Bermuda reinsurer Flagstone's ratings with AM Best will remain unchanged after investment losses and its acquisition of Lloyd's managing agency Marlborough Underwriting.

Best said yesterday Flagstone would keep its A- (excellent) financial strength rating, while its underwriting unit Flagstone Reassurance Suisse SA would keep its "a-" issuer credit rating.

Although Flagstone would probably make a full-year loss for 2008, Best believes the company will achieve a turnaround next year.

Best said that investment losses and claims related to third-quarter hurricanes Gustav and Ike, as well as expenses related to the company's restructuring, meant that Flagstone's "level of risk-adjusted capitalisation fell marginally below the guidelines established for a start-up property catastrophe writer".

"While overall profitability during 2008 is expected to be negative, driven by realised and unrealised investment losses, AM Best expects a turnaround during 2009 based on the change to the investment portfolio and the favourable rate environment expected in Flagstone Holdings' lines of business," Best said in its commentary. "Future volatility of operating results or risk-adjusted capitalisation may place pressure on the ratings and/or outlook of Flagstone Holdings and its subsidiaries."

Best said the turmoil on world markets in the second half of this year has led to Flagstone recording an investment return of negative 6.6 percent.

Although underwriting income has fallen 70 percent compared to last year, Best said results had been solid considering the busy year for catastrophes. Flagstone's combined ratio — the proportion of premium dollars spent on claims and expenses — was 94.8 percent through the first nine months of the year, despite Ike, estimated by some in the industry to have been the third costliest in history for insurers.

The acquisition of Marlborough, announced in mid-October, was a good fit for the company, Best said. As the managing agency for Lloyd's Syndicate 1861, Marlborough specialised in short-tailed and reinsurance consistent with Flagstone's other operations. And the link to the Lloyd's market had the added advantage of global licences and strong franchise value, Best said.

Best said that "given Flagstone Holdings' ability to address its risk profile despite unexpected investment losses, the ratings remain unchanged".