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Fitch Ratings upgraded the ratings of Validus Holdings, Ltd. (Validus).
These rating upgrades include Validus' senior unsecured debt rating, which was upgraded to 'BBB+' from 'BBB', and the Insurer Financial Strength (IFS) rating of Validus Reinsurance, Ltd. (Validus Re), which was upgraded to 'A' from 'A-'. The Rating Outlook is Stable. A complete list of rating actions is provided below.
KEY RATING DRIVERS
The ratings upgrade reflects Validus' solid operating performance and internal capital generation since its inception in late 2005. The upgrade also reflects that the company's underwriting performance, while volatile, compares favorably to other property catastrophe reinsurers rated by Fitch when viewed on a multi-year rolling average basis.
Fitch notes favorably that Validus has produced an operating and underwriting profit in each year of its existence. This period includes 2011, when record levels of international catastrophe losses caused many of Validus' comparably rated peers to report significant annual underwriting and operating losses.
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.
Most recently, Validus reported $408 million of net earnings in 2012, driven by a solid combined ratio of 86.8 percent, despite $361 million of net pre-tax losses and loss adjustment expenses from Superstorm Sandy in the fourth quarter of 2012.
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.
The balance sheet risk is relatively modest, as its investment portfolio is dominated by highly rated fixed income investments that fared well during periods of capital market volatility. There is relatively little risk of significant adverse loss development from the company's largely short-tail underwriting liabilities.
Validus' ratings continue to recognize the company's significant exposure to earnings and capital volatility derived from its property catastrophe reinsurance products.
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 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 0.7 times (x) from recent levels of 0.4x. Likewise, an increase in Validus' 1-100 and 1-250 year per event catastrophe probable maximum losses (PML's) to 30 percent (currently 22 percent) and 40 percent (currently 27 percent) of total equity, respectively, could result in a downgrade.
Additionally, failure to maintain a run rate average combined ratio in the mid-80 percent's, which approximates Validus' average result from 2008 through 2012, could result in a ratings 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 percent or decrease in run-rate 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 upgraded the following ratings and assigned a Stable Rating Outlook:
Validus Holdings, Ltd.--Issuer Default Rating (IDR) to 'A-' from 'BBB+';--$250 million of 8.875 percent senior unsecured notes due 2040 to 'BBB+' from 'BBB';--$150 million of 9.07 percent junior subordinated deferrable debentures due June 2036 to 'BBB-' from 'BB+';--$140 million of 8.48 percent junior subordinated deferrable debentures due June 2037 to 'BBB-' from 'BB+'.
Validus Reinsurance, Ltd.--IFS to 'A' from 'A-'.
Fitch has upgraded the following ratings to reflect parent company guarantees in place and has also withdrawn the following ratings, as they no longer possess analytical relevance for Fitch's rating coverage:
Flagstone Reinsurance Holdings, S.A.--$120 million of floating rate subordinated debentures due Sept. 15, 2036 to 'BBB-' from 'BB+';--EUR13 million of floating rate subordinated debentures due Sept. 15, 2036 to 'BBB-' from 'BB+';--$25 million of floating rate subordinated debentures due Sept. 15, 2037 to 'BBB-' from 'BB+'.
Flagstone Finance S.A.--Long-term IDR to 'A-' from 'BBB+';--$100 million of floating rate subordinated debentures due July 30, 2037 to 'BBB-' from 'BB+'.
Fitch has withdrawn the following rating, as it no longer possesses analytical relevance for Fitch's rating coverage:
Flagstone Reassurance Suisse SA:--IFS at 'A-'.
Fitch has withdrawn the following rating as the entity has ceased to exist:
Flagstone Reinsurance Holdings, S.A.--Long-term IDR at 'BBB+'.
Additional information is available at fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:--Insurance Rating Methodology (Jan. 11,).
Applicable Criteria and Related Research:Insurance Rating Methodology -- Amended
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