N@N

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings today placed the ratings of Flagstone Reinsurance Holdings, S.A. (NYSE: FSR) and subsidiaries (collectively Flagstone) on Rating Watch Negative. The rating action follows Fitch's normal periodic review. A full list of ratings is included at the end of this release.

The Rating Watch reflects Fitch's heightened concerns about Flagstone's current financial profile and recent operating performance. Fitch notes that Flagstone suffered a high level of underwriting losses in 2011 that led to a steep decline in shareholders equity (30%) that was significantly greater than comparably rated peers.

Fitch's concern is further heightened by Flagstone's modest size which presents the possibility that further capital erosion could compromise Flagstone's competitive viability.

Fitch anticipates resolving the Rating Watch in the second half of 2012 when the outcome of steps that Flagstone has taken, or is expected to take in the near term, to improve its financial profile and operating performance, will become more evident. Upon resolution of the Rating Watch, Fitch's expectation is that Flagstone's ratings will either be downgraded one notch or affirmed at their current levels.

Specific factors that Fitch will evaluate at that time include the current and perceived prospective underwriting profitability of the company's book of business given re-underwriting steps the company undertook as part of the January renewal season, the amount and perceived quality of business placed during subsequent renewals, and current and prospective underwriting leverage given these steps.

Additionally, Fitch's expectation is that Flagstone will successfully complete the previously announced divestitures of its Lloyd's syndicate and its Caribbean-based primary operations in the second quarter 2012. The agency believes that these divestitures will be integral to Flagstone's ability to reduce underwriting leverage and right-size the company's expense base.

Fitch further believes that a simpler, more cost efficient organizational structure will enable Flagstone to focus on its core catastrophe reinsurance lines. Going forward, Flagstone's expense base, historically high relative to its closest peers, should decrease meaningfully, improving run rate profitability.

Fitch also notes favorably that Flagstone has revised its underwriting guidelines to place additional constraints on exposed limits in geographic zones and has also reduced modeled losses from large catastrophe events in peak zones.

Key rating triggers that could result in a ratings downgrade would include a failure to significantly reduce underwriting leverage and generate positive earnings momentum, or if the planned divestitures discussed above are not completed within Flagstone's publicly targeted time frames at levels that approximate or exceed each entity's current carrying value on Flagstone's balance sheet.

Key rating triggers that could result in a ratings affirmation include a reduction in current and prospective underwriting leverage and a return to overall profitability, coupled with the successful execution of the proposed transactions discussed above.

If the ratings are affirmed, Fitch expects the Outlook at that time would be Negative given recent trends.

Fitch expects to develop and provide additional ratings triggers upon resolution of the Rating Watch.

Fitch has placed the following ratings on Rating Watch Negative.

Flagstone Reassurance Suisse SA:

--Insurer Financial Strength 'A-'.

Flagstone Reinsurance Holdings, S.A.

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

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

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

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

Flagstone Finance S.A.

--Long-term IDR 'BBB+';

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

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

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