Flagstone Reinsurance Holdings Ltd. last night reported a net loss of $186.5 million for the third quarter, as it revised its expected losses from hurricanes Gustav and Ike upwards by $30 million and announced a negative 7.2 percent return on investments.

The class of 2005 reinsurer said it suffered net realised and unrealised losses of $69.4 million on derivatives, out of its total portfolio losses of $138.7 million.

Flagstone said the key factors in its investment performance had been the widening of credit spreads and the impact of turbulent world markets on it equity, commodity and real estate holdings. In September, two days after Ike roared into Texas on its way to causing more than $10 billion in insured losses, Flagstone produced a preliminary estimate for losses of $85 million. Last night the company said it had raised its estimate to $115 million.

"Despite Ike being a category two storm, damages were greater due to its larger wind field and higher impact sustained inland," Flagstone chief executive officer David Brown said.

"We remain comfortable with our own modelled estimate of the industry loss in the range of $10 billion to $16 billion for onshore losses. The vendors of commercial catastrophe models and other reinsurers have published estimates indicating a somewhat higher loss than our range. This higher range has been adopted by many of our cedants in estimating their own losses and our reserve levels reflect the more conservative amounts indicated by these larger industry estimates."

Mr. Brown added: "We are proud that our business model has withstood the test of what looks like the third-largest catastrophe in history together with a financial market catastrophe that dwarfs all natural catastrophes."

Flagstone's $186.5 million loss broke down to a loss of $2.18 per share, compared to net income of $66.2 million, or 77 cents per share, in the same period last year.

The company's diluted book value per share fell 12.7 percent to $12.62 during the quarter, inclusive of dividends. Book value growth has been 10 percent annualised since the company's inception — below the reinsurer's target.

Flagstone chairman Mark Byrne said the July through September period had been "a poor investment quarter of historic proportions for the market".

"Our analysis indicates the broad asset returns to be worse than any period since the Great Crash of 1929, and it is not possible to plan for these periods without sacrificing satisfactory investment results 99 out of 100 years," Mr. Byrne said. He added that 12 of the 14 asset classes the company follows had seen negative returns for the year.

Looking ahead, Mr. Byrne said Flagstone expected "a hardening market, since so much capital has been destroyed in our industry this year".

Flagstone has expanded globally since being founded as one of the wave of insurance companies to be established in Bermuda to meet rising demand in the wake of the devastating 2005 hurricane season. The company said it had managed to grow its business by 34.1 percent on a year-to-date basis over 2007.

Gross premiums written soared by almost $50 million to $173.2 million in the third quarter of 2008, compared to the same three months last year.

Early in the fourth quarter, the expansion continued when Flagstone agreed to buy Marlborough Underwriting Agency, operators of Lloyd's Syndicate 1861, a transaction the company said it expected to close shortly.