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Announcement:

Moody's affirms Validus Holdings, Flagstone Re on merger announcement; Flagstone Re outlook changed to stable from negative

31 Aug 2012

New York, August 31, 2012 -- Moody's Investors Service has affirmed the ratings of Validus Holdings Ltd. (Baa2 senior unsecured), Validus Reinsurance Ltd. (A3 insurance financial strength), Flagstone Reinsurance Holdings, S.A. (Baa3 long-term issuer rating) and Flagstone Reassurance Suisse, S.A. (A3 insurance financial strength rating) following an announcement that Validus has agreed to acquire Flagstone with a combination of cash and stock. The outlook for Validus' ratings remains stable. The outlook for Flagstone Reinsurance Suisse, S.A. has been changed to stable from negative. The outlook for Flagstone Reinsurance Holdings, S.A. has been changed to developing from negative.

RATINGS RATIONALE

Moody's rating actions assume a successful closing of the transaction, which is subject to approval of regulators and Flagstone's shareholders. Certain Flagstone shareholders, who collectively own approximately 22.5% of the outstanding shares, have already agreed to vote in favor of the transaction. In the event the transaction does not close, the outlook for Flagstone may revert back to negative.

Under the terms of the agreement, Flagstone shareholders will receive 0.1935 Validus voting common shares and $2.00 in cash for each Flagstone share, for a total aggregate equity value of $623.2 million. The purchase price is a 19.4% premium to Flagstone's August 29, 2012 share price of $7.06 and 73.2% of Flagstone's June 30, 2012 diluted book value per share of $11.52.

From the Validus perspective, Moody's believes the transaction is credit neutral to Validus' ratings as the size of Flagstone ($0.8 billion shareholders' equity at June 30, 2012) is relatively modest compared to the size of Validus ($3.5 billion shareholders' equity at June 30, 2012).

Assuming catastrophes do not erode Flagstone's book value between now and closing, Validus will receive some financial and strategic benefit, albeit small. Financially, Validus expects to record a small bargain purchase gain of $58.2 million at closing. Strategically, Validus will become the largest Bermuda writer of property catastrophe reinsurance premiums. Validus' financial leverage will rise moderately because of the cash outlay associated with the purchase and assumption of $250 million of Flagstone junior subordinated debentures. Net catastrophe leverage could rise, depending on how much of Flagstone's business is non-renewed and how much of Flagstone's extensive retrocession protection is non-renewed.

From the Flagstone perspective, Moody's believes the transaction is positive for Flagstone policyholders. The company had a significant setback in 2011 as worldwide catastrophe losses eroded capital and it had to rely extensively on retrocession protection to protect capital. Following the acquisition, we anticipate that Validus will seek to renew Flagstone's business on the balance sheet of Validus Reinsurance Ltd, leading to diminishing risk and capital at Flagstone Reassurance Suisse, S.A. over time.

The developing outlook on Flagstone Reinsurance Holdings, S.A. reflects the uncertainty regarding the post-merger organization structure. There is currently $250 million of debt (unrated) at this holding company, which is supported by dividends from the Flagstone operating company. Post-merger, it is unclear whether the Flagstone holding company will still benefit from this direct credit support, given the uncertainty about the group's final organizational structure and plan for the Flagstone operating company.

The following ratings have been affirmed with a stable outlook:

Validus Reinsurance, Ltd. -- insurance financial strength at A3;

Validus Holdings, Ltd. -- senior unsecured debt at Baa2, long-term issuer rating at Baa2, provisional senior unsecured debt at (P)Baa2, provisional subordinated debt at (P)Baa3, provisional preferred stock at (P)Ba1.

The following rating has been affirmed with a stable outlook:

Flagstone Reassurance Suisse SA -- insurance financial strength at A3.

The following rating has been affirmed with a developing outlook:

Flagstone Reinsurance Holdings, S.A. -- long term issuer rating at Baa3.

Validus Holdings, Ltd. is a provider of reinsurance and insurance, conducting its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. ("Validus Re") and Talbot Holdings Ltd. ("Talbot"). Validus Re is a Bermuda based reinsurer focused on short-tail lines of reinsurance. Talbot is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd's insurance market through Syndicate 1183. For the first six months of 2012, the company reported gross premiums written of $1,464 million, net income available to Validus of $$292 million and total shareholders' equity available to Validus of $3,478 million.

Flagstone Reinsurance Holdings, S.A. is a Luxembourg holding company whose subsidiaries write property, property catastrophe, and specialty reinsurance worldwide. For the first six months of 2012, the company reported gross premiums written of $341 million, net income attributable to Flagstone of $53 million and total shareholders' equity available to Flagstone of $837 million.

The principal methodology used in rating Flagstone was the Moody's Global Rating Methodology for Reinsurers published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Kevin Lee
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Stanislas F Rouyer
Senior Vice President
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Validus Holdings, Flagstone Re on merger announcement; Flagstone Re outlook changed to stable from negative
No Related Data.
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