Cat Risk Limits Key to New Validus Bond Rating

Validus Holdings received a rating of Baa2 on a proposed debt with Moody’s adding the reinsurer’s debt could be quickly changed depending on how the Bermuda-based company manages its risk limits.

According to Moody’s, Validus is proposing to sell $250 to $350 million of 30-year senior unsecured notes. The proceeds of the bonds will be used for “general corporate purposes” including new dividends or a stock repurchase under an existing $400 million share repurchase authorization.

Validus purchased IPC for $1.65 billion in cash and stock in July after several months of bidding between rival insurers.

Moody’s added that Validus’ adherence to internal risk will be a “key pressure point for its ratings” in the near future.

Specifically, existing debt could be downgraded is Validus experiences an erosion of shareholders’ equity of more than 10 percent over a rolling twelve month period or if there was an increase in the reinsurers natural catastrophe exposure, Moody’s said.

The bond ratings could also be pushed down by fixed charge coverage below 4x or if Validus “deviates” from the risk limits it has set for itself.

The debt rating could be improved if the reinsurance tightened of internal natural catastrophe risk limits and reduced in non-natural catastrophe exposures such as terrorism and political risk coverages.

Moody’s added that a reduction of 1-in-250 year net annual aggregate modeled loss to pre-IPC merger levels could also be a factor in a debt upgrade.

The rating agency said Validus should be particularly careful as the writes significant business in classes such as direct and facultative property risks, and war and terrorism coverage “which are difficult to quantify with confidence.”

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