TEXT-S&P raises Validus Re's financial strength rating to 'A'
Overview -- Bermuda-based Validus Reinsurance Ltd. has shown strong operating performance since inception, with earnings volatility somewhat mitigated through its strong catastrophe research and modeling functions. -- Validus has built a strong competitive position under its two underwriting platforms, Validus Re and Talbot, providing diversification in terms of reinsurance versus primary business, geographic spread, and specialized short-tail lines of business. -- We are raising our financial strength rating on Validus Reinsurance Ltd. to 'A' from 'A-' and our counterparty credit rating on its holding company, Validus Holdings Ltd., to 'BBB+' from 'BBB'. The outlook is stable. -- We expect 2012 gross premiums written to grow organically, in the mid-single-digit range, mainly in the Talbot segment. Rating Action On Aug. 23, 2012, Standard & Poor's Ratings Services raised its financial strength rating on Validus Reinsurance Ltd. (Validus Re) to 'A' from 'A-'and its counterparty credit rating on the holding company, Validus Holdings Ltd., to 'BBB+' from 'BBB' (together, the two companies are referred to as Validus). The outlook remains stable. Rationale Since beginning operations in 2006, Validus has shown strong operating performance with less volatility in underwriting performance than many peers. The company has also outperformed its peers in 2011, a year with substantial catastrophe losses around the globe. As a short-tail insurer and reinsurer with almost half of its premium writings in property-exposed business, Validus produced a combined ratio of 99.3% and a return on revenue (ROR) of 4.7% in a year when many reinsurance companies produced substantial underwriting losses. Notably, Validus did not produce underwriting losses in either its Talbot Holdings Ltd. segment or its Validus Re segment. We do recognize, however, that Validus was relatively underweight in catastrophe-affected territories such as Japan, Australia, and New Zealand. We believe that Validus's performance will continue to benefit from its strong catastrophe risk management. A subsidiary, Validus Research, employs a team of scientists and statisticians, many with PhDs and other advanced degrees, to research catastrophe risk. This allows Validus to supplement existing third-party catastrophe models and incorporate new science more quickly into its proprietary modeling, improving its exposure management and pricing capabilities. Validus also mitigates potential earnings volatility by diversifying its noncorrelated short-tail lines brought by its Talbot Syndicate 1183 operating at Lloyd's of London (which represented about half of total writings). Nevertheless, we believe that Validus's performance could materially fluctuate with a large U.S. catastrophe, like a hurricane. Validus has a strong competitive position within the property catastrophe and other short-tail lines of business, with $2.1 billion gross premiums written (GPW) in 2011. The group is well diversified in terms of reinsurance versus primary business, geographic spread, and specialized short-tail lines of business. Operating under two segments, Validus Re and Talbot, the company has a leading position in various lines of business and a presence in numerous global insurance hubs. The international noncatastrophe short-tail insurance writings and geographic diversification from Talbot balance the more U.S. concentrated property catastrophe writings of the Validus Re segment. Validus Research enables Validus to provide scientific research to its cedants, helping solidify its competitive position. This service and the ability to offer sizable capacity helps Validus maintain its position as an approved lead reinsurer for major cedants. Validus has also been able to capitalize three sidecars in the past couple of years, demonstrating its ability to bring solutions to market and further expand into the property catastrophe market without increasing its retained risk exposures. Outlook The outlook is stable. With Validus's expansion into emerging markets, we expect 2012 GPW to grow organically, in the mid-single-digit range, mainly in the Talbot segment. Geographically, growth will be focused on Latin America and Asia through the company's Miami; Santiago, Chile; and Singapore offices. As the company expands, we expect Validus's ERM function will meet the additional complexity in the business. Over the longer term, we expect operating performance to remain strong with an average combined ratio between 80% and 85% (with catastrophe and other large losses contributing 25 to 35 percentage points) and an average ROR of at least 20%. Results will likely be volatile due to the company's severity exposures, particularly to U.S. windstorms. We also expect the company to maintain its strong capitalization. An upgrade is unlikely over the next 12 to 24 months because of management's evolving corporate strategy and the inherent volatility in the company's risk profile. A negative rating action is possible if Validus doesn't meet our stated expectations, if its ERM capabilities fail to address the growing complexity, if it completes an acquisition that could compromise its risk profile, or if it experiences outlier losses in a significant catastrophe event. Related Criteria And Research -- Evaluating Insurers' Competitive Positions, April 22, 2009 -- Analysis Of NonLife Insurance Operating Performance, April 22, 2009 Ratings List Upgraded To From Validus Holdings Ltd. Counterparty Credit Rating BBB+/Stable/-- BBB/Stable/-- Validus Reinsurance Ltd. Financial Strength Rating Local Currency A/Stable/-- A-/Stable/-- Validus Holdings Ltd. Senior Unsecured BBB+ BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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