CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Validus Holdings, Ltd. (Validus). The affirmations include Validus' 'BBB+' senior unsecured debt rating and 'A' Insurer Financial Strength (IFS) rating of Validus Reinsurance, Ltd. (Validus Re). 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 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.
In addition, the ratings reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions, particularly for property catastrophe risk.
The company announced on Jan. 12, 2016 that its joint hedge fund reinsurance venture PaCRe, Ltd. (PaCRe) was off-risk effective of Jan. 1, 2016. PaCRe had reported material investment losses that impacted Validus' results as a 10% stake-holder in the entity. Validus' results at year-end 2015 include a restatement of prior year results related to the early adoption of a revised accounting standard for consolidations and the consolidation of all of the AlphaCat entities. As of year-end 2015 PaCRe, Ltd. had been deconsolidated from Validus' results and $470.3 million was returned to PaCRe investors, including $423.3 million to third parties.
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 2015, specialty primary business written in the Talbot segment through the company's Lloyd's Syndicate (1183) experienced a 7.5% decrease in overall total gross premiums written GPW, largely as a result of reduced premium in the Marine line as energy and cargo classes were impacted by the decline in oil and commodity prices during the year. The decline in premium at Talbot was more than offset by the inclusion by the first full year of results for Western World, which was acquired mid-year 2014. Specialty primary insurance written in the Talbot and Western World segments combined to represent 50.7% of overall GPW for Validus at year-end 2015, up from 49.4% in the prior year.
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 10-year operating history. The most recent five-year averages (2011-2015) are 82.1% and 9.6%, respectively. In 2015, Validus posted a calendar-year combined ratio of 79.7% with an ROE of 10.4%.
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 20% and 28% of common shareholders' equity at Jan. 1, 2016, but remain within expectations for the current rating category.
The company's financial leverage ratio is modest at 17% as of Dec. 31, 2015, up from 16.8% at year-end 2014. This increase reflects a 1.5% increase in shareholders' equity available to Validus from strong net earnings to over $3.6 billion at Dec. 31, 2015, offset by a decrease in noncontrolling interest ($154.6 million at year-end 2015) included in the leverage calculation.
At year-end 2015 Validus' 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. The company's low underwriting leverage enables it to preserve capital during periods that include underwriting volatility.
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;
--Continued profitable organic growth in the Western World segment consistent, with demonstrated success consistent with the Validus Re and Talbot segments.
--Net 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;
--Financial leverage ratio in excess of 25% or interest 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 come from foreign entities outside of the Bermuda group solvency environment, Validus' holding company ratings could be lowered reflecting a ring-fencing environment classification.
FULL LIST OF RATING ACTIONS
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 on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 16 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
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