur in 2011. This is evidenced by the reduction in Flagstone's 1-100 year per event PML (falls to $162 million from $272 million) and its 1-250 year per event PML (falls to $204 million from $326 million).
Fitch also notes that Flagstone's geographically diverse underwriting portfolio (more so than several peers), will occasionally have greater relative exposure to global catastrophe events than some of its peers that may be more heavily concentrated in peak catastrophe zones such as those with U.S. hurricane exposure.
Key rating drivers that could result in a ratings downgrade include:
--Current loss expectations from first quarter 2011 events develop unfavorably;
--Additional catastrophe events occur that further reduce capital and financial flexibility;
--If the company were to report a further increase in underwriting leverage (measured by traditional premiums written to equity ratios) to levels in excess of 1.0 times (x) or asset leverage in excess of 3.0x;
--A material increase in Flagstone's debt-to-capital ratio to levels in excess of 25% from current levels in the mid-teens, or a decrease in run-rate interest coverage ratios to the low single digits.
Key rating drivers that could result in a Stable Rating Outlook include:
--If Flagstone were to rebuild cushion in its underwriting leverage ratios to year-end 2010 levels;
--If Flagstone were to grow (or raise) capital to offset recent losses.
Fitch has affirmed the following ratings with a Negative Rating Outlook.
Flagstone Reassurance Suisse SA:
--Insurer Financial Strength at 'A-'.
Flagstone Reinsurance Holdings, S.A.
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--$120 million of floating rate subordinated debentures due Sept. 15, 2036 at 'BB+';
--Euro13 million of floating rate subordinated debentures due Sept. 15, 2036 at 'BB+';
--$25 million of floating rate subordinated debentures due Sept. 15, 2037 at 'BB+'.
Flagstone Finance S.A.
--Long-term IDR at 'BBB+';
--$100 million of floating rate subordinated debentures due July 30, 2037 at 'BB+'.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Aug. 13, 2010);
--Rating Hybrid Securities (Dec. 29, 2009;
--'Non-Life Insurance Rating Criteria' (March 24, 2010);
--Insurance Industry: Global Notching Methodology and Recovery Analysis (Dec. 29, 2009).
Applicable Criteria and Related Research:
Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Non-Life Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366 ]
Insurance Industry: Global Notching Methodology and Recovery Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614265 ]
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