Fitch Affirms Ratings Of Validus Holdings

August 19, 2015

Fitch Ratings has affirmed the ratings of Validus Holdings, Ltd. These rating actions include Validus’ senior unsecured debt rating, which was affirmed at ‘BBB+’ and the Insurer Financial Strength [IFS] rating of Validus Reinsurance, Ltd. [Validus Re], which was affirmed at ‘A’.

The ratings agency said, “Fitch has also upgraded Validus’ junior subordinated debt to ‘BBB’ from ‘BBB-’ due to the application of updated notching criteria for hybrid ratings. The Rating Outlook is Stable.

“The upgrade of the junior subordinated debt reflects Fitch’s recently updated notching criteria, published on July 14, 2015 in the master criteria ‘Insurance Rating Methodology’, Section VI. Under the revised criteria the junior subordinated debt is considered to have ‘minimal’ non-performance risk. Notching is set two below the Issuer Default Rating [IDR] based on ‘Poor’ recovery expectations, with no additional notching for non-performance. Under prior criteria, a notch was added for non-performance.

“Validus’ ratings reflect the company’s continued solid operating performance and internal capital generation, solid capitalization, reasonable financial leverage, strong interest coverage, and well-managed reserve risk. These favorable factors are partially offset by potential volatility from large catastrophe-related events.

“In addition, the ratings reflect Fitch’s negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions, particularly for property catastrophe risk. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive positions.

“Validus has responded to these harsh conditions by reducing its property catastrophe risk by reducing participation in various programs. The company has offset declines in reinsurance premium in the first half of 2015 with modest increases in primary marine and specialty lines. Fitch expects that Validus will continue to maintain underwriting discipline should future market conditions continue to deteriorate.

“Validus has a broad product portfolio of both reinsurance and property/casualty primary insurance, including Western World Insurance Group business that is included in 2015 results. Fitch views this favorably as it provides the company flexibility to deemphasize various products when market conditions are poor and reduces its dependency on any single product line. Fitch expects that Validus will continue to manage successfully through various market conditions and cycles.

“Profitability is strong, characterized by low and stable combined ratios and solid returns on average common equity [ROAE]. The most recent five-year averages [2010-2014] are 83.5% and 9.7%, respectively. In the first half of 2015, Validus reported a combined ratio of 77.9% and annualized ROAE of 13.0% as underwriting income decreased year over year largely as a result of $48 million of catastrophe losses related to the Pemex offshore oil rig explosion. Validus has posted an underwriting profit and overall net income in every year of its 10 year operating history.

“Validus has also reduced its per event probable maximum losses [PMLs] for most catastrophe perils, on an absolute basis and as a percent of total equity. Peak per event 1-100 and 1-250-year PMLs for the U.S. wind peril is 16% and 23% at July 1, 2015.

“Fitch observes that the company’s share of global catastrophe losses since its inception, while significant in some cases, has been manageable and consistent with levels that might be expected from a reinsurer of Validus’ size and focus.

“The company’s financial leverage ratio is modest at 15.9% as of Dec. 31, 2014, down from 16.3% at year-end 2014. This increase reflects a 1.9% increase in shareholders’ equity available to Validus from strong net earnings to nearly $3.7 billion at June 30, 2015, offset by share repurchases and dividends.

“At year-end 2014 Validus’ net written premiums-to-equity ratio remained at 0.5x, consistent with the levels reported by the company in each of the last several years. Validus’ low underwriting leverage enables the company to preserve capital during periods that include underwriting volatility.”

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