On Wednesday, Moody’s Investors Service affirmed its ratings for Validus Holdings, Ltd., including the A3 insurance financial strength rating of the principal operating subsidiary Validus Reinsurance, Ltd.

The rating action follows Validus’ announced that it will acquire U.S. excess and surplus lines insurer Western World Insurance Group for $690.0 million.

Kevin Lee, the analyst for Validus Holdings, outline three factors supporting the affirmation:

  • Regardless of the acquisition, Moody’s believes Validus is relatively well positioned to cope with the current, significant challenges in the reinsurance industry.

Last week, Moody’s changed its outlook on the global reinsurance segment to negative.

  • Moody’s views Western World as a company with a mix of credit strengths and challenges; the company has a good track record in its core general liability product and contract binding division, but less success in other product lines and unproven track record in newer initiatives.
  • Moody’s believes the acquisition could potentially yield revenue synergies and a way for Validus to diversify further away from reinsurance, a credit positive.

Lee noted, however, that there is material uncertainty of realizing those diversifying benefits on a meaningful scale.

In the statement about the rating status, Moody’s noted that Validus is one of a select number of reinsurance companies that has turned a profit in each year since 2006, which fueled a change in rating outlook to positive (from stable) in September 2013.

“Although conditions in the reinsurance sector have deteriorated since last September, Moody’s believes Validus has a reasonable chance to emerge from these challenges in the top tier of an increasingly two-tier market, given its ability to provide significant capacity and value-added services to remain relevant with buyers and intermediaries,” Moody’s said.

While Moody’s said it views Western World as a weaker credit than Validus, citing the small size and poor performance in lines other than its core business, as well as some new unproven initiatives. Reserve adequacy for a newer Specialty Brokerage Division, representing 14 percent of 2013 direct written premiums, is inherently more uncertain due to limited historical data, Moody’s said, noting that this risk factor was mentioned in the Statement of Actuarial Opinion.

On the plus side, Moody’s noted a 50-year track record in Western World’s core E&S business for small and medium-sized businesses—and 20 consecutive years of reserve releases for that business.

“On balance, Moody’s views the acquisition as credit neutral for Validus. The acquisition is small enough that Western World’s…credit challenges should not overwhelm Validus’ credit profile.”

“The new platform could help Validus diversify further away from reinsurance, a credit positive, but execution risk is meaningful,” Moody’s said.

Moody’s listed other deal benefits, such as a broader distribution platform for Validus’ direct insurance products, which are now sold through its Lloyd’s syndicate Talbot, along with more options for cycle management.

“Realization of these benefits hinges on how receptive Western World’s distribution partners will be to new product offerings or pruning of unprofitable products — a significant uncertainty,” Moody’s said, adding that succession planning is also a key issue.

Source: Moody’s Investors Service