Flagstone Re Income Drops 44 Percent On Flood Losses

Commenting on the quarter's overall net income figure, Chairman Mark Byrne said, "It's important to recognize that given the high percentage of our risks…outside the United States, Flagstone will be more vulnerable to…losses [like the U.K. and Australian floods] than a company that was more focused on the United States."

"In the long run, we like the improved risk-return dynamics this strategy offers, [although] in a given quarter, the effect could be either way–and this was the unfavorable way."

Flagstone's earnings report also revealed that the top line rose by the same percentage that the bottom line tumbled, with gross premiums soaring 45 percent to $181.3 million.

James O'Shaughnessy, Flagstone's chief financial officer, attributed growth both to increased participation in business from existing clients and the addition of new clients made possible by a larger capital base.

David Brown, Flagstone's chief executive officer, said he was particularly pleased with growth in specialty business.

At about $35 million through six months, the specialty book–representing 9 percent of six-month gross premiums–is dwarfed by the property-catastrophe book, which accounts for over $300 million, or 78 percent of premiums. But the specialty book has nearly tripled in size over last year's six-month total–$12 million–and Mr. Brown said he is confident growth in this segment will "accelerate more as new underwriters begin to develop business in marine, aviation and engineering."

During what is only its second conference call as a public company, the "Class of 2005″ Bermuda start-up further outlined business plans with Mr. Byrne saying Flagstone has set up a "systematic method" of reviews of existing business lines by chief underwriting officers around the world twice a year. The company has also designated a "dedicated strategy professional" to evaluate new lines in a systematic way.

"Rather than choosing among the many things that come across our doorstep, we're trying to be systematic about evaluating them both for profitability and for fit to our strengths," he said.

Mr. Brown, commenting on overall market conditions, said rates in all the company's major markets throughout the world remain at adequate levels or better. He said he is unwavering in his belief that a "permanent change in market behavior," which was evident when Flagstone formed, still exists today. "After 18 months, I've seen nothing that would cause me to change that view," he said.

In July, Flagstone announced it increased its ownership in Island Heritage–a Cayman Islands insurer doing business in 16 Caribbean countries–to 55 percent, giving Flagstone control of the company. As a result, the financial results of Island Heritage will impact Flagstone's financials going forward, the company said.

In late July, Flagstone entered into the fourth sidecar transaction of its brief history, buying $60 million excess of loss retrocessional coverage from Mont Gele Re, a Cayman Islands vehicle, which will provide protection to the global portfolio in the event of a large catastrophe, Mr. Byrne said.

"Organizationally, we had a productive quarter," said Mr. Byrne, noting that in addition to its transactions the company hired many seasoned executives throughout the world and added new offices in Dubai and San Juan, Puerto Rico, to cover the Middle East, South Africa and Latin America, among other things.

Also significant, he said, was the receipt of "A-minus" ratings from Fitch Ratings for the company's Bermuda and Switzerland operating units in May, and "A3″ from Moody's in June, complementing an "A-minus" from A.M. Best already in place.