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

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