Fitch Affirms Validus' Ratings; Outlook Stable
--Long-Term Issuer Default Rating (IDR) at 'A-';
--Senior debt at 'BBB+';
--Junior subordinated debt at 'BBB';
--Preferred shares at 'BBB'.
Fitch has also affirmed the 'A' Insurer Financial Strength (IFS) rating of Validus Reinsurance, Ltd. (Validus Re). A full list of ratings follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS
Validus' ratings reflect the company's 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 and Fitch's negative sector outlook on global reinsurance.
Validus' market position and size/scale is characterized as 'Medium' by Fitch when measured by net written premium and equity. Along with Validus' broad product portfolio of reinsurance business, the company writes 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. 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.
In the first half of 2016 (1H16), gross premiums written GPW increased by 5.0% 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 1H16.
Profitability for Validus is strong, characterized by 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. The most recent five-year averages (2011 - 2015) are 82.1% and 9.6%, respectively. In 1H16, Validus posted a calendar-year combined ratio of 82.5% with an annualized ROE of 14.2%.
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 18% and 26% of common shareholders' equity at July 1, 2016, but remain within expectations for the current rating category.
Validus' financial leverage ratio (FLR) is modest at 16.2% as of June 30, 2016, down from 17% at year-end 2015. This decrease reflects a 7.5% increase in total shareholders' equity to
Nearly $4.1 billion at June 30, 2016, as a result of strong net earnings in the first half (1H16).
At mid-year 2016 Validus' 12-month trailing net written premiums-to-equity ratio remained conservative at 0.6x, 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.
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 has affirmed the following ratings with a Stable Rating Outlook:
Validus Holdings, Ltd.
--Long-Term 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'.