Fitch Affirms Validus' Ratings; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Validus Holdings, Ltd. (Validus). 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 Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release.
KEY RATING DRIVERS
Validus' ratings reflect the company's continued solid operating performance and internal capital generation since its inception in late 2005. Validus reported $316 million of net earnings in the first half of 2014, driven by a strong combined ratio of 68.5% which benefited from the absence of large catastrophe events during the period.
In addition, the ratings reflect Fitch's negative sector outlook on global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with declining premium pricing and weakening of terms and conditions. This has been particularly the case for property catastrophe risk, Validus' largest individual line of business that represented approximately one third of total company gross premiums written in 2013.
Validus has responded to increased price competition by reducing its risk exposure, with property catastrophe gross premiums written down 16% in the first half of 2014 as compared to the first half of 2013. Validus has also reduced its per event probable maximum losses (PML's) for most catastrophe perils, on an absolute basis and as a percent of total equity. Fitch expects that Validus will continue to maintain underwriting discipline should future market conditions continue to deteriorate.
The ratings affirmation reflects that the company's underwriting performance, while potentially volatile, continues to compare favorably to other reinsurers with a property catastrophe focus rated by Fitch when viewed on a multi-year rolling average basis. This is due, in part, to the company's growing diversification into specialty reinsurance lines, Talbot operations within Lloyds, and more recently, its AlphaCat alternative capital segment.
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.
Fitch believes that Validus uses sound risk management processes to manage its exposure to potential catastrophe-related losses by geographic zone and relative to its capital base. Validus' low underwriting leverage enables the company to preserve capital during periods that include underwriting volatility.
Validus' capital ratios (such as net premium to equity and assets to equity) have consistently remained well within tolerances for the current rating level. Fitch expects this trend to continue for the foreseeable future.
Validus' ratings were unaffected by the company's June 2014 announcement that it plans to acquire Western World Insurance Group (Western World) for $690 million in cash. Western World is a New Jersey-based privately held property/casualty insurer that focuses on casualty risks in the excess and surplus lines market.
Fitch expects the transaction, which Validus plans to fund with cash on hand, to result in negligible changes to the company's financial and operating leverage. After closing, expected in the fourth quarter of 2014, the company's consolidated debt-to-capital ratio is anticipated to remain near recent levels in the mid-teens while net written premiums-to-equity ratio should remain close to levels of around 0.5x reported by Validus in each of the last several years.
Key rating triggers that could generate longer term positive rating pressure include a prolonged period during which Validus outperformed comparably rated peers with respect to underwriting performance and overall profitability, continued strong risk adjusted capitalization metrics, and enhanced competitive positioning and scale in the company's key product lines.
Key rating triggers that could lead to a downgrade include continued deterioration in market conditions in Validus' core business lines that impair the company's ability to sustain its historically strong profitability. Specifically, failure to maintain a multi-year average combined ratio of 90% or better, could result in a ratings downgrade.
Other key rating triggers that could result in a ratings downgrade include an increase in underwriting leverage (measured by traditional net premiums written to equity ratios) to levels at or above 0.8 times (x) from recent levels of 0.5x. Likewise, an increase in Validus' 1-100 and 1-250 year per event catastrophe probable maximum losses (PML's) to 30% (currently 17%) and 40% (currently 23%) of total equity, respectively, could result in a downgrade.
Fitch could also downgrade the company's ratings if Validus were to suffer catastrophe losses that were unfavorably inconsistent with its own internally modeled results or that resulted in earnings and/or capital declines that were significantly worse than comparably rated peers.
A material increase in Validus' debt-to-capital ratio to levels in excess of 25% or decrease in interest coverage ratios to the low single digits for a period of consecutive years could lead Fitch to downgrade the company's debt ratings.
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Validus Holdings, Ltd.
--Issuer Default Rating (IDR) at 'A-';
--$250 million of 8.875% senior unsecured notes due 2040 at 'BBB+';
--$150 million of 9.07% junior subordinated deferrable debentures due June 2036 at 'BBB-';
--$140 million of 8.48% junior subordinated deferrable debentures due June 2037 at 'BBB-'.
Validus Reinsurance, Ltd.
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Insurance Rating Methodology (November 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology