Flagstone Reinsurance Holdings Ltd. has announced that Flagstone Réassurance Suisse SA has bought three years of fully collateralised retrocessional coverage from Montana Re Ltd., a newly-formed special purpose Class B reinsurer in the Cayman Islands.

Montana Re, which was formed as a programme structure enabling further issuance of additional series of notes in the future, offers Flagstone protection on its reinsurance portfolio through two separate tranches, using a PCS index trigger with state and peril-specific personal and commercial payout factors.

Montana Re has issued $100 million of Series 2009 - 1, Class A principal-at-risk variable rate notes and $75 million of Series 2009-1, Class B principal-at-risk variable rate notes, both due on December 7, 2012 to collateralise its obligations under the retrocession agreements. Risk analysis for the transaction was carried out by by Risk Management Solutions Inc. (RMS).

AM Best Co. yesterday assigned a debt ratings of "bb-" to the $100 million Series 2009-1 Class A principal at-risk variable rate notes and "b" to the $75 million Series 2009-1 Class B principal at-risk variable rate notes. The outlook for both ratings is stable.

Under the reinsurance agreement, the issuer will provide Flagstone Re with up to $100 million protection against US hurricanes for the Class A Notes; and $75 million protection against US hurricanes and earthquakes for the Class B Notes based on a modified property claim services index trigger on a per occurrence basis over a three-year period.

This will cover losses above a specific reinsurance attachment from Flagstone Re's commercial and personal lines that are exposed to covered events in those areas. In exchange for receiving the multi-year reinsurance coverage, Flagstone Re will make periodic premium payments to the issuer.

David Brown, Flagstone CEO, said: "We are very pleased with the outcome of this transaction. Access to the capital markets in transactions such as this helps us to optimise returns for our owners and enhance security for our clients.

"The multi-year nature of the coverage allows us certainty in an important aspect of our business plan over the coming years."

Mark Byrne, Flagstone's chairman, said: "The cat bond marketplace has been challenged to find index-based trigger structures acceptable to the credit rating agencies for capital relief, and also to find collateral structures which provide acceptable LIBOR returns while overcoming limitations of earlier deals. Montana Re's design is at the innovative end of the market in both respects."

Peter Nakada, managing director of RMS Risk Markets, said: "This transaction was one of the most efficient transactions we have worked on to date, thanks to the combined modeling expertise of Flagstone Re and the RMS team. We look forward to working with Flagstone on similar transactions in the future."