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Fitch Affirms Validus' Ratings; Outlook Stable
March 1, 2017 / 6:30 PM / 9 months ago

Fitch Affirms Validus' Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has affirmed Validus Holdings, Ltd. (Validus) Issuer Default Rating (IDR) at 'A-'. Additionally, Fitch has affirmed the 'A' Insurer Financial Strength (IFS) rating of Validus Reinsurance, Ltd. (Validus Re). A full list of rating actions follows at the end of this release. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings affirmation reflects the company's strong business profile with increasing diversity in the company's book of business, very strong operating performance on an absolute basis and relative to peers, and a modest decrease in peak probable maximum loss exposure relative to equity. These favorable factors are partially offset by potential volatility from large catastrophe-related events, recent deterioration in Western World Insurance Group (Western World) results, integration risk related to the recent acquisition of primary crop insurance general agent Crop Risk Services (CRS) and Fitch's negative sector outlook on global reinsurance and U.S. non-life insurance. Validus' business profile is characterized as 'Strong' by Fitch. Validus' maintains a broad product portfolio of reinsurance business along with an increasing business mix allocation to property/casualty primary specialty insurance business through subsidiaries Talbot Underwriting, Ltd. (Talbot) in the Lloyds market (Syndicate 1183) and Western World Insurance Group (Western World) in the U.S. Validus' AlphaCat segment represents a strategic advantage in the current competitive environment as it has grown to become one of the largest (re)insurer owned third-party ILS asset managers with $2.7 billion of assets under management as of Jan. 1, 2017. Validus reported a 3.6% increase in gross premiums written (GPW) in 2016 over the prior year. The increase in premiums is driven by the AlphaCat and Western World segments, somewhat offset by a decrease in GPW in the Validus Re and Talbot segments. The decline in GPW at Validus Re was primarily related to property catastrophe, marine and agriculture lines, while new casualty business served to offset some of the drop in premium in 2016. Profitability for Validus is very strong, characterized by a history of low and stable combined ratios and solid returns on average common equity (ROAE) as Validus has posted an underwriting profit and overall net income in every year of its operating history. In 2016, Validus posted a calendar-year combined ratio of 84.2%, up from 79.7% in 2015 and an ROAE of 9.8%, down from 10.4% in the prior year as the company reported modest increases in catastrophe losses and less favorable reserve development during the year. The Western World segment reported a combined ratio of 107.6% in 2016, up from 98.2% in the prior year as expenses related to policy acquisition increased. Validus' underlying performance remains in line with higher rated peers and Fitch's sector credit factors at higher rating categories. The most recent five-year averages (2012-2016) for combined ratio and ROAE are 78.3% and 11.6%, respectively. Fitch observes that the company's share of global catastrophe losses since its inception, while significant in some cases, has been manageable and catastrophe loss experience has not exceeded the company's modelled loss estimates. Per event 1-100 and 1-250-year PMLs on an occurrence basis for the U.S. wind peril remain among the highest within Validus' peer group at 19% and 27% of common shareholders' equity at Jan. 1, 2017 but remain within expectations for the current rating category. Validus' financial leverage ratio (FLR) is modest at 16.3% as of Dec. 31, 2016, down from 17.1% at year-end 2015. This decrease reflects a 7.5% increase in total shareholders' equity to over $4 billion at Dec. 31, 2016, as a result of strong net earnings and a $150 million preferred share issuance during the year. RATING SENSITIVITIES 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; --Profitable growth in the Western World segment including the CRS business with a combined ratio for the segment under 100%; --Maintaining favorable run-rate earnings and low volatility, with a combined ratio under 90%; --Net probable maximum loss (PML) to common equity ratios consistent with higher-rated reinsurance peers. Key rating triggers that could result in a downgrade include: --Deterioration in (re)insurance sector fundamentals or consolidation in the (re)insurance landscape that Fitch viewed as weakening Validus' competitive position, operating profile or overall profitability; --Sustained combined ratio above 103% or operating ratio above 95%; --An increase in Validus' 1-100 and 1-250-year peak per event catastrophe (PMLs) to 25% and 35% of common 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 has affirmed the following ratings with a Stable 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'. --$150 million of 5.875% non-cumulative Series A preference shares at 'BBB'. Validus Reinsurance, Ltd. --IFS at 'A'. Contact: Primary Analyst Christopher A. Grimes, CFA Director +1-312-368-3263 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Committee Chairperson Jeff A. 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