Flagstone Re to Realign Strategy and Core Capabilities

What does the future hold for Flagstone Reinsurance Holdings S.A.? Change. After an 18-month analysis of its underwriting strategy, the reinsurer has decided to concentrate primarily on its property/casualty catastrophe business, as well as its highest-margin short-tail specialty lines of reinsurance business. Flagstone contends that these businesses will enable it to produce the highest returns on equity, while reducing its focus on businesses that absorb capital but produce less attractive returns.

As a result, Flagstone has commenced a formal process to divest its ownership positions in its Lloyds and Island Heritage operations. The company expects these divestitures to lower its gross written premium by approximately $300 million per year without any impact on expected return on equity, as well as cutting expense savings by reducing infrastructure and the consequent requirement for operational support.

The company has retained Evercore Partners and Aon Benfield Securities Inc. respectively in relation to the Lloyd’s and Island Heritage divesture processes, which are expected to be concluded by the end of the first quarter of 2012.

The company intends to maintain its current investment strategy, which focuses on significant liquidity and security, to provide a stable capital base with which to underwrite.

Flagstone recently closed its offices in Dubai and Puerto Rico, and plans to divest its South Africa office by the first quarter of 2012. Underwriting operations will continue to be centralized in Bermuda and Martigny. Flagstone has previously undertaken measures to reduce global operating costs and now intends to take further steps to reduce back office expenses across the organization. It will adjust its geographic diversification in order to decrease the threat of frequency risk.

“This business realignment will result in a more nimble, cost-effective, and opportunistic structure, allowing the company to react quickly to market changes,” said David Brown, Flagstone CEO. “These changes will not impact our strong technical, analytical focus. We will also continue to aggressively reduce expenses and bring expense ratios to competitive levels. By significantly streamlining our cost structure, we expect to have enhanced financial flexibility to pursue future opportunities to deliver greater value. We believe transparency is the best policy and announcing these initiatives simultaneously, rather than piecemeal, is the best approach for our clients, employees and shareholders.”

Flagstone is scheduled to release third-quarter 2011 results after the close of trading on November 3, but it announced preliminary estimates. Losses impacting the reinsurance segment related to Hurricane Irene, floods in Denmark and U.S. Aggregate covers are expected to be approximately $20 million, $10 million and $5 million, respectively, net of reinstatement premiums and retrocession. Furthermore, the company expects its Lloyd’s segment to report a $10 million net loss for the quarter.

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