CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BBB' rating to Validus Holdings, Ltd.'s (Validus) Series A non-cumulative perpetual preferred issuance. Proceeds from this new issue will be used for general corporate purposes.
KEY RATING DRIVERS
Under Fitch's rating methodology, Validus' new non-cumulative perpetual preference shares receive 100% equity credit in evaluating financial leverage. Fitch considers the preference shares to have 'minimal' non-performance risk with notching set two below the Issuer Default Rating (IDR) based on 'Poor' recovery expectations, with no additional notching for non-performance.
Validus' ratings reflect the company's continued solid operating performance and stable combined ratios, solid capitalization with a conservative premiums-to-equity ratio and modest financial leverage, and diversity in the company's book of business. These favorable factors are partially offset by potential volatility from large catastrophe-related events.
Validus' financial leverage ratio (FLR) is modest at 16.8% as of March 31, 2016, down from 17% at year-end 2015. This decrease reflects a 2.3% increase in total shareholders' equity to approximately $3.9 billion at March 31, 2016, as a result of strong net earnings in the first quarter (1Q16). Pro forma including the preferred issuance, FLR is expected to decrease to 16.3%.
Operating fixed charge coverage (FCC) was favorable at 11.5x in 1Q16, up from 7.8x for full-year 2015. Fitch estimates pro forma operating FCC to remain strong at 10x for 1Q16 (7x for full-year 2015) including the preferred issue.
FLR and FCC are manageable and within Fitch's expectations for the company and the sector credit factor guidelines for the rating category.
Key rating triggers that could result in an upgrade include:
--Enhanced scale and relative competitive position with maintenance of current operating performance in the challenging reinsurance environment;
--Continued profitable organic growth in the Western World segment, consistent with demonstrated success in the Validus Re and Talbot segments.
--Net probable maximum loss (PML) to common equity ratios consistent with higher-rated reinsurance peers.
--Continued growth in equity through earnings retention, while maintaining favorable run-rate earnings and low volatility, with a combined ratio under 90%.
Key rating triggers that could result in a downgrade include:
--Deterioration in reinsurance sector fundamentals or consolidation in the reinsurance landscape that Fitch viewed as weakening Validus' competitive position, operating profile or overall profitability;
--Underwriting leverage (measured by net premiums written to equity) at or above 0.8x;
--An increase in Validus' 1-100 and 1-250-year peak per event catastrophe (PMLs) to 25% and 35% of total equity, respectively;
--FLR in excess of 25% or fixed charge coverage ratios in the low single digits for a period of consecutive years;
--Under Fitch's notching criteria, if more than 30% of Validus' earnings or capital is sourced from foreign entities outside of the Bermuda group solvency environment, Validus' holding company ratings could be lowered by one notch reflecting a ring-fencing environment classification;
--Validus' hybrid securities ratings could be lowered by one notch to reflect non-performance risk should Fitch view Bermuda's regulatory environment as becoming more controlling in its supervision of (re)insurers.
FULL LIST OF RATING ACTIONS
Fitch expects to assign the following rating:
Validus Holdings, Ltd.
--$150 million of 6% non-cumulative Series A preference shares at 'BBB'.
Fitch currently rates the Validus Holdings, Ltd. companies as follows:
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.
--Insurer Financial Strength at 'A'.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 17 May 2016)
Dodd-Frank Rating Information Disclosure Form