TEXT-S&P affirms Validus Re 'A', Validus Holdings 'BBB+' ratings

Overview
-- Bermuda-based Validus Reinsurance Ltd. announced that it will acquire
Flagstone Reinsurance Holdings S.A.
-- We expect the company to experience relatively low integration risk
due to short-tail reserves and limited integration of Flagstone's underwriting
operations.
-- We are affirming our 'A' financial strength rating on Validus
Reinsurance Ltd. and 'BBB+' counterparty credit rating on Validus Holdings
Ltd. The outlook remains stable.
-- We believe the acquisition will boost Validus's capital base and
property catastrophe premium writings, allowing the combined company to offer
increased capacity.

Rating Action
On Aug. 30, 2012, Standard & Poor's Ratings Services affirmed its 'A'
financial strength rating on Validus Reinsurance Ltd. (Validus Re) and its
'BBB+' counterparty credit rating on the holding company, Validus Holdings
Ltd. (we refer to the two companies together as Validus). The outlook remains
stable.

Rationale
On Aug. 30, 2012, Validus announced its acquisition of Flagstone Reinsurance
Holdings S.A. for $2 cash and 0.1935 Validus common shares per Flagstone
common share. Flagstone shareholders will own 12% of the combined entity.
Validus has an agreement with Lightyear Capital and Trilantic Partners
(collectively, 22.5% Flagstone common owners) that they will vote in favor of
the transaction.

Upon completion of the transaction, Validus expects to strengthen Flagstone's
reserves by $76 million, take $59 million of other charges, and record a $58
million bargain purchase gain. It will discontinue Flagstone's noncatastrophe
portfolio and migrate the property catastrophe book to, and optimized with,
Validus's Bermuda business. The acquisition will boost Validus's capital base
by almost $800 million with additional shareholder equity and Flagstones
junior subordinated debt. Although Validus could potentially have the largest
property catastrophe book in Bermuda, the overall business mix shift will be
modest.

We do not expect the acquisition to involve heavy integration of Flagstone's
underwriting operations. This and Flagstone's short-tail reserves mitigate the
integration risk of this deal. However, Flagstone's various legal entities in
Luxembourg and Switzerland raise some concern around the fungibility of
capital.

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.

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 Validus Re's more
U.S.-concentrated property catastrophe writings. 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
help 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 (excluding the effect of the proposed
Flagstone acquisition), 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 offices in Miami, Singapore, and Santiago, Chile.

As the company expands, we expect Validus's enterprise risk management (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 of 80% to 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.

Considering the recent upgrade, an additional upgrade is unlikely over the
next 24 months because of management's evolving corporate strategy and the
potentially high volatility inherent 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 that result in a loss of
over one year of earnings or a 10% or greater loss of capital.

Related Criteria And Research
-- Evaluating Insurers' Competitive Positions, April 22, 2009
-- Analysis Of NonLife Insurance Operating Performance, April 22, 2009

Ratings List
Ratings Affirmed

Validus Holdings Ltd.
Counterparty Credit Rating BBB+/Stable/--

Validus Reinsurance Ltd.
Financial Strength Rating
Local Currency A/Stable/--

Validus Holdings Ltd.
Senior Unsecured BBB+
Preferred Stock BBB-

Complete ratings information is available to subscribers of RatingsDirect on
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