Moody’s assessment comes after unsuccessful merger bid

Moody's Investors Service said that it has affirmed the ratings and places a negative rating outlook on Flagstone Reinsurance Holdings Limited and its main operating subsidiary after it was unsuccessful in reaching a merger agreement with IPC Holdings. On July 7, 2009, Moody's changed the outlook to negative, citing that recent consolidation activity has placed more pressure on smaller reinsurers like Flagstone to increase scale to remain strongly positioned with brokers and clients.

"We believe the recent trend toward consolidation could make it harder for smaller reinsurers like Flagstone to maintain strong credit fundamentals" said Kevin Lee, senior credit officer at Moody's. "Smaller reinsurers could be less insulated from the greater bargaining power of brokers given recent broker consolidation. Smaller reinsurers may also find accessing capital more challenging following recent market turmoil."

Moody’s said access to capital is a significant pressure point for Flagstone given its significant private equity ownership and limited public float.

Moody's also noted that smaller reinsurers like Flagstone may have less opportunity to diversify their business, as buyers of longer-tail reinsurance tend to be more sensitive to size.

“Over the short term, Flagstone's efficient operations and strong service orientation are expected to help it maintain its current competitive position. That said, loss of significant business, greater compromise on price or terms at the next renewal cycle, or breach of stated risk limits could lead to a downgrade. Moreover, further consolidation in the industry would also place additional pressure on Flagstone's ratings,” a Moody’s statement said.

“Conversely, an increase in public float and reduction in financial leverage below 20% could return the outlook to stable.”

The following ratings have been affirmed with a negative outlook:

Flagstone Reassurance Suisse SA -- insurance financial strength at A3.

Flagstone Reinsurance Holdings Limited -- long term issuer rating at Baa3.

Flagstone Reinsurance Holdings Limited is a global reinsurance and insurance company that focuses on property, property catastrophe, and specialty lines of business. For first quarter 2009, the company reported net income of $35.7 million, gross premiums written of $361.5 million and shareholder's equity of $1.02 billion as of March 31, 2009.

The last rating action on Flagstone occurred on July 7, 2009 when Moody's changed the outlook to negative from stable.