Best, S&P, Moody's React To Validus' IPCRe Purchase

NU Online News Service, Sept. 9, 2:19 p.m. EDT

Validus Holdings $1.6 billion acquisition of IPCRe Holdings--completed Friday after a bitter takeover battle--drew different reactions from three rating agencies.

A.M. Best Company said today it would have no impact on the two Bermuda-based reinsurers, and Moody's Investors Service affirmed Validus Holdings Ltd.'s "Baa2" long-term issuer rating and Validus Reinsurance Ltd.'s "A3" insurance financial strength rating. Moody's also moved Validus outlook to stable from negative.

Standard & Poor's in New York, however, lowered the IPC credit rating.

Oldwick, N.J.-based Best said it has removed the two Bermuda companies from under review with negative implications and affirmed the financial strength ratings of "A-minus" (Excellent) and issuer credit ratings (ICR) of "a-minus."

Its action includes IPCRe Europe Limited, Dublin, Ireland. Best said it also removed from under review with negative implications and affirmed the issuer credit rating of "bbb-minus" and the indicative ratings for securities available under the shelf registration of "bbb-minus" on senior debt, "bb-plus" on subordinated debt and "bb" on the preferred stock of Validus Holdings Ltd. The outlook assigned to the companies is "stable."

S&P said it lowered its counterparty credit rating on IPC Holdings Ltd. to "BBB-minus" from "BBB" and removed it from CreditWatch, where it was placed on June 16, 2009, with negative implications.

After IPC Holdings Ltd.'s shareholders approved the acquisition Friday, S&P said it aligned the counterparty credit rating on IPC Holdings Ltd. with that on Validus Holdings Ltd. ("BBB"/Positive).

S&P said the acquisition "will significantly enhance Validus' competitive position" by expanding its market presence in the global property catastrophe marketplace.

The firm noted also that Validus' combined company's pro forma capital base will be significantly higher, about $4 billion as of June 30. S&P said this should provide the group with a greater capacity to participate in programs and market opportunities and it expects the combined companies' capital adequacy will remain strong and that financial leverage will remain moderate.

Validus Holdings acquired IPCRe Holdings in exchange for a .9727 common voting share of Validus Holdings for each IPCRe common share and cash consideration of $7.50 per share.

Best said the acquisition "effectively put IPCRe into runoff as all renewal business going forward will be written by Validus."

The rating firm noted that management has indicated its intention to move capital from IPCRe to Validus "commensurate with the movement of risk as business renews."

The ratings, Best explained, "contemplate the prospective benefits that will be realized through the acquisition due to the larger capital base and market profile. However, it will take time to truly gauge these prospective benefits' impact on the Validus franchise."

According to Best, Validus' strengths are offset by susceptibility to low frequency, high severity events as a property catastrophe focused reinsurer and the increased uncertainty over the short term due to the business that was previously underwritten by IPCRe.

The stable outlook reflects the expectation that operating performance and risk-adjusted capitalization will continue to remain supportive of the current rating levels, said Best.

S&P said despite finding positive factors it is concerned about Validus' aggressive appetite for acquisitions, noting that in July 2007, Validus acquired Lloyd's syndicate Talbot Underwriting Holdings and effectively doubled its premium writings.

However, the firm said Validus' track record of a successful integration of Talbot to date partially allays these concerns. With property catastrophe risks constituting one of Validus' core lines of business, the group is familiar with IPC's property catastrophe book of business, which S&P said it expects to be quickly integrated into Validus' proprietary VCAPS underwriting system.

Moody's in New York also mentioned that the acquisition will allow Validus to see more business opportunities, citing its greater size, a reduction in financial leverage (to less than 10 percent debt-to-capital) and increased public float enhancing access to capital.

As negatives, it said the acquisition will increase Validus' natural catastrophe exposure meaningfully, based on annual aggregate modeled losses as a percent of equity.