Flagstone Reinsurance has been put on ratings watch by Moody’s after the release of its estimated losses from the Australian floods and February 22 Christchurch earthquake.

Flagstone currently holds an A3 insurance financial strength rating from the agency, but that rating is now under review. 

A3 is Moody’s lowest level of A rating and a downgrade to B could force the company into raising additional capital, as many cedants are unwilling or unable to deal with a company whose rating is less than A.

Flagstone says its losses from the second Christchurch earthquake are expected to be between $US60 million and $US90 million ($58.8 million and $88.2 million), net of reinstatement premiums and retrocession, based on an estimated industry wide loss of up to $US12 billion ($11.8 billion).

Flagstone CEO David Brown says he does not expect any significant increase in losses from the NZ quake “due to our reinsurance protection, even if the industry loss continues to increase and exceeds the high end of our industry loss estimate”.

Moody’s says the flood and Cyclone Yasi loss estimate represents 5-7% of Flagstone’s shareholder equity of $US1.1 billion ($1.08 billion) while the Christchurch estimate represents 5-8% of Flagstone’s equity.

“We consider the size of the losses from the Australian floods and New Zealand earthquake to be out of step in relation to the limited size of the company,” says Kevin Lee, a senior credit officer at Moody’s.

Flagstone responded sharply with a statement saying it’s “disappointed” in Moody’s decision “and believes the action is unwarranted”.

“Furthermore, the company does not believe Moody’s rationale accurately reflects Flagstone’s overall risk exposure. Finally, Flagstone also believes that Moody’s has not adequately assessed the company’s limited exposure to future events and the significant reinsurance protection it has in place.”

Flagstone is rated A- by both AM Best and Fitch Ratings, and neither agency has yet indicated it intends to review Flagstone’s rating.

Flagstone is yet to quantify its exposure to the Japanese earthquake and tsunami but does underwrite catastrophe covers in that country.

With regards to Japan, the company says: “Flagstone does have significant reinsurance protection covering this and subsequent events, particularly should the size of the industry losses increase.”

Moody’s says that while Flagstone appears to have “meaningful reinsurance protections in place to manage losses from future catastrophes” the company’s reliance on reinsurance has “its own risks, as it exposes the company to shifts in the availability and pricing of such protection to a greater degree than peers”.