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OLDWICK, N.J.--([ BUSINESS WIRE ])--A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit ratings (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 ratings for securities available under the shelf registration of abba on preferred stock, abb+a on subordinated debt and abbb-a on senior debt of Flagstone Holdingas. The outlook for all ratings is negative.

"Risk Management and the Rating Process for Insurance Companies"

The ratings of Flagstone Re reflect its excellent level of risk-based capitalization, experienced management team and its specialty focused business profile. The ratings also recognize the significant remedial actions taken by current management to streamline the organizational structure, de-risk the balance sheet and significantly reduce overall expenses. A.M. Best believes the current leadership has the necessary capabilities to support the core operating activities of the organization as well as enhance its franchise going forward.

A.M. Best recognizes that as a catastrophe-focused reinsurer, periodically losses will occur of a magnitude sufficient to significantly impact earnings. Despite the fact that Flagstone Re has been negatively impacted by a series of catastrophe losses in 2011, its current overall capitalization remains more than sufficient to withstand A.M. Bestas 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. Flagstone Reas current capital is supported by an enhanced level of retrocessional support. The current retrocession program adequately contains Flagstone Reas net exposure to large catastrophe events, and in combination with underwriting initiatives, has reduced its net retained PML materially as compared to prior years. The retrocessional protection is collateralized or acquired from highly rated counterparties. Flagstone Reas ratings also continue to reflect the high quality and liquid investment portfolio that supports the companyas loss reserves.

The negative outlook reflects A.M. Bestas opinion that Flagstone Reas current financial flexibility and the companyas competitive position may be somewhat constrained as a result of its recent losses and smaller capital position. The companyas historical profit measures have fallen short of its peer group due to legacy issues and an apparent weakness in its enterprise risk management framework, which have since been addressed. It is necessary, however, for Flagstone Re to demonstrate the benefits of its recent actions by exhibiting an ability to generate sustainable earnings, organic capital growth and thereby enhance its overall business profile.

Resolution of the negative outlook is therefore dependent on Flagstone Reas ability to successfully execute its new business strategy by demonstrating the ability to generate a reasonable and sustainable level of profitability over the near to medium term and improve its overall financial flexibility.

The methodology used in determining these ratings is Bestas Credit Rating Methodology, which provides a comprehensive explanation of A.M. Bestas rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: aRisk Management and the Rating Process for Insurance Companiesa; aUnderstanding Universal BCARa; aCatastrophe Analysis in A.M. Best Ratingsa; aInsurance Holding Company and Debt Ratingsa; and aRating Members of Insurance Groups.a Bestas Credit Rating Methodology can be found at [ www.ambest.com/ratings/methodology ].

Founded in 1899, A.M. Best Company is the worldas oldest and most authoritative insurance rating and information source. For more information, visit [ www.ambest.com ].

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