Flagstone Re Announces Strategic Business Realignment
Flagstone Reinsurance Holdings, S.A. (NYSE: FSR) today announced a number of strategic initiatives designed to realign the Company's strategy and core capabilities. Through these initiatives, Flagstone intends to refocus its underwriting strategy to leverage its existing strengths, and streamline its corporate structure to reduce expenses and enhance capital levels.
Over the past 18 months, Flagstone has undertaken a thorough analysis of its underwriting strategy and has determined to increase its focus on businesses that produce the highest returns on equity, while reducing its focus on businesses that absorb capital but produce less attractive returns. Accordingly, the Company now intends to concentrate primarily on its property and property catastrophe business, as well as its highest margin short-tail specialty lines of reinsurance business. In addition, the Company will adjust its geographic diversification in order to decrease the threat of frequency risk. Flagstone believes that these initiatives will significantly lower its underwriting leverage.
As a result of this realignment, Flagstone has commenced a formal process to divest its ownership positions in its Lloyds and Island Heritage operations. The Company expects that these divestitures will lower its gross written premium by approximately $300 million per year, without any impact on expected return on equity, as well as produce significant expense savings through reduced infrastructure and the consequent requirement for operational support. Furthermore, these divestures, along with other strategic actions are expected to create significant additional excess capital for rating agency capital requirements. 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.
As part of the realignment initiatives, Flagstone is taking a number of steps to streamline operations and to reduce its cost structure. The Company 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. The Company believes these measures will result in significant annual cost savings.
Flagstone also announced its preliminary estimates for losses occurring in the third quarter of 2011. 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.
In addition, due to updated loss estimates for catastrophes that occurred during the first half of 2011, Flagstone expects that its collective loss estimate related to first half catastrophes will impact the third quarter by approximately $35 million, net of reinstatement premiums and retrocession. Lastly, weak financial markets in the third quarter will have a negative impact on the Company's low duration fixed income investment portfolio of negative 1%.
