A.M. Best Affirms Ratings and Revises Outlook to Negative for Flagstone Reassurance Suisse S.A.

OLDWICK, N.J.--([ BUSINESS WIRE ])--A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating (ICR) of aa-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 abbb-a of Flagstone Reinsurance Holdings S.A. (Luxembourg) (NYSE:FSR) (collectively referred to as Flagstone Re). Concurrently, A.M. Best has affirmed the indicative debt ratings of abba on preferred stock, abb+a on subordinated debt and abbb-a on senior debt for securities available under Flagstone Reinsurance Holdings S.A.a�s shelf registration. The outlook for all ratings has been revised to negative from stable.

"a-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 abbb"

The rating affirmations reflectFlagstone Rea�s continued excellent level of risk-based capitalization, which is supportive of its current ratings. A.M. Best recognizes that catastrophe focused reinsurers will periodically suffer losses of a magnitude sufficient to significantly impact earnings. Despite the fact that the company has been negatively impacted by an unprecedented series of significant catastrophe losses since January of this year, its current overall capitalization remains more than sufficient to withstand A.M. Besta�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. The companya�s current capital is supported by (1) an enhanced level of retrocessional support, which was in place at January 1, 2011, and (2) the proactive action of management to protect its capital position since the Japanese earthquake last month through the purchase of additional retrocessional support at competitive pricing. The structure of the current reinsurance program will significantly reduce Flagstone Rea�s net exposure to another large catastrophe event or combination of events in 2011, and has reduced the companya�s 1:100 PML from $272 million at December 31, 2010 to $135 million. The retrocessional protection is purchased on a collateralized basis or from highly rated counterparties. Flagstone Rea�s ratings also continue to reflect the high-quality and liquid investment portfolio that supports the companya�s loss reserves.

In addition, the rating affirmations recognize the significant steps that already had been underway since the last half of 2010 to streamline the operations of Flagstone Re and improve expense levels at the company. These included the de-risking of the reinsurance portfolio and significant expense reduction initiatives. A.M. Best believes that the current leadership has the necessary capabilities to maintain as well as enhance its franchise going forward.

The negative outlook reflects Flagstone Rea�s limited financial flexibility, and A.M. Besta�s concerns that the companya�s competitive position may be somewhat compromised by these recent events (although A.M. Best does acknowledge Flagstone Rea�s successful writings at the April 1, 2011 renewals) and would be unable to fully benefit from a turn in the property catastrophe reinsurance market. The companya�s historical profit measures have fallen short of its peer group due to legacy issues (which are now being addressed) while up to this point its low loss ratio had been a significant strength. Near-term profitability also may be negatively impacted by unfavorable reserve development relating to these recent losses and any future catastrophes. However, this risk appears to be limited through the enhanced retrocessional support covering existing and potential future events and the companya�s positive track record on loss reserve development. Flagstone Re also will need to demonstrate that its current risk management framework is sufficient to ensure that its global diversification strategy can be achieved within the context of its risk appetite. The severity of the individual losses experienced by Flagstone Re is comparable to the peer composite in terms of monetary losses. However, the accumulation of losses sustained in the first quarter of 2011 outsized its peer group as a percentage of equity.

Resolution of the negative outlook is dependent on Flagstone Rea�s ability to generate a reasonable and sustainable level of profitability, reduce its dependence on retrocessional support, bring its risk appetite in line with its available capital, continue with its expense reduction initiatives and, most importantly, improve its overall financial flexibility.

The principal methodology used in determining these ratings is [ Besta�s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition ], which provides a comprehensive explanation of A.M. Besta�s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: aRisk Management and the Rating Process for Insurance Companiesa; aUnderstanding BCAR for Property/Casualty Insurersa; a[ Understanding ] Universal BCARa; aNatural Catastrophe Stress Testa; aRating Members of Insurance Groupsa; and aA.M. Besta�s Ratings & the Treatment of Debt.a Methodologies 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 ].

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A.M. Best Affirms Ratings and Revises Outlook to Negative for Flagstone Reassurance Suisse S.A.