Edgar Filing: VALIDUS HOLDINGS LTD

2014.12.31 - 10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number 001-33606

VALIDUS HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)



BERMUDA	98-0501001
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

29 Richmond Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

(441) 278-9000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class:		Name of Each Exchange on Which Registered:
Common Shares, $0.175 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014 was $2,647.4 million computed upon the basis of the closing sales price of the Common Shares on June 30, 2014. For the purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

As of February 20, 2015, there were 83,243,666 outstanding Common Shares, $0.175 par value per share, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information from certain portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2014.



PART I		1
Item 1.	Business	1
Item 1A.	Risk Factors	33
Item 1B.	Unresolved Staff Comments	50
Item 2.	Properties	50
Item 3.	Legal Proceedings	50
Item 4.	Mine Safety Disclosure—Not Applicable	52
PART II		53
Item 5.	Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	53
Item 6.	Selected Financial Data	56
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	128
Item 8.	Financial Statements and Supplementary Data	130
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	130
Item 9A.	Controls and Procedures	130
Item 9B.	Other Information	131
PART III		132
Item 10.	Directors, Executive Officers and Corporate Governance	132
Item 11.	Executive Compensation	132
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	132
Item 13.	Certain Relationships and Related Transactions, and Director Independence	132
Item 14.	Principal Accountant Fees and Services	132
PART IV		133
Item 15.	Exhibits and Financial Statement Schedules	133
Signatures		138

Index to Consolidated Financial Statements and Financial Statements Schedules		140

This Annual Report on Form 10-K contains “Forward-Looking Statements” as defined in the Private Securities Litigation Reform Act of 1995. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such Forward-Looking Statements is set forth herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements.”

PART I

All amounts presented in this part are in thousands of U.S. dollars except as otherwise noted.

Item 1. Business

Overview

Validus Holdings, Ltd. was incorporated under the laws of Bermuda on October 19, 2005. Hereinafter, "the Company", "us" or "we" is used to describe any or all of Validus Holdings, Ltd. and its subsidiary companies. The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting: Validus Re, AlphaCat, Talbot and Western World. Validus Re is a Bermuda-based reinsurance segment focused on short-tail lines of reinsurance. AlphaCat is a Bermuda-based investment adviser, managing capital from third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. Talbot is a specialty insurance segment operating within the Lloyd's insurance market through Syndicate 1183. Western World is a specialty excess and surplus lines insurance segment operating within the U.S. commercial market.

We seek to establish ourselves as a leader in the global insurance and reinsurance markets. Our principal operating objective is to use our capital efficiently by underwriting primarily short-tail insurance and reinsurance contracts with superior risk and return characteristics. Our primary underwriting objective is to construct a portfolio of short-tail insurance and reinsurance contracts that maximizes our return on equity subject to prudent risk constraints on the amount of capital we expose to any single event. We manage our risks through a variety of means, including contract terms, portfolio selection, diversification criteria, including geographic diversification criteria, and proprietary and commercially available third-party vendor catastrophe models.

Since our formation in 2005, we have been able to achieve substantial success in the development of our business. Selected examples of our accomplishments are as follows:


•	Raising approximately $1.0 billion of initial equity capital in December 2005 and underwriting $217.4 million in gross premiums written for the January 2006 renewal season;


•	Building a risk analytics staff comprised of over 40 experts, many of whom have PhDs and Masters degrees in related fields;


•	Developing Validus Capital Allocation and Pricing System (“VCAPS”), a proprietary computer-based system for modeling, pricing, allocating capital and analyzing catastrophe-exposed risks;


•	Acquiring all of the outstanding shares of Talbot Holdings Ltd. on July 2, 2007;


•	Completing an initial public offering (“IPO”) on July 30, 2007;


•	Acquiring all of the outstanding shares of IPC Holdings Ltd. (“IPC”) on September 4, 2009;


•	Raising $450.0 million of third party capital for PaCRe, Ltd. ("PaCRe") a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance, on April 2, 2012 and a further $58.5 million on May 1, 2013;


•	Acquiring all of the outstanding shares of Flagstone Reinsurance Holdings, S.A. ("Flagstone") on November 30, 2012;


•	Acquiring all of the outstanding shares of Western World Insurance Group, Inc. ("Western World") on October 2, 2014;


•	Successfully launching a series of sidecars beginning on May 25, 2011 and most recently, raising $127.0 million of third party capital for AlphaCat 2015, Ltd. ("AlphaCat 2015") on December 29, 2014; of which, $117.4 was funded as at December 31, 2014. The remaining commitment of $9.6 million will be called and deployed throughout 2015;


•	Managing third party capital of $785.9 million for the AlphaCat Insurance Linked Securities ("ILS") funds as at December 31, 2014;


•	Delivering a 12.4% compounded annual growth in book value per diluted common share plus accumulated dividends from formation to December 31, 2014;


•	Declaring a $2.00 special dividend per common share and per common share equivalent on February 6, 2013 and, on that same date, increasing the annual dividend by 20% from $1.00 to $1.20 per common share and per common share equivalent;


•	Further increasing the annual dividend by an additional 6.7% from $1.20 to $1.28 per common share and per common share equivalent on February 3, 2015; and


•	Repurchasing approximately 71.4 million common shares for an aggregate purchase price of approximately $2,284.8 million and paying an aggregate amount of $947.0 million in dividends from formation to February 20, 2015.

Our Operating Subsidiaries

The following chart shows how our Company and its principal subsidiaries operate:

For a complete list of the Company’s subsidiaries, see Exhibit 21.


(a)	AlphaCat 2014 and AlphaCat 2015 are non-consolidated operating affiliates that are owned 19.6% and 20.0%, respectively, by the Company.


(b)	One of the funds is consolidated and the remaining funds are owned 7.9%, 39.7% and 9.1% by the Company.


(c)	The Company has an equity interest of 10% in PaCRe, the remaining 90% interest is held by third party investors.

Operating Segments

Validus Re: The Validus Re segment operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Validus Re concentrates on first-party property and other reinsurance risks commonly referred to as short-tail in nature due to the relatively brief period between the occurrence and payment of a claim.

Validus Reinsurance Ltd. was registered as a Class 4 insurer under The Insurance Act 1978 of Bermuda, amendments thereto and related regulations (the “Insurance Act”) in November 2005. It commenced operations with approximately $1.0 billion of equity capital and a balance sheet unencumbered by any historical losses relating to the 2005 hurricane season, the events of September 11, 2001, asbestos or other legacy exposures affecting our industry.

Validus Re entered the global reinsurance market in 2006 during a period of imbalance between the supply of underwriting capacity available for reinsurance on catastrophe-exposed property, marine and energy risks and demand for such reinsurance coverage.

On September 4, 2009, the Company acquired all of the outstanding shares of IPC. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. For segmental reporting purposes, the results of IPC’s operations since the acquisition date have been included within the Validus Re segment in the Consolidated Financial Statements.

On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone, strengthening the Company's leading property catastrophe reinsurance and short-tail specialty insurance platform. The primary lines in which Flagstone conducted business were property catastrophe reinsurance, property pro rata and per-risk excess and short-tail specialty and casualty reinsurance such as aviation, energy, personal accident and health, satellite, marine and workers' compensation catastrophe. For segmental reporting purposes, the results of Flagstone’s reinsurance operations since the acquisition date have been included within the Validus Re segment in the Consolidated Financial Statements. As part of this acquisition, the Company acquired Flagstone Reassurance Suisse, SA and renamed it Validus Reinsurance (Switzerland) Ltd ("Validus Re Swiss"). Validus Re Swiss is based in Zurich, Switzerland. Through this local presence, the Company is in a position to closely follow and respond effectively to the changing needs of the various European and Bermuda insurance markets. Validus Re Swiss is licensed by the Swiss Financial Market Supervisory Authority, or FINMA, in Switzerland. Validus Re Swiss is also licensed as a permit company in Bermuda under the Companies Act and is registered in Bermuda as a Class 4 insurer under the Insurance Act, operating through its Bermuda branch, which complements our Swiss-based underwriters with a separate Bermuda underwriting platform.

The following are the primary lines in which Validus Re conducts its business. Details of gross premiums written by line of business, are provided below:



	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)
Property	$	631,032	55.5	%	$	744,630	59.9	%	$	771,617	68.2	%
Marine	190,959		16.8	%	194,001		15.6	%	257,469		22.7	%
Specialty	314,919		27.7	%	303,891		24.5	%	102,873		9.1	%
Total	$	1,136,910	100.0	%	$	1,242,522	100.0	%	$	1,131,959	100.0	%

Property: Validus Re underwrites property catastrophe reinsurance, property per risk reinsurance and property pro rata reinsurance.

Property catastrophe: Property catastrophe reinsurance provides reinsurance for insurance companies’ exposures to an accumulation of property and related losses from separate policies, typically relating to natural disasters or other catastrophic events. Property catastrophe reinsurance is generally written on an excess of loss basis, which provides coverage to insurance companies when aggregate claims and claim expenses from a single occurrence for a covered peril exceed a certain amount specified in a particular contract. Under these contracts, the Company provides protection to an insurer for a portion of the total losses in excess of a specified loss amount, normally up to a maximum amount per loss and/or an aggregate amount across multiple losses, as specified in the contract. In the event of a loss, most contracts provide for coverage of a second occurrence following the payment of a premium to reinstate the coverage under the contract, which is referred to as a reinstatement premium. The coverage provided under excess of loss reinsurance contracts may be on a worldwide basis or limited in scope to specific regions or geographical areas. Coverage can also vary from “all property” perils, which is the most expansive form of coverage, to more limited coverage of specified perils such as windstorm-only coverage. Property catastrophe reinsurance contracts are typically “all risk” in nature,

providing protection against losses from earthquakes and hurricanes, as well as other natural and man-made catastrophes such as floods, tornadoes, fires and storms. The predominant exposures covered are losses stemming from property damage and business interruption coverage resulting from a covered peril. Certain risks, such as war or nuclear contamination may be excluded, partially or wholly, from certain contracts. Gross premiums written on property catastrophe business during the year ended December 31, 2014 were $513.4 million.

Property per risk: Property per risk reinsurance provides reinsurance for insurance companies’ excess retention on individual property and related risks, such as highly-valued buildings. Per risk reinsurance protects insurance companies on their primary insurance risks on a “single risk” basis. A “risk” in this context might mean the insurance coverage on one building or a group of buildings or the insurance coverage under a single policy which the reinsured treats as a single risk. Coverage is usually triggered by a large loss sustained by an individual risk rather than by smaller losses which fall below the specified retention of the reinsurance contract. Such property per risk coverages are generally written on an excess of loss basis, which provides the reinsured with protection beyond a specified amount up to the limit set within the reinsurance contract. Gross premiums written on property per risk business during the year ended December 31, 2014 were $27.5 million.

Property pro rata: Property pro rata contracts require that the reinsurer share the premiums as well as the losses and loss expenses in an agreed proportion with the cedant. Gross premiums written on property pro rata business during the year ended December 31, 2014 were $90.2 million.

Marine: Validus Re underwrites reinsurance on marine risks covering damage to or losses of marine vessels and cargo, third-party liability for marine accidents and physical loss and liability from principally offshore energy properties. Validus Re underwrites marine on an excess of loss basis and on a pro rata basis. Gross premiums written on marine business during the year ended December 31, 2014 were $191.0 million.

Specialty: Validus Re underwrites other lines of business depending on an evaluation of pricing and market conditions, which include aerospace and aviation, agriculture, financial, terrorism, life, accident and health, nuclear, workers’ compensation, crisis management, contingency, motor, technical, composite and trade credit lines. The Company seeks to underwrite specialty lines with very limited exposure correlation with its property, marine and energy portfolios. With the exception of the aerospace and aviation, agriculture, financial and trade credit lines of business, which have a meaningful portion of its gross premiums written volume on a proportional basis, the Company’s other specialty lines are written on an excess of loss basis. Gross premiums written on specialty business during the year ended December 31, 2014 were $314.9 million.

AlphaCat: AlphaCat Managers, Ltd. ("AlphaCat Managers") is an asset manager which has strategic relationships that leverage the Company’s underwriting and investment expertise. As an asset manager, AlphaCat Managers’ primary source of income is earned through management, performance and underwriting fees.

The AlphaCat segment is a core element within the Company's strategic initiative to expand into capital market activities by participating in the market for ILS. ILS are financial instruments whose fundamental value is determined by insurance losses caused by natural catastrophes such as major earthquakes and hurricanes. As the returns on ILS are primarily driven by natural catastrophes, when carefully structured, they are generally uncorrelated with the overall financial markets, making ILS an attractive asset class for capital market investors.

AlphaCat invests in private reinsurance transactions, as well as catastrophe bonds, a common type of ILS issued by insurance and reinsurance companies. AlphaCat leverages the Company's extensive business sourcing, underwriting, research and analytic capabilities to construct ILS portfolios subject to prudent risk constraints.

AlphaCat investors access this uncorrelated asset class through various funds and sidecars that participate in the market via AlphaCat Reinsurance Ltd. ("AlphaCat Re"), a Bermuda provider of fully collateralized property catastrophe reinsurance and retrocession capacity and AlphaCat Master Fund Ltd. ("AlphaCat Master Fund"), a Bermuda investment fund investing in reinsurance related capital markets transactions.

The various funds and sidecars are included in the results of the AlphaCat segment through either consolidation or as income from operating affiliates, depending on the assessment of accounting treatment under the appropriate U.S. GAAP guidance. The results of PaCRe are consolidated in the AlphaCat segment with the offsetting 90% third party ownership accounted for within noncontrolling interest.

During the first quarter of 2012, to better align the Company’s operating and reporting structure with its strategy, there was a change in the Company's segment structure. This change included reporting the AlphaCat group of companies as a separate operating segment. The AlphaCat segment currently includes AlphaCat Re 2011 Ltd. ("AlphaCat Re 2011") (off-risk), AlphaCat Re 2012 Ltd. ("AlphaCat Re 2012") (off-risk), AlphaCat 2013, Ltd. ("AlphaCat 2013") (off-risk), AlphaCat 2014, Ltd. ("AlphaCat 2014"), AlphaCat 2015, Ltd. ("AlphaCat 2015"), PaCRe, the AlphaCat ILS funds and the BetaCat ILS funds.

The following are the primary financial indicators for the AlphaCat segment:



	Year ended December 31,
(Dollars in thousands)	2014		Change		2013		Change		2012
Managed gross premiums written	$	135,181	(7,965	)	$	143,146	(4,945	)	$	148,091
Other insurance related income	27,122		698		26,424		3,195		23,229
Income from operating affiliates	17,723		3,434		14,289		1,709		12,580

Managed gross premiums written: Managed gross premiums written includes gross premiums written by our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012. A reconciliation of managed gross premiums written to gross premiums written, the most comparable U.S. GAAP financial measure, is presented in the section entitled "Non-GAAP Financial Measures." Managed gross premiums written for the year ended December 31, 2014 were $135.2 million.

Other insurance related income: Other insurance related income primarily includes third party and related party management and performance fee income. Other insurance related income for the year ended December 31, 2014 was $27.1 million.

Income from operating affiliates: Income from operating affiliates includes income from our non-consolidated operating affiliates accounted for as equity method investments. At December 31, 2014, AlphaCat's non-consolidated operating affiliates were AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and three of the AlphaCat ILS funds. For further details on the operating affiliates, refer to Note 9 "Investments in affiliates" to the Consolidated Financial Statements in Part II, Item 8. Income from operating affiliates for the year ended December 31, 2014 was $17.7 million.



	Assets Under Management
(Dollars in thousands)	As at December 31, 2014		As at December 31, 2013
Related party	$	346,907	$	392,384
Third party	1,533,840		1,204,562
Total	$	1,880,747	$	1,596,946

Assets under management: Assets under management ("AUM") represents total assets managed by AlphaCat Managers on behalf of related and third party investors. AUM includes the assets of AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015, PaCRe, the AlphaCat ILS funds and the BetaCat ILS funds. AUM as at December 31, 2014 was $1.9 billion.

Talbot: On July 2, 2007, the Company acquired all of the outstanding shares of Talbot Holdings Ltd. Talbot Holdings Ltd. is the Bermuda parent of a specialty insurance group primarily operating within the Lloyd’s insurance market through Syndicate 1183. The acquisition provided the Company with significant benefits in terms of product line and geographic diversification as well as offering the Company broader access to underwriting expertise. Similar to Validus Re, Talbot writes primarily short-tail lines of business but, as a complement to Validus Re, focuses mostly on insurance, as opposed to reinsurance risks, and on specialty lines where Validus Re currently has limited or no presence (e.g., war, financial institutions, contingency and accident and health). In addition, Talbot provides the Company with access to the Lloyd’s marketplace where Validus Re does not operate. As a London-based insurer, Talbot also writes the majority of its premiums on risks outside the United States. Talbot’s team of underwriters have, in many cases, spent most of their careers writing niche, short-tail business and bring their expertise to bear on expanding the Company’s short-tail insurance franchise.

The Company has expanded and diversified its business through Syndicate 1183’s access to Lloyd’s license agreements with regulators around the world. Talbot Underwriting Risk Services Ltd. (London), Talbot Underwriting Services, (U.S.) Ltd. (New York), Talbot Underwriting (MENA) Ltd. (Dubai), Validus Reaseguros, Inc. (Miami), Validus Re Chile S.A. (Chile), Talbot Risk Services (Labuan) Pte Limited (Malaysia), and Talbot Risk Services Pte, Ltd. (Singapore and Australia), act as approved Lloyd’s coverholders for Syndicate 1183.

The following are the primary lines in which Talbot conducts its business. Details of gross premiums written by line of business are provided below:



	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)
Property	$	337,210	30.6	%	$	345,831	31.7	%	$	324,910	30.1	%
Marine	392,701		35.6	%	381,238		34.9	%	396,207		36.7	%
Specialty	371,859		33.8	%	364,821		33.4	%	357,519		33.2	%
Total	$	1,101,770	100.0	%	$	1,091,890	100.0	%	$	1,078,636	100.0	%

Property: The main sub-classes within the property class are International and North American direct and facultative contracts, lineslips and binding authorities, together with a book of business written on a treaty reinsurance basis. The business written is mostly commercial and industrial insurance. Coverage provided includes all risks of direct physical loss or damage, business interruption and natural catastrophe perils. Property also includes onshore energy and construction business. Within the onshore energy sector, covered occupancies include oil, gas, petrochemicals, chemical, power generation and utilities and process industries. Coverage is typically all risks and includes machinery breakdown and business interruption where required. The primary focus within the construction line is on major capital projects, placed on a direct or facultative subscription basis. The business is mainly short-tail with premiums for reinsurance and direct and facultative business, substantially earned within 12 months and premiums for lineslips and binding authorities mainly earned within 12 months of the expiry of the contract, however there are a minority of risks with long-term policies. Gross premiums written on property business during the year ended December 31, 2014 were $337.2 million, including $55.2 million of treaty reinsurance.

Marine: The main types of business within the marine class are hull, cargo, offshore energy, marine and energy liabilities, yachts and a book of business written on a treaty reinsurance basis. Hull consists primarily of ocean going vessels and covers worldwide risks on an all risks or total loss only basis. Cargo consists of worldwide transits with a particular emphasis on oil cargo, project cargo, pre-launch satellite and space risks, specie, fine art and high value motor vehicles. Offshore energy covers a variety of oil and gas industry exploration and production risks. The marine and energy liability account provides cover for protection and indemnity clubs and a wide range of companies operating in the marine and energy sectors. Most business written is short-tail, enabling a quicker and more accurate picture of expected profitability than is the case for long-tail business. The marine and energy liability account, which makes up $59.8 million of the $392.7 million of gross premiums written during the year ended December 31, 2014, is the primary long-tail business in this class.

Specialty: This class consists of war (comprising marine & aviation war, political risks and political violence, including war on land), financial institutions, contingency, accident and health, aviation direct and aviation treaty. With the exception of aviation treaty, most of the business within the specialty class is written on a direct or facultative basis or under a binding authority through a coverholder. Gross premiums written on the specialty business during the year ended December 31, 2014 were $371.9 million.

War: The marine and aviation war account covers physical damage to aircraft and marine vessels caused by acts of war and terrorism. The political risk account deals primarily with expropriation, contract frustration/trade credit, kidnap and ransom, and malicious and accidental product tamper. The political violence account mainly insures physical loss to property or goods anywhere in the world, caused by war, terrorism or civil unrest. This class is often written in conjunction with cargo, specie, property, energy, contingency and political risk. The period of the risks can extend up to 36 months and beyond. Gross premiums written on war business during the year ended December 31, 2014 were $189.7 million.

Aviation: The aviation account insures major airlines, airport operations, aviation products and airports, general aviation, satellites and a book of business written on a treaty reinsurance basis. The coverage includes excess of loss treaties with medium to high attachment points. Gross premiums written on aviation business during the year ended December 31, 2014 were $93.5 million.

Financial Institutions: Talbot’s financial institutions team underwrites bankers blanket bond, commercial crime, computer crime, professional indemnity and directors’ and officers’ coverage for various types of financial institutions and similar companies. The team also provides professional indemnity and directors' and officers' coverage to a more general selection of clients. Bankers blanket bond and commercial crime insurance products are specifically designed to protect against direct financial loss caused by fraud/criminal actions and mitigate the damage such activities may have on the asset base of the insured. Computer crime insurance protects against the misappropriation of funds and assets via the insured's computer system. Professional indemnity insurance protects businesses in the event that legal action is taken against them by third parties claiming professional negligence. Directors’

and officers’ insurance protects directors and officers against personal liability for losses incurred by a third party due to negligent performance by a director or officer. The financial institutions account is longer tail business as the periods of time between the occurrence, reporting and settlement of claims can be several years. Gross premiums written on financial institutions business for the year ended December 31, 2014 were $40.3 million.

Accident and Health: The accident and health account provides insurance in respect of individuals in both their personal and business activity together with corporations where they have an insurable interest relating to death or disability of employees or those under contract. Gross premiums written on accident and health business during the year ended December 31, 2014 were $26.4 million.

Contingency: The main types of covers written under the contingency account are event cancellation, non-appearance and prize indemnity business. Gross premiums written on contingency business during the year ended December 31, 2014 were $21.9 million.

Western World: On October 2, 2014, the Company acquired all of the outstanding shares of Western World, a U.S. based specialty excess and surplus lines insurance company. The acquisition provided the Company with enhanced access to the specialty U.S. commercial insurance market, the world's largest short-tail market, complementing the Company's existing market positions in both Bermuda reinsurance and the Lloyd's marketplace and increasing the Company's ability to leverage operational strengths in short-tail classes of business. In addition, the acquisition improves the Company's ability to manage (re)insurance cycles.

Western World primarily insures small to medium size commercial and institutional risks covering general liability, professional liability, products liability, miscellaneous malpractice and property classes through three wholly owned insurance subsidiaries: Western World Insurance Company ("WWIC"), Tudor Insurance Company ("Tudor") and Stratford Insurance Company ("Stratford"). WWIC, Tudor and Stratford are domiciled in New Hampshire. WWIC operates as a surplus lines insurer in all other jurisdictions. Tudor is licensed as a domestic surplus lines insurer in New Hampshire and is authorized to conduct business as a surplus lines insurer in all other jurisdictions. Stratford operates as an admitted insurer in 49 jurisdictions.

The following are the primary lines in which Western World conducts its business. Details of gross premiums written by line of business are provided below:



	Year Ended December 31, 2014 (a)
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)
Property	$	9,983	15.3	%
Liability	55,252		84.7	%
Total	$	65,235	100.0	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Property: This class consists of habitational and mercantile risks and is primarily offered on a package basis with the liability coverage. Gross premiums written on property business during the year ended December 31, 2014 were $10.0 million.

Liability: This class consists of occurrence-based coverage for contractors, dwellings, special events, manufacturers, social workers, drug clinics and exercise and health facilities. Coverage is also provided on a claims-made basis for lines such as directors' and officers', and errors and omissions liability. Gross premiums written on the liability business during the year ended December 31, 2014 were $55.3 million.

Enterprise Risk Management

Risk Management Framework: The Company believes in having a culture that embraces sound risk management practices at all levels of the organization. We have therefore implemented an Enterprise Risk Management (“ERM”) framework (the “Framework”) that is aligned with the Company’s culture and responds to the needs of the business. The Framework has been established to identify, assess, quantify and manage risks and opportunities. In particular it is designed to:


•	Establish the principles by which the Company can evaluate the risk/reward trade-offs associated with key strategic and tactical decisions.


•	Establish a risk governance structure that, in respect of all activities related to ERM, operates with clearly defines roles and responsibilities.


•	Establish minimum requirements that must be met by each of the Company’s segments.


•	Identify and assess all risks and causes of risks arising out of the Company’s strategic initiatives, internal processes, and external environment.


•	Establish a set of responses to manage the Company’s risks within its stated risk appetite and risk tolerances.


•	Establish procedures through which near-miss and actual incidents, that either have the potential to impact or have impacted the Company, are reported and reviewed in order to inform the risk identification and assessment process.

Risk Governance: Our risk governance philosophy reflects the overall governance of the Company, with the segments given broad autonomy over the management of their business, while adhering to the overall strategy of the Company. Similarly, the segments have broad operational latitude over their risk management functions while staying within the parameters set by the Company.

Our risk governance structure has the flexibility to allow integration of Western World into the Company while taking into account their long history, work culture and risk practices. Western World’s existing risk management is complemented by our experience in implementing the Company's risk framework. We will leverage our regulatory experience in Bermuda and London to facilitate Western World’s compliance with the U.S. Own Risk Solvency Assessment ("ORSA") requirements.

The Company’s Board of Directors has established a separate Risk Committee ("RC") that is governed by a charter which is updated and reviewed periodically by the Board of Directors. The RC is responsible for, among other things, approving the Framework, working with management to ensure ongoing, effective implementation of the Framework and reviewing the Company’s specific risk limits as defined in the Framework, including limits related to major categories of risk. The implementation of risk policies and oversight of risk management is the responsibility of the Group Risk Management Committee ("GRMC"). The GRMC reports to the RC and is governed by a charter that is reviewed and approved annually by the RC. The GRMC also has two subcommittees, the Model Risk Subcommittee and the Operational Risk Subcommittee, both of which are governed by charters that are reviewed annually by the RC. Various risk policies are in place to facilitate consistent risk assessment across the Company and to ensure that strategic business decisions are supported by effective modeling and analysis.

Risk Appetite: The Company's risk appetite is expressed through a series of qualitative and quantitative statements, principles, limits, and tolerances that, in the aggregate, convey the Company's risk and reward preferences and set the risk parameters within which the Company and its segments operate. The risk appetite is proposed by management and approved by the Board of Directors.

The significant quantitative measures include meeting minimum returns on capital and risk-adjusted capital over a full insurance industry cycle, managing the probability of break-even or better and meeting or exceeding budgeted net income over a calendar year, and managing the probability of losing specified percentages of shareholders’ equity in a calendar year. They also include probability thresholds in respect of maintaining a buffer above regulatory and rating agency capital levels.

The Company also sets levels of concentration risks within its risk appetite, including those related to probable maximum losses, zonal aggregates and the contribution of various risk categories to the overall assessment of the Company’s risk capital.

Risk Classification: Risks are broadly divided into those that the Company assumes explicitly and from which it derives income and those that are a by-product of the operating and business environment, from which the Company does not earn income.

The risks assumed are categorized as catastrophe, reserve and premium risks (also together referred to as insurance risk), market (or investment) risk and credit risk. The Company’s goal is to get adequately compensated for these risks, while creating optimal insurance and investment portfolios subject to the constraints of the Company’s risk appetite. The remaining risks are categorized as operational and strategic risks, which typically include emerging risks, for which the Company’s goal is to identify, assess and mitigate to the extent considered appropriate.

Risk Ownership: The Company’s risk management philosophy is to entrust risk identification and control activities with the employees who have the responsibility for and expertise in the areas giving rise to each risk. This not only creates workflow efficiencies but also promotes awareness of and accountability for risk at all levels of the Company. As such, primary risk ownership is assigned to the managers of functional areas. The risk identification and control activities are embedded in the job descriptions of risk owners and control operators and monitored by the GRMC.

Risk Assessment, Control and Mitigation: The Company performs a regular risk assessment process that considers the likelihood and impact of causes of risk, both before and after the existence of relevant controls. The approaches used to identify and update causes of risk include scenario building, incident and near-miss reporting and market intelligence. Controls have been established to appropriately manage the likelihood and impact of risks, focused on those with the most significance and after considering the tolerance level established for each risk. New controls may also be designed as a result of the incident reporting process.

The Company also has in place policies, including underwriting, investment, and credit policies, to manage the assumption of risk. These policies provide for the Company’s risk limits, tolerance levels and other guidelines, as well as the processes for ensuring compliance with the desired risk profile of the Company. The Company has at its disposal a variety of risk mitigation tools, including the purchase of reinsurance and retrocessional coverage, which it uses to ensure that its risk profile stays within prescribed limits and tolerance levels.

Exposure Management: In order to manage the assumption of insurance risk, the Company has established risk limits through both qualitative and quantitative considerations, including factors such as market share, history of and expertise in a class of business or jurisdiction, transparency and symmetry of available information, reliability of pricing models and availability and cost of reinsurance. These limits are reviewed at least annually and aligned to the overall risk appetite established by the Company’s Board of Directors. In addition, a group exposure management policy is in place to ensure appropriate and consistent risk assessment and aggregation of exposures that accumulate between the operating companies in the group.

Three tools are used to measure and manage exposures:


•	Absolute maximum limits - these are defined based on the underlying peril or coverage and include measures such as zonal aggregates, which convey the maximum contractual loss exposure.


•	Probable maximum loss - these are defined where probabilistic event sets exist for underlying perils and are established for most natural catastrophe, aviation and offshore energy coverage, and conveys an extreme but likely loss exposure.


•	Realistic disaster scenarios ("RDSs") - these are either prescribed by third parties or developed internally and convey a more intuitive view of potential loss outcome.

The Company will often use multiple tools to validate its exposure measurement and ensures that at least one of these tools is available for each class of business.

Model Validation Framework: The Company relies extensively on a wide range of models to support key decisions made across the business. We have therefore implemented a Model Validation Framework to establish a uniform set of validation and governance standards that ensure the quality and reliability of key models across the Company.

Portfolio Optimization: The Company has developed a comprehensive and integrated Economic Capital Model (“ECM”) framework to facilitate the consistent assessment of risk, including risks classified as operational. This framework includes assessment at the individual operating company level, as well as across the Company. Using the ECM framework, the Company is able to assess the impact on risk appetite metrics of key strategic and tactical decisions as well as the risk return trade-offs associated with these decisions, including growth strategy, new product launch, business mix and retrocession strategy, mergers and acquisitions, planning and budgeting, investment strategy and capital management.

It is the goal of the Company to make the most efficient use of its capital and to achieve an adequate return for its shareholders. To that end, the Company seeks to maximize net income given the amount of capital at risk and subject to the risk limits, tolerance levels and other constraints that are imposed by our business, regulatory, and rating agency environments. The Company has therefore put in place portfolio optimization procedures, including the integrated use of the ECM within the annual planning process, in order to help shape portfolios that optimize their respective risk return profiles.

Underwriting Risk Management

The Company's underwriters manage risk by paying close attention to a number of qualitative and quantitative indicators. Our in-house pricing platform, VCAPS, provides reinsurance underwriters with a real-time view of the risk-adjusted profitability of each account. This allows them to examine the effects of contract terms and conditions as well as analyze the contribution of a contract to our overall risk capital and its impact on the projected incurred loss for one of our key stress scenarios. In addition, Talbot maintains a suite of pricing models for the direct and facultative underwriting teams that includes VCAPS and other proprietary models, as well as models licensed from third parties. The Company believes that giving our underwriters the tools to make sound decisions at every turn is critical to our long-term success. To that end, we strive to create an environment that promotes close cooperation between our underwriting, catastrophe modeling, risk, claims, and actuarial functions.

All of the Company’s underwriters adhere to a strict set of underwriting guidelines and letters of authority that specifically address the limits of their underwriting authority and their referral criteria. The Company’s current underwriting guidelines and letters of authority include:


•	lines of business that a particular underwriter is authorized to write;


•	exposure limits by line of business;


•	contractual exposures and limits requiring mandatory referrals; and


•	levels of analysis to be performed by lines of business.

In general, our underwriting approach is to:


•	seek high quality clients who have demonstrated superior performance over an extended period;


•	evaluate our clients’ exposures and make adjustments where their exposure is not adequately reflected;


•	apply the comprehensive knowledge and experience of our entire underwriting team to make progressive and cohesive decisions about the business they underwrite; and


•	employ our well-founded and carefully maintained market contacts within the Company to enhance our robust distribution capabilities.

Our underwriters have the responsibility to analyze all submissions and determine if the related potential exposures meet with both the Company’s risk profile line size and aggregate limitations, in line with the business plan. In order to ensure compliance, we run appropriate management information reports and all lines are subject to regular audits.

All of the companies managed by AlphaCat are subject to investment or underwriting guidelines. These guidelines are established in the offering documentation of each AlphaCat company. AlphaCat manages investment portfolios in accordance with guidelines, which are subject to oversight by the respective company's board of directors. AlphaCat leverages the Company's underwriting and analytical resources. However, all investment and underwriting decisions are ultimately made by AlphaCat. When services are provided to AlphaCat by the Company's underwriting teams, the relevant underwriting risk management framework outlined in this section applies.

Use of Models

A pivotal factor in determining whether to found and fund the Company was the opportunity for differentiation based upon superior risk management expertise; specifically, managing catastrophe risk and optimizing our portfolio to generate attractive returns on capital while controlling our exposure to risk, and assembling a management team with the experience and expertise to do so. The Company’s proprietary models are current with emerging scientific trends. This has enabled the Company to gain a competitive advantage over those reinsurers who rely exclusively on commercial models for pricing and portfolio management. The Company has made a significant investment in expertise in the risk modeling area to capitalize on this opportunity. The Company has assembled an experienced group of professional experts who operate in an environment designed to allow them to use their expertise as a competitive advantage. While the Company uses both proprietary and commercial probabilistic models, catastrophe risk is ultimately subject to absolute aggregate limitations as discussed above.

Commercial Vendor Models: The Company licenses two major commercial vendor models (RMS and AIR) to assess the adequacy of risk pricing and to monitor its overall exposure to risk in correlated geographic zones. The vendor models enable the Company to aggregate exposures by correlated event loss scenarios, which are probability-weighted. This enables the generation of exceedance probability curves for the portfolio and major geographic areas. Once exposures are modeled using one of the vendor models, the other model is used as both a reasonability check and as validation of the loss scenarios developed and reported by the first. The two commercial models each have unique strengths and weaknesses. For example, it is sometimes necessary to impose changes to frequency and severity.

The Company also uses its quantitative expertise to improve the reliability of the vendor model outputs and expedite scientific review and operationalization of their findings to formulate its view of risk in the following areas:

•

Ceding companies may often report insufficient data and many reinsurers may not be sufficiently critical in their analysis of this data. The Company generally scrutinizes data for anomalies that may indicate insufficient data quality. These circumstances are addressed by either declining the program or, if the variances are manageable, by modifying the model inputs and outputs and pricing to reflect insufficient data quality;


•	Performing independent checks on the accuracy of reported building characteristics through third-party tools;


•	Prior to making overall adjustments for changes in climate variables, other variables are carefully examined (for example, demand surge, storm surge, and secondary uncertainty); and


•	To properly quantify risk, we frequently adjust vendor models in advance of their updates based on the latest scientific studies and claims data.

In addition, many risks, such as second-event covers, aggregate excess of loss, or attritional loss components, cannot be fully evaluated using the vendor models. In order to better evaluate and price these risks, the Company has developed proprietary analytical tools, such as VCAPS and other models and data sets.

Proprietary Models: In addition to making frequency and severity adjustments to the vendor model outputs, the Company has implemented a proprietary pricing and risk management tool, VCAPS, to assist in pricing submissions and monitoring risk aggregation.

To supplement the analysis performed using vendor models, VCAPS uses the gross loss output of catastrophe models to generate a 100,000-year simulation set, which is used for both pricing and risk management. This approach allows more precise measurement and pricing of exposures. The two primary benefits of this approach are:

•

VCAPS takes into account annual limits, event/franchise/annual aggregate deductibles, and reinstatement premiums. This allows for more accurate evaluation of treaties with a broad range of features, including both common (reinstatement premium and annual limits) and complex features (second or third event coverage, aggregate excess of loss, attritional loss components, covers with varying attachment across different geographical zones or lines of businesses and covers with complicated structures); and


•	VCAPS use of 100,000-year simulations enables robust pricing of catastrophe-exposed business. This is possible in real-time operation because the Company has designed a computing hardware platform and software environment to accommodate the significant computing needs.

In addition to VCAPS, the Company uses other proprietary models and other data in evaluating exposures. The Company cannot assure that the models and assumptions used by the software will accurately predict losses. Further, the Company cannot assure that the software is free of defects in the modeling logic or in the software code. In addition, the Company has not been granted copyright or other legal protection for VCAPS.

Geographic Diversification

The Company actively manages its aggregate exposures by geographic or risk zone to maintain a balanced and diverse portfolio of underlying risks. The coverage the Company is willing to provide for any risk located in a particular zone is limited to a predetermined level, thus limiting the net aggregate loss exposure from all contracts covering risks believed to be located in any zone. Contracts that have “worldwide” territorial limits have exposures in several geographic zones. Generally, if a proposed contract would cause the limit to be exceeded, the contract would be declined, regardless of its desirability, unless the Company buys reinsurance or retrocessional coverage, thereby reducing the net aggregate exposure to the maximum limit permitted or less.

The following table sets forth the gross premiums written allocated to the territory of coverage exposure:



	Year Ended December 31, 2014
	Gross Premiums Written
(Dollars in thousands)	Validus Re		AlphaCat		Talbot		Western World (d)		Eliminations			Total		%
United States	$	442,314	$	30,987	$	108,458	$	65,235	$	(11,026	)	$	635,968	27.0	%
Worldwide excluding United States (a)	76,129		7,331		139,570		—		(1,334		)	221,696		9.4	%
Australia and New Zealand	20,257		1,019		9,736		—		—			31,012		1.3	%
Europe	58,236		3,005		45,615		—		(2,305		)	104,551		4.4	%
Latin America and Caribbean	54,053		—		116,281		—		(23,958		)	146,376		6.2	%
Japan	43,310		608		4,116		—		(608		)	47,426		2.0	%
Canada	3,670		215		10,194		—		(214		)	13,865		0.6	%
Rest of the world (b)	21,467		—		93,012		—		—			114,479		4.8	%
Sub-total, non United States	277,122		12,178		418,524		—		(28,419		)	679,405		28.7	%
Worldwide including United States (a)	179,564		92,016		96,187		—		(22,463		)	345,304		14.6	%
Other locations non-specific (c)	237,910		—		478,601		—		(13,902		)	702,609		29.7	%
Total	$	1,136,910	$	135,181	$	1,101,770	$	65,235	$	(75,810	)	$	2,363,286	100.0	%


(a)	Represents risks in two or more geographic zones.


(b)	Represents risk in one geographic zone.


(c)	The other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable, such as marine and aerospace risks, since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.


(d)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The effectiveness of geographic zone limits in managing risk exposure depends on the degree to which an actual event is confined to the zone in question and on the Company’s ability to determine the actual location of the risks believed to be covered under a particular insurance or reinsurance contract. Accordingly, there can be no assurance that risk exposure in any particular zone will not exceed that zone’s limits. Further control over diversification is achieved through guidelines covering the types and amount of business written in product classes and lines within a class.

Reinsurance Management

The Company enters into reinsurance agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks and enable it to underwrite policies with higher limits. The ceding of the insurance risk does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is therefore required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement.

Validus Re Retrocession: Validus Re monitors the opportunity to purchase retrocessional coverage on a continual basis and employs the VCAPS modeling system to evaluate the effectiveness of risk mitigation and exposure management relative to the cost. This coverage may be purchased on an indemnity basis as well as on an index basis (e.g., industry loss warranties (“ILWs”)). Validus Re also considers and at times uses alternative retrocessional structures, including collateralized quota share facilities (“sidecars”) and other capital markets products (e.g., catastrophe bonds), where the pricing and terms are attractive.

When Validus Re buys retrocessional coverage on an indemnity basis, payment is for an agreed upon portion of the losses actually suffered. In contrast, when Validus Re buys an ILW cover, which is a reinsurance contract in which the payout is dependent

on both the insured loss of the policy purchaser and the measure of the industry-wide loss, payment is made only if both Validus Re and the industry suffer a loss, as reported by one of a number of independent agencies, in excess of specified threshold amounts. With an ILW, Validus Re bears the risk of suffering a loss while receiving no payment under the ILW if the industry loss was less than the specified threshold amount.

AlphaCat: AlphaCat has ceded only a minimal level of business to third parties and will typically write contracts on a net retention basis only.

Talbot Ceded Reinsurance: The reinsurance program is reviewed by the reinsurance purchasing team on an on-going basis in line with the main business planning process. This process incorporates advice and analytical work from our brokers, actuarial and capital modeling teams.

The review and any subsequent modification to the program is based upon the following:


•	budgeted underwriting for the coming year;


•	loss experience from prior years;


•	loss information from the coming year’s individual capital assessment calculations;


•	expected changes to risk limits and aggregation limits and any other changes to Talbot’s risk tolerance;


•	scenario planning;


•	changes to capital requirements; and


•	RDSs prescribed by Lloyd’s.

The main type of reinsurance purchased is losses occurring; however, for a few lines of business, where the timing of the loss event is less easily verified or where such cover is available, risk attaching policies are purchased.

The type, quantity and cost of cover of the proposed reinsurance program is reviewed by the Chief Executive Officer of the Talbot group, and ultimately authorized by the Talbot Underwriting Ltd. ("TUL") Board.

The reinsurance program is purchased in the months prior to the beginning of the covered period. All reinsurance contracts arranged are authorized for purchase by the Talbot Managing Director. Slips are developed prior to inception to ensure that optimum cover is achieved. After purchase, cover notes are reviewed by the relevant class underwriters and presentations made to all underwriting staff to ensure they are aware of the boundaries of the cover.

Western World Ceded Reinsurance: The reinsurance program is managed by senior management. Western World uses brokers to provide guidance on modeling, prices and preparing contract terms and conditions. The main type of reinsurance purchased is excess of loss on a risk attaching basis. Western World utilizes reinsurance to reduce earnings volatility, protect capital and to limit the exposure to risk concentration.

Distribution

Although we conduct some business on a direct basis with our treaty and facultative reinsurance clients, most of our business is derived through insurance and reinsurance intermediaries (“brokers”), who access business from clients and coverholders. We are able to attract business through our recognized lead capability in most classes we underwrite, particularly in classes where such lead ability is rare.

Currently, our largest broker relationships, as measured by gross premiums written, are with Aon Benfield Group Ltd., Marsh & McLennan and Willis Group Holdings Ltd. The following table sets forth the Company’s gross premiums written by broker:



	Year Ended December 31, 2014
	Gross Premiums Written
(Dollars in thousands)	Validus Re		AlphaCat		Talbot		Western World (a)		Eliminations			Total		%
Name of Broker
Aon Benfield Group Ltd.	$	342,882	$	17,151	$	152,521	$	—	$	(37,768	)	$	474,786	20.1	%
Marsh & McLennan	413,619		44,142		216,103		—		(1,368		)	672,496		28.5	%
Willis Group Holdings Ltd.	240,646		48,951		141,553		—		(5,328		)	425,822		18.0	%
Sub-total	997,147		110,244		510,177		—		(44,464		)	1,573,104		66.6	%
All Others/Direct	139,763		24,937		591,593		65,235		(31,346		)	790,182		33.4	%
Total	$	1,136,910	$	135,181	$	1,101,770	$	65,235	$	(75,810	)	$	2,363,286	100.0	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Reserve for Losses and Loss Expenses

For insurance and reinsurance companies, a significant judgment made by management is the estimation of the reserve for losses and loss expenses. The Company establishes its reserve for losses and loss expenses to cover the estimated incurred liability for both reported and unreported claims.

The following tables show certain information with respect to the Company’s gross and net reserves:



	As at December 31, 2014
(Dollars in thousands)	Gross Case Reserves		Gross Incurred But Not Reported Reserves		Total Gross Reserve for Losses and Loss Expenses
Property (a)	$	628,289	$	472,122	$	1,100,411
Marine	426,631		399,417		826,048
Specialty	273,450		441,237		714,687
Liability (a)	166,953		426,295		593,248
Total	$	1,495,323	$	1,739,071	$	3,234,394


(a)	The reserves for losses and loss expenses of Western World are consolidated from the October 2, 2014 date of acquisition.



	As at December 31, 2014
(Dollars in thousands)	Net Case Reserves		Net Incurred But Not Reported Reserves		Total Net Reserve for Losses and Loss Expenses
Property (a)	$	545,699	$	399,418	$	945,117
Marine	398,121		362,971		761,092
Specialty	246,693		394,296		640,989
Liability (a)	158,473		351,257		509,730
Total	$	1,348,986	$	1,507,942	$	2,856,928


(a)	The reserves for losses and loss expenses of Western World are consolidated from the October 2, 2014 date of acquisition.

Loss reserves are established due to the significant periods of time that may lapse between the occurrence, reporting and payment of a loss. To recognize liabilities for unpaid losses and loss expenses, the Company estimates future amounts needed to pay claims and related expenses with respect to insured events. The Company’s reserving practices and the establishment of any particular reserve reflects management’s judgment concerning sound financial practice and does not represent any admission of liability with respect to any claim. Unpaid losses and loss expense reserves are established for reported claims (“case reserves”) and incurred but not reported ("IBNR") claims.

The nature of the Company’s high excess of loss and catastrophe business can result in loss expenses and payments that are both irregular and significant. Such losses are part of the normal course of business for the Company. Adjustments to reserves for individual years can also be irregular and significant. Conditions and trends that have affected development of liabilities in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience. See Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements.”

The tables below present the development of the Company’s unpaid losses and loss expense reserves on both a net and gross basis. The cumulative redundancy (deficiency) calculated on a net basis differs from that calculated on a gross basis. As different reinsurance programs cover different underwriting years, net and gross loss experience will not develop proportionately. The top line of each table shows the estimated liability, net and gross of reinsurance recoveries, as at the balance sheet date for each of the indicated years. This represents the estimated amounts of losses and loss expenses, including IBNR, arising in the current and all prior years that are unpaid at that date. The tables also show the re-estimated amount of the previously recorded reserve liability based on experience as of the balance sheet date of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The cumulative redundancy (deficiency) represents the aggregate change with respect to that liability originally estimated, as of December 31, 2014. The lower portion of each table also reflects the cumulative paid losses relating to these reserves. Conditions and trends that have affected development of liabilities in the past may not necessarily occur in the future.

Analysis of Losses and Loss Expense Reserve Development Net of Recoveries



	Years Ended December 31,
(Dollars in thousands)	2006		2007		2008		2009		2010		2011		2012 (b)			2013		2014 (d)
Estimated liability for unpaid losses and loss expenses, net of reinsurance recoverable	$	77,363	$	791,713	$	1,096,507	$	1,440,369	$	1,752,839	$	2,258,658	$	3,077,606		$	2,660,245	$	2,856,928
Net loss reserves disposed													(36,519		)
Liability re-estimated as of: (c)
One year later	60,106		722,010		1,018,930		1,283,759		1,596,720		2,083,378		2,835,639			2,408,038
Two years later	54,302		670,069		937,696		1,181,987		1,451,448		1,954,084		2,662,571
Three years later	50,149		606,387		902,161		1,085,664		1,404,349		1,860,323
Four years later	46,851		584,588		847,935		1,053,327		1,361,282
Five years later	45,946		547,965		827,153		1,013,019
Six years later	45,199		544,656		825,567
Seven years later	44,567		538,439
Eight years later	43,605
Cumulative redundancy (deficiency) (a)	33,758		253,274		270,940		427,350		391,557		398,335		378,516			252,207
Cumulative paid losses, net of reinsurance recoveries, as of: (c)
One year later	$	27,180	$	216,469	$	353,476	$	384,828	$	476,779	$	631,889	$	916,796		$	816,823
Two years later	34,935		320,803		562,831		634,041		741,940		1,047,879		1,446,139
Three years later	39,520		350,521		662,319		744,324		902,507		1,264,608
Four years later	41,746		374,788		722,652		818,184		1,002,242
Five years later	41,901		390,895		753,899		854,823
Six years later	43,571		403,540		769,119
Seven years later	43,794		409,234
Eight years later	43,164


(a)	See Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.


(b)	The reserves for losses and loss expenses of Flagstone are consolidated from the November 30, 2012 date of acquisition.


(c)	The impact of foreign currency exchange rate movements is excluded from the re-estimated liability and from paid losses.


(d)	The reserves for losses and loss expenses of Western World are consolidated from the October 2, 2014 date of acquisition.

Analysis of Losses and Loss Expense Reserve Development Gross of Recoveries



			Years Ended December 31,
(Dollars in thousands)	2006		2007		2008		2009		2010		2011		2012 (b)			2013		2014 (d)
Estimated gross liability for unpaid losses and loss expenses	$	77,363	$	926,117	$	1,305,303	$	1,622,134	$	2,035,973	$	2,631,143	$	3,517,573		$	3,030,399	$	3,234,394
Gross loss reserves disposed													(36,590		)
Liability re-estimated as of: (c)
One year later	60,106		846,863		1,223,018		1,484,646		1,854,565		2,422,343		3,266,832			2,719,232
Two years later	54,302		791,438		1,164,923		1,385,533		1,705,995		2,257,704		3,066,429
Three years later	50,149		745,624		1,134,043		1,288,915		1,648,273		2,157,008
Four years later	46,851		721,730		1,079,842		1,252,042		1,574,858
Five years later	45,946		675,884		1,055,033		1,198,135
Six years later	45,199		668,266		1,034,276
Seven years later	44,567		661,445
Eight years later	43,605
Cumulative redundancy (deficiency)(a)	33,758		264,672		271,027		423,999		461,115		474,135		414,554			311,167
Cumulative paid losses, gross of reinsurance recoveries, as of: (c)
One year later	$	27,180	$	245,240	$	437,210	$	455,182	$	557,894	$	807,296	$	1,065,485		$	961,061
Two years later	34,935		394,685		706,249		709,309		878,406		1,279,820		1,687,413
Three years later	39,520		452,559		825,159		864,918		1,057,705		1,574,951
Four years later	41,746		480,277		898,338		950,013		1,187,167
Five years later	41,901		496,511		933,825		1,002,614
Six years later	43,571		509,513		964,380
Seven years later	43,794		517,630
Eight years later	43,165


(a)	See Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.


(b)	The reserves for losses and loss expenses of Flagstone are consolidated from the November 30, 2012 date of acquisition.


(c)	The impact of foreign currency exchange rate movements is excluded from the re-estimated liability and from paid losses.


(d)	The reserves for losses and loss expenses of Western World are consolidated from the October 2, 2014 date of acquisition.

The following table presents an analysis of the Company’s paid, unpaid and incurred losses and loss expenses and a reconciliation of beginning and ending unpaid losses and loss expenses for the years indicated:



	Years Ended December 31,
(Dollars in thousands)	2014 (a)			2013			2012 (c)
Reserve for losses and loss expenses, beginning of year	$	3,030,399		$	3,517,573		$	2,631,143
Losses and loss expenses recoverable	(370,154		)	(439,967		)	(372,485		)
Net reserves for losses and loss expenses, beginning of year	2,660,245			3,077,606			2,258,658
Net loss reserves acquired (disposed)	525,091			(36,519		)	639,641
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
Current year	1,024,256			999,380			1,174,415
Prior years (b)	(252,207		)	(205,448		)	(174,969		)
Total incurred losses and loss expenses (b)	772,049			793,932			999,446
Less net losses and loss expenses paid in respect of losses occurring in:
Current year	(245,084		)	(244,682		)	(182,146		)
Prior years	(816,823		)	(916,796		)	(653,874		)
Total net paid losses	(1,061,907		)	(1,161,478		)	(836,020		)
Foreign exchange	(38,550		)	(13,296		)	15,881
Net reserve for losses and loss expenses, end of year	2,856,928			2,660,245			3,077,606
Losses and loss expenses recoverable	377,466			370,154			439,967
Reserve for losses and loss expenses, end of year	$	3,234,394		$	3,030,399		$	3,517,573


(a)	The reserves for losses and loss expenses of Western World are consolidated from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.


(c)	The reserves for losses and loss expenses of Flagstone are consolidated from the November 30, 2012 date of acquisition.

Validus Re and AlphaCat: Validus Re and AlphaCat’s loss reserves are established based upon an estimate of the total cost of claims that have been incurred, including estimates of unpaid liability on known individual claims, the costs of additional case reserves ("ACRs") on claims reported but not considered to be adequately reserved in such reporting and amounts that have been incurred but not yet reported. ACRs are used in certain cases and are calculated based on management’s estimate of the required case reserve on an individual claim less the case reserves reported by the client. The Validus Re Loss Reserve Committee follows catastrophe event ultimate loss reserve estimation procedures for the investigation, analysis, estimation and approval of ultimate loss reserving resulting from any material catastrophe event.

For reported losses, Validus Re and AlphaCat establish case reserves within the parameters of the coverage provided in the impacted reinsurance contracts. Where there is a reported claim for which the reported case reserve is determined to be insufficient, Validus Re and AlphaCat will book an ACR or individual claim IBNR estimate that is adjusted as claims notifications are received. Information is obtained from various sources including brokers, proprietary and third party vendor models and internal data regarding reinsured exposures related to the geographic location of the event, as well as other sources. Validus Re and AlphaCat use generally accepted actuarial techniques in its IBNR estimation process. Validus Re and AlphaCat also use historical insurance industry loss emergence patterns, as well as estimates of future trends in claims severity, frequency and other factors, to aid it in establishing loss reserves.

Loss reserves represent estimates, including actuarial and statistical projections at a given point in time, of the expectations of the ultimate settlement and administration costs of claims incurred. Such estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in loss severity and frequency and other variable factors such as inflation, litigation and tort reform. This uncertainty is heightened by the low frequency high severity nature of the business written by Validus Re and AlphaCat, thereby providing limited claims loss emergence patterns that directly pertain to Validus Re’s and AlphaCat's operations. This continues to necessitate the partial use of industry loss emergence patterns in deriving IBNR, which contribute to the inherent uncertainty within the loss reserve estimation process and therefore will differ from actual experience. Further, expected losses and loss ratios are typically developed in part by using outputs from vendor and proprietary computer models and these expected losses and loss ratios are a significant component in the calculation of IBNR. Finally, the

uncertainty surrounding estimated costs is greater in cases where large, unique events have been reported and the associated claims are in early stages of resolution. As a result of these uncertainties, it is likely that the ultimate liability will differ from such estimates, perhaps materially.

Talbot: Talbot’s loss reserves are established based upon an estimate of the total cost of claims that have been incurred, including case reserves and IBNR. Talbot uses generally accepted actuarial techniques in its IBNR estimation process. ACRs are not generally used.

Talbot performs internal assessments of liabilities on a quarterly basis. Talbot’s loss reserving process involves the assessment of actuarial estimates of gross ultimate losses on both an ultimate basis (i.e., ignoring the period during which premium earns) and an earned basis, split by underwriting year and class of business, and generally also between attritional, large and catastrophe losses. These estimates are made using a variety of generally accepted actuarial projection methodologies, as well as additional qualitative consideration of future trends in frequency, severity and other factors. The gross estimates are used to estimate ceded reinsurance recoveries, which are in turn used to calculate net ultimate losses as the difference between gross and ceded. These figures are subsequently used by Talbot’s management to help it assess its best estimate of gross and net ultimate losses.

Western World: Western World's loss reserves are established based upon an estimate of the total cost of claims incurred, including case reserves and IBNR. Case reserves are established by Western World claims personnel. The amount of the reserve is based on a case-by-case evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the type of loss. The estimate reflects the informed judgment of such personnel based on their knowledge, experience and Western World's established reserving practices. Until the claim is resolved, these estimates are revised as deemed appropriate by the responsible claims personnel based on subsequent developments and periodic reviews of the case. IBNR reserves are established based on generally accepted actuarial techniques. These techniques assume that past experience, adjusted for the effects of current developments, such as trends in loss costs or in the legal and claims environment, are an appropriate basis for predicting future events.

As with Validus Re and AlphaCat, Talbot and Western World's loss reserves represent estimates, including actuarial and statistical projections at a given point in time, of the expectations of the ultimate settlement and administration costs of claims incurred. Such estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in loss severity and frequency and other variable factors such as inflation, litigation and tort reform. The uncertainty surrounding estimated costs is also greater in cases where large, unique events have been reported and the associated claims are in the early stages of resolution. As a result of these uncertainties, it is likely that the ultimate liability will differ from such estimates, perhaps materially.

In respect of the risks related to the reserve for losses and loss expenses for all segments, see Part I, Item 1A, "Risk Factors" Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" and Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements." Loss reserves are reviewed regularly and adjustments to reserves, if any, will be recorded in earnings in the period in which they are determined. Even after such adjustments, the ultimate liability may exceed or be less than the revised estimates.

Notable loss events: For disclosure purposes, only those loss events which aggregate to more than a certain threshold on a consolidated basis are disclosed separately and included in the reserve for notable loss events and reserve for potential development on notable loss events tables. Notable loss events are first determined at the respective operating segments based on segment thresholds and are then aggregated and only disclosed if it is determined that they reach the consolidated threshold for notable loss event disclosure. The Company increased the consolidated threshold for disclosure of notable loss events effective January 1, 2011, from $5.0 million to $15.0 million. The Company further increased the threshold for disclosure of notable loss events effective January 1, 2013 from $15.0 million to $30.0 million.

Non-notable loss events: For disclosure purposes, only those loss events which aggregate to more than $15.0 million but less than $30.0 million on a consolidated basis are disclosed separately and included in the Company's analysis of losses and loss expenses. Non-notable loss events are first determined at the respective operating segments based on segment thresholds and are then aggregated and only disclosed if it is determined that they reach the consolidated threshold for non-notable loss event disclosure. As noted above, effective January 1, 2013, the Company increased the consolidated threshold for disclosure of notable loss events from $15.0 million to $30.0 million. Therefore, the effective date for the disclosure of non-notable loss events which aggregate to more than $15.0 million but less than $30.0 million on a consolidated basis is January 1, 2013.

During 2010 and 2011, given the complexity and severity of notable loss events in each of those years, an explicit reserve for potential development on notable loss events ("RDE") was included within the Company’s IBNR reserving process. As uncertainties surrounding initial estimates on notable loss events have developed, this reserve has been allocated to specific notable loss events, to the point where the reserve had been fully allocated at December 31, 2013. No RDE has been established for 2012, 2013 or 2014 notable loss events.

The requirement for a reserve for potential development on notable loss events in a period is a function of (a) the number of significant events occurring in that period and (b) the complexity and volatility of those events. Complexity and volatility factors considered include the following:

• Contract complexity;

• Nature and number of perils arising from an event;

• Limits and sub limits exposed;

• Quality, timing and flow of information received from each loss;

• Timing of receipt of information to the Company;

• Information regarding retrocessional covers;

• Assumptions, both explicit and implicit, regarding future paid and reported loss development patterns;

• Frequency and severity trends;

• Claims settlement practices; and

• Potential changes in the legal environment.

Each of these factors may lead to associated volatility for each notable loss event as well as consideration of the total reserve for loss events in the aggregate. Consequently, all of these factors are considered in the aggregate for the events occurring in the period, recognizing that it is more likely that one or some of the events may deteriorate significantly, rather than all deteriorating proportionately. The establishment of each period's requirement for a reserve for potential development on notable loss events takes place as part of the quarterly evaluation of the Company’s overall reserve requirements. It is not directly linked in isolation to any one significant/notable loss. The reserve for potential development on notable loss events is evaluated by our in-house actuaries as part of their normal process of setting indicated reserves at the end of each reporting period. In ensuing periods, senior management and the in-house actuaries revisit and re-estimate certain events previously considered in the catastrophe loss event process as well as events that have subsequently emerged in the most recent period. To the extent that there has been adverse development on a notable loss event, if there is RDE remaining from that accident year, an allocation from the respective accident year RDE will be made to the notable loss event. If there is no remaining RDE relating to the accident year of the loss, then adverse development will be recorded for the notable loss event through the Statements of Comprehensive Income.

Changes to the reserve for potential development on notable loss events are considered in light of changes to previous loss estimates from notable loss events in this re-estimation process. To the extent that there are continued complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year, as illustrated in the RDE roll forward table which can be found in Item. 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Investment Management

The Company manages its investment portfolio on a consolidated basis. As we provide predominantly short-tail insurance and reinsurance coverage, we could become liable to pay substantial claims on short notice. Accordingly, we follow a conservative investment strategy designed to emphasize the preservation of invested assets and provide sufficient liquidity for the prompt payment of claims. Our Board of Directors, led by our Finance Committee, Chief Financial Officer and Chief Investment Officer oversees our investment strategy and has established investment guidelines for us. The investment guidelines dictate the portfolio’s overall objectives, benchmark portfolios, eligible securities, duration, use of derivatives, inclusion of foreign securities, diversification requirements and average portfolio rating. Management and the Finance Committee periodically review these guidelines in light of our investment goals and consequently they may change at any time.

Substantially all of the fixed maturity investments held at December 31, 2014 were publicly traded. At December 31, 2014, the average duration of the Company’s fixed maturity and short term investment portfolio, excluding assets held in trust on behalf of operating affiliates, was 2.16 years (December 31, 2013: 1.84 years). Management emphasizes capital preservation for the portfolio and maintains a significant allocation of short-term investments. At December 31, 2014, the average rating of the portfolio was AA- (2013: AA-). At December 31, 2014, the total fixed maturity portfolio was $5.5 billion (2013: $5.5 billion), of which $2.5 billion (2013: $2.5 billion) was rated AAA.

Claims Management

Claims management includes the receipt of initial loss notifications, generation of appropriate responses to claim reports, identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of legal representation, establishment of case reserves, approval of loss payments and notification to reinsurers.

Validus Re and AlphaCat: The role of our claims department is to investigate, evaluate and, if validated, pay claims efficiently. Our claims director has implemented claims handling guidelines and reporting and control procedures. The primary objectives of the claims department are to ensure that each claim is evaluated, processed and appropriately documented in a timely and efficient manner and information relevant to the management of the claim is retained.

Talbot: Where Talbot is the lead syndicate on business written, the claims adjusters will, in accordance with the respective policies, assess, investigate, appoint third party experts (including attorneys, loss adjusters or other experts) as required and communicate the Company's actions or findings to the Broker who represents the insured. The Company will also establish adequate reserves and promptly pay valid claims in accordance with the applicable "Lloyd's Claims Scheme" and "Lloyd's Claims Management Principles and Minimum Standards."

Where Talbot is not the lead syndicate, the claims handling and case reserves are established in accordance with the applicable "Lloyd's Claims Scheme" and "Lloyd's Claims Management Principles and Minimum Standards." Claims and claims movements are reviewed and monitored by the Talbot claims department. Claim financial reports are received daily from the "Xchanging" system pursuant to a centralized contract with Lloyd's.

Western World: The claims handling process is a vital component of Western World's products and is a key part of the relationship between the insured and Western World. It is the policy of the Western World to investigate, analyze and resolve all claims promptly, fairly and efficiently. Western World's claims philosophy is to provide the highest quality customer service by employing experienced staff specialized in claims handling.

Competition

The insurance and reinsurance industries are highly competitive. We compete with major U.S., Bermuda, European and other international insurers and reinsurers and certain underwriting syndicates and insurers. We encounter competition in all of our classes of business but there is less competition in those of our lines where we are a specialist underwriter. The Company competes with insurance and reinsurance providers such as:


•	Alleghany Corporation, Allied World Assurance Company Holdings, Limited., Arch Capital Group, Limited., Argo Group International Holdings, Ltd., Aspen Insurance Holdings Limited, AXIS Capital Holdings Limited, Endurance Specialty Holdings Ltd., Everest Re Group Limited, Montpelier Re Holdings Ltd., PartnerRe Ltd., Platinum Underwriters Holdings Ltd., and RenaissanceRe Holdings Ltd.;


•	Amlin plc, Catlin Group Limited, Hiscox and others in the Lloyd’s market;


•	Asset managers and reinsurers who provide collateralized reinsurance and retrocessional coverage;


•	Treaty and direct insurers, in not only the London but also the global market, that compete with Lloyd’s on a worldwide basis;


•	Various capital markets participants who access insurance and reinsurance business in securitized form, including through special purpose entities or derivative transactions; and


•	Government-sponsored insurers and reinsurers.

Competition varies depending on the type of business being insured or reinsured and whether the Company is in a leading or following position. Competition in the types of business that the Company underwrites is based on many factors, including:


•	Premiums charged and other terms and conditions offered;


•	Services provided;


•	Financial ratings assigned by independent rating agencies;


•	Speed of claims payment;


•	Reputation;


•	Perceived financial strength; and


•	The experience of the underwriter in the line of insurance or reinsurance written.

Increased competition could result in fewer submissions, lower premium rates, lower share of allocated cover, and less favorable policy terms, which could adversely impact the Company’s growth and profitability. Capital market participants have created alternative products such as catastrophe bonds that are intended to compete with reinsurance products. The Company is unable to predict the extent to which these new, proposed or potential initiatives may affect the demand for products or the risks that may be available to consider underwriting.

Regulation

The following is a discussion of the regulatory environment and certain key requirements in the jurisdictions of our significant operating subsidiaries.

Bermuda

General: As a holding company, Validus Holdings, Ltd. is not subject to Bermuda insurance regulation. However, the Insurance Act 1978 and its related regulations (the "Insurance Act") regulates the Company’s operating insurance subsidiaries in Bermuda, and it provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the “BMA”) under the Insurance Act. The Insurance Act makes no distinction between insurance and reinsurance business. The Company has eight Bermuda licensed insurance subsidiaries: Validus Reinsurance, Ltd., a Class 4 insurer; Validus Reinsurance (Switzerland) Ltd (Bermuda Branch) (formerly known as Flagstone Réassurance Suisse S.A. (Bermuda Branch)), a Class 4 insurer; PaCRe, Ltd., a Class 4 insurer; IPCRe Limited ("IPCRe") (formerly known as Validus Re Americas, Ltd.), a Class 3A insurer; Validus Re Americas, Ltd. (formerly known as Longhorn Re, Ltd.), a Class 3A insurer; Talbot Insurance (Bermuda), Ltd. ("TIBL"), a Class 3 insurer; AlphaCat Reinsurance, Ltd., a Class 3 insurer; and Mont Fort Re Ltd., a Class 3 insurer. The Company also has investments in two Bermuda-based insurance affiliates, AlphaCat Re 2011, Ltd. and AlphaCat Re 2012, Ltd., each licensed as a Special Purpose Insurer (“SPI”) under the Insurance Act.

Regulation of Class 3, 3A and 4 insurers: Significant aspects of the Bermuda insurance regulatory framework and requirements imposed on Class 3, 3A and Class 4 insurers are noted below.

Principal Representative and Principal Office: The Insurance Act requires that every insurer appoint and maintain a principal representative resident in Bermuda and maintain a principal office in Bermuda. It is the duty of the principal representative on his reaching a view that there is a likelihood of the insurer for which the principal representative acts becoming insolvent or that a reportable event has, to the principal representative's knowledge, occurred, to immediately notify the BMA and to make a report in writing to the BMA within 14 days of the prior notification setting out all the particulars of the case that are available to the principal representative.

Where there has been a significant loss which is reasonably likely to cause the insurer to fail to comply with its enhanced capital requirement, the principal representative must also furnish the BMA with a capital and solvency return reflecting an enhanced capital requirement prepared using post-loss data. The principal representative must provide this within 45 days of notifying the BMA regarding the event.

Approved Independent Auditor: Class 3, 3A and 4 insurers must appoint an independent auditor who will annually audit and report on the statutory financial statements and the statutory financial return of the insurer, both of which are required to be filed annually with the BMA. The independent auditor must be approved by the BMA.

Approved Loss Reserve Specialist: Class 3, 3A and 4 insurers are required to submit an opinion of their approved loss reserve specialist with their statutory financial return in respect of their losses and loss expense provisions. The loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the BMA.

Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return: Class 3, 3A and 4 insurers must prepare annual statutory financial statements as prescribed in the Insurance Act. The statutory financial statements are separate from the annual financial statements prepared in accordance with GAAP Standards defined and discussed further below. Class 3, 3A and 4 insurers are also required to prepare and file with the BMA statutory financial returns unless granted an exemption under section 56 of the Insurance Act. The statutory financial return includes, among other items, a report of the approved independent auditor on the statutory financial statements of such insurer, a statutory solvency certificate, the statutory financial statements, the opinion of the loss reserve specialist, a special purpose business solvency certificate in relation to any special purpose business undertaken, and in the case of Class 3A and 4 insurers only a schedule of reinsurance ceded. In addition, Class 3A and 4 insurers are required to file a capital and solvency return in respect of their general business which shall include, amongst other items, the regulatory risk based capital model, a schedule of net reserves for losses and loss expense provisions by line of business and a schedule of premiums written by line of business, a schedule of risk management and schedules of fixed income securities. Class 3A and 4 insurers are also required to file audited annual financial statements, prepared in accordance with either International Financial Reporting Standards, generally accepted accounting principles (GAAP) that apply in Bermuda, Canada, the United Kingdom or the United States of America or such other GAAP as the BMA may recognize (together “GAAP Standards”), which are published on the BMA website.

Minimum Solvency Margins: The value of the general business assets of licensed insurers must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin (“MSM,”) being equal to the greater of:

Class 4:

(a)$100,000,000;

(b)50% of net premiums written (being gross premiums written less any premiums ceded by the insurer for reinsurance, but the insurer may not deduct more than 25% of gross premiums when computing net premiums written);

(d)25% of the insurer's enhanced capital requirement.

Class 3 and 3A:

(a)$1,000,000;

(b)20% of net premiums written up to $6,000,000 (being gross premiums written less any premiums ceded by the insurer for reinsurance); or where net premiums written exceed $6,000,000, $1,200,000 plus 15% of the net premiums written in excess of $6,000,000; or

and in the case of Class 3A insurers only 25% of the insurer's enhanced capital requirement.

Minimum Liquidity Ratio: The Insurance Act provides a minimum liquidity ratio for general business insurers. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include, but are not limited to, cash and time deposits, quoted investments, unquoted bonds and debentures, investments in mortgage loans on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as investments in and advances to affiliates. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax, sundry liabilities (by interpretation, those not specifically defined), letters of credit, guarantees and other instruments.

Enhanced Capital Requirement: Class 3A and 4 insurers are required to maintain available statutory capital and surplus with respect to its general business at a level equal to or in excess of its enhanced capital requirement (“ECR”) which is calculated at the end of its relevant year by reference to the Bermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capital model. The BSCR employs a standard mathematical model that correlates risk underwritten by Bermuda insurers to the capital that is dedicated to the business. The ECR is equal to the higher of each insurer's MSM or the BSCR/approved internal capital model. The BMA expects Class 3A and 4 insurers to operate at or above a target capital level (“TCL”) which exceeds the insurer's ECR. The TCL for a Class 3A and 4 insurer is set at 120% of its ECR.

Eligible Capital: To enable the BMA to better assess the quality of an insurer’s capital resources, Class 3A and 4 insurers must maintain available capital in accordance with a '3 tiered capital regime'. All capital instruments are classified as either basic or ancillary capital which in turn are classified into one of three tiers (Tiers 1, 2 and 3) based on their "loss absorbency" characteristics ("Tiered Capital Requirements"). Eligibility limits are then applied to each tier in determining the amounts eligible to cover regulatory capital requirement levels. The highest capital is classified as Tier 1 Capital, lesser quality capital is classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, not more than certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to satisfy the Class 3A and 4 insurers' MSM and ECR requirements.

Group Supervision: The BMA may, in respect of an insurance group, determine whether it is appropriate for it to be the group supervisor of that group. For purposes of the Insurance Act, an insurance group is defined as a group of companies that conducts insurance business. The BMA may make such determination where it ascertains that (i) the group is headed by a "specified insurer" (that is to say, it is headed by either a Class 3A, 3B, 4 or Class C, D or E insurer or another class of insurer designated by order of the BMA); or (ii) where the insurance group is not headed by a "specified insurer" whether it is headed by a parent company which is incorporated in Bermuda; or (iii) where the parent company of the group is not a Bermuda incorporated company, whether the BMA is satisfied that the insurance group is directed and managed from Bermuda or the insurer with the largest balance sheet total in the insurance group is a specified insurer. Where the BMA determines that it should act as the group supervisor, it shall designate a specified insurer that is a member of the insurance group to be the "designated insurer" in respect of that insurance group and it shall give written notice to the designated insurer and other competent authorities that it is the group supervisor.

The BMA is our group supervisor and Validus Reinsurance, Ltd. is the "designated insurer" of our group. The BMA maintains a register of particulars for every insurance group for which it acts as the group supervisor detailing: the name and address of the designated insurer; name and address of each member company of the insurance group falling within the scope of group supervision; the name and address of the principal representative of the insurance group in Bermuda; the name and address of other competent authorities supervising other member companies of the insurance group; and the name and address of the insurance group auditors. The designated insurer must notify the BMA of any changes to the details entered on the register in respect of that insurance group.

As group supervisor, the BMA will perform a number of functions including (i) coordinating the gathering and dissemination of essential or relevant information including disseminating information which is of importance for the supervisory task of other competent authorities; (ii) carrying out a supervisory review and assessment of the financial situation of the insurance group; (iii) carrying out an assessment of the insurance group's compliance with the rules on solvency, risk concentration, intra-group transactions and governance systems; (iv) planning and coordinating, with other competent authorities concerned, supervisory activities in respect of the insurance group; (v) coordinating any enforcement action that may be taken against the insurance group or any of its members; and (vi) planning and coordinating meetings of colleges of supervisors in order to facilitate the carrying out of the functions described above.

Group Actuary: Every insurance group is required to submit an annual group actuarial opinion when filing its group statutory financial return. The group actuary must be approved by the BMA.

Group Solvency: The Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 and Insurance (Group Supervision) Rules 2011 (together, "Group Rules"), will apply to us so long as the BMA remains our group supervisor. The BMA has implemented and imposed many of the additional requirements described in this section as part of its efforts to gain equivalence under Solvency II. Solvency II is an EU directive covering the capital adequacy, risk management and regulatory reporting for insurers and was adopted by the European Parliament in April 2009. The BMA will now wait until further notice to implement Solvency II as a result of the delay in the implementation of Solvency II in Europe. In addition, through the Group Rules, the BMA may take action which affects the Company.

Group Financial Statements, Group Statutory Financial Return and Annual Capital and Solvency Return: Every insurance group is required to prepare an annual group statutory financial return which must be submitted to the BMA by the designated insurer within five months after its financial year end (unless specifically extended). The Group Rules prescribe the rules pertaining to the preparation and substance of the group statutory financial statements (which include, in statutory form, a group balance sheet, a group income statement, a group statement of capital and surplus, and notes thereto). The statutory financial return shall include, among other items, a report of the approved group auditor, an opinion of a group actuary where applicable, an insurance group business solvency certificate, an insurance group cover sheet, particulars of ceded reinsurance comprising the top ten unaffiliated reinsurers for which the group has the highest recoverable balances and any reinsurer with recoverable balances exceeding 15% of the insurance group's statutory capital and surplus, particulars of qualifying members, a list of non-insurance financial regulated entities owned by the group and details of all adjustments applied to the group financial statements in the form of a reconciliation of amounts reported as total assets, total liabilities, net income and total statutory capital and surplus.

Every insurance group must also prepare and submit a group capital and solvency return (the "Group Capital and Solvency Return") which comprises the group BSCR model or outputs from an approved group internal capital model, along with the returns prescribed in the applicable schedules to the Group Rules. The Group Capital and Solvency Return is submitted by the designated insurer on behalf of the group and must include a declaration signed by two directors of the parent company, one of which may be the chief executive, and either the chief risk officer of the parent company, or the chief financial officer of the parent company.

Every insurance group must prepare and submit, on an annual basis, consolidated audited financial statements including notes to the financial statements of the parent company of the group prepared under GAAP Standards ("Group Financial Statements"). The Group Financial Statements must be audited annually by the group's approved auditor who must prepare an auditor's report in accordance with generally accepted auditing standards. The designated insurer is required to file with the BMA annually the audited Group Financial Statements within five months from the end of the relevant financial year (unless specifically extended). The Group Financial Statements are published by the BMA on its website.

Group Quarterly Financial Returns: In addition to the annual filings, the designated insurer is required to prepare and file, on behalf of the group, quarterly financial returns no later than the end of the month of each May, August and November for the first, second and third quarters respectively. The quarterly financial return shall consist of (a) quarterly unaudited (consolidated) group financial statements in respect of its business for each financial quarter where such statements are the most recent produced by the group, and must not reflect a financial position that exceeds two months and (b) details of material intra-group transactions and risk concentrations, including among other things, details surrounding reinsurance and retrocession arrangements and the ten largest exposures to unaffiliated counterparty risk and other unaffiliated counterparty exposures exceeding 10% of the insurer's statutory capital and surplus.

Group Solvency Margin and Group Enhanced Capital Requirements ("Group ECR"): An insurance group must ensure that the value of the insurance group's assets exceeds the amount of the group's liabilities by the aggregate of: (i) the individual minimum margin of solvency of each qualifying member of the group controlled by the parent company; and (ii) the parent company’s percentage shareholding in the member multiplied by the member’s MSM, where the parent company exercises significant influence over a member of the group but does not control the member (the "Group MSM"). A member is a qualified member of the insurance group if it is subject to solvency requirements in the jurisdiction in which it is registered.

Insurance groups are required to maintain available statutory capital and surplus to an amount that is equal to or exceeds the value of its group enhanced capital requirement (“Group ECR”) which is calculated at the end of its relevant year by reference to the Group BSCR model or an approved internal capital model provided that the Group ECR shall at all times be an amount equal to or exceeding the Group MSM. The Group ECR is being phased in over a period of six years which commenced with the 2013 financial year end. For the 2014 financial year end the applicable Group ECR is equivalent to 60% of the amount determined by the Group BSCR or an approved internal capital model. This requirement will increase by increments of 10% in each of the following four years until 100% of the amount determined by the Group BSCR or an approved internal capital model for the ECR is required for the 2018 financial year end.

The BMA expects insurance groups to operate at or above a group TCL which exceeds the Group ECR. The TCL for insurance groups is set at 120% of its Group ECR.

Group Eligible Capital: Under the Tiered Capital Requirements described above, not more than certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used by an insurance group to satisfy the Group's MSM and Group ECR requirements.

Restrictions on Dividends and Distributions: A Class 4 insurer shall not declare or pay any dividends of more than 25% of its total statutory capital and surplus, as shown on its previous financial year statutory balance sheet, unless at least seven days before payment of the dividends it files with the BMA an affidavit confirming that it will continue to meet its relevant margins. If it failed to meet any of its relevant margins on the last day of any financial year, a Class 3, 3A and 4 insurer shall not, without the approval of the BMA, declare or pay any dividends during the next financial year. In addition, Class 3, 3A and 4 insurers must obtain the BMA's prior approval before reducing its total statutory capital, as shown in its previous year's financial statements, by 15% or more.

Furthermore, under the Companies Act, a Bermuda company may only declare or pay a dividend, or make a distribution out of contributed surplus as the case may be, if the company has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than its liabilities.

The BMA Insurance Code of Conduct: The BMA Insurance Code of Conduct establishes duties and standards which must be complied with by all insurers licensed under the Insurance Act. The Code is divided into six categories, including:


•	Proportionality Principle;


•	Corporate Governance;


•	Risk Management;


•	Governance Mechanism;


•	Outsourcing; and


•	Market Discipline and Disclosure.

Failure to comply with the requirements under the Code will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act and may result in the BMA exercising its powers of intervention and investigation.

Notification of Material Changes: Class 3, 3A and 4 insurers are required to give advance notice to the BMA of their intention to effect a material change within the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes are material: (i) the acquisition or transfer of insurance business being part of a scheme falling under section 25 of the Insurance Act or section 99 of the Companies Act 1981; (ii) the amalgamation with or acquisition of another firm; (iii) engaging in unrelated business that is retail business; (iv) acquisition of controlling interest in an undertaking that is engaged in non-insurance business which offers services and products to persons who are not affiliates of the insurer; (v) outsourcing all or substantially all of the functions of actuarial, risk management, compliance, and internal audit; (vi) outsourcing of all or a material part of an insurer’s underwriting activity, (vii) transfer other than by way of reinsurance of all or substantially all of a line of business; and (viii) expansion into a material new line of business.

No Class 3, 3A or 4 insurer shall take any steps to give effect to a material change, unless it has first served notice on the BMA that it intends to effect such material change and before the end of 14 days, either the BMA has notified such company in writing that it has no objection to such change or that period has lapsed without the BMA having issued a notice of objection.

Designated insurers are also required to give notice to the BMA if any member of its group intends to give effect to any material change as defined in clauses (ii) through (viii) above. The designated insurer shall notify the BMA of any material change, effected by a member of the group, within 30 days of such material change taking effect.

BMA's Powers of Investigation, Intervention and Obtaining Information: The BMA may require a registered person or a designated insurer to provide such information or reports the BMA may reasonably require with respect to matters that are likely to be material to the performance of its functions under the Insurance Act. In addition, it may require such person's auditor, underwriter, accountant or any other person with relevant professional skill to prepare a report on any aspect pertaining thereto.

The BMA has certain powers of investigation relating to insurers and their insurance groups which it may exercise in the interest of such insurer’s policyholders or potential policyholders. The BMA has certain powers of intervention relating to registered persons including insurers if: (a) there is any significant risk of insolvency; (b) there has been a breach of the Insurance Act or the registered person’s license conditions; (c) the minimum criteria for the registered person is not or has not been fulfilled; (d) any controller provisions pursuant to the Insurance Act have been breached; or (e) an insurer is in breach of its ECR. In such circumstances the BMA may give the registered person such directions as it sees fit in order to safeguard the interests of the registered person’s clients and potential clients. In addition, if it appears to the BMA that a designated insurer is in breach of the Insurance Act or regulations or rules applicable to it, the BMA may give the designated insurer such directions as the BMA sees fit in order to safeguard the interests of policyholders and potential policyholders of the insurance group. The BMA may disclose certain information relating to the business or other affairs of any person to authorities in countries or territories outside Bermuda to exercise functions corresponding to the BMA’s functions under the Insurance Act and in certain other limited circumstances.

Securities: Securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003, and Exchange Control Act 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA, in its policy dated June 1, 2005, provides that where any equity securities, which would include our ordinary shares, of a Bermuda company are listed on an appointed stock exchange (the New York Stock Exchange is deemed to be an appointed stock exchange under Bermuda law), general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equity securities of the company remain so listed. The ordinary shares of the Company are listed on the New York Stock Exchange.

Notwithstanding the above general permission, the BMA has granted the Company permission, subject to our ordinary or voting shares being listed on an appointed stock exchange, to issue, grant, create, sell and transfer any of our shares, options, warrants, depositary receipts, rights, loan notes, debt instruments and other securities of the Company, to and among persons who are either resident or non-resident of Bermuda for exchange control purposes.

Shareholder Controller and other Notifications: Under the Insurance Act each shareholder controller or prospective shareholder controller will be responsible for notifying the BMA in writing if the shareholder controller becomes a controller, directly or indirectly, of 10%, 20%, 33% or 50% ("shareholder controller") of the Company and/or any of the Company’s Bermuda insurance subsidiaries. The BMA may serve a notice of objection on any existing controller of the Company or any of the Company’s Bermuda insurance subsidiaries if it appears to the BMA that the person is no longer a fit and proper person to be such a controller. The Company’s Bermuda insurance subsidiaries are required to notify the BMA in writing in the event of any person becoming or ceasing to be a controller or officer of the insurer. In addition the group’s designated insurer in respect of its parent company of the insurance group, is required to notify the BMA in the event of any person becoming or ceasing to be an officer of the insurer or of the parent company of the group. An officer includes a director, chief executive, or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters. A controller includes a managing director, or a chief executive of the insurer or of another company of which it is a subsidiary, or any other person in accordance with whose directions or instructions the directors or controllers of the insurer or a company of which the insurer is a subsidiary are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting shares or voting power or is able to exercise a significant influence over the management of the insurer or a company of which the insurer is a subsidiary pursuant to the provisions of the Insurance Act.

United States

General: Western World's operating subsidiaries are domiciled in the state of New Hampshire. Western World Insurance Company operates as a surplus lines insurer in all other jurisdictions. Tudor Insurance Company is licensed as a domestic surplus lines insurer in New Hampshire and is authorized to conduct business as a surplus lines insurer in all other jurisdictions. Stratford Insurance Company operates as an admitted insurer in 49 jurisdictions. Talbot operates within the Lloyd’s insurance market through Syndicate 1183, and Lloyd’s operations are subject to regulation in the United States in addition to being regulated in the United Kingdom, as discussed further below. The Lloyd’s market is licensed to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin Islands. Validus Reaseguros, Inc. and Validus Re America (New Jersey) Inc. are licensed reinsurance intermediaries in Florida and New York, respectively.

Much of state insurance regulation follows model statutes or regulations developed or amended by the National Association of Insurance Commissioners ("NAIC") which is governed by the chief insurance regulators of each U.S. jurisdiction. Through the NAIC, state insurance regulators establish standards, best practices and coordinate regulatory oversight.

Holding Company Regulation: Western World's operating subsidiaries are subject to the insurance holding company laws of the state of New Hampshire. These regulations generally provide that each insurance company in the system is required to register with the state insurance department and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and reasonable and notice to the state insurance department is required prior to the consummation of certain material transactions between an insurer and any entity in its holding company system. In addition, certain of such transactions cannot be consummated without prior approval from the state insurance department, or its failure to disapprove after receiving notice. The holding company acts also prohibit any person from directly or indirectly acquiring control of a U.S. insurance company unless that person has filed an application with specified information with the insurance company’s domiciliary commissioner and has obtained the commissioner’s prior approval. Under most states’ statutes, including New Hampshire, acquiring 10% or more of the voting securities of an insurance company or its parent company is presumptively considered an acquisition of control of the insurance company, although such presumption may be rebutted. Accordingly, any person or entity that acquires, directly or indirectly, 10% or more of the voting securities a U.S. insurance company without the prior approval of the commissioner will be in violation of these laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the commissioner or prohibiting the voting of those securities, or to other actions that may be taken by the commissioner.

In 2010, the NAIC adopted amendments to the Insurance Holding Company System Regulatory Act and Regulation, which, among other changes, introduce the concept of “enterprise risk” within an insurance holding company system. If and when the amendments are adopted by a particular state, the amended Insurance Holding Company System Regulatory Act and Regulation would impose more extensive informational requirements on parents and other affiliates of licensed insurers or reinsurers with the purpose of protecting them from enterprise risk, including requiring an annual enterprise risk report by the ultimate controlling person identifying the material risks within the insurance holding company system that could pose enterprise risk to the licensed companies. The amended Insurance Holding Company System Regulatory Act also requires any controlling person of a U.S. insurance company seeking to divest its controlling interest in the insurance company to file with the commissioner a confidential notice of the proposed divestiture at least 30 days prior to the cessation of control; after receipt of the notice, the commissioner shall determine those instances in which the parties seeking to divest or to acquire a controlling interest will be required to file for or obtain approval of the transaction. The amended Insurance Holding Company System Regulatory Act and Regulation must be adopted by the individual states for the new requirements to apply to U.S. domestic insurers and reinsurers. To date, only certain states, including New Hampshire, have enacted legislation adopting the amended Insurance Holding Company System Regulatory Act in some form.

Enterprise Risk: The NAIC has increased its focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. “Enterprise risk” is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. As noted above, the NAIC recently adopted amendments to its Model Insurance Holding Company System Regulatory Act and Regulation, which include, among other amendments, a requirement for the ultimate controlling person to file an enterprise risk report. In 2012, the NAIC adopted the Risk Management and ORSA Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. The ORSA Model Act also provides that, no more than once a year, an insurer’s domiciliary regulator may request that an insurer submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and/or the insurance

group of which it is a member. If and when the ORSA Model Act is adopted by a particular state, the ORSA Model Act would impose more extensive filing requirements on parents and other affiliates of domestic insurers.

Statutory Accounting Practices: Statutory accounting practices, or “SAP,” are a basis of accounting developed to assist U.S. insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state. U.S. GAAP concerns an insurer’s solvency, but it also concerns other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with U.S. GAAP as opposed to SAP.

Statutory Accounting Practices established by the NAIC and adopted, in part, by the New Hampshire insurance regulator, determine, among other things, the amount of statutory surplus and statutory net income of Western World's insurance company subsidiaries and thus determine, in part, the amount of funds they have available to pay dividends.

Restrictions on Dividends and Distributions: The ability of an insurer to pay dividends or make other distributions is subject to insurance regulatory limitations of the insurance company’s state of domicile. Generally, such laws limit the payment of dividends or other distributions above a specified level. Dividends or other distributions in excess of such thresholds are “extraordinary” and are subject to prior regulatory approval. Such dividends or distributions may be subject to applicable withholding or other taxes. Refer to Note 26 "Statutory and regulatory requirements" to the Consolidated Financial Statements in Part II, Item 8.

Insurance Regulatory Information System Ratios: The NAIC Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 13 industry ratios (referred to as “IRIS ratios”) and specifies “usual values” for each ratio. Departure from the usual values of the IRIS ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. Our insurance subsidiaries have consistently met the majority of the IRIS ratio tests.

Risk-Based Capital Requirements: In order to enhance the regulation of insurer solvency, the NAIC adopted in December 1993 a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:


•	underwriting, which encompasses the risk of adverse loss developments and inadequate pricing;


•	declines in asset values arising from credit risk; and


•	declines in asset values arising from investment risks.

An insurer will be subject to varying degrees of regulatory action depending on how its statutory surplus compares to its risk-based capital calculation. For equity investments in an insurance company affiliate, the risk-based capital requirements for the equity securities of such affiliate would generally be our U.S.-based subsidiaries’ proportionate share of the affiliate’s risk-based capital requirement.

Under the approved formula, an insurer’s total adjusted capital is compared to its authorized control level risk-based capital. If this ratio is above a minimum threshold, no company or regulatory action is necessary. Below this threshold are four distinct action levels at which a regulator can intervene with increasing degrees of authority over an insurer as the ratio of surplus to risk-based capital requirement decreases. The four action levels include:


•	insurer is required to submit a plan for corrective action;


•	insurer is subject to examination, analysis and specific corrective action;


•	regulators may place insurer under regulatory control; and


•	regulators are required to place insurer under regulatory control.

Western World’s surplus (as calculated for statutory purposes) is above the risk-based capital thresholds that would require either company or regulatory action.

Guaranty Funds: Most states require all admitted insurance companies to participate in their respective guaranty funds which cover certain claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and are generally subject to annual assessments in the states by the guaranty funds to cover these losses.

Federal Regulation: Although state regulation is the dominant form of regulation for insurance business, the federal government in recent years has shown some concern over the adequacy of state regulation. It is not possible to predict the future impact of any potential federal regulations or other possible laws or regulations on our U.S. based subsidiaries’ capital and operations, and such laws or regulations could materially adversely affect their business. In addition, a number of federal laws affect and apply to the insurance industry, including various privacy laws and the economic and trade sanctions implemented by the Office of Foreign Assets Control (“OFAC”). OFAC maintains and enforces economic sanctions against certain foreign countries and groups and prohibits U.S. persons from engaging in certain transactions with certain persons or entities. OFAC has imposed civil penalties on persons, including insurance companies, arising from violations of its economic sanctions program.

The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) created the Federal Insurance Office (“FIO”) within the Department of Treasury, which is not a federal regulator or supervisor of insurance, but monitors the insurance industry for systemic risk, consults with the states regarding insurance matters and develops federal policy on aspects of international insurance matters. The Dodd-Frank Act also created a uniform system for non-admitted insurance premium tax payments based on the home state of the policyholder and provides for single state regulation for financial solvency and credit for reinsurance as discussed below.

Credit for Reinsurance: Certain provisions of the Dodd-Frank Act, which became effective on July 21, 2011, provide that only the state in which a primary insurer is domiciled may regulate the financial statement credit for reinsurance taken by that primary insurer. U.S. domiciled ceding companies typically receive full credit for outwards reinsurance protections in their statutory financial statements with respect to liabilities ceded to admitted U.S. domestic reinsurers. However, most states in the U.S. do not confer full credit for outwards reinsurance protections for liabilities ceded to non-admitted or unlicensed reinsurers, unless the reinsurer specifically collateralizes its obligations to the ceding company or is an authorized or trusteed reinsurer in the ceding company's state of domicile through the establishment of a Multi-Beneficiary Reinsurance Trust ("MBRT").

In December 2014, the Company established a MBRT to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As a result, cedants domiciled in that state will receive automatic credit in their regulatory filings for the reinsurance provided prospectively by the Company. Following the approval by the State of New Jersey, in 2015, we expect to submit applications in most other U.S. states and territories, respectively, to become a trusteed reinsurer. It is our intention over time to transition U.S. domiciled cedants with outstanding letters of credit to the MBRT and therefore reduce our reliance on letters of credit. Through Lloyd's, Talbot is also an accredited reinsurer in all states and territories of the United States. Lloyd’s maintains various trust funds in the state of New York to protect its U.S. business and is therefore subject to regulation by the New York Department of Financial Services, which acts as the domiciliary department for Lloyd’s U.S. trust funds. There are deposit trust funds in other states to support Lloyd’s reinsurance and excess and surplus lines insurance business.

As a result of the requirements relating to the provision of credit for reinsurance, our reinsurance operations are indirectly subject to certain regulatory requirements imposed by jurisdictions in which ceding companies are domiciled. In addition, the insurance and reinsurance regulatory framework of Bermuda and the insurance of U.S. risk by companies based in Bermuda and not licensed or authorized in the United States recently has become the subject of increased scrutiny in many jurisdictions, including the United States. We are not able to predict the future impact of changes in the laws and regulation to which we are or may become subject on the Company’s financial condition or results of operations.

Tax Regulations: Talbot is subject to a Closing Agreement between Lloyd’s and the U.S. Internal Revenue Service pursuant to which Talbot is subject to U.S. federal income tax to the extent its income is attributable to U.S. agents who have authority to bind Talbot. Specifically, U.S. federal income tax is imposed on 35% of its income attributable to U.S. binding authorities (70% for Illinois or Kentucky business).

Other Regulations: AlphaCat Managers, Ltd. is a licensed insurance manager and is registered as an investment adviser with the U.S. Securities and Exchange Commission under the U.S. Investment Advisers Act of 1940, as amended. AlphaCat Managers, Ltd. is also registered as a "commodity pool operator" with the Commodity Futures Trading Commission (the "CFTC") and is a member of the National Futures Association.

United Kingdom

On April 1, 2013, the UK Financial Services Authority (“FSA”) ceased to exist in its current form and two new focused regulators were established, namely the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”), both of which fall under the Financial Services Markets Act 2000.

The Financial Conduct Authority (“FCA”) has a strong mandate for promoting confidence and transparency in financial services and gives greater protection for consumers of financial services.

The Prudential Regulation Authority (“PRA”) is responsible for the day-to-day supervision of financial institutions that are subject to significant prudential regulation. It adopts a more judgment-focused approach to regulation so that business models can be challenged, risks identified and action taken to preserve financial stability. The PRA also has an insurance objective of contributing to the securing of an appropriate degree of protection for those who are or may become policyholders.

In relation to insurance, the FCA and PRA both regulate insurers, insurance intermediaries and Lloyd’s itself. The FCA, PRA and Lloyd’s have common objectives in ensuring that the Lloyd’s market is appropriately regulated. To minimize duplication, there are arrangements with Lloyd’s for co-operation on supervision and enforcement.

Talbot’s underwriting activities are therefore regulated by both the FCA and PRA as well as being subject to the Lloyd’s “franchise” rules. All three have powers to remove their respective authorization for Talbot to manage Lloyd’s syndicates. Lloyd’s approves annually Syndicate 1183’s business plan and any subsequent material changes, and the amount of capital required to support that plan. Lloyd’s may require changes to any business plan presented to it or additional capital to be provided to support the underwriting (known as Funds as Lloyd’s).

Talbot Risk Services Pte, Ltd. operates in Singapore to source business in the Far East under the Lloyd’s Asia Scheme. The Lloyd’s Asia Scheme was established by the Monetary Authority of Singapore to encourage members of Lloyd’s to expand insurance activities in Asia.

An EU directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II was adopted by the European Parliament in April 2009. The proposed implementation date has been changed more than once, but is it now intended to come into force on January 1, 2016. Insurers and reinsurers have been and continue to undertake a significant amount of work to ensure that they meet the new requirements and this may divert resources from other operational roles. Talbot's implementation plans are materially complete, as Lloyd's requires that businesses in the Lloyd's market must be materially Solvency II compliant by January 1, 2015 and fully compliant with the tests and standards for internal model approval by February 28, 2015. Talbot is currently engaged in the review process with Lloyd's and expects to achieve compliance with the agreed time line. If the review process results in noncompliance, there is a risk that it may result in prudential measures being taken by Lloyd's in respect of Talbot.

Switzerland

Our Swiss reinsurance subsidiary, Validus Reinsurance (Switzerland) Ltd ("Validus Re Swiss") (formerly Flagstone Réassurance Suisse SA), is a société anonyme headquartered in Zurich, Switzerland as of February 1, 2014.

Regulation and Supervision: Validus Re Swiss obtained its reinsurance license from the Swiss Federal Office of Private Insurance (now the Swiss Financial Market Supervisory Authority or "FINMA") in December 2006. The conduct of reinsurance business by a company headquartered in Switzerland requires a license granted by FINMA. In principle, licensing and supervision requirements are imposed on Validus Re Swiss as a standalone legal entity.

In general, FINMALaw is an overarching statute applying in as far as there is no contrary provision in the sectoral laws for insurance and reinsurance. Sectoral laws are those laws germane to a particular industry sector such as, for example, insurance, reinsurance and banking. Aside from some inconsequential amendments under FINMALaw unifying cross sectoral issues, the existing sectoral laws governing insurance and reinsurance continue in force, substantially unchanged.

The various legal and regulatory requirements that must be satisfied, are set forth primarily by the three following sets of rules and regulations: the Federal Insurance Supervisory Law (“ISL”); the Federal Private Insurance Supervision Ordinance (“ISO”); and the FINMA Insurance Supervision Ordinance, as well as by various implementing directives and circulars. In general, the approach is principles based and allows for consideration of a justified application by management in relation to such principles.

Under Swiss rules and regulations, Swiss reinsurance companies are generally subject to many, but not all, of the same provisions that apply to direct insurers, and include the following obligations:

Adequacy of Financial Resources: ISL Article 9 and ISO, sets out the minimum capital requirements and solvency requirements. The minimum capital for a reinsurance firm is CHF 10 million.

In addition, Validus Re Swiss must keep adequate disposable and unencumbered capital resources to cover its entire activities. In calculating the solvency margin, account is taken of the risks to which the firm is exposed, the insurance classes involved, the extent of the business, the geographical scope and internationally recognized principles (ISL Article 9). Solvency is determined based on two independent methodologies:

Solvency I: This involves calculating a margin applying defined percentages to a base of the higher of gross annual premium or gross claims for the last three available years and comparing coverage in terms of admissible “own funds” as determined under ISL Article 37.

The Swiss Solvency Test ("SST"): Under this approach, a company's capital is considered adequate if its risk bearing capital ("RBC") exceeds its target capital ("TC"). RBC is defined as the difference between assets at a market-consistent value and discounted best estimated liabilities. TC is defined as the sum of a market value margin and the difference between the discounted one-year RBC and the current year RBC. The SST involves a sophisticated analysis to calculate the market-consistent valuation of all assets and liabilities with a methodological approach to risk categories (insurance risk, credit risk, etc.) subjecting them to scenario stress tests at a basic level in the context of the standard regulatory approach but, where appropriate (for instance mandatory for reinsurance companies), permitting the use of internal models in the overall management of risk, once such models are validated. The validation of internal models is a general process which FINMA has pursued with all regulated firms over the past years and is ongoing.

The SST is very close to the “Solvency II” standard of the European Union. On February 1, 2010, Switzerland was formally recognized as equivalent by the EU committee of supervisors, the Committee of European Insurance and Occupational Pensions Supervisors (“CEIOPS”), firstly as regards the EU Reinsurance Directive of 2005 regulating pure reinsurers and secondly as regards its supervisory regime.

For the SST all assets of Validus Re Swiss are considered. There is no direct constraint on permitted investments since the provisions regarding assets linked to reserves in the ISL do not apply to reinsurance firms. However, the use of derivative instruments is required to be fully considered as part of the risk management processes and limited to reducing investment or insurance risk or to secure investment efficiencies.

Sound Corporate Governance, Risk Management and Internal Control System: In addition to quantitative risk measures, FINMA requires full qualitative governance and control of risk in the firm. This includes requirements as to the ongoing fitness, propriety and competence of the directors and senior management, observance of ethical standards, objective and appropriate remuneration procedures, management of conflicts of interests, independence and adequate resourcing of control functions (including the responsible actuary, the risk management function and the internal audit function), as well as clear terms of reference and systems of delegation and report throughout.

ISL and ISO each require the appointment of a Responsible Actuary - an independent and properly qualified actuary responsible for ensuring that solvency margins are calculated correctly, proper accounting principles are used, and adequate technical reserves are established and that this person report to the Board periodically.

Insurance companies are required to implement documented procedures for risk management and internal control. While FINMA does not require a specific quantitative outcome in relation to operational risk, the firm is expected to undertake proper analysis and to account for it.

Supervisory Process: The supervisory process includes the following requirements:

Annual Reporting: Validus Re Swiss is required to prepare an annual report at the end of each financial year on the solvency margins available, as well as an annual report on the calculation of target capital and on risk bearing capital. Validus Re Swiss files a corporate report incorporating financial statements prepared and audited in accordance with Swiss accounting rules and a supervisory report in the prescribed format. The supervisory report is to be submitted to FINMA by June 30 of each year in electronic form together with the annual report.

Ad Hoc Notifications: FINMA requires ad hoc notifications of all changes to the firm's scheme of operations which include the following: any changes to company statutes, details of its organizational structure or business activities (including expansion into new jurisdictions; changes involving at least a 10% equity holding or at least 10% of votes in the Company, or where there is a change of control allowing persons to exert a significant influence on the Company's commercial activities; changes in management personnel, including the Responsible Actuary).

In addition, Validus Re Swiss is required to notify changes in levels of control of it upstream or by it downstream at 10%, 20%, 33% or 50% in terms of capital or voting rights.

There is a general duty to notify FINMA of all matters of which it might want to be advised (FINMALaw Article 29). This includes all material solvency matters, which are specified by circular to include a breach of solvency requirements, fluctuations of 10% or more in terms of assets, technical provisions, or of a significant retrocession contract of the company as well as redemption of any hybrid debt instruments; and any regulatory or criminal investigations brought against the company or the senior management or other significant events.

External Auditor Involvement: Audit firms are subjected to approval and supervision by FINMA and are a significant agent in the supervisory process applying to reinsurance companies (FINMALaw 24 et seq.). Auditors report both to the governing body of the company and to FINMA. They report to the Board on the financial statements of the company and on regulatory shortcomings with a requirement for remediation. Material shortcomings are reported directly to FINMA. A standardized audit report on these topics is prescribed by FINMA Directive. Failure to have an audit conducted in accordance with legal requirements, to fulfill the legal duty of cooperation with auditors or for the auditors to perform their role properly (including whistle blowing or failing to identify regulatory breaches) all attract criminal sanctions.

Intervention and Enforcement by the Regulator. FINMALaw provides for a wider range of supervisory intervention tools than previously provided for under the ISL such as the commencement of formal proceedings, including orders to comply with the law, leading up to withdrawal of license, declarations of unfitness for individuals, disgorgement and the appointment of independent specialists to investigate and implement remediation.

Capital Structure and Dividends: Validus Re Swiss is funded by equity in the form of paid in capital by shares and in share premium. Under Swiss corporate law as modified by insurance supervisory law, a non-life insurance company is obliged to contribute to statutory legal reserves a minimum of 20% of any annual profit up to 50% of statutory capital, being paid in share capital. Validus Re Swiss has been substantially funded by share premium. As of the date of this Annual Report we are advised that, share premium can be distributed to shareholders without being subject to withholding tax. However, the distribution of any special dividend to shareholders remains subject to the approval of FINMA which has regard to the maintenance of solvency and the interests of reinsureds and creditors.

Employment Practices

The following table details our personnel by geographic location as at December 31, 2014:



Location	Validus Re	AlphaCat	Talbot	Western World	Corporate	Total	%
London, England	—	—	259	—	65	324	39.8	%
New Jersey, United States	—	—	—	208	—	208	25.6	%
Pembroke, Bermuda	70	9	—	—	59	138	17.0	%
New York, United States	2	—	14	1	18	35	4.3	%
Republic of Singapore	10	—	20	—	—	30	3.7	%
Waterloo, Canada	—	—	—	—	24	24	2.9	%
Miami, United States	14	—	4	—	—	18	2.2	%
Dubai, United Arab Emirates	—	—	12	—	—	12	1.5	%
Santiago, Chile	—		8	—		8	1.0	%
Toronto, Canada	—	—	—	—	7	7	0.9	%
Zurich, Switzerland	5	—	—	—	—	5	0.6	%
Dublin, Ireland	3	—	—	—	—	3	0.3	%
Boston, United States	—	—	—	2	—	2	0.2	%
Total	104	9	317	211	173	814	100.0	%

We believe our relations with our employees are excellent.

Available Information

The Company files periodic reports, proxy statements and other information with the SEC. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov. The Company’s common shares are traded on the NYSE under the symbol “VR.” Similar information concerning the Company can be reviewed at the office of the NYSE at 20 Broad Street, New York, New York, 10005. The Company’s website address is http://www.validusholdings.com. Information contained in this website is not part of this report.

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge, including through our website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Copies of the charters for the audit committee, the compensation committee, the corporate governance and nominating committee, the finance committee and the risk committee, as well as the Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics for Directors, Officers and Employees (the “Code”), which applies to all of the Company’s Directors, officers and employees, and Code of Ethics for Senior Officers, which applies to the Company’s principal executive officer, principal accounting officer and other persons holding a comparable position, are available free of charge on the Company’s website at http://www.validusholdings.com or by writing to Investor Relations, Validus Holdings, Ltd., 29 Richmond Road, Pembroke, HM 08, Bermuda. The Company will also post on its website any amendment to the Code and any waiver of the Code granted to any of its directors or executive officers to the extent required by applicable rules.

Item 1A. Risk Factors

Risks Related to Our Company

Claims on policies written under our short-tail insurance lines that arise from unpredictable and severe catastrophic events could adversely affect our financial condition or results of operations.

The majority of our gross premiums written to date are in short-tail lines, many of which have the potential to accumulate, which means we could become liable for a significant amount of losses in a brief period. The short-tail policies we write expose us to claims arising out of unpredictable natural and other catastrophic events, whether arising from natural causes such as hurricanes, windstorms, tsunamis, severe winter weather, earthquakes and floods, or man-made causes such as fires, explosions, acts of terrorism, war or political unrest. Many observers believe that the Atlantic basin is in the active phase of a multi-decade cycle in which conditions in the ocean and atmosphere, including warmer-than-average sea-surface temperatures and low wind shear, enhance hurricane activity. This increase in the number and intensity of tropical storms and hurricanes can span multiple decades (approximately 20 to 30 years). These conditions may translate to a greater potential for hurricanes to make landfall in the U.S. at higher intensities over the next several years. In addition, climate change may be causing changes in global temperatures, which may in the future increase the frequency and severity of natural catastrophes and the losses resulting therefrom. Although the frequency and severity of catastrophes are inherently unpredictable, we use state-of-science understanding of climate change and other climate signals for pricing and risk aggregation.

The extent of losses from catastrophes is a function of both the number and severity of the insured events and the total amount of insured exposure in the areas affected. Increases in the value and concentrations of insured property, the effects of inflation and changes in cyclical weather patterns may increase the severity of claims from natural catastrophic events in the future. Similarly, changes in global political and economic conditions may increase both the frequency and severity of man-made catastrophic events in the future. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year, which could adversely affect our financial condition, possibly to the extent of eliminating our shareholders’ equity. Our ability to write new reinsurance policies could also be affected as a result of corresponding reductions in our capital.

Underwriting is inherently a matter of judgment, involving important assumptions about matters that are unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more catastrophic or other events could result in claims that substantially exceed our expectations and which would become due in a short period of time, which could materially adversely affect our financial condition, liquidity or results of operations.

Emerging claim and coverage issues could adversely affect our business.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance or reinsurance contracts that are affected by the changes. For example, a (re)insurance contract might limit the amount that can be recovered as a result of flooding. However, if the flood damage was caused by an event that also caused extensive wind damage, the quantification of the two types of damage is often a matter of judgment. Similarly, one geographic zone could be affected by more than one catastrophic event. In this case, the amount recoverable from an insurer or reinsurer may in part be determined by the judgmental allocation of damage between the events. Given the magnitude of the amounts at stake, these types of issues occasionally necessitate judicial resolution. In addition, our actual losses may vary materially from our current estimate of the loss based on a number of factors, including receipt of additional information from insureds or brokers, the attribution of losses to coverages that had not previously been considered as exposed and inflation in repair costs due to additional demand for labor and materials. As a result, the full extent of liability under an insurance or reinsurance contract may not be known for many years after such contract is issued and a loss occurs. Our exposure to this uncertainty is greater in our longer tail lines (marine and energy liabilities, aviation products and airports (aviation direct), financial institutions, construction, political risk and liability).

We depend on ratings from third party rating agencies. Our financial strength rating could be revised downward, which could affect our standing among brokers and customers, cause our premiums and earnings to decrease and limit our ability to pay dividends on our common shares.

Third-party rating agencies assess and rate the financial strength of insurers and reinsurers based upon criteria established by the rating agencies, which criteria are subject to change. The financial strength ratings assigned by rating agencies to insurance and reinsurance companies represent independent opinions of financial strength and ability to meet policyholder obligations and are not directed toward the protection of investors. Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. Insurers and intermediaries use these ratings as one measure by which to assess the financial strength and quality of insurers and reinsurers. These ratings are often a key factor in the decision by

an insured or intermediary of whether to place business with a particular insurance or reinsurance provider. These ratings are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our common shares.

If our financial strength rating is reduced from current levels, our competitive position in the (re)insurance industry could suffer, and it would be more difficult for us to market our products. A downgrade could result in a significant reduction in the number of (re)insurance contracts we write as our customers and brokers that place such business, move to other competitors with higher financial strength ratings.

The substantial majority of reinsurance contracts issued through reinsurance brokers contain provisions permitting the ceding company to cancel such contracts in the event of a downgrade of the reinsurer by A.M. Best below “A-” (Excellent). We cannot predict in advance the extent to which this cancellation right would be exercised, if at all, or what effect any such cancellations would have on our financial condition or future operations, but such effect could be material and adverse. Consequently, substantially all of Validus Re’s business could be affected by a downgrade of our A.M. Best rating below “A-”.

The indenture governing our Junior Subordinated Deferrable Debentures would restrict us from declaring or paying dividends on our common shares if we are downgraded by A.M. Best to a financial strength rating of “B” (Fair) or below or if A.M. Best withdraws its financial strength rating on any of our material insurance subsidiaries. A downgrade of the Company’s A.M. Best financial strength rating below “B++” (Fair) would also constitute an event of default under our credit facilities. Either of these events could, among other things, reduce the Company’s financial flexibility.

If our risk management and loss limitation methods fail to adequately manage exposure to losses from catastrophic events, our financial condition and results of operations could be adversely affected.

We manage exposure to catastrophic losses by analyzing the probability and severity of the occurrence of catastrophic events and the impact of such events on our overall (re)insurance and investment portfolio. We use various tools to analyze and manage the reinsurance exposures assumed from insureds and ceding companies and risks from a catastrophic event that could have an adverse effect on our investment portfolio. VCAPS, our proprietary risk modeling software, enables us to assess the adequacy of reinsurance risk pricing and to monitor the overall exposure to insurance and reinsurance risk in correlated geographic zones. There can be no assurance that the models and assumptions used by the software will accurately predict losses. Further, there can be no assurance that the models are free of defects in the modeling logic or in the software code. In addition, we have not sought copyright or other legal protection for VCAPS.

In addition, much of the information that we enter into the risk modeling software is based on third-party data that may not be reliable, as well as estimates and assumptions that are dependent on many variables, such as assumptions about building material and labor demand surge, storm surge, the expenses of settling claims (known as loss adjustment expenses), insurance-to-value and storm intensity. Accordingly, if the estimates and assumptions that are entered into the proprietary risk model are incorrect, or if the proprietary risk model proves to be an inaccurate forecasting tool, the losses we might incur from an actual catastrophe could be materially higher than the expectation of losses generated from modeled catastrophe scenarios, and our financial condition and results of operations could be adversely affected.

A modeled outcome of net loss from a single event also relies in significant part on the reinsurance and retrocessional arrangements in place, or expected to be in place at the time of the analysis, and may change during the year. Modeled outcomes assume that the reinsurance in place responds as expected with minimal reinsurance failure or dispute. Reinsurance and retrocessional coverage is purchased to protect the inwards exposure in line with our risk appetite, but it is possible for there to be a mismatch or gap in cover which could result in higher than modeled losses. In addition, many parts of our reinsurance program are purchased with limited reinstatements and, therefore, the number of claims or events which may be recovered from second or subsequent events is limited. It should also be noted that renewal dates of the reinsurance and retrocessional program do not necessarily coincide with those of the inwards business written. Where inwards business is not protected by risks attaching reinsurance and retrocessional programs, the programs could expire resulting in an increase in the possible net loss retained and as such, could have a material adverse effect on our financial condition and results of operations.

We also seek to limit loss exposure through loss limitation provisions in policies we write, such as limitations on the amount of losses that can be claimed under a policy, limitations or exclusions from coverage and provisions relating to choice of forum, which are intended to assure that our policies are legally interpreted as intended. There can be no assurance that these contractual provisions will be enforceable in the manner expected or that disputes relating to coverage will be resolved in our favor. If the loss limitation provisions in the policies are not enforceable or disputes arise concerning the application of such provisions, the losses we incur from a catastrophic event could be materially higher than expected and our financial condition and results of operations could be adversely affected.

The insurance and reinsurance business is historically cyclical and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions, which could materially adversely affect our financial condition and results of operations.

The insurance and reinsurance industry has historically been cyclical. Insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of underwriting capacity, underwriting results of primary insurers, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate, including in response to changes in rates of return on investments being earned in the reinsurance industry.

The insurance and reinsurance pricing cycle has historically been a market phenomenon, driven by supply and demand rather than by the actual cost of coverage. The upward phase of a cycle is often triggered when a major event forces insurers and reinsurers to make large claim payments, thereby drawing down capital. This, combined with increased demand for insurance against the risk associated with the event, pushes prices upwards. Over time, insurers’ and reinsurers’ capital is replenished with the higher revenues. At the same time, new entrants flock to the industry seeking a part of the profitable business. This combination prompts a slide in prices—the downward cycle—until a major insured event potentially restarts the upward phase. As a result, the insurance and reinsurance business has been characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity, which is the percentage of surplus or the dollar amount of exposure that a reinsurer is willing to place at risk, as well as periods when shortages of capacity result in favorable premium rates and policy terms and conditions.

Premium levels may be adversely affected by a number of factors which fluctuate and may contribute to price declines generally in the reinsurance industry. For example, as premium levels for many products increased subsequent to the significant natural catastrophes of 2004 and 2005, the supply of reinsurance increased, either as a result of capital provided by new entrants or by the commitment of additional capital by existing reinsurers. Increases in the supply of insurance and reinsurance may have consequences for the reinsurance industry generally and for us including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions. As a consequence, the Company will experience greater competition on most insurance and reinsurance lines. This could adversely affect the rates we receive for our (re)insurance and our gross premiums written. The insurance and reinsurance industry is currently experiencing a soft market whereby premiums tend to be lower, capacity is higher and competition increases.

The cyclical trends in the industry and the industry’s profitability can also be affected significantly by volatile and unpredictable developments, such as natural disasters (e.g., catastrophic hurricanes, windstorms, tornadoes, earthquakes and floods), courts granting large awards for certain damages, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds and primary insurance companies. We expect to experience the effects of cyclicality, which could materially adversely affect our financial condition and results of operations.

Competition for business in our industry is intense, and if we are unable to compete effectively, we may not be able to retain market share and our business may be materially adversely affected.

The insurance and reinsurance industries are highly competitive. We face intense competition, based upon (among other things) global capacity, product breadth, reputation and experience with respect to particular lines of business, relationships with (re)insurance intermediaries, quality of service, capital and perceived financial strength (including independent rating agencies’ ratings), innovation and price. We compete with major global insurance and reinsurance companies and underwriting syndicates, many of which have extensive experience in (re)insurance and may have greater financial, marketing and employee resources available to them than us. Other financial institutions, such as banks and hedge funds, now offer products and services similar to our products and services through alternative capital markets products that are structured to provide protections similar to those provided by reinsurers. These products, such as catastrophe-linked bonds, compete with our products. In the future, underwriting capacity will continue to enter the market from these identified competitors and perhaps other sources. Increased competition could result in fewer submissions and lower rates, which could have a material adverse effect on our growth and profitability. If we are unable to compete effectively against these competitors, we may not be able to retain market share.

Insureds have been retaining a greater proportion of their risk portfolios than previously, and industrial and commercial companies have been increasingly relying upon their own subsidiary insurance companies, known as captive insurance companies, self-insurance pools, risk retention groups, mutual insurance companies and other mechanisms for funding their risks, rather than risk transferring insurance. This has also put downward pressure on (re)insurance premiums.

Consolidation in the (re)insurance industry could adversely affect our business.

We believe that several (re)insurance industry participants are seeking to consolidate. These consolidated entities may try to use their enhanced market power to negotiate price reductions for our products and services and/or obtain a larger market share through increased line sizes. If competitive pressures reduce our prices, we would expect to write less business. As the (re)insurance industry consolidates, competition for customers will become more intense and the importance of acquiring and properly servicing each customer will become greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. In addition, insurance companies that merge may be able to spread their risks across a consolidated, larger capital base so that they require less reinsurance. Reinsurance intermediaries could also continue to consolidate, potentially adversely impacting our ability to access business and distribute our products. We could also experience more robust competition from larger, better capitalized competitors. Any of the foregoing could adversely affect our business or our results of operations.

If we underestimate our reserve for losses and loss expenses, our financial condition and results of operations could be adversely affected.

Our success depends on our ability to accurately assess the risks associated with the businesses and properties that we insure/reinsure. If unpredictable catastrophic events occur, or if we fail to adequately manage our exposure to losses or fail to adequately estimate our reserve requirements, our actual losses and loss expenses may deviate, perhaps substantially, from our reserve estimates.

We estimate the risks associated with our outstanding obligations, including the risk embedded within our unearned premiums. To do this, we establish reserves for losses and loss expenses (or loss reserves), which are liabilities that we record to reflect the estimated costs of claim payment and the related expenses that we will ultimately be required to pay in respect of premiums written and include case reserves and IBNR reserves. However, under U.S. GAAP, we are not permitted to establish reserves for losses until an event which gives rise to a claim occurs. As a result, only reserves applicable to losses incurred up to the reporting date may be set aside on our financial statements, with no allowance for the provision of loss reserves to account for possible other future losses, unless we deem the unearned premium reserve to be insufficient to cover future losses on risks that have already incepted. Case reserves are reserves established with respect to specific individual reported claims. IBNR reserves are reserves for estimated losses that we have incurred but that have not yet been reported to us.

Our reserve estimates do not represent an exact calculation of liability. Rather, they are estimates of what we expect the ultimate settlement and administration of claims will cost. These estimates are based upon actuarial and statistical projections, on our assessment of currently available data, predictions of future developments and estimates of future trends and other variable factors such as inflation. Establishing an appropriate level for our loss reserve estimates is an inherently uncertain process. It is likely that the ultimate liability will be greater or less than these estimates and that, at times, this variance will be material. Our reserve estimates are regularly refined as experience develops and claims are reported and settled. In addition, as we operate largely through intermediaries, reserving for our business can involve added uncertainty arising from our dependence on information from ceding companies which, in addition to the risk of receiving inaccurate information, involves an inherent time lag between reporting information from the primary insurer to us. Additionally, ceding companies employ differing reserving practices which add further uncertainty to the establishment of our reserves. Moreover, in certain circumstances, the Company has necessitated the use of industry loss emergence patterns in deriving IBNR. Loss emergence patterns are development patterns used to project current reported or paid loss amounts to their ultimate settlement value or amount. Further, expected losses and loss ratios are typically developed using vendor and proprietary computer models and these expected loss ratios are a material component in the calculation of IBNR. Actual loss ratios will deviate from expected loss ratios and ultimate loss ratios will be greater or less than expected loss ratios. Because of these uncertainties, it is possible that our estimates for reserves at any given time could prove inadequate.

To the extent we determine that actual losses and loss adjustment expenses from events which have occurred exceed our expectations and the loss reserves reflected in our financial statements, we will be required to reflect these changes in the current reporting period. This could cause a sudden and material increase in our liabilities and a reduction in our profitability, including operating losses and reduction of capital, which could materially restrict our ability to write new business and adversely affect our financial condition and results of operations and potentially our A.M. Best rating.

The preparation of our financial statements requires us to make many estimates and judgments which, if inaccurate, could cause volatility in our results.

Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. Management believes the item that requires the most subjective and complex estimates is the reserve for losses and loss expenses. Following a major catastrophic event, the possibility of future litigation or legislative change that may affect interpretation of policy terms further increases the degree of uncertainty in the reserving process. The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different than the reserves initially established. Changes to prior year reserves will affect current underwriting results by increasing net income if the prior year reserves prove to be redundant or by decreasing net income if the

prior year reserves prove to be insufficient. We expect volatility in results in periods in which significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. As a result, we are not allowed to record contingency reserves to account for expected future losses. We anticipate that claims arising from future events will require the establishment of substantial reserves from time to time.

We rely on key personnel and the loss of their services may adversely affect us. The Bermuda location of our head office may be an impediment to attracting and retaining experienced personnel.

Various aspects of our business depend on the services and skills of key personnel of the Company. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of Edward J. Noonan, Chairman of our Board of Directors and Chief Executive Officer; Jeffrey D. Sangster, Executive Vice President and Chief Financial Officer; John J. Hendrickson, Director of Strategy, Risk Management and Corporate Development; Kean Driscoll, Executive Vice President and Chief Executive Officer of Validus Reinsurance, Ltd.; C.N. Rupert Atkin, Chief Executive Officer of the Talbot Group; Robert F. Kuzloski, Executive Vice President and General Counsel; Andrew E. Kudera, Executive Vice President and Chief Actuary; Lixin Zeng, Executive Vice President and Chief Executive Officer of AlphaCat Managers, Ltd.; Romel Salam, Executive Vice President and Chief Risk Officer; Jonathan P. Ritz, Executive Vice President and Chief Operating Officer and Michael R. Moore, Executive Vice President and Chief Accounting Officer, among other key employees. The loss of any of their services or the services of other members of our management team or any difficulty in attracting and retaining other talented personnel could impede the further implementation of our business strategy, reduce our revenues and decrease our operational effectiveness. Although we have an employment agreement with each of the above named executives, there is a possibility that these employment agreements may not be enforceable in the event any of these employees leave. The employment agreements for each of the above-named executives provide that the terms of the agreement will continue for a defined period after either party giving notice of termination, and will terminate immediately upon the Company giving notice of termination for cause. We do not currently maintain key man life insurance policies with respect to these or any of our other employees. In addition, changes in employment laws, taxation and remuneration practices within our operating jurisdiction may adversely impact the retention or recruitment of key personnel.

The operating location of our head office and our primary Validus Re subsidiary may be an impediment to attracting and retaining experienced personnel. Under Bermuda law, non-Bermudians (other than spouses of Bermudians or permanent resident certificate holders) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Our success may depend in part on the continued services of key employees in Bermuda. A work permit may be granted or renewed upon demonstrating that, after proper public advertisement, no Bermudian (or spouse of a Bermudian or a holder of a permanent resident’s certificate) is available who meets the minimum standards reasonably required by the employer. A work permit is issued with an expiry date (up to ten years for senior executives) and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. If work permits are not obtained, or are not renewed, for our principal employees, we would lose their services, which could materially affect our business. Work permits are currently required for 54 of our Bermuda employees, the majority of whom have obtained three- or five-year work permits.

Certain of our directors and officers may have conflicts of interest with us.

Entities affiliated with some of our directors have sponsored or invested in, and may in the future sponsor or invest in, other entities engaged in or intending to engage in insurance and reinsurance underwriting, some of which compete with us. They have also entered into, or may in the future enter into, agreements with companies that compete with us.

We have a policy in place applicable to each of our directors and officers which provides for the resolution of potential conflicts of interest. However, we may not be in a position to influence any party’s decision to engage in activities that would give rise to a conflict of interest, and they may take actions that are not in our shareholders’ best interests.

We may require additional capital or credit in the future, which may not be available or only available on unfavorable terms.

We monitor our capital adequacy on a regular basis. The capital requirements of our business depend on many factors, including our premiums written, loss reserves, investment portfolio composition and risk exposures, as well as satisfying regulatory and rating agency capital requirements. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. To the extent that our existing capital is insufficient to fund our future operating requirements and/or cover claim losses, we may need to raise additional funds through financings or limit our growth. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities. In addition, the capital and credit markets have recently been experiencing extreme volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity for certain issuers. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected.

In addition, for certain of our subsidiaries as an alien insurer and reinsurer (not licensed in the U.S.), we are required to post collateral security with respect to any (re)insurance liabilities that we assume from insureds or ceding insurers domiciled in the U.S. in order for U.S. ceding companies to obtain full statutory and regulatory credit for our reinsurance. Other jurisdictions may have similar collateral requirements. Under applicable statutory provisions, these security arrangements may be in the form of letters of credit, insurance or reinsurance trusts maintained by trustees or funds-withheld arrangements where assets are held by the ceding company. We intend to satisfy such statutory requirements by maintaining the trust fund requirements for Talbot’s underwriting at Lloyd’s and Validus Re and by providing to primary insurers letters of credit issued under our credit facilities. To the extent that we are required to post additional security in the future, we may require additional letter of credit capacity and there can be no assurance that we will be able to obtain such additional capacity or arrange for other types of security on commercially acceptable terms or on terms as favorable as under our current letter of credit facilities. Our inability to provide collateral satisfying the statutory and regulatory guidelines applicable to insureds and primary insurers would have a material adverse effect on our ability to provide (re)insurance to third parties and negatively affect our financial position and results of operations.

Security arrangements may subject our assets to security interests and/or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the investment regulations of the state of domicile of the ceding insurer and therefore the investment returns on these assets may not be as high as they otherwise would be.

Loss of business from one or more major brokers could adversely affect us.

We market our insurance and reinsurance on a worldwide basis primarily through brokers, and we depend on a small number of brokers for a large portion of our revenues. For the year ended December 31, 2014, our business was primarily sourced from the following brokers: Aon Benfield Group Ltd. 20.1%, Marsh & McLennan 28.5% and Willis Group Holdings Ltd. 18.0%. These three brokers provided a total of 66.6% of our gross premiums written for the year ended December 31, 2014. Loss of all or a substantial portion of the business provided by one or more of these brokers could adversely affect our business.

We assume a degree of credit risk associated with substantially all of our brokers.

In accordance with industry practice, we frequently pay amounts owed on claims under our policies to brokers and the brokers, in turn, pay these amounts over to the insured and reassured that have reinsured a portion of their liabilities with us. In some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or reassured for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the insured or reassured pays premiums for these policies to the insurance and reinsurance brokers for payment to us, these premiums are considered to have been paid and the insured or reassured will no longer be liable to us for these premiums, whether or not we have actually received them. Consequently, we assume a degree of credit risk associated with substantially all of our brokers.

Our utilization of brokers, managing general agents and other third parties to support our business exposes us to operational and financial risks

Our insurance business relies upon brokers, managing general agents and other third parties to produce and service a portion of its operations. In these arrangements, we typically grant the third party the right to bind us to new and renewal policies, subject to underwriting guidelines we provide and other contractual restrictions and obligations. Should these third parties issue policies that contravene these guidelines, restrictions or obligations, we could nonetheless be deemed liable for such policies. Although we would intend to resist claims that exceed or expand on our underwriting intention, it is possible that we would not prevail in such an action, or that our managing general agent would be unable to adequately indemnify us for their contractual breach.

We also rely on managing general agents, third party administrators or other third parties we retain, to collect premiums and to pay valid claims. We could also be exposed to their or their producer’s operational risk, including, but not limited to, contract wording errors, technological and staffing deficiencies and inadequate disaster recovery plans. We could also be exposed to potential liabilities relating to the claims practices of the third party administrators we have retained to manage the claims activity on this business. Although we have implemented monitoring and other oversight protocols, we cannot assure that these measures will be sufficient to mitigate all of these exposures.

Our success depends on our ability to establish and maintain effective operating procedures and internal controls. Failure to detect control issues and any instances of fraud could adversely affect us.

Our success is dependent upon our ability to establish and maintain operating procedures and internal controls (including the timely and successful implementation of information technology systems and programs) to effectively support our business and our regulatory and reporting requirements. We may not be successful in such efforts. Even when implemented, as a result of the inherent limitations in all control systems, no evaluation of controls can provide full assurance that all control issues and instances of fraud, if any, within the Company will be detected.

We may be unable to purchase reinsurance or retrocessional reinsurance in the future, and if we do successfully purchase reinsurance or retrocessional reinsurance, we may be unable to collect on claims submitted under such policies, which could adversely affect our business, financial condition and results of operations.

We purchase reinsurance and retrocessional reinsurance in order that we may offer insureds and cedants greater capacity, and to mitigate the effect of large and multiple losses on our financial condition. Reinsurance is a transaction whereby an insurer or reinsurer cedes to a reinsurer or retrocessional reinsurer all or part of the insurance it has written or reinsurance it has assumed. A reinsurer’s or retrocessional reinsurer’s insolvency or inability or refusal to make timely payments under the terms of its reinsurance agreement with us could have an adverse effect on us because we remain liable to our client. From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance or retrocessional reinsurance that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of reinsurance or retrocessional reinsurance or negotiate terms that we deem appropriate or acceptable or obtain reinsurance or retrocessional reinsurance from entities with satisfactory creditworthiness.

Our investment portfolio may suffer reduced returns or losses which could adversely affect our results of operations and financial condition. Any increase in interest rates or volatility in the fixed income markets could result in significant unrealized losses in the fair value of our investment portfolio which would reduce our net income.

Our operating results depend in part on the performance of our investment portfolio, which currently consists largely of fixed maturity securities, as well as the ability of our investment managers to effectively implement our investment strategy. Our Board of Directors, led by our Finance Committee, Chief Financial Officer and Chief Investment Officer oversees our investment strategy and has established investment guidelines. The investment guidelines dictate the portfolio’s overall objective, benchmark portfolio, eligible securities, duration, limitations on the use of derivatives and inclusion of foreign securities, diversification requirements and average portfolio rating. Management and the Finance Committee periodically review these guidelines in light of our investment goals and consequently they may change at any time.

The investment return including net investment income, net realized and the change in net unrealized gains (losses) on investments, excluding assets held in trust on behalf of operating affiliates, catastrophe bonds and noncontrolling interest, on our invested assets excluding assets held in trust on behalf of operating affiliates, catastrophe bonds and noncontrolling interest was $110.2 million, or 1.8% for the year ended December 31, 2014. While we follow a conservative investment strategy designed to emphasize the preservation of invested assets and to provide sufficient liquidity for the prompt payment of claims, we will nevertheless be subject to market-wide risks including illiquidity and pricing uncertainty and fluctuations, as well as to risks inherent in particular securities. Our investment performance may vary substantially over time, and there can be no assurance that we will achieve our investment objectives. See “Business—Investment Management.”

Investment results will also be affected by general economic conditions, market volatility, interest rate fluctuations, liquidity and credit risks beyond our control. In addition, our need for liquidity may result in investment returns below our expectations. Also, with respect to certain of our investments, we are subject to prepayment or reinvestment risk. In particular, our fixed income portfolio is subject to reinvestment risk, and as at December 31, 2014, 26.3% of our fixed maturity portfolio is comprised of mortgage-backed and asset-backed securities which are subject to prepayment risk. Although we attempt to manage the risks of investing in a changing interest rate environment, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse effect on our results of operations.

Investment methodologies and assumptions are subject to differing interpretations and unrealized losses taken on our investments are subjective which could adversely affect our results of operations and financial condition.

The valuation of our investments may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to our investment valuations. During periods of market disruptions, it may be difficult to value certain securities if trading becomes less frequent or market data less observable. There may also be certain asset classes that become illiquid due to the financial environment. As a result, valuation of securities in our investment portfolio may require more subjectivity and management judgment. Valuation methods that require greater estimation may result in values which may be greater or less than the value at which the investments may be ultimately sold. In addition, rapidly changing and unpredictable credit and equity market conditions could materially affect the valuation of securities as reported in our Consolidated Financial Statements.

The determination of the unrealized losses taken on our investments are also partially subjective and could materially impact our financial position. Unrealized losses vary by investment type and are based upon our periodic evaluations and assessments of known and inherent risks associated with the respective asset class. Evaluations are revised as conditions change, and management reflects unrealized losses in operations on a quarterly basis. Furthermore, additional unrealized losses may need to be taken in the future. Subjective unrealized losses could adversely affect our financial condition and our results of operations.

Certain of our investments are illiquid and may be difficult to sell, or to sell in significant amounts at acceptable prices, to generate cash to meet our needs.

Investments in certain securities in funds attributed to utilizing the equity method, may be illiquid due to contractual provisions or investment market conditions. If we require significant amounts of cash on short notice in excess of anticipated cash obligations, then we may have difficulty selling these investments in a timely manner or we may be forced to sell or terminate them at unfavorable values. The foregoing could adversely affect our financial condition and results of operations.

Our operating results may be adversely affected by currency fluctuations.

Our reporting currency is the U.S. dollar and the majority of our operating companies have a functional currency of the U.S. dollar. Many of our companies maintain both assets and liabilities in local currencies. Therefore, we are exposed to foreign exchange risk on the assets and liabilities denominated in those foreign currencies. Foreign exchange risk is reviewed as part of our risk management process. Locally required capital levels may be invested in home currencies in order to satisfy regulatory requirements and to support local insurance operations. The principal currencies potentially creating unhedged foreign exchange risk are the Australian dollar, New Zealand dollar, Japanese yen, British pound sterling and the Euro. As a result of the accounting treatment for non-monetary items, we may experience volatility in our income statement during a period when movement in foreign exchange rates fluctuate significantly. In accordance with U.S. GAAP, non-monetary items are not re-measured at the reporting date and are therefore translated at historic exchange rates. Non-monetary items include unearned premiums and deferred acquisition costs. Therefore, a mismatch arises in the income statement between the amount of premium recognized at historical exchange rates and the related claims which are re-measured using currency rates at the reporting date which can cause volatility in the income statement. We look to manage our foreign currency exposure through matching our major foreign-denominated assets and liabilities, as well as through the use of currency derivatives. However, there is no guarantee that we will effectively mitigate our exposure to foreign exchange losses. Please refer to Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of foreign currency risk.

Heightened European sovereign debt risk could adversely affect our results of operations and financial condition.

Our fixed maturity portfolio contains certain Eurozone government and government agency securities and Eurozone corporate securities which are subject to increased liquidity risk, interest rate risk and default risk as a result of heightened European sovereign debt risk. As of December 31, 2014, our fixed maturity portfolio contains $115.3 million or 2.1% of Eurozone government and government agency securities and $197.1 million or 3.6% of Eurozone corporate securities. Increased defaults, and/or a significant increase in interest rates could result in losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse effect on our results of operations.

We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.

We depend on the proper functioning and availability of our information technology platform, including communications and data processing systems, in operating our business. These systems consist of proprietary software programs that are integral to the efficient operation of our business, including our proprietary pricing and exposure management system. We are also required to effect electronic transmissions with third parties including brokers, client's vendors and others with whom we do business, and to facilitate the oversight conducted by our Board of Directors. Security breaches could expose us to a risk of loss or misuse of our information, litigation and potential liability. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of these systems could have a significant impact on our operations, and potentially on our results. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. A significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, which could be significant.

We may be exposed to risk in connection with our management of third party capital.

Our operating subsidiaries may owe certain legal duties and obligations to third party investors (including reporting obligations) and are subject to a variety of often complex laws and regulations relating to the management of third party capital. Compliance with some of these laws and regulations requires significant management time and attention. Although we seek to continually monitor our policies and procedures to attempt to ensure compliance, there could be faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established policies and procedures that could result in our failure to comply with applicable laws or regulations which could result in significant liabilities, penalties or other losses to the Company, and seriously harm our business and results of operations. In addition to the forgoing, our third party capital providers may redeem their interests in our managed funds, which could materially impact the financial condition of such funds, and could in turn materially impact our financial condition and results of operations. Moreover, we can provide no assurance that we will be able to attract and raise additional third party capital for our existing funds or for potential new funds and therefore we may forego existing and/or potential fee income and other income generating opportunities.

The ongoing development of our U.S. excess and surplus lines insurance operations is subject to increased risk from changing market conditions.

Excess and surplus lines insurance is a substantial portion of the business written by our newly acquired U.S. operating subsidiary, Western World. Excess and surplus lines insurance covers risks that are typically more complex and unusual than standard risks and require a high degree of specialized underwriting. As a result, excess and surplus lines risks do not often fit the underwriting criteria of standard insurance carriers. Our excess and surplus lines insurance business fills the insurance needs of businesses with unique characteristics and is generally considered higher risk than those in the standard market. If our underwriting staff inadequately judges and prices the risks associated with the business underwritten in the excess and surplus lines market, our financial results could be adversely impacted.

Further, the excess and surplus lines market is significantly affected by the conditions of the property and casualty insurance market in general. The impact of this cyclicality can be more pronounced in the excess and surplus market than in the standard insurance market. During times of hard market conditions (when market conditions are more favorable to insurers), as rates increase and coverage terms become more restrictive, business tends to move from the admitted market to the excess and surplus lines market and growth in the excess and surplus market can be significantly more rapid than growth in the standard insurance market. When soft market conditions are prevalent (when market conditions are less favorable to insurers), standard insurance carriers tend to loosen underwriting standards and expand market share by moving into business lines traditionally characterized as excess and surplus lines, exacerbating the effect of rate decreases. If we fail to manage the cyclical nature and volatility of the revenues and profit we generate in the excess and surplus lines market, our financial results could be adversely impacted.

A decrease in the fair value of Talbot, Western World and/or our intangible assets may result in future impairments.

Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. These tests require us to use significant judgment in making various estimates and assumptions, such as the determination of expected future cash flows and/or earnings, and actual results may ultimately be materially different from such estimates and assumptions. For example, expected future cash flows and/or earnings may be materially and negatively impacted as a result of, among other things, a decrease in renewals and new business, loss of key personnel, lower-than-expected yields and/or cash flows from our investment portfolio or higher-than-expected claims activity and incurred losses as well as other general economic factors. As a result of these potential changes, the estimated fair value of Talbot, Western World and/or our intangible assets may decrease, causing the carrying value to exceed the fair value and the goodwill and/or intangible assets to be impaired. If an impairment is determined to exist, the carrying value of the goodwill and/or intangible asset is adjusted to its implied fair value with the corresponding expense recorded in our income statement in the period in which the impairment is determined. If we are required to record goodwill impairments in the future, our financial condition and results of operations would be negatively affected.

Risks Related to Acquisitions and New Ventures

Any future acquisitions or new ventures may expose us to operational risks.

We may in the future make strategic acquisitions, either of other companies or selected books of business, or grow our business organically. Any future acquisitions or new ventures may expose us to operational challenges and risks, including:


•	integrating financial and operational reporting systems;


•	integration into new geographical regions;


•	establishing satisfactory budgetary and other financial controls;


•	funding increased capital needs and overhead expenses;


•	retaining management personnel required for existing operations;


•	obtaining management personnel required for expanded operations;


•	obtaining necessary regulatory permissions;


•	funding cash flow shortages that may occur if anticipated revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties;


•	the value of assets related to acquisitions or new ventures may be lower than expected or may diminish due to credit defaults or changes in interest rates and liabilities assumed may be greater than expected;


•	the assets and liabilities related to acquisitions or new ventures may be subject to foreign currency exchange rate fluctuation; and


•	financial exposures in the event that the sellers of the entities we acquire are unable or unwilling to meet their indemnification, reinsurance and other obligations to us.

Our failure to manage successfully these operational challenges and risks may adversely impact our results of operations.

Risks Related to Lloyd’s and Other U.K. Regulatory Matters

The regulation of Lloyd’s members and of Lloyd’s by the U.K. Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) and under European Directives and other local laws may result in intervention that could have a significant negative impact on Talbot.

Talbot operates in a regulated jurisdiction. Its underwriting activities are regulated by the FCA and PRA and franchised by Lloyd’s. The FCA and PRA have substantial powers of intervention in relation to the Lloyd’s managing agents (such as Talbot Underwriting Ltd.) which it regulates, including the power to remove their authorization to manage Lloyd’s syndicates. In addition, the Lloyd’s Franchise Board requires annual approval of Syndicate 1183’s business plan, including a maximum underwriting capacity, and may require changes to any business plan presented to it or additional capital to be provided to support underwriting (known as Funds at Lloyd’s or “FAL”). An adverse determination in any of these cases could lead to a change in business strategy which may have an adverse effect on Talbot’s financial condition and results of operations.

Additionally, Lloyd’s worldwide insurance and reinsurance business is subject to local regulation. Changes in such regulation may have an adverse effect on Lloyd’s generally and on Talbot in particular.

Should Lloyd’s Council decide additional levies are required to support the central fund, this could adversely affect Talbot.

The central fund, which is funded by annual contributions and loans from Lloyd’s members, acts as a policyholders’ protection fund to make payments where any Lloyd’s member has failed to pay, or is unable to pay, valid claims. The Lloyd’s Council may resolve to make payments from the central fund for the advancement and protection of policyholders, which could lead to additional or special contributions being payable by Lloyd’s members, including Talbot. This, in turn, could adversely affect Talbot and the Company.

The failure of Lloyd’s to satisfy the PRA’s annual solvency test could result in limitations on managing agents’ ability, including Talbot’s ability to underwrite or the commencement of legal proceedings against Lloyd’s.

The PRA requires Lloyd’s to satisfy an annual solvency test. The solvency requirement in essence measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and in run-off. If Lloyd’s fails to satisfy the test in any year, the PRA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting. In the event of Lloyd’s failing to meet any solvency requirement, either the Society of Lloyd’s or the PRA may apply to the court for a Lloyd’s Market Reorganization Order (“LMRO”). On the making of an order a “reorganization controller” is appointed, and for its duration, a moratorium is imposed preventing any proceedings or legal process from being commenced or continued against any party that is the subject of such an order, which, if made, would apply to the market as a whole, including members, former members, managing agents, members’ agents, Lloyd’s brokers, approved run-off companies and managing general agents unless individual parties are specifically excluded.

A downgrade in Lloyd’s ratings would have an adverse effect on Syndicate 1183’s rating as well its standing among brokers and customers and cause its premiums and earnings to decrease.

The ability of Lloyd’s syndicates to trade in certain classes of business at current levels is dependent on the maintenance of a satisfactory credit rating issued by an accredited rating agency. The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies, A.M. Best, Standard & Poor’s and Fitch Ratings. Lloyd's current ratings are: A.M. Best: A, Positive Outlook; Standard & Poor's: A+, Stable Outlook; Fitch Ratings: AA-, Stable Outlook. Syndicate 1183 is also rated A, Positive Outlook, by A.M. Best. Syndicate 1183 benefits from Lloyd’s current ratings and would be adversely affected if the current ratings were downgraded from their present levels.

An increase in the charges paid by Talbot to participate in the Lloyd’s market could adversely affect Talbot’s financial and operating results.

Lloyd’s imposes a number of charges on businesses operating in the Lloyd’s market, including, for example, annual subscriptions and central fund contributions for members and policy signing charges. The basis and amounts of charges may be varied by Lloyd’s and could adversely affect Talbot and the Company.

An increase in the level or type of deposits required by U.S. Situs Trust Deeds to be maintained by Lloyd’s syndicates could result in Syndicate 1183 being required to make a cash call which could adversely affect Talbot’s financial performance.

The U.S. Situs Trust Deeds require syndicates transacting certain types of business in the United States to maintain minimum deposits as protection for U.S. policyholders. These deposits represent the syndicates' estimates of unpaid claims liabilities (less premiums receivable) relating to this business, adjusted for provisions for potential bad debt on premiums earned but not received and for any anticipated profit on unearned premiums. No credit is generally allowed for potential reinsurance recoveries. The New York Insurance Department and the U.S. National Association of Insurance Commissioners ("NAIC") currently require funding of 30% of gross liabilities in relation to insurance business classified as “Surplus Lines.” The “Credit for Reinsurance” trust fund is usually required to be funded at 100% of gross liabilities. The funds contained within the deposits are not ordinarily available to meet trading expenses. U.S. regulators may increase the level of funding required or change the requirements as to the nature of funding. Accordingly, in the event of a major claim arising in the United States, for example from a major catastrophe, syndicates participating in such U.S. business may be required to make cash calls on their members to meet claims payments and deposit funding obligations. This could adversely affect Talbot.

Risks Related to Taxation

Our non U.S companies may be subject to U.S. tax.

We intend to operate in such a manner that none of our non-U.S. companies would be considered engaged in a U.S. trade or business. No definitive standards, however, are provided by the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations or court decisions regarding activities that constitute the conduct of a U.S. trade or business. Because that determination is essentially factual, there can be no assurance that the Internal Revenue Service (the “IRS”) will not contend that we are engaged in a U.S. trade or business. If we were found to be so engaged, we could be subject to U.S. corporate income and branch profits tax on our earnings that are effectively connected to such U.S. trade or business.

If the group company involved is entitled to the benefits of a U.S. income tax treaty (the “Treaty”), it would not be subject to U.S. income tax on any income protected by the Treaty unless that income is attributable to a permanent establishment in the U.S. The income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”) clearly applies to premium income, but may be construed as not protecting other income such as investment income. If any of the Company's Bermuda-based subsidiaries were found to be engaged in a trade or business in the U.S. and were entitled to the benefits of the Bermuda Treaty in general, but the Bermuda Treaty was found not to protect investment income, a portion of the relevant subsidiary's investment income could be subject to U.S. tax.

U.S. persons who hold common shares may be subject to U.S. income taxation at ordinary income rates on our undistributed earnings and profits.

Controlled Foreign Corporation Status: The Company should not be a controlled foreign corporation (“CFC”) because its organizational documents provide that if the common shares owned, directly, indirectly or by attribution, by any person would otherwise represent more than 9.09% of the aggregate voting power of all the Company’s common shares, the voting rights attached to those common shares will be reduced so that such person may not exercise and is not attributed more than 9.09% of the total voting power of the common shares. There can be no assurance, however, that the provisions of the Organizational Documents will operate as intended and that the Company will not be considered a CFC. If the Company were considered a CFC, any shareholder that is a U.S. person that owns directly, indirectly or by attribution, 10% or more of the voting power of the Company may be subject to current U.S. income taxation at ordinary income tax rates on all or a portion of the Company’s undistributed earnings

and profits attributable to the Company's insurance and reinsurance income, including underwriting and investment income. Any gain realized on sale of common shares by such shareholder may also be taxed as a dividend to the extent of the Company’s earnings and profits attributed to such shares during the period that the shareholder held the shares and while the Company was a CFC (with certain adjustments).

Related Person Insurance Income: If the related person insurance income (“RPII”) of any of the Company’s non-U.S. insurance subsidiaries were to equal or exceed 20% of that subsidiary’s gross insurance income in any taxable year, and U.S. persons were treated as owning 25% or more of the subsidiary’s stock, by vote or value, a U.S. person who directly or indirectly owns any common shares on the last day of such taxable year on which the 25% threshold is met would be required to include in income for U.S. federal income tax purposes that person’s ratable share of that subsidiary’s RPII for the taxable year. The amount to be included in income is determined as if the RPII were distributed proportionately to U.S. shareholders on that date, regardless of whether that income is distributed. The amount of RPII to be included in income is limited by such shareholder’s share of the subsidiary’s current-year earnings and profits, and possibly reduced by the shareholder’s share of prior year deficits in earnings and profits. The amount of RPII earned by a subsidiary will depend on several factors, including the identity of persons directly or indirectly insured or reinsured by that subsidiary. Although we do not believe that the 20% threshold will be met for our non-U.S. insurance subsidiaries, some of the factors that might affect that determination in any period may be beyond our control. Consequently, we cannot assure that we will not exceed the RPII threshold in any taxable year.

If a U.S. person disposes of shares in a non-U.S. insurance corporation that had RPII (even if the 20% threshold was not met) and the 25% threshold is met at any time during the five-year period ending on the date of disposition, and the U.S. person owned any shares at such time, any gain from the disposition will generally be treated as a dividend to the extent of the holder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the holder owned the shares (possibly whether or not those earnings and profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. We believe that those rules should not apply to a disposition of common shares because the Company is not itself directly engaged in the insurance business. We cannot assure, however, that the IRS will not successfully assert that those rules apply to a disposition of common shares.

U.S. persons who hold common shares will be subject to adverse tax consequences if the Company is considered a passive foreign investment company for U.S. federal income tax purposes.

If the Company is considered a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, a U.S. holder who owns common shares will be subject to adverse tax consequences, including a greater tax liability than might otherwise apply and an interest charge on certain taxes that are deferred as a result of the Company’s non-U.S. status. We currently do not expect that the Company will be a PFIC for U.S. federal income tax purposes in the current taxable year or the foreseeable future because, through Validus Reinsurance, Ltd., Talbot 2002 Underwriting Capital Ltd., Validus Reinsurance (Switzerland) Ltd and Talbot Underwriting Ltd., it intends to be predominantly engaged in the active conduct of a global insurance and reinsurance business. We cannot assure you, however, that the Company will not be deemed to be a PFIC by the IRS. No regulations currently exist regarding the application of the PFIC provisions to an insurance company.

Changes in U.S. tax laws may be retroactive and could subject a U.S. holder of our common shares to other adverse tax consequences.

The tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance and reinsurance subsidiaries has been the subject of Congressional discussion and legislative proposals in the U.S. We cannot assure you that future legislative action will not increase the amount of U.S. tax payable by us.

In addition, the U.S. federal income tax laws and interpretations, including those regarding whether a company is engaged in a U.S. trade or business or is a PFIC, or whether U.S. holders would be required to include “subpart F income” or RPII in their gross income, are subject to change, possibly on a retroactive basis. No regulations regarding the application of the PFIC rules to insurance companies are currently in effect, and the regulations regarding RPII are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. We cannot be certain if, when, or in what form, such regulations or pronouncements may be provided, and whether such guidance will have a retroactive effect.

The Obama administration’s proposed budget for Fiscal Year 2016 could disallow a deduction for premiums paid for reinsurance.

Insurance companies are generally allowed a deduction for premiums paid for reinsurance. The proposed U.S. budget for fiscal year 2016 contains a proposal that denies an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with respect to the premiums received. Furthermore, the proposed law would exclude from the insurance company’s income (in the same proportion in which the premium deduction was denied) any return premiums, ceding commissions, reinsurance recovered, or other amounts received with respect to reinsurance policies for which a premium deduction is wholly or partially denied. Based on the information currently available to us, it is uncertain to what extent this legislation will adversely impact us.

We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our results of operations.

Under current Bermuda law, we are not subject to tax on income or capital gains. We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 31, 2035. We could be subject to taxes in Bermuda after that date. This assurance is subject to the provision that it is not to be construed to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any property leased to us. The Company's Bermuda-domiciled subsidiaries each pay annual Bermuda government fees and each Bermuda subsidiary licensed insurer and reinsurer pays an annual insurance license fee. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.

The impact of Bermuda's letter of commitment to the Organization for Economic Cooperation and Development ("OECD") to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.

The OECD has published reports and launched a global initiative among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Bermuda was not listed in the most recent report as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices, to embrace international tax standards for transparency, to exchange information and to eliminate an environment that attracts business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

Our non-U.K. companies may be subject to U.K. tax.

We intend to operate in such a manner that none of our non-U.K. companies would be resident in the U.K. for tax purposes. A company incorporated outside the U.K. will be deemed resident if its business is centrally managed and controlled from the U.K. The concept of central management and control is not defined in statute but derives from case law and the determination of residence is subjective, therefore Her Majesty's Revenue and Customs ("HMRC") might contend successfully that one or more of our companies are resident in the U.K.

Furthermore, we intend to operate in such a manner that none of our non-U.K. companies carry on a trade wholly or partly in the U.K. Case law has held that whether or not a trade is being carried on is a matter of fact and emphasis is placed on where operations take place from which the profits in substance arise. This judgment is subjective. The HRMC might contend successfully that one or more of our non-U.K. companies, is conducting business in the U.K. For tax purposes, a non-U.K. tax resident company will only be subject to corporation tax if it carries on a trade in the U.K. through a permanent establishment. However, that company will still have an income tax liability if it carries on a trade in the U.K., even absent a permanent establishment, unless that company is treaty-protected.

We may become subject to taxation on profits generated in Bermuda as a result of the OECD's plan on "Base erosion and profit shifting"

In 2013, the OECD published an ‘Action Plan on Base Erosion and Profit Shifting.’ The plan proposes the development of rules to prevent Base Erosion and Profit Shifting which may drive fundamental changes in the perception of tax structuring and transfer pricing by tax authorities. The action plan includes adopting transfer pricing rules or special measures to ensure that returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The action plan will likely put a much greater emphasis on the location of individuals and their contributions towards profit generation. This would notably result in a significant change to the existing transfer pricing rules and could potentially have a significant impact on the

allocation of taxable profits throughout the Company. As a consequence, profits currently generated in Bermuda may become subject to taxation outside Bermuda.

Our non-Swiss companies may be subject to taxation in Switzerland.

We intend to operate in such a manner that none of our non-Swiss companies would be resident in Switzerland for tax purposes. A company incorporated outside Switzerland will be deemed resident if its business is centrally managed and controlled from Switzerland. However, the analysis is factual and the Swiss tax authorities might contend successfully that one or more of our non-Swiss group companies are resident in Switzerland.

Furthermore, a group company incorporated and managed outside of Switzerland should not be liable for Swiss corporation taxation unless it carries on business through a permanent establishment in Switzerland. From a Swiss tax perspective, a permanent establishment is a fixed place of business through which a company performs business activities that are considered as being quantitatively and qualitatively significant by the tax authorities, and may include a branch, office, agency or place of management. As of the date of this Annual Report, the Validus group intends to operate in such a manner so that none of our non-Swiss companies will carry on business through a permanent establishment in Switzerland. If any of our companies were to be treated as carrying on business in Switzerland through a branch or agency or of having a permanent establishment in Switzerland, our results of operations could be adversely affected.

Diverted Profit Tax in the U.K.

The U.K. Authorities announced in 2014 that they would introduce a new Diverted Profits Tax. This tax will apply as of April 1, 2015 to profits of multinationals artificially diverted from the U.K. The Lloyd's accounting practices delay the recognition of underwriting results by three years ("reinsurance to close") and this might give the Diverted Profits Tax a retroactive effect. The tax rate will be 25%. Diverted Profits Tax will apply in two situations; (a) where a foreign company has artificially avoided having a taxable presence in the U.K, or (b) where a group has entered into a tax advantageous structure or transaction that lacks economic substance. On December 10, 2014, draft legislation and guidance and a Technical Note were published by HMRC.

Although the intentions of the legislation are to address aggressive tax planning which is artificial or lacks economic substance, the draft legislation may have a wider reach. The Validus group has significant U.K. operations and several intragroup reinsurance agreements. We believe that these transactions have economic substance and should fall outside the intended reach of the Diverted Profit Tax. However, given that the legislation is still in draft and the many uncertainties related to its application, we are not able to predict the financial impact of the new Diverted Profits Tax and such impact may be adverse.

Risks Related to Laws and Regulations Applicable to Us

If we become subject to insurance statutes and regulations in addition to the statutes and regulations that currently apply to us, there could be a significant and negative impact on our business.

We currently conduct our business in a manner such that we expect the Company will not be subject to insurance and/or reinsurance licensing requirements or regulations in any jurisdiction other than Bermuda, Switzerland, the United States, and, with respect to Talbot, the U.K. and jurisdictions to which Lloyd’s is subject. See “Business—Regulation.” Although we do not currently intend to engage in activities which would require us to comply with insurance and reinsurance licensing requirements of other jurisdictions, should we choose to engage in activities that would require us to become licensed in such jurisdictions, we cannot assure you that we will be able to do so or that we will be able to do so in a timely manner.

The insurance and reinsurance regulatory framework has recently become subject to increased scrutiny in many jurisdictions. Governmental authorities in both the U.S. and worldwide have become increasingly interested in the potential risks posed by the insurance industry as a whole, and to commercial and financial systems in general. For example, the U.S. Congress and the current administration have made, or called for consideration of, several additional proposals relating to a variety of issues with respect to financial regulation reform, including the Dodd-Frank Act that was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represented a comprehensive overhaul of the regulation of the financial services industry within the United States and established a Federal Insurance Office under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. The director of the Federal Insurance Office has the ability to recommend that an insurance company or an insurance holding company be subject to heightened prudential standards under the supervision of the Federal Reserve. In addition, some state legislators have considered or enacted laws that will alter and likely increase state regulation of insurance and reinsurance companies and holding companies. Furthermore, the NAIC, which is an association of the insurance commissioners of all 50 states and the District of Columbia, regularly reexamines existing laws and regulations.

Government regulators are generally concerned with the protection of policyholders rather than other constituencies, such as our shareholders. We are not able to predict the exact nature, timing or scope of changes in laws and regulations to which we are or may become subject; however, compliance with such laws and regulations may result in additional costs which may adversely impact our results of operations.

Our international business is subject to applicable laws and regulations relating to sanctions and foreign corrupt practices, the violation of which could adversely affect our operations.

We must comply with all applicable economic sanctions and anti-bribery laws and regulations of the United States and other foreign jurisdictions where we operate, including the United Kingdom and the European Community. United States laws and regulations applicable to us include the economic trade sanctions laws and regulations administered by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) as well as certain laws administered by the United States Department of State. In addition, we are subject to the Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws such as the UK Bribery Act that generally bar corrupt payments or unreasonable gifts to foreign governments or officials. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or intermediary could fail to comply with applicable laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other punitive actions. In addition, such violations could damage our business and/or our reputation. Such criminal or civil sanctions, penalties, other sanctions, and damage to our business and/or reputation could have a material adverse effect on our financial condition and results of operations.

Risks Related to Ownership of Our Common Shares

Because Validus Holdings, Ltd. is a holding company and substantially all of our operations are conducted by our main operating subsidiaries our ability to meet any ongoing cash requirements and to pay dividends will depend on our ability to obtain cash dividends or other cash payments or obtain loans from these subsidiaries.

We conduct substantially all of our operations through subsidiaries. Our ability to meet our ongoing cash requirements, including any debt service payments or other expenses, and pay dividends on our common shares in the future, will depend on our ability to obtain cash dividends or other cash payments or obtain loans from these subsidiaries and as a result will depend on the financial condition of these subsidiaries. The inability of these subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements could have a material adverse effect on us and the value of our common shares. Each of these subsidiaries is a separate and distinct legal entity that has no obligation to pay any dividends or to lend or advance us funds and may be restricted from doing so by contract, including other financing arrangements, charter provisions or applicable legal and regulatory requirements or rating agency constraints. The payment of dividends by these subsidiaries to us is limited under Bermuda, U.K. and U.S. laws and regulations. The Insurance Act provides that our Bermuda Class 3B and 4 insurance subsidiaries may not declare or pay in any financial year dividends of more than 25% of their total statutory capital and surplus (as shown on their statutory balance sheets in relation to the previous financial year) unless they file an affidavit with the BMA at least seven days prior to the payment signed by at least two directors and such subsidiary’s principal representative, stating that in their opinion such subsidiaries will continue to satisfy the required margins following declaration of those dividends, though there is no additional requirement for BMA approval. In addition, before reducing its total statutory capital by 15% or more (as set out in its previous years’ statutory financial statements) each of our Class 3A and Class 4 insurance subsidiaries must make application to the BMA for permission to do so, such application to consist of an affidavit signed by at least two directors and such subsidiary’s principal representative stating that in their opinion the proposed reduction in capital will not cause such subsidiaries to fail to meet its relevant margins, and such other information as the BMA may require. Each of our Class 3 insurance subsidiaries must make application to the BMA before reducing its total statutory capital by 15% or more and should provide such information as the BMA may require. During 2015, the Bermuda regulated subsidiaries have the ability to distribute up to $968.2 million of unrestricted net assets as dividend payments and/or return of capital to Validus Holdings, Ltd. without prior regulatory approval.

Talbot manages Syndicate 1183 (the “Syndicate”) at Lloyd’s. Lloyd’s requires Talbot to hold cash and investments in trust for the benefit of policyholders either as Syndicate trust funds or as Funds at Lloyd’s (“FAL”). Talbot may not distribute funds from the Syndicate into its corporate member’s trust accounts unless, firstly, they are represented by audited profits and, secondly, the Syndicate has adequate future cash flow to service its policyholders. Talbot’s corporate member may not distribute funds to Talbot’s unregulated bank or investment accounts unless they are represented by a surplus of cash and investments over the FAL requirement. Additionally, U.K. company law prohibits Talbot’s corporate name from declaring a dividend to the Company unless it has profits available for distribution. The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws do not impose statutory restrictions on a corporate name’s ability to declare a dividend, the FCA and PRA rules require maintenance of each insurance company’s solvency margin within its jurisdiction.

Western World's operating subsidiaries are domiciled in the state of New Hampshire. New Hampshire insurance laws limit the amount of dividends Western World may pay to the Company in any 12 month period without prior approval of the New Hampshire State Insurance Department. These limitations are based on the lesser of: a maximum of 10% of prior year end statutory surplus as determined under statutory accounting practices or the net income, not including realized capital gains, for the 12-month period ending December 31, next preceding, but shall not include pro rata distributions of any class of the insurer's own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carry-forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years. During 2015, the maximum dividend that may be paid to the Company by Western World without obtaining prior approval is $45.2 million.

The timing and amount of any cash dividends on our common shares are at the discretion of our Board of Directors and will depend upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that our Board of Directors deems relevant. In addition, the indentures governing our Junior Subordinated Deferrable Debentures would restrict us from declaring or paying dividends on our common shares if we are downgraded by A.M. Best to a financial strength rating of “B” (Fair) or below or if A.M. Best withdraws its financial strength rating on any of our material insurance subsidiaries.

Future sales of our common shares and grants of restricted shares may affect the market price of our common shares and the future exercise of options and warrants may result in immediate and substantial dilution of the common shares.

As of December 31, 2014 (but without giving effect to unvested restricted shares), we had 83,869,845 common shares outstanding and 5,174,114 shares issuable upon exercise of outstanding warrants. Approximately 2,449,543 of these outstanding shares were subject to the volume limitations and other conditions of Rule 144 under the Securities Act of 1933, as amended, which we refer to as the “Securities Act.” Furthermore, certain of our sponsoring shareholders and their transferee's have the right to require us to register these common shares under the Securities Act for sale to the public, either in an independent offering pursuant to a demand registration or in conjunction with a public offering, subject to a “lock-up” agreement of no more than 90 days. Following any registration of this type, the common shares to which the registration relates will be freely transferable. In addition, we have filed one or more registration statements on Form S-8 under the Securities Act to register common shares issued or reserved for issuance under our 2005 Long Term Incentive Plan (the “Plan”). The number of common shares that have been reserved for issuance under the Plan is equal to 13,126,896 of which 903,292 shares remain available as of December 31, 2014. We cannot predict what effect, if any, future sales of our common shares, or the availability of common shares for future sale, will have on the market price of our common shares. Sales of substantial amounts of our common shares in the public market, or the perception that sales of this type could occur, could depress the market price of our common shares and may make it more difficult for our shareholders to sell their common shares at a time and price that they deem appropriate.

Our Bye-laws authorize our Board of Directors to issue one or more series of common shares and preferred shares without shareholder approval. Specifically, we have an authorized share capital of 571,428,571 shares ($0.175 par value per share), which can consist of common shares and/or preference shares, as determined by our Board of Directors. The Board of Directors has the right to issue the remaining shares without obtaining any approval from our shareholders and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or designation of such series. Any issuance of our preferred stock could adversely affect the voting power of the holders of our common shares and could have the effect of delaying, deferring, or preventing the payment of any dividends (including any liquidating dividends) and any change in control of us. If a significant number of either common or preferred shares are issued, it may cause the market price of our common shares to decline.

Our classified board structure may prevent a change in our control.

Our Board of Directors is divided into three classes of directors. Each year one class of directors is elected by the shareholders for a three year term. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders.

There are provisions in our Bye-laws that reduce the voting rights of voting common shares that are held by a person or group to the extent that such person or group holds more than 9.09% of the aggregate voting power of all common shares entitled to vote on a matter.

In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, if, and for so long as, the common shares of a shareholder, including any votes conferred by “controlled shares” (as defined below), would otherwise represent more than 9.09% of the aggregate voting power of all common shares entitled to vote on a matter, including an election of directors, the votes conferred by such shares will be reduced by whatever amount is necessary such that, after giving effect to any such reduction (and any other reductions in voting

power required by our Bye-laws), the votes conferred by such shares represent 9.09% of the aggregate voting power of all common shares entitled to vote on such matter. “Controlled shares” include, among other things, all shares that a person is deemed to own directly, indirectly or constructively (within the meaning of Section 958 of the Code, or Section 13(d) (3) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). At December 31, 2014, there were 86,728,556 common shares, of which 7,883,625 common shares would confer votes that represent 9.09% of the aggregate voting power of all common shares entitled to vote generally at an election of directors. An investor who does not hold, and is not deemed under the provisions of our Bye-laws to own, any of our common shares may therefore purchase up to such amount without being subject to voting cutback provisions in our Bye-laws.

In addition, we have the authority under our Bye-laws to request information from any shareholder for the purpose of determining ownership of controlled shares by such shareholder.

There are regulatory limitations on the ownership and transfer of our common shares which could result in the delay or denial of any transfers shareholders might seek to make.

The BMA must approve all issuances and transfers of securities of a Bermuda exempt company except where a general permission applies under the Exchange Control Act 1972 and related regulations. We have received permission from the BMA to issue our common shares and securities, and for the free transferability of our common shares and securities, as long as the common shares are listed on the New York Stock Exchange or other appointed exchange, to and among persons who are residents and non-residents of Bermuda for exchange control purposes. Any other transfers remain subject to approval by the BMA and such approval may be denied or delayed. Additionally issuances and transfers of voting or controlling shares of Bermuda registered insurance subsidiaries requires application to, or notification to, the BMA Insurance Division (depending on the circumstances) pursuant to the Insurance Act.

A shareholder of our Company may have greater difficulties in protecting its interests than as a shareholder of a U.S. corporation.

The Companies Act 1981 (the “Companies Act”), which applies to us, differs in material respects from laws generally applicable to U.S. corporations and their shareholders. Taken together with the provisions of our Bye-laws, some of these differences may result in a shareholder having greater difficulties in protecting its interests as a shareholder of our company than it would have as a shareholder of a U.S. corporation. This affects, among other things, the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with our Company, what approvals are required for business combinations by our Company with a large shareholder or a wholly owned subsidiary, what rights a shareholder may have as a shareholder to enforce specified provisions of the Companies Act or our Bye-laws, and the circumstances under which we may indemnify our directors and officers.

We are a Bermuda company and it may be difficult for our shareholders to enforce judgments against us or against our directors and executive officers.

We were incorporated under the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and a portion of our assets and the assets of such persons may be located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda; however, a Bermuda court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law. Currently, of our executive officers, Kean Driscoll, Jeffrey Sangster, Robert Kuzloski, Michael Moore and Lixin Zeng reside in Bermuda, Edward Noonan, John Hendrickson, Romel Salam, Andrew Kudera and Jonathan Ritz maintain residences in both Bermuda and the United States and Rupert Atkin resides in the United Kingdom. Of our directors, Edward Noonan and John Hendrickson maintain residences in both Bermuda and the United States, Jean-Marie Nessi resides in France, Michael Carpenter resides in the United Kingdom and the remainder reside in the United States.

We have been advised by Bermuda counsel that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, predicated upon the civil liability provisions of the U.S. federal securities laws, or original actions brought in Bermuda against us or such persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Bermuda counsel that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which Bermuda courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to public policy in Bermuda. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for our shareholders to recover against us based upon such judgments.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company and its subsidiaries currently occupy office space as described below. As a result of the Flagstone acquisition, we own office space and buildings in Hyderabad, India and Luxembourg. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations.



Legal entity	Location	Expiration date
Validus Holdings, Ltd.	Pembroke, Bermuda	December 31, 2021
Validus Research Inc.	Waterloo, Canada	March 31, 2020
Validus Research Inc.	Toronto, Canada	February 29, 2024
Validus Reaseguros, Inc.	Miami, Florida, USA	April 1, 2018
Validus Services, Inc.	New York, New York, USA	November 8, 2015
Talbot Underwriting Services (U.S.) Ltd.	New York, New York, USA	November 8, 2015
Talbot Holdings Ltd. and Talbot Underwriting Services Ltd.	London, England	June 22, 2024
Validus Reinsurance, Ltd.	Republic of Singapore	August 31, 2016
Talbot Risk Services Pte, Ltd.	Republic of Singapore	December 31, 2015
Talbot Underwriting (MENA) Ltd.	Dubai, United Arab Emirates	January 31, 2017
Validus Reinsurance (Switzerland) Ltd	Zurich, Switzerland	January 31, 2019
Western World Insurance Group, Inc.	Franklin Lakes, New Jersey, USA	May 31, 2016

Item 3. Legal Proceedings

During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.

Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.

As at December 31, 2014, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

Executive Officers of the Company

The following table provides information regarding our executive officers and key employees as of February 24, 2015:



Name	Age	Position
Edward J. Noonan	56	Chairman of the Board of Directors and Chief Executive Officer of the Validus Group
Jeffrey D. Sangster	42	Executive Vice President and Chief Financial Officer
C.N. Rupert Atkin	56	Chief Executive Officer of the Talbot Group
Kean D. Driscoll	41	Executive Vice President and Chief Executive Officer of Validus Reinsurance, Ltd.
John J. Hendrickson	54	Director of Strategy, Risk Management and Corporate Development
Andrew E. Kudera	55	Executive Vice President and Chief Actuary
Robert F. Kuzloski	51	Executive Vice President and General Counsel
Michael R. Moore	45	Executive Vice President and Chief Accounting Officer
Romel Salam	48	Executive Vice President and Chief Risk Officer
Jonathan P. Ritz	47	Executive Vice President and Chief Operating Officer
Lixin Zeng	46	Executive Vice President and Chief Executive Officer of AlphaCat Managers, Ltd.

Edward J. Noonan has been Chairman of our Board and the Chief Executive Officer of the Company since its formation. Mr. Noonan has over 30 years of experience in the insurance and reinsurance industry, serving most recently as the acting Chief Executive Officer of Global Indemnity plc (NASDAQ: GBLI) from February 2005 through October 2005 and as a member of the Board of Directors from December 2003 to May 2007. Mr. Noonan served as President and Chief Executive Officer of American Re-Insurance Company from 1997 to 2002, having joined American Re in 1983. Mr. Noonan also served as Chairman of Inter-Ocean Reinsurance Holdings of Hamilton, Bermuda from 1997 to 2002. Mr. Noonan is also a Director of Central Mutual Insurance Company and All American Insurance Company, both of which are property and casualty companies based in Ohio.

Jeffrey D. Sangster has served as Executive Vice President and Chief Financial Officer of the Company since February 2013. Mr. Sangster joined the Company in October 2006 and has served in various finance positions during that time, including Chief Accounting Officer and Chief Financial Officer of Validus Reinsurance, Ltd. Mr. Sangster has 17 years of experience in the reinsurance industry and was previously with Endurance, Centre Group and Ernst & Young. Mr. Sangster is a member of the Institute of Chartered Accountants in Bermuda and the Institute of Chartered Accountants in Manitoba.

C. N. Rupert Atkin began his career at the Alexander Howden Group in 1980 before moving to Catlin Underwriting Agencies in 1984. After six years at Catlin he left to join Talbot, then Venton Underwriting Ltd to start Syndicate 1183 as Active Underwriter. In November 2001, Mr. Atkin was made Director of Underwriting. Following the sale of Talbot to Validus in the summer of 2007 Mr. Atkin was appointed as Chief Executive Officer of Talbot. Mr. Atkin has served or is still serving on a variety of market bodies including chairing the Lloyd's Underwriters' Association and Joint War Risk Committee and being a member of the Lloyd's Insurance Services Board, Lloyd's Regulatory Board, Lloyd's Professional Standards Committee and Lloyd's Charities Trust Committee. Mr. Atkin was appointed to the Council of Lloyd's in 2007, Chairman of the Lloyd's Market Association in 2012 and Deputy Chairman of Lloyd's in 2014.

Kean D. Driscoll is the Chief Executive Officer of Validus Reinsurance, Ltd., the reinsurance segment for the Validus Group. He was a founding member of the Company, and previously served as Chief Underwriting Officer. Mr. Driscoll has 19 years of experience as a reinsurance underwriter, and was previously with Quanta Re, and Zurich Re N.A. (Converium). Mr. Driscoll holds a B.A. in Literature from Colgate University and an M.B.A. from Columbia University, where he graduated with Honors.

John J. Hendrickson has been a director of the Company since its formation. In February 2013, Mr. Hendrickson joined Validus Group as Director of Strategy, Risk Management and Corporate Development. Prior to this, Mr. Hendrickson was the Founder and Managing Partner of SFRi LLC, an independent investment and advisory firm specializing in the insurance industry. From 1995 to 2004, Mr. Hendrickson held various positions with Swiss Re, including as Member of the Executive Board, Head of Capital Partners (Swiss Re's Merchant Banking Division) and Managing Partner of Securitas Capital. From 1985 to 1995, Mr. Hendrickson was with Smith Barney, the U.S. investment banking firm. Mr. Hendrickson has also served as a director of insurance and reinsurance companies, including serving as audit committee chair.

Andrew E. Kudera has served as Chief Actuary of the Company since January 2010. Previously, Mr. Kudera operated an independent actuarial consulting firm which served as corporate actuary and loss reserve specialist for Validus Reinsurance, Ltd. from its inception through to the end of 2008. Prior to establishing his own consulting firm, Mr. Kudera was the Chief Reserving Actuary for Endurance Specialty Holdings Ltd., a large international insurance and reinsurance company. Mr. Kudera has over 30 years of actuarial and financial management experience in the insurance industry, primarily in a consulting capacity. Mr. Kudera is a Fellow of the Casualty Actuarial Society, a Member of the American Academy of Actuaries, an Associate of the Society of Actuaries, and a Fellow of the Canadian Institute of Actuaries.

Robert F. Kuzloski joined the company in January 2009 and served as Executive Vice President and Chief Corporate Legal Officer of the Company until August of 2012 when he was appointed Executive Vice President and General Counsel of the Company. Prior to joining the Company in January of 2009, Mr. Kuzloski served as Senior Vice President and Assistant General Counsel of XL Capital Ltd. Prior to that, Mr. Kuzloski worked as an attorney at the law firm of Cahill Gordon & Reindel LLP where he specialized in general corporate and securities law, mergers and acquisitions and corporate finance.

Michael R. Moore serves as Executive Vice President and Chief Accounting Officer of the Company, a position he has held since June 2013. Mr. Moore has 20 years of experience, including 15 years in the insurance and reinsurance industry. Prior to this role, Mr. Moore served as a Senior Vice President, Corporate Operations at Axis Capital, Chief Accounting Officer at Endurance Specialty Holdings Ltd. and as a Senior Manager with Ernst & Young. Mr. Moore received a Bachelor of Commerce, with distinction, from the University of Alberta in 1993 and he is a Chartered Accountant and member of the Canadian Institute of Chartered Accountants.

Romel Salam serves as Executive Vice President and Chief Risk Officer of the Company, a position he has held since April 2013. He was promoted to his current role after serving for three years as Chief Actuary and Chief Risk Officer of Validus Reinsurance, Ltd, the reinsurance arm of Validus Group. Prior to joining the Company in 2010, Romel was a Senior Vice President at Transatlantic Reinsurance where he spent 20 years in positions of increasing responsibility. Romel is a Fellow of the Casualty of Actuarial Society and a Member of the American Academy of Actuaries.

Jonathan P. Ritz joined the Company in October 2010 and currently serves as Executive Vice President and Chief Operating Officer of the Company. Mr. Ritz has over 20 years of experience in the (re)insurance and brokerage industries. Most recently, Mr. Ritz served as Chief Operating Officer of IFG Companies-Burlington Insurance Group. Prior to IFG, Mr. Ritz served as Chief Operating Officer of the specialty lines division of ICAT Holdings LLC. From 2007 to 2008, Mr. Ritz was a Managing Director at Guy Carpenter and from 1997 to 2007 he held various positions with United America Insurance Group including Chief Operating Officer and Senior Vice President of ceded reinsurance.

Lixin Zeng, Ph.D., CFA serves as Executive Vice President and Chief Executive Officer of AlphaCat Managers, Ltd. and has played a key role in AlphaCat since its formation in 2008. Prior to this role, he was Executive Risk Officer of Validus Reinsurance, Ltd., responsible for developing and executing the catastrophe risk strategy of the entire Validus Group. Mr. Zeng was one of the original employees at the founding of the Company in 2005. His prior positions include: Chief Catastrophe Risk Officer at the ACE Group from 2004 to 2005, Head of Development at Willis Re Inc. from 2001 to 2004, Analyst at EW Blanch Co. from 1998 to 2001 and Research Scientist at Arkwright Mutual Insurance Co from 1996 to 1998. Mr. Zeng has expertise in insurance portfolio optimization and risk management and has published multiple articles in professional journals on related topics. He has a Ph.D. in atmospheric sciences from the University of Washington where he graduated in 1996. He received a B.S. in Meteorology from Beijing University, graduating in 1990 and is a CFA charter holder.

Item 4. Mine Safety Disclosure—Not Applicable

PART II

All amounts presented in this part are in U.S. dollars except as otherwise noted.

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The Company’s common shares, $0.175 par value per share, are listed on the New York Stock Exchange under the symbol “VR.”

The following tables set forth the high and low sales prices per share, as reported on the New York Stock Exchange Composite Tape, of the Company’s common shares per fiscal quarter for the two most recent fiscal years.



	High		Low
2014:
1st Quarter	$	40.20	$	34.68
2nd Quarter	$	38.43	$	36.01
3rd Quarter	$	39.72	$	36.16
4th Quarter	$	42.35	$	37.45



	High		Low
2013:
1st Quarter	$	37.80	$	34.20
2nd Quarter	$	40.06	$	33.40
3rd Quarter	$	37.18	$	34.10
4th Quarter	$	40.71	$	36.82

There were approximately 43 record holders of our common shares as of December 31, 2014. This figure does not represent the actual number of beneficial owners of our common shares because such shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners.

Performance Graph

Set forth below is a line graph comparing the percentage change in the cumulative total shareholder return, assuming the reinvestment of dividends, over the five year period through December 31, 2014 as compared to the cumulative total return of the S&P 500 Stock Index and the cumulative total return of an index of the Company’s peer group. The peer group index is comprised of the following companies: Alleghany Corporation, Allied World Assurance Company Holdings, Ltd., Arch Capital Group, Ltd., Argo Group International Holdings, Ltd., Aspen Insurance Holdings Limited, AXIS Capital Holdings Limited, Endurance Specialty Holdings Ltd., Everest Re Group, Ltd., Montpelier Re Holdings Ltd., PartnerRe Ltd., Platinum Underwriters Holdings Ltd., and RenaissanceRe Holdings Ltd.

Dividend Policy

On February 3, 2015, the Company approved an increase in its regular quarterly dividend to $0.32 from $0.30 per common share and common share equivalent for which each outstanding warrant is exercisable.

We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of our principal operating subsidiaries to pay dividends to us. As a holding company, Validus Holdings, Ltd.'s principal source of income is dividends or other sources of permitted payments from its subsidiaries. These funds provide the cash flow required for dividend payments to the Company's shareholders. During 2015, the Bermuda regulated subsidiaries have the ability to distribute up to $968.2 million of unrestricted net assets as dividend payments and/or return of capital to Validus Holdings, Ltd. without prior regulatory approval. The Companies Act limits the Company’s ability to pay dividends and distributions to shareholders. Total statutory capital and surplus and total statutory capital of our subsidiaries are relevant to the calculation of net assets that are free of restriction for the payment of dividends and/or return of capital to Validus Holdings Ltd. In addition, the maximum dividend that may be paid to the Company by Western World without obtaining prior approval is $45.2 million. See “Risk Factors, Risks Related to Ownership of Our Common Shares." Because Validus Holdings, Ltd. is a holding company and substantially all of our operations are conducted by our main operating subsidiaries our ability to meet any ongoing cash requirements and to pay dividends will depend on our ability to obtain cash dividends or other cash payments or obtain loans from these subsidiaries.

Share Repurchase Program

The Company has repurchased approximately 71.4 million common shares for an aggregate purchase price of $2.3 billion from the inception of the share repurchase program to February 20, 2015.

The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors.

On February 3, 2015, the Board of Directors of the Company approved an increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.

The repurchase program may be modified, extended or terminated by the Board of Directors at any time. The remaining amount available under the current share repurchase authorization is $739.6 million as of February 20, 2015.

Share repurchases include repurchases by the Company of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares which have vested. We repurchase these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested.



			Share Repurchase Activity by Quarter
Effect of share repurchases:	As at December 31, 2013 (cumulative)		Quarter ended March 31, 2014		Quarter ended June 30, 2014		Quarter ended September 30, 2014
	(Dollars in thousands, except share and per share amounts)
Aggregate purchase price (a)	$	1,720,349	$	197,339	$	—	$	89,187
Shares repurchased	56,805,310		5,366,672		—		2,330,428
Average price (a)	$	30.29	$	36.77	$	—	$	38.27
Estimated net cumulative accretive (dilutive) impact on:
BV per diluted common share (b)			$	2.58	$	2.93	$	3.00
Diluted EPS—Quarter (c)			$	0.60	$	0.61	$	0.12
Estimated quarterly net accretive (dilutive) impact on:
BV per diluted common share			$	0.04	$	—	$	0.01



			Fourth Quarter Share Repurchase Activity
Effect of share repurchases:	As at September 30, 2014 (cumulative)		October		November		December		Quarter ended December 31, 2014
	(Dollars in thousands, except share and per share amounts)
Aggregate purchase price (a)	$	2,006,875	$	65,633	$	73,454	$	85,339	$	224,426
Shares repurchased	64,502,410		1,663,577		1,815,805		2,063,712		5,543,094
Average price (a)	$	31.11	$	39.45	$	40.45	$	41.35	$	40.49
Maximum number of shares that may yet be purchased under the program (d)			5,171,341		3,085,374		1,034,415		1,034,415
Estimated net cumulative accretive (dilutive) impact on:
BV per diluted common share (b)									$	3.35
Diluted EPS—Quarter (c)									$	0.53
Estimated quarterly net accretive (dilutive) impact on:
BV per diluted common share									$	(0.05	)



			Share Repurchase Activity Post Year End
Effect of share repurchases:	As at December 31, 2014 (cumulative)		January		February		As at February 20, 2015		Cumulative to Date Effect
	(Dollars in thousands, except share and per share amounts)
Aggregate purchase price(a)	$	2,231,301	$	43,100	$	10,382	$	53,482	$	2,284,783
Shares repurchased	70,045,504		1,072,462		247,438		1,319,900		71,365,404
Average price(a)	$	31.86	$	40.19	$	41.96	$	40.52	$	32.02


(a)	Share transactions are on a trade date basis through February 20, 2015 and are inclusive of commissions. Average share price is rounded to two decimal places.


(b)	As the average price per share repurchased during the periods from 2009 at the inception of the share repurchase program through to 2014 was lower than the book value per common share, the repurchase of shares increased the ending book value per share.

(c)

The estimated impact on earnings per diluted share was calculated by comparing reported results versus i) net income per share plus an estimate of lost net investment income on the cumulative share repurchases divided by ii) weighted average diluted shares outstanding excluding the weighted average impact of cumulative share repurchases. The impact of cumulative share repurchases was accretive to earnings per diluted share.


(d)	The maximum number of shares that may yet be purchased under the program is calculated using the month end closing price.

Item 6. Selected Financial Data

The summary Consolidated Statements of Comprehensive Income data for the years ended December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010 and the summary Consolidated Balance Sheet data as of December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010 are derived from our audited Consolidated Financial Statements. The Company was formed on October 19, 2005 and completed the acquisitions of Talbot, IPC, Flagstone and Western World on July 2, 2007, September 4, 2009, November 30, 2012 and October 2, 2014, respectively. Flagstone is included in the Company's consolidated results for the one month ended December 31, 2012 and for subsequent fiscal year ends. Western World is included in the Company's consolidated results from the October 2, 2014 date of acquisition.



(Dollars in thousands, except share and per share amounts)	Years Ended December 31,
	2014			2013			2012			2011			2010

Revenues
Gross premiums written	$	2,363,286		$	2,401,106		$	2,166,440		$	2,124,691		$	1,990,566
Reinsurance premiums ceded	(309,233		)	(372,585		)	(307,506		)	(289,241		)	(229,482		)
Net premiums written	2,054,053			2,028,521			1,858,934			1,835,450			1,761,084
Change in unearned premiums	(51,649		)	73,524			14,282			(33,307		)	39
Net premiums earned	2,002,404			2,102,045			1,873,216			1,802,143			1,761,123
Gain on bargain purchase, net of expenses (a)	—			—			17,701			—			—
Net investment income	100,076			96,072			107,936			112,296			134,103
Net realized gains on investments	23,095			3,258			18,233			28,532			32,498
Net unrealized (losses) gains on investments	(57,973		)	(58,481		)	17,585			(19,991		)	45,952
Income (loss) from investment affiliate	8,411			4,790			(964		)	—			—
Other insurance related income and other income	19,739			8,343			22,396			5,718			5,219
Foreign exchange (losses) gains	(10,630		)	2,505			4,798			(22,124		)	1,351
Total revenues	2,085,122			2,158,532			2,060,901			1,906,574			1,980,246
Expenses
Losses and loss expenses	772,049			793,932			999,446			1,244,401			987,586
Policy acquisition costs	340,556			360,310			334,698			314,184			292,899
General and administrative expenses	329,792			315,265			263,652			197,497			209,290
Share compensation expenses	33,073			27,630			26,709			34,296			28,911
Finance expenses	63,854			64,177			53,857			54,817			55,870
Transaction expenses (b)	8,096			—			—			17,433			—
Total expenses	1,547,420			1,561,314			1,678,362			1,862,628			1,574,556
Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	537,702			597,218			382,539			43,946			405,690



Tax expense	(155		)	(383		)	(2,501		)	(824		)	(3,126		)
Income from operating affiliates	17,723			14,289			12,580			—			—
(Income) attributable to operating affiliate investors	(109,399		)	(68,763		)	—			—			—
Net income	445,871			542,361			392,618			43,122			402,564
Net loss (income) attributable to noncontrolling interest	35,464			(9,695		)	15,820			(21,793		)	—
Net income available to Validus	481,335			532,666			408,438			21,329			402,564
Other comprehensive (loss) income
Change in foreign currency translation adjustments	(7,501		)	(1,954		)	3,648			(1,146		)	(604		)
Change in minimum pension liability, net of tax	(210		)	—			—			—			—
Change in fair value of cash flow hedge	(228		)	—			—			—			—
Comprehensive income available to Validus	$	473,396		$	530,712		$	412,086		$	20,183		$	401,960
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	90,354,745			102,202,274			97,184,110			98,607,439			116,018,364
Diluted	94,690,271			103,970,289			102,384,923			100,928,284			120,630,945
Basic earnings per share available to common shareholders	$	5.26		$	5.02		$	4.13		$	0.14		$	3.41
Earnings per diluted share available to common shareholders	$	5.08		$	4.94		$	3.99		$	0.14		$	3.34
Cash dividends declared per share	$	1.20		$	3.20		$	1.00		$	1.00		$	0.88
Selected financial ratios
Losses and loss expenses ratio (c)	38.6		%	37.8		%	53.4		%	69.1		%	56.1		%
Policy acquisition costs ratio (d)	17.0		%	17.1		%	17.9		%	17.4		%	16.6		%
General and administrative expenses ratio (e)	18.1		%	16.3		%	15.5		%	12.9		%	13.5		%
Expense ratio (f)	35.1		%	33.4		%	33.4		%	30.3		%	30.1		%
Combined ratio (g)	73.7		%	71.2		%	86.8		%	99.4		%	86.2		%
Return on average equity (h)	13.1		%	14.0		%	11.3		%	0.6		%	10.8		%


(a)	The gain on bargain purchase, net of expenses, arose from the acquisitions of Flagstone on November 30, 2012 and is net of transaction related expenses.


(b)	The transaction expenses related to costs incurred in connection with the Company’s proposed acquisition of Transatlantic Holdings, Inc. during 2011. Transaction expenses incurred during 2014 relate to the acquisition of Western World. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.


(c)	The losses and loss expenses ratio is calculated by dividing losses and loss expenses by net premiums earned.


(d)	The policy acquisition costs ratio is calculated by dividing policy acquisition costs by net premiums earned.


(e)	The general and administrative expenses ratio is calculated by dividing the sum of general and administrative expenses and share compensation expenses by net premiums earned.


(f)	The expense ratio is calculated by combining the policy acquisition costs ratio and the general and administrative expenses ratio.


(g)	The combined ratio is calculated by combining the losses and loss expenses ratio, the policy acquisition costs ratio and the general and administrative expenses ratio.


(h)	Return on average equity is calculated by dividing the net income available to Validus for the period by the average of the beginning, ending and intervening quarter end shareholders’ equity available to Validus balances.

The following table sets forth summarized balance sheet data as of December 31, 2014, 2013, 2012, 2011 and 2010:



(Dollars in thousands, except share and per share amounts)	As at December 31,
	2014		2013		2012		2011		2010
Summary Balance Sheet Data:
Investments at fair value (a)	$	7,396,816	$	7,034,058	$	6,895,159	$	5,292,444	$	5,118,859
Cash and cash equivalents and restricted cash (a)	750,243		934,640		1,088,252		731,523		620,740
Total assets	10,311,621		9,846,432		10,020,264		7,618,471		7,060,878
Reserve for losses and loss expenses	3,234,394		3,030,399		3,517,573		2,631,143		2,035,973
Unearned premiums	990,564		824,496		894,362		772,382		728,516
Senior notes payable	247,306		247,198		247,090		246,982		246,874
Debentures payable	539,277		541,416		540,709		289,800		289,800
Total shareholders’ equity	4,046,553		4,201,751		4,455,107		3,448,425		3,504,831
Book value per common share (b)	42.78		38.57		37.26		34.67		35.76
Book value per diluted common share (c)	39.66		36.23		35.22		32.28		32.98


(a)	Investments at fair value as at December 31, 2013, 2012 and 2011 includes revisions of $121,706, $131,127 and $101,321, respectively, from cash and cash equivalents to conform to current period presentation.


(b)	Book value per common share is defined as total shareholders’ equity available to Validus divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities.

(c)

Book value per diluted common share is calculated based on total shareholders’ equity available to Validus plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise). Book value per diluted common share is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”

The above summary consolidated financial information should be read together with the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere herein.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2014, 2013 and 2012 and the Company’s consolidated financial condition, liquidity and capital resources at December 31, 2014 and 2013. This discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes thereto included elsewhere within this filing.

For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A above present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Executive Overview

The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. Validus Re is a Bermuda-based reinsurance segment focused on short-tail lines of reinsurance. AlphaCat is a Bermuda-based investment adviser, managing capital from third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. Talbot is a specialty insurance segment, primarily operating within the Lloyd's insurance market through Syndicate 1183. Western World is a U.S. based specialty excess and surplus lines insurance company.

The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.

On April 2, 2012, the Company capitalized PaCRe, a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. PaCRe was funded with $500.0 million of contributed capital, of which the Company invested $50.0 million in PaCRe's common equity. On May 1, 2013, PaCRe was funded with an additional $58.5 million in contributed capital from a third party investor and $6.5 million from the Company. The Company underwrites business for PaCRe, for which it is paid a profit commission based on PaCRe's underwriting results. As the Company holds a majority of PaCRe's outstanding voting rights, the financial statements of PaCRe are included in the Consolidated Financial Statements of the Company and its results are reported within the AlphaCat segment. The portion of PaCRe's earnings attributable to third party investors is recorded in the consolidated Statements of Comprehensive Income as "Net (income) loss attributable to noncontrolling interest."

On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone. As part of this acquisition, the Company acquired Flagstone Reassurance Suisse, SA, and renamed it Validus Reinsurance (Switzerland) Ltd ("Validus Re Swiss"). Validus Re Swiss is based in Zurich, Switzerland and forms part of Validus Re segment. During October 2013, the Company completed the sale of its wholly owned subsidiary, Flagstone Alliance Insurance and Reinsurance plc.

On December 20, 2013, the Company joined with other investors in capitalizing AlphaCat 2014, a special purpose vehicle formed for the purpose of investing in collateralized reinsurance and retrocessional contracts. The Company has an equity interest and voting rights in AlphaCat 2014 which are below 50%, therefore the investment in AlphaCat 2014 is included as an equity method investment in the Consolidated Financial Statements of the Company.

On October 2, 2014, the Company acquired all of the outstanding shares of Western World. The acquisition provided the Company with enhanced access to the specialty U.S. commercial insurance market, the world's largest short-tail market, complementing the Company's existing market positions in both Bermuda reinsurance and the Lloyd's marketplace and increasing the Company's ability to leverage operational strengths in short-tail classes of business. In addition, the acquisition improves the Company's ability to manage (re)insurance cycles.

On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, a special purpose vehicle formed for the purpose of investing in collateralized reinsurance and retrocessional contracts. The Company has an equity interest and voting rights in AlphaCat 2015 which are below 50%, therefore the investment in AlphaCat 2015 is included as an equity method investment in the Consolidated Financial Statements of the Company.

Business Outlook and Trends

We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. accounting principles do not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.

Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. At the same time, management believes that there is a heightened awareness of exposure to natural catastrophes on the part of cedants, rating agencies and catastrophe modeling firms, resulting in an increase in the demand for reinsurance protection. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates on most lines. During 2010 and 2011, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, Tohoku and New Zealand earthquake events, but the Company continues to see increased competition and decreased premium rates in most classes of business.

During the January 2014 renewal season, the Validus Re and AlphaCat segments underwrote $575.2 million in gross premiums written (net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 3.2% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. property catastrophe business, which experienced a reduction in rates of approximately 12.5%. During the mid-year 2014 renewal period, the Validus Re segment experienced rate softening across U.S. and international property lines. In particular, although limits placed from the Florida market increased, the availability of capacity resulted in overall pricing reductions for Florida property catastrophe business. The Talbot segment experienced a whole account rate decrease of 3.8% through December 31, 2014.

During the January 2015 renewal season, the Validus Re and AlphaCat segments underwrote $540.9 million in gross premiums written (net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 6.0% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. and European property catastrophe business, which experienced a reduction in rates of approximately 10-15%.

Financial Measures

The Company believes that the primary financial indicator for evaluating performance and measuring the overall growth in value generated for shareholders is book value per diluted common share. Book value per diluted common share plus accumulated dividends, together with other important financial indicators, is shown below:



	Years Ended December 31,
	2014	2013	2012
Book value per diluted common share plus accumulated dividends	$48.54	$43.91	$39.70
Book value per diluted common share	$39.66	$36.23	$35.22
Underwriting income	$526,934	$604,908	$248,711
Net operating income available to Validus	$486,464	$589,449	$333,747
Annualized return on average equity	13.1%	14.0%	11.3%

Book value per diluted common share plus accumulated dividends is considered by management to be the primary indicator of financial performance, as we believe growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends increased by $4.63, or 10.5%, from $43.91 at December 31, 2013 to $48.54 at December 31, 2014. Cash dividends per common share are an integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.30 per common share and common share equivalent during the year ended December 31, 2014. On February 3, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on March 31, 2015 to holders of record on March 13, 2015. Book value per diluted common share plus accumulated

dividends is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise), plus accumulated dividends. Book value per diluted common share plus accumulated dividends is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”

Book value per diluted common share is considered by management to be a measure of returns to common shareholders, as we believe growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid increased by $3.43, or 9.5%, from $36.23 at December 31, 2013 to $39.66 at December 31, 2014. Growth in book value per diluted common share inclusive of dividends was 12.8% for the year ended December 31, 2014. Book value per diluted common share is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”

Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other insurance related income, finance expenses, net realized and change in net unrealized gains (losses) on investments, foreign exchange gains (losses) and non-recurring items. The Company believes the reporting of underwriting income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the years ended December 31, 2014, 2013 and 2012 was $526.9 million, $604.9 million and $248.7 million, respectively. Underwriting income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures."

Net operating income available to Validus is defined as net income excluding net realized and change in net unrealized gains (losses) on investments, income (loss) from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and operating income (loss) attributable to noncontrolling interest. This measure focuses on the underlying fundamentals of the Company's operations without the influence of gains (losses) from the sale of investments, translation of non-U.S. dollar currencies and non-recurring items. Net operating income available to Validus for the years ended December 31, 2014, 2013 and 2012 was $486.5 million, $589.4 million and $333.7 million, respectively. Net operating income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”

Annualized return on average equity represents the return generated on common shareholders’ capital during the period. Return on average equity is calculated by dividing the net income available to Validus for the period by the average shareholders’ equity available to Validus during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed. The annualized return on average equity for the years ended December 31, 2014 and 2013 was 13.1% and 14.0%, respectively.

Fourth Quarter 2014 Summarized Consolidated Results of Operations


•	Gross premiums written for the three months ended December 31, 2014 were $336.6 million compared to $237.3 million for the three months ended December 31, 2013, an increase of $99.4 million, or 41.9%.


•	Net premiums earned for the three months ended December 31, 2014 were $558.7 million compared to $492.2 million for the three months ended December 31, 2013, an increase of $66.5 million, or 13.5%.


•	Underwriting income for the three months ended December 31, 2014 was $135.7 million compared to underwriting income of $110.4 million for the three months ended December 31, 2013, an increase of $25.3 million, or 22.9%.

•

Combined ratio for the three months ended December 31, 2014 was 75.7% which included $84.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 15.1 percentage points compared to a combined ratio for the three months ended December 31, 2013 of 77.6% which included $33.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 6.8 percentage points.


•	Loss ratio for the three months ended December 31, 2014 was 40.5% compared to 41.9% for the three months ended December 31, 2013.


•	Loss ratios by line of business are as follows:



	Three Months Ended December 31, 2014 (a)		Three Months Ended December 31, 2013		Percentage Point Change
Property	24.2	%	36.1	%	(11.9	)
Marine	28.4	%	41.9	%	(13.5	)
Specialty	65.7	%	52.5	%	13.2
Liability	68.3	%	—	%	68.3
All lines	40.5	%	41.9	%	(1.4	)


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


•	Losses and loss expenses from notable loss events for the three months ended December 31, 2014 was $6.8 million compared to ($1.9) million for the three months ended December 31, 2013, an increase of $8.7 million.


•	Net investment income for the three months ended December 31, 2014 was $30.2 million compared to $24.2 million for the three months ended December 31, 2013, an increase of $6.0 million, or 24.6%.


•	Investment yield for the three months ended December 31, 2014 was 1.84% compared to 1.44% for the three months ended December 31, 2013.


•	Net operating income available to Validus for the three months ended December 31, 2014 was $129.0 million compared to $100.1 million for the three months ended December 31, 2013, an increase of $29.0 million, or 29.0%.


•	Net income available to Validus for the three months ended December 31, 2014 was $125.9 million, or $1.38 per diluted common share compared to $95.3 million or $0.93 per diluted common share for the three months ended December 31, 2013.


•	Annualized return on average equity and annualized net operating return on average equity for the three months ended December 31, 2014 were 13.8% and 14.2%, respectively, compared to 10.2% and 10.7% for the three months ended December 31, 2013.

Further details on the fourth quarter results are as follows:

Gross premiums written increased $99.4 million for the three months ended December 31, 2014 compared to the three months ended December 31, 2013. This increase primarily relates to the acquisition of Western World. Gross premiums written by Western World were $65.2 million for the three months ended December 31, 2014. In addition, gross premiums written by Validus Re and Talbot increased by $22.5 million and $11.1 million, respectively, during the three months ended December 31, 2014. These increases were primarily due to premium adjustments and additional premium signings, respectively.

Net premiums earned increased $66.5 million for the three months ended December 31, 2014 compared to the three months ended December 31, 2013. This increase primarily relates to the acquisition of Western World. Net premiums earned for the Western World segment were $73.0 million for the three months ended December 31, 2014.

The current period loss ratio, excluding notable and non-notable loss events, for the three months ended December 31, 2014 was 52.7% compared to 49.1% for the three months ended December 31, 2013.

Full Year 2014 Summarized Consolidated Results of Operations and Financial Condition


•	Gross premiums written for the year ended December 31, 2014 were $2.363 billion compared to $2.401 billion for the year ended December 31, 2013, a decrease of $37.8 million, or 1.6%.


•	Net premiums earned for the year ended December 31, 2014 were $2.002 billion compared to $2.102 billion for the year ended December 31, 2013, a decrease of $99.6 million, or 4.7%.


•	Underwriting income for the year ended December 31, 2014 was $526.9 million compared to $604.9 million for the year ended December 31, 2013, a decrease of $78.0 million, or 12.9%.

•

Combined ratio for the year ended December 31, 2014 was 73.7%, which included $252.2 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 12.6 percentage points, compared to 71.2%, which included $205.4 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.8 percentage points, for the year ended December 31, 2013.


•	Loss ratio for the year ended December 31, 2014 was 38.6% compared to 37.8% for the year ended December 31, 2013.


•	Loss ratios by line of business are as follows:



	Year Ended December 31, 2014 (a)		Year Ended December 31, 2013		Percentage Point Change
Property	17.0	%	22.9	%	(5.9	)
Marine	40.5	%	47.8	%	(7.3	)
Specialty	64.0	%	54.6	%	9.4
Liability	68.3	%	—	%	68.3
All lines	38.6	%	37.8	%	0.8


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


•	Losses and loss expenses from notable loss events for the year ended December 31, 2014 was $34.9 million compared to $60.8 million for the year ended December 31, 2013, a decrease of $25.9 million.


•	Net investment income for the year ended December 31, 2014 was $100.1 million compared to $96.1 million for the year ended December 31, 2013, an increase of $4.0 million, or 4.2%.


•	Investment yield for the year ended December 31, 2014 was 1.53% compared to 1.38% for the year ended December 31, 2013.


•	Net operating income available to Validus for the year ended December 31, 2014 was $486.5 million, or $5.14 per diluted common share compared to $589.4 million or $5.48 per diluted common share for the year ended December 31, 2013.


•	Net income available to Validus for the year ended December 31, 2014 was $481.3 million, or $5.08 per diluted common share compared to $532.7 million or $4.94 per diluted common share for the year ended December 31, 2013.


•	Return on average equity and net operating return on average equity for the year ended December 31, 2014 were 13.1% and 13.2%, respectively compared to 14.0% and 15.5% for the year ended December 31, 2013.


•	Total cash and cash equivalents, restricted cash and investments less assets held in trust on behalf of operating affiliates, catastrophe bonds and non-controlling interest as at December 31, 2014 was $7.1 billion compared to $7.1 billion as at December 31, 2013.

Overview of the Results of Operations for Years Ended December 31, 2014 and December 31, 2013 compared to the Years Ended December 31, 2013 and December 31, 2012, respectively.

The change in net operating income available to Validus for the years ended December 31, 2014 and December, 31 2013 as compared to the years ended December 31, 2013 and December 31, 2012, respectively, is described in the following table:




	Increase (decrease) to net operating income available to Validus over the years ended
(Dollars in thousands)	2014 compared to 2013 (a)			2013 compared to 2012 (b)
Net premiums earned	$	(99,641	)	$	228,829
Notable and non-notable loss events (c)	(8,793		)	439,742
Incurred current year losses, excluding notable and non-notable loss events	(16,083		)	(264,707		)
Prior period loss development	46,759			30,479
Other underwriting deductions (d)	(216		)	(78,146		)
Underwriting income (e)	(77,974		)	356,197
(Income) attributable to operating affiliate investors	(40,636		)	(68,763		)
Other operating expenses and income, net (f)	10,851			(21,548		)
Net operating income (e)	(107,759		)	265,886
Net operating (income) loss attributable to noncontrolling interest	4,774			(10,184		)
Net operating income available to Validus (e)	$	(102,985	)	$	255,702


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


(b)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.


(c)	The notable loss event for the year ended December 31, 2014 was Tripoli Airport. The notable loss event for the year ended December 31, 2013 was the European Floods. Notable loss events for the year ended December 31, 2012 were Costa Concordia, Cat 67, U.S. drought, Hurricane Isaac and Hurricane Sandy.


(d)	Other underwriting deductions consist of policy acquisition costs, general & administration expenses and share compensation expenses.

(e)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”


(f)	Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Net operating income available to Validus for the year ended December 31, 2014 was $486.5 million compared to $589.4 million for the year ended December 31, 2013, a decrease of $103.0 million. The primary factors driving the decrease in net operating income available to Validus were:


•	A decrease in net premiums earned of $99.6 million, primarily within the Validus Re segment, due to a reduction in gross premiums written, the timing of the purchase of retrocessional coverage and the effect of the Flagstone run-off business; and,


•	An increase in income attributable to operating affiliate investors of $40.6 million; offset by,


•	A decrease in losses and loss expenses of $21.9 million primarily due to an increase in favorable prior period development of $46.8 million; offset by an increase in current year losses and loss expenses of $24.9 million.

The Year Ended December 31, 2013 compared to the Year Ended December 31, 2012

Net operating income available to Validus for the year ended December 31, 2013 was $589.4 million compared to $333.7 million for the year ended December 31, 2012, an increase of $255.7 million. The primary factors driving the increase in net operating income available to Validus were:


•	An increase in net premiums earned of $228.8 million, primarily due to new agriculture business written by Validus Re and business written in consolidated AlphaCat subsidiaries; and


•	A decrease in losses and loss expenses of $205.5 million, driven by a significantly lower level of notable loss events, offset by losses on the new agricultural business written by Validus Re; offset by,


•	An increase in general and administrative expenses of $51.6 million, due primarily to costs associated with the run-off of the former Flagstone business and an increase in average headcount;


•	An increase in policy acquisition costs of $25.6 million, reflecting the higher level of net premiums earned; and


•	An increase in income attributable to operating affiliate investors of $68.8 million.

Segment Reporting

Management has determined that the Company operates in four reportable segments Validus Re, AlphaCat, Talbot and Western World. For segmental reporting purposes, the results of Flagstone’s operations since November 30, 2012 have been included within the Validus Re segment in the Consolidated Financial Statements. The results of Western World have been included in the consolidated results from the October 2, 2014 date of acquisition.

Fourth Quarter 2014 Summarized Results of Operations - Validus Re Segment

•

Gross premiums written for the three months ended December 31, 2014 were $32.7 million compared to $10.3 million for the three months ended December 31, 2013, an increase of $22.5 million, or 219.4%. Gross premiums written for the three months ended December 31, 2014 included $14.0 million of property premiums, $15.3 million of marine premiums and $3.5 million of specialty premiums; compared to $17.2 million of property premiums and $nil of marine premiums, offset by ($6.9) million of specialty premiums for the three months ended December 31, 2013.


•	Net premiums earned for the three months ended December 31, 2014 were $230.5 million compared to $250.3 million for the three months ended December 31, 2013, a decrease of $19.8 million, or 7.9%.


•	Underwriting income for the three months ended December 31, 2014 was $112.3 million compared to income of $77.1 million for the three months ended December 31, 2013, an increase of $35.2 million, or 45.7%.


•	Combined ratio for the three months ended December 31, 2014 was 51.3% compared to 69.1% for the three months ended December 31, 2013.

•

The loss ratio for the three months ended December 31, 2014 was 25.8% compared to 44.2% for the three months ended December 31, 2013, a decrease of 18.4 percentage points. The loss ratio for the three months ended December 31, 2014 included favorable loss reserve development on prior accident years of $30.8 million, decreasing the loss ratio by 13.3 percentage points. The loss ratio for the three months ended December 31, 2013 included unfavorable loss reserve development on prior accident years of $3.4 million, increasing the loss ratio by 1.3 percentage points.


•	Losses and loss expenses from a notable loss event for the three months ended December 31, 2014 was $6.8 million compared to $nil for the three months ended December 31, 2013.


•	Net investment income for the three months ended December 31, 2014 was $18.3 million compared to $19.6 million for the three months ended December 31, 2013, a decrease of $1.3 million, or 6.4%.


•	Other insurance related income for the three months ended December 31, 2014 was $0.8 million compared to $0.9 million for the three months ended December 31, 2013, a decrease of $0.1 million.


•	Net operating income for the three months ended December 31, 2014 of $132.1 million compared to income of $92.1 million for the three months ended December 31, 2013, an increase of $40.0 million.


•	General and administrative expenses for the three months ended December 31, 2014 were $21.0 million compared to $21.6 million for the three months ended December 31, 2013, a decrease of $0.6 million, or 2.9%.

Full Year 2014 Results of Operations - Validus Re Segment

The following table presents results of operations for the years ended December 31, 2014, 2013 and 2012:



	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012 (a)
Underwriting income
Gross premiums written	$	1,136,910		$	1,242,522		$	1,131,959
Reinsurance premiums ceded	(182,056		)	(226,264		)	(144,578		)
Net premiums written	954,854			1,016,258			987,381
Change in unearned premiums	(37,570		)	117,679			35,890
Net premiums earned	917,284			1,133,937			1,023,271

Underwriting deductions
Losses and loss expenses	307,290			430,026			575,416
Policy acquisition costs	141,670			180,779			154,362
General and administrative expenses	74,739			91,260			63,048
Share compensation expenses	9,739			7,668			7,763
Total underwriting deductions	533,438			709,733			800,589

Underwriting income (b)	383,846			424,204			222,682

Net investment income	74,599			81,346			88,727
Finance expenses	(14,727		)	(16,111		)	(8,943		)
Other insurance related income	3,159			19,222			5,000

Operating income before taxes	446,877			508,661			307,466
Tax benefit (expense)	5,512			272			(168		)
Net operating income (b)	$	452,389		$	508,933		$	307,298

Selected ratios:
Net premiums written / Gross premiums written	84.0		%	81.8		%	87.2		%
Losses and loss expenses	33.5		%	37.9		%	56.2		%
Policy acquisition costs	15.5		%	16.0		%	15.1		%
General and administrative expenses (c)	9.2		%	8.7		%	6.9		%
Expense ratio	24.7		%	24.7		%	22.0		%
Combined ratio	58.2		%	62.6		%	78.2		%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

(b)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”


(c)	The general and administrative expenses ratio includes share compensation expenses.

The change in net operating income for the years ended December 31, 2014 and December, 31 2013 as compared to the years ended December 31, 2013 and December 31, 2012, respectively, is described in the following table:




	Increase (decrease) to net operating income over the years ended
(Dollars in thousands)	2014 compared to 2013			2013 compared to 2012 (a)
Net premiums earned	$	(216,653	)	$	110,666
Notable and non-notable loss events (b)	2,964			347,419
Incurred current year losses, excluding notable and non-notable loss events	91,430			(188,726		)
Prior period loss development	28,342			(13,303		)
Other underwriting deductions (c)	53,559			(54,534		)
Underwriting income (e)	(40,358		)	201,522
Other operating income and expenses, net (d)	(16,186		)	113
Net operating income (e)	$	(56,544	)	$	201,635


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.


(b)	The notable loss event for the year ended December 31, 2014 was Tripoli Airport. The notable loss event for the year ended December 31, 2013 was the European Floods. Notable loss events for the year ended December 31, 2012 were Costa Concordia, Cat 67, U.S. drought, Hurricane Isaac and Hurricane Sandy.


(c)	Other underwriting deductions consist of policy acquisition costs, general & administration expenses and share compensation expenses.


(d)	Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.

(e)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”

Gross Premiums Written



	Gross Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012 (a)
Property	$	631,032	$	(113,598	)	$	744,630	$	(26,987	)	$	771,617
Marine	190,959		(3,042		)	194,001		(63,468		)	257,469
Specialty	314,919		11,028			303,891		201,018			102,873
Total	$	1,136,910	$	(105,612	)	$	1,242,522	$	110,563		$	1,131,959


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in gross premiums written in the property lines of $113.6 million was primarily due to reductions in business written in the catastrophe excess of loss and per risk lines of $87.4 million and $5.7 million, respectively. These decreases were as a result of current market conditions, the impact of a program that was withdrawn and a number of non-renewals due to both unfavorable pricing and the proposed inclusion of terror exposure on some programs without appropriate premium for the additional risk. The decrease in gross premiums written of $3.0 million in the marine lines was primarily due to non-renewals and some business historically written in the marine lines being renewed in the specialty lines. This decrease was partially offset by positive premium adjustments. The increase in gross premiums written of $11.0 million in the specialty lines was primarily due to new composite and trade credit business of $22.0 million and $16.5 million, respectively; offset by a $31.5 million reduction in agricultural business as a result of reduced participation in a number of quota share agreements.



	Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012 (a)
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)
Property	$	631,032	55.5	%	$	744,630	59.9	%	$	771,617	68.2	%
Marine	190,959		16.8	%	194,001		15.6	%	257,469		22.7	%
Specialty	314,919		27.7	%	303,891		24.5	%	102,873		9.1	%
Total	$	1,136,910	100.0	%	$	1,242,522	100.0	%	$	1,131,959	100.0	%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The changes in mix of business were consistent with the changes in gross premiums written discussed above.

Reinsurance Premiums Ceded



	Reinsurance Premiums Ceded
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012 (a)
Property	$	154,134	$	(17,799	)	$	171,933	$	48,323		$	123,610
Marine	16,524		471			16,053		(4,344		)	20,397
Specialty	11,398		(26,880		)	38,278		37,707			571
Total	$	182,056	$	(44,208	)	$	226,264	$	81,686		$	144,578


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Reinsurance premiums ceded in the property lines decreased by $17.8 million, due to significant restructuring of retrocessional coverage purchased, reflecting more favorable market conditions in the current year. The decrease in reinsurance premiums ceded in the specialty lines of $26.9 million was due primarily to the non-renewal of proportional coverage that was purchased in the first quarter of 2013 related to the agriculture business.

Net Premiums Written



	Net Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012 (a)
Property	$	476,898	$	(95,799	)	$	572,697	$	(75,310	)	$	648,007
Marine	174,435		(3,513		)	177,948		(59,124		)	237,072
Specialty	303,521		37,908			265,613		163,311			102,302
Total	$	954,854	$	(61,404	)	$	1,016,258	$	28,877		$	987,381


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The changes in net premiums written were driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.



	Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012 (a)
(Dollars in thousands)	Net Premiums Written		% of Gross Premiums Written		Net Premiums Written		% of Gross Premiums Written		Net Premiums Written		% of Gross Premiums Written
Property	$	476,898	75.6	%	$	572,697	76.9	%	$	648,007	84.0	%
Marine	174,435		91.3	%	177,948		91.7	%	237,072		92.1	%
Specialty	303,521		96.4	%	265,613		87.4	%	102,302		99.4	%
Total	$	954,854	84.0	%	$	1,016,258	81.8	%	$	987,381	87.2	%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The specialty ratio has increased by 9.0 percentage points due to the decrease in reinsurance coverage purchased on the agriculture business.

Net Premiums Earned



	Net Premiums Earned
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012 (a)
Property	$	470,295	$	(201,372	)	$	671,667	$	(2,261	)	$	673,928
Marine	167,256		(28,157		)	195,413		(58,679		)	254,092
Specialty	279,733		12,876			266,857		171,606			95,251
Total	$	917,284	$	(216,653	)	$	1,133,937	$	110,666		$	1,023,271


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decreases in the property and marine lines net premiums earned were as a result of lower gross premiums written and the tail of the Flagstone run-off as premiums were earned in the year ended December 31, 2013 with no comparative amounts for the year ended December 31, 2014. The increase in the specialty lines net premiums earned was due primarily to various adjustments on existing business.

Losses and Loss Expenses



	Losses and Loss Expenses Ratio - All Lines
	Years Ended December 31,
	2014		2013		2012 (a)
All lines—current period excluding items below	37.3	%	38.2	%	23.9	%
All lines—current period—notable loss events	2.4	%	4.9	%	39.4	%
All lines—current period—non-notable loss events	3.3	%	0.0	%	0.0	%
All lines—change in prior accident years	(9.5	)%	(5.2	)%	(7.1	)%
All lines—loss ratio	33.5	%	37.9	%	56.2	%



	Losses and Loss Expenses - All Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012 (a)
All lines—current period excluding items below	$	342,538		$	(91,430	)	$	433,968		$	188,726		$	245,242
All lines—current period—notable loss events	22,469			(32,847		)	55,316			(347,419		)	402,735
All lines—current period—non-notable loss events	29,883			29,883			—			—			—
All lines—change in prior accident years	(87,600		)	(28,342		)	(59,258		)	13,303			(72,561		)
All lines - losses and loss expenses	$	307,290		$	(122,736	)	$	430,026		$	(145,390	)	$	575,416


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

Notable Loss Events

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Losses and loss expenses from notable loss events for the year ended December 31, 2014 was $22.5 million from a single notable loss event, Tripoli Airport, which represented 2.4 percentage points of the loss ratio. Net of $3.0 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $19.5 million. Losses and loss expenses from notable loss events for the year ended December 31, 2013 was $55.3 million also from a single notable loss event, the European Floods, which represented 4.9 percentage points of the loss ratio. Net of $4.8 million of reinstatement premiums, the effect of this event on net operating income was a $50.5 million reduction.

Losses and Loss Expenses by Line of Business



	Losses and Loss Expenses Ratio - Property Lines
	Years Ended December 31,
	2014		2013		2012 (a)
Property—current period excluding items below	18.7	%	24.2	%	18.5	%
Property—current period—notable loss events	0.0	%	8.2	%	41.1	%
Property—current period—non-notable loss events	6.4	%	0.0	%	0.0	%
Property—change in prior accident years	(16.2	)%	(12.2	)%	(6.8	)%
Property—loss ratio	8.9	%	20.2	%	52.8	%



	Losses and Loss Expenses - Property Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012 (a)
Property—current period excluding items below	$	87,870		$	(74,332	)	$	162,202		$	37,724		$	124,478
Property—current period—notable loss events	—			(55,316		)	55,316			(221,751		)	277,067
Property—current period—non-notable loss events	29,883			29,883			—			—			—
Property—change in prior accident years	(76,064		)	5,546			(81,610		)	(35,877		)	(45,733		)
Property—losses and loss expenses	$	41,689		$	(94,219	)	$	135,908		$	(219,904	)	$	355,812


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The property lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2014. In comparison, for the year ended December 31, 2013 the property lines incurred $55.3 million of losses and loss expenses from a single notable loss event, the European Floods, which represented 8.2 percentage points of the property lines loss ratio. Net of $4.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $50.5 million.

The property lines current year loss ratio, excluding the impact of notable and non-notable loss events, decreased by 5.5 percentage points as a result of lower attritional losses in the current year. The favorable development of $76.1 million, on prior accident years for the year ended December 31, 2014, was primarily due to lower claims emergence on attritional losses and favorable loss development on Hurricane Sandy.



	Losses and Loss Expenses Ratio - Marine Lines
	Years Ended December 31,
	2014		2013		2012 (a)
Marine—current period excluding items below	39.3	%	41.4	%	36.3	%
Marine—current period—notable loss events	0.0	%	0.0	%	40.3	%
Marine—current period—non-notable loss events	0.0	%	0.0	%	0.0	%
Marine—change in prior accident years	(4.1	)%	13.7	%	(4.4	)%
Marine—loss ratio	35.2	%	55.1	%	72.2	%



	Losses and Loss expenses - Marine Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013		Change			2012 (a)
Marine—current period excluding items below	$	65,749		$	(15,189	)	$	80,938	$	(11,384	)	$	92,322
Marine—current period—notable loss events	41			41			—		(102,512		)	102,512
Marine—current period—non-notable loss events	—			—			—		—			—
Marine—change in prior accident years	(6,830		)	(33,535		)	26,705		38,003			(11,298		)
Marine—losses and loss expenses	$	58,960		$	(48,683	)	$	107,643	$	(75,893	)	$	183,536


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The marine lines current year loss ratio, excluding the impact of notable and non-notable loss events, decreased by 2.1 percentage points as a result of lower attritional losses in the current year. The favorable development of $6.8 million, on prior accident years for the year ended December 31, 2014, was primarily due to lower claims emergence on attritional losses; whereas, the unfavorable development of $26.7 million, on prior accident years for the year ended December 31, 2013, was primarily due to adverse development on both Costa Concordia and Deepwater Horizon.



	Losses and Loss Expenses Ratio - Specialty Lines
	Years Ended December 31,
	2014		2013		2012 (a)
Specialty—current period excluding items below	67.6	%	71.5	%	29.9	%
Specialty—current period—notable loss events	8.0	%	0.0	%	24.3	%
Specialty—current period—non-notable loss events	0.0	%	0.0	%	0.0	%
Specialty—change in prior accident years	(1.7	)%	(1.6	)%	(16.3	)%
Specialty—loss ratio	73.9	%	69.9	%	37.9	%



	Losses and Loss Expenses - Specialty Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012 (a)
Specialty—current period excluding items below	$	188,919		$	(1,909	)	$	190,828		$	162,386		$	28,442
Specialty—current period—notable loss events	22,428			22,428			—			(23,156		)	23,156
Specialty—current period—non-notable loss events	—			—			—			—			—
Specialty—change in prior accident years	(4,706		)	(353		)	(4,353		)	11,177			(15,530		)
Specialty—losses and loss expenses	$	206,641		$	20,166		$	186,475		$	150,407		$	36,068


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

During the year ended December 31, 2014, the specialty lines incurred $22.4 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 8.0 percentage points of the specialty lines loss ratio. Net of $3.0 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $19.4 million. In comparison, the specialty lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2013.

The specialty lines current year loss ratio, excluding the impact of notable and non-notable loss events, decreased by 3.9 percentage points as a result of lower attritional losses in the current year.

Policy Acquisition Costs



	Policy Acquisition Costs
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012 (a)
Property	$	76,955	$	(27,962	)	$	104,917	$	10,678		$	94,239
Marine	26,724		(9,626		)	36,350		(7,993		)	44,343
Specialty	37,991		(1,521		)	39,512		23,732			15,780
Total	$	141,670	$	(39,109	)	$	180,779	$	26,417		$	154,362


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.



	Acquisition Cost Ratio
	Years Ended December 31,
	2014		Percentage Point Change		2013		Percentage Point Change		2012 (a)
Property	16.4	%	0.8		15.6	%	1.6		14.0	%
Marine	16.0	%	(2.6	)	18.6	%	1.1		17.5	%
Specialty	13.6	%	(1.2	)	14.8	%	(1.8	)	16.6	%
Total	15.5	%	(0.5	)	16.0	%	0.9		15.1	%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The acquisition cost ratio for the marine lines decreased 2.6 percentage points primarily due to adjustments to estimates on proportional lines in the respective years. The acquisition cost ratio for the specialty lines has decreased by 1.2 percentage points due to changes on renewed agricultural policies.

General and Administrative and Share Compensation Expenses



	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012 (a)
(Dollars in thousands)	Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned
General and administrative expenses	$	74,739	8.1	%	$	91,260	8.0	%	$	63,048	6.2	%
Share compensation expenses	9,739		1.1	%	7,668		0.7	%	7,763		0.7	%
Total	$	84,478	9.2	%	$	98,928	8.7	%	$	70,811	6.9	%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in general and administrative expenses of $16.5 million or 18.1% was primarily due to a reduction in office and infrastructure costs related to entities that are no longer in use as a result of efficiencies achieved through rationalization of historical Flagstone entities. Also contributing to the decrease was a reduction in professional fees and staff costs associated with the wind-up of certain Flagstone entities. This was partially offset by an increase in staff costs related to underwriting operations in Dublin, Ireland and Zurich, Switzerland compared to the year ended December 31, 2013. The increase in share compensation expenses of $2.1 million or 27.0% was primarily due to a higher level of awards being issued in 2013 compared to earlier years.

Selected Underwriting Ratios

The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expenses ratio and the expense ratio. The losses and loss expenses ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition costs ratio, general and administrative expenses ratio, expense ratio and combined ratio for the years ended December 31, 2014, 2013 and 2012.



	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012 (a)
Losses and loss expenses ratio	33.5	%	37.9	%	56.2	%
Policy acquisition costs ratio	15.5	%	16.0	%	15.1	%
General and administrative expenses ratio (b)	9.2	%	8.7	%	6.9	%
Expense ratio	24.7	%	24.7	%	22.0	%
Combined ratio	58.2	%	62.6	%	78.2	%


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.


(b)	Includes general and administrative expenses and share compensation expenses.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in the combined ratio for the year ended December 31, 2014 of 4.4 percentage points compared to the year ended December 31, 2013 was due to the movement in the underlying ratios as discussed above.

Net Investment Income



	Investment Income
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012 (a)
Fixed maturities and short-term investments	$	69,709		$	(10,119	)	$	79,828		$	(8,172	)	$	88,000
Other investments	6,753			1,509			5,244			2,044			3,200
Cash and cash equivalents	3,730			953			2,777			(1,296		)	4,073
Securities lending income	11			5			6			(8		)	14
Total gross investment income	80,203			(7,652		)	87,855			(7,432		)	95,287
Investment expenses	(5,604		)	905			(6,509		)	51			(6,560		)
Total	$	74,599		$	(6,747	)	$	81,346		$	(7,381	)	$	88,727


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in net investment income for the year ended December 31, 2014 was $6.7 million or 8.3% primarily due to a decrease in the balance of fixed maturities and a slightly lower overall yield on such investments. Net investment income from other investments includes distributed and undistributed net income from certain investments.

Other Insurance Related Income



	Other Insurance Related Income
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012 (a)
Other insurance related income	$	3,159	$	(16,063	)	$	19,222	$	14,222	$	5,000


(a)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in other insurance related income for the year ended December 31, 2014 was $16.1 million or 83.6% primarily due to the gain recorded on the redemption of part of Validus Re's investment in the AlphaCat ILS funds during the year ended December 31, 2013.

Finance Expenses



	Finance Expenses
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012 (a)
Finance expenses	$	14,727	$	(1,384	)	$	16,111	$	7,168	$	8,943


(a)	The results of operations from Flagstone are consolidated from the November 30, 2012 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Finance expenses for the year ended December 31, 2014 and 2013 were comparable.

Fourth Quarter 2014 Summarized Results of Operations - AlphaCat Segment


•	Gross premiums written from our consolidated entities, including PaCRe, for the three months ended December 31, 2014 were $0.1 million compared to $0.3 million for the three months ended December 31, 2013, a decrease of $0.1 million.


•	Net premiums earned for the three months ended December 31, 2014 were $34.1 million compared to $37.6 million for the three months ended December 31, 2013, a decrease of $3.6 million.


•	Underwriting income for the three months ended December 31, 2014 was $29.2 million compared to $28.0 million for the three months ended December 31, 2013, an increase of $1.2 million.


•	Other insurance related income for the three months ended December 31, 2014 was $5.6 million compared to $9.0 million for the three months ended December 31, 2013, a decrease of $3.3 million.


•	Income from operating affiliates for the three months ended December 31, 2014 was $4.1 million compared to income from operating affiliates of $5.5 million for the three months ended December 31, 2013, a decrease of $1.4 million.


•	Income attributable to operating affiliate investors for the three months ended December 31, 2014 and 2013 was $26.6 million.


•	The combined ratio for the three months ended December 31, 2014 was 14.3% compared to 25.6% for the three months ended December 31, 2013, a decrease of 11.3 percentage points.


•	The loss ratio for the three months ended December 31, 2014 was (7.4)% compared to 1.7% for the three months ended December 31, 2013, a decrease of 9.1 percentage points.


•	Net investment income for the three months ended December 31, 2014 was $1.7 million compared to $1.0 million for the three months ended December 31, 2013, an increase of $0.7 million.


•	Net operating income available to AlphaCat for the three months ended December 31, 2014 was $8.9 million compared to $11.8 million for the three months ended December 31, 2013, a decrease of $2.9 million.

2014 Results of Operations - AlphaCat Segment

The following table presents results of operations for the years ended December 31, 2014, 2013 and 2012:



	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012
Underwriting income
Gross premiums written	$	135,181		$	147,009		$	21,603
Reinsurance premiums ceded	(4,348		)	(525		)	—
Net premiums written	130,833			146,484			21,603
Change in unearned premiums	1,517			(9,070		)	(3,937		)
Net premiums earned	132,350			137,414			17,666

Underwriting deductions
Losses and loss expenses	(9,670		)	17,569			—
Policy acquisition costs	12,673			13,853			1,774
General and administrative expenses	19,590			18,765			7,532
Share compensation expenses	501			468			279
Total underwriting deductions	23,094			50,655			9,585

Underwriting income (a)	109,256			86,759			8,081
Net investment income	4,276			3,865			3,748
Finance expenses	(3,545		)	(5,734		)	(3,061		)
Other insurance related income	27,122			26,424			23,229
Operating income before income from operating affiliates and (income) attributable to operating affiliate investors	137,109			111,314			31,997
Income from operating affiliates	17,723			14,289			12,580
(Income) attributable to operating affiliate investors	(109,399		)	(68,763		)	—
Net operating income (a)	45,433			56,840			44,577
Net operating (income) attributable to noncontrolling interest	(6,843		)	(11,617		)	(1,433		)
Net operating income available to Validus (a)	$	38,590		$	45,223		$	43,144
Selected ratios:
Net premiums written / Gross premiums written	96.8		%	99.6		%	100.0		%
Losses and loss expenses	(7.3		)%	12.8		%	—		%
Policy acquisition costs	9.6		%	10.1		%	10.0		%
General and administrative expenses (b)	15.2		%	14.0		%	44.2		%
Expense ratio	24.8		%	24.1		%	54.2		%
Combined ratio	17.5		%	36.9		%	54.2		%

(a)


(b)	The general and administrative expenses ratio includes share compensation expenses.




	Increase (decrease) to net operating income available to Validus over the years ended
(Dollars in thousands)	2014 compared to 2013			2013 compared to 2012
Net premiums earned	$	(5,064	)	$	119,748
Notable and non-notable loss events (a)	809			(809		)
Incurred current year losses, excluding notable and non-notable loss events	14,229			(16,760		)
Prior period loss development	12,201			—
Other underwriting deductions (b)	322			(23,501		)
Underwriting income (d)	22,497			78,678
(Income) attributable to operating affiliate investors	(40,636		)	(68,763		)
Other operating income and expenses, net (c)	6,732			2,348
Net operating income (d)	(11,407		)	12,263
Net operating (income) loss attributable to noncontrolling interest	4,774			(10,184		)
Net operating income available to Validus (d)	$	(6,633	)	$	2,079


(a)	The notable loss event for the year ended December 31, 2013 was the European Floods.


(b)	Other underwriting deductions consist of policy acquisition costs, general & administration expenses and share compensation expenses.


(c)	Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.

(d)

Gross Premiums Written



	Gross Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012
Property	$	135,181	$	(11,828	)	$	147,009	$	125,406	$	21,603

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in gross premiums written in the property lines of $11.8 million was as a result of AlphaCat 2014 having a smaller capital base than AlphaCat 2013. Partially offsetting this was an increase in the capital base of the AlphaCat ILS funds for the year ended December 31, 2014 compared to the year ended December 31, 2013. Business written into the AlphaCat ILS funds typically has a lower rate on line than business written into AlphaCat 2014 or AlphaCat 2013. As a result, the impact on gross premiums written from a change in capital base between AlphaCat 2014 and AlphaCat 2013 will be proportionately higher than from a change in the capital base of the AlphaCat ILS funds.

Managed gross premiums written for the year ended December 31, 2014 were $135.2 million compared to $143.1 million for the year ended December 31, 2013, a decrease of $8.0 million or 5.6%. A reconciliation of managed gross premiums written to gross premiums written, the most comparable U.S. GAAP financial measure, is presented in the section entitled "Non-GAAP Financial Measures."

Reinsurance Premiums Ceded

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

AlphaCat reinsurance premiums ceded for the year ended December 31, 2014 were $4.3 million compared to $0.5 million for the year ended December 31, 2013. The reinsurance was purchased due to the availability of attractively priced coverage.

Net Premiums Written



	Net Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012
Property	$	130,833	$	(15,651	)	$	146,484	$	124,881	$	21,603

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in AlphaCat net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 96.8% and 99.6% for the years ended December 31, 2014 and 2013, respectively.

Net Premiums Earned



	Net Premiums Earned
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012
Property	$	132,350	$	(5,064	)	$	137,414	$	119,748	$	17,666

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in net premiums earned in the property lines was due to lower mid-year renewals in 2014 compared to 2013.

Losses and Loss Expenses



	Losses and Loss Expenses Ratio
	Years Ended December 31,
	2014		2013		2012
Property—current period excluding items below	1.9	%	12.2	%	0.0	%
Property—current period—notable loss events	0.0	%	0.6	%	0.0	%
Property—current period—non-notable loss events	0.0	%	0.0	%	0.0	%
Property—change in prior accident years	(9.2	)%	0.0	%	0.0	%
Property—loss ratio	(7.3	)%	12.8	%	0.0	%



	Losses and Loss Expenses
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013		Change		2012
Property—current period excluding items below	$	2,531		$	(14,229	)	$	16,760	$	16,760	$	—
Property—current period—notable loss events	—			(809		)	809		809		—
Property—current period—non-notable loss events	—			—			—		—		—
Property—prior year development	(12,201		)	(12,201		)	—		—		—
Property—losses and loss expenses	$	(9,670	)	$	(27,239	)	$	17,569	$	17,569	$	—

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The property lines current year loss ratio, excluding the impact of notable and non-notable loss events, was lower by 10.3 percentage points as a result of lower attritional losses in the current year. The favorable development of $12.2 million, on prior accident years for the year ended December 31, 2014, relates the partial release of reserves originally established in the third quarter of 2013 on an aggregate excess of loss contract.

Notable Loss Events

There were no losses and loss expenses from notable loss events for the year ended December 31, 2014. In comparison, losses and loss expenses from notable loss events for the year ended December 31, 2013 was $0.8 million from a single notable loss event, the European Floods, which represented 0.6 percentage points of the loss ratio.

Policy Acquisition Costs



	Policy Acquisition Costs
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012
Property	$	12,673	$	(1,180	)	$	13,853	$	12,079	$	1,774



	Acquisition Cost Ratio
	Years Ended December 31,
	2014		Change		2013		Change		2012
Property	9.6	%	(0.5	)%	10.1	%	0.1	%	10.0	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The acquisition cost ratios for the year ended December 31, 2014 and 2013 were comparable.

General and Administrative Expenses



	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned
General and administrative expenses	$	19,590	14.8	%	$	18,765	13.7	%	$	7,532	42.6	%
Share compensation expenses	$	501	0.4	%	$	468	0.3	%	$	279	1.6	%
Total	$	20,091	15.2	%	$	19,233	14.0	%	$	7,811	44.2	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The increase in general and administrative expenses of $0.8 million or 4.4% was due primarily to an increase in professional fees relating to PaCRe.

Selected Underwriting Ratios

The following table presents the losses and loss expenses ratio, policy acquisition costs ratio, general and administrative expenses ratio, expense ratio and combined ratio for the years ended December 31, 2014, 2013 and 2012.



	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
Losses and loss expenses ratio	(7.3	)%	12.8	%	0.0	%
Policy acquisition costs ratio	9.6	%	10.1	%	10.0	%
General and administrative expenses ratio (a)	15.2	%	14.0	%	44.2	%
Expense ratio	24.8	%	24.1	%	54.2	%
Combined ratio	17.5	%	36.9	%	54.2	%


(a)	Includes general and administrative expenses and share compensation expenses.

The decrease in the combined ratio for the year ended December 31, 2014 of 19.4 percentage points compared to the year ended December 31, 2013 was due to the movement in the underlying ratios as discussed above.

Net Investment Income



	Investment Income
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013		Change		2012
Fixed maturities and short-term investments	$	4,204	$	374	$	3,830	$	115	$	3,715
Restricted cash and cash and cash equivalents	72		37		35		2		33
Total gross investment income	4,276		411		3,865		117		3,748
Investment expenses	—		—		—		—		—
Total	$	4,276	$	411	$	3,865	$	117	$	3,748

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Net investment income for the year ended December 31, 2014 and 2013 was comparable.

Other Insurance Related Income



	Other Income
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013		Change		2012
Other insurance related income	$	27,122	$	698	$	26,424	$	3,195	$	23,229

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Other insurance related income for the year ended December 31, 2014 and 2013 was comparable.

Finance Expenses



	Finance Expenses
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change		2012
Finance expenses	$	3,545	$	(2,189	)	$	5,734	$	2,673	$	3,061

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in finance expenses of $2.2 million or 38.2% was primarily due to non-recurring finance costs incurred of $1.9 million during the year ended December 31, 2013.

Income From Operating Affiliates



	Income from Operating Affiliates
	Years Ended December, 31
(Dollars in thousands)	2014		Change			2013			Change			2012
AlphaCat Re 2011	$	622	$	(1,309	)	$	1,931		$	(7,830	)	$	9,761
AlphaCat Re 2012	938		(2,799		)	3,737			918			2,819
AlphaCat 2013	2,086		(4,658		)	6,744			6,744			—
AlphaCat 2014	6,103		6,121			(18		)	(18		)	—
AlphaCat ILS funds	7,974		6,079			1,895			1,895			—
Total	$	17,723	$	3,434		$	14,289		$	1,709		$	12,580

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

For details of voting and equity ownership interests of the above entities, refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8. The increase in income from operating affiliates for the year ended December 31, 2014 was primarily due to the deconsolidation of one of the AlphaCat ILS funds in the first quarter of 2014.

(Income) attributable to operating affiliate investors



	(Income) attributable to operating affiliate investors
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012
(Income) attributable to operating affiliate investors	$	(109,399	)	$	(40,636	)	$	(68,763	)	$	(68,763	)	$	—

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Income attributable to operating affiliate investors was $40.6 million higher, reflecting the increased transfer of economics as a result of the deconsolidation of one of the AlphaCat ILS funds in the first quarter of 2014. This balance represents the transfer of investors' economic interest in the non-consolidated affiliated entities and includes both the Company's and third-party investors' share.

Net Operating (Income) Attributable to Noncontrolling Interest



	Net Operating (Income) attributable to noncontrolling interest
	Years Ended December 31,
(Dollars in thousands)	2014			Change		2013			Change			2012
Net operating (income) attributable to noncontrolling interest	$	(6,843	)	$	4,774	$	(11,617	)	$	(10,184	)	$	(1,433	)

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

For the year ended December 31, 2014, the net operating income attributable to noncontrolling interest was $6.8 million, which comprised $3.2 million relating to 90% of the net operating income in PaCRe for the year and $3.6 million of net operating income relating to the consolidated AlphaCat ILS funds.

Fourth Quarter 2014 Summarized Results of Operations - Talbot Segment

•

Gross premiums written for the three months ended December 31, 2014 were $247.4 million compared to $236.4 million for the three months ended December 31, 2013, an increase of $11.1 million, or 4.7%. Gross premiums written for the three months ended December 31, 2014 included $76.1 million of property premiums, $72.9 million of marine premiums and $98.4 million of specialty premiums compared to $60.9 million of property premiums, $75.1 million of marine premiums and $100.4 million of specialty premiums for the three months ended December 31, 2013.


•	Net premiums earned for the three months ended December 31, 2014 were $221.2 million compared to $204.3 million for the three months ended December 31, 2013, an increase of $16.9 million, or 8.3%.


•	Underwriting income for the three months ended December 31, 2014 was $7.2 million compared to $27.1 million for the three months ended December 31, 2013, a decrease of $19.9 million.


•	Combined ratio for the three months ended December 31, 2014 was 96.8% compared to 86.8% for the three months ended December 31, 2013.

•

The loss ratio for the three months ended December 31, 2014 was 53.6% compared to 46.4% for the three months ended December 31, 2013, an increase of 7.2 percentage points. The loss ratio for the three months ended December 31, 2014 included favorable loss reserve development on prior accident years of $42.0 million, benefiting the loss ratio by 19.0 percentage points. The loss ratio for the three months ended December 31, 2013 included favorable loss reserve development on prior accident years of $37.0 million, benefiting the loss ratio by 18.1 percentage points.


•	Losses and loss expenses from notable loss events for the three months ended December 31, 2014 was $nil compared to ($1.7) million for the three months ended December 31, 2013, an increase of $1.7 million.


•	Net investment income for the three months ended December 31, 2014 was $6.3 million compared to $4.6 million for the three months ended December 31, 2013, an increase of $1.7 million, or 37.0%.


•	Net operating income for the three months ended December 31, 2014 was $11.3 million compared to $33.4 million for the three months ended December 31, 2013, a decrease of $22.1 million.

2014 Results of Operations - Talbot Segment

The following table presents results of operations for the years ended December 31, 2014, 2013 and 2012:



	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012
Underwriting income
Gross premiums written	$	1,101,770		$	1,091,890		$	1,078,636
Reinsurance premiums ceded	(192,211		)	(226,111		)	(228,686		)
Net premiums written	909,559			865,779			849,950
Change in unearned premiums	(29,785		)	(35,085		)	(17,671		)
Net premiums earned	879,774			830,694			832,279

Underwriting deductions
Losses and loss expenses	423,394			346,337			424,030
Policy acquisition costs	187,162			170,738			183,926
General and administrative expenses	150,828			136,458			133,281
Share compensation expenses	11,346			9,613			7,789
Total underwriting deductions	772,730			663,146			749,026

Underwriting income (a)	107,044			167,548			83,253
Net investment income	20,575			18,061			21,310
Finance expenses	213			(259		)	(162		)
Other insurance related income	1,095			1,819			2,033
Operating income before taxes	128,927			187,169			106,434
Tax expense	(3,880		)	(671		)	(2,229		)
Net operating income (a)	$	125,047		$	186,498		$	104,205

Selected ratios:
Net premiums written / Gross premiums written	82.6		%	79.3		%	78.8		%
Losses and loss expenses	48.1		%	41.7		%	50.9		%
Policy acquisition costs	21.3		%	20.5		%	22.1		%
General and administrative expense (b)	18.4		%	17.6		%	16.9		%
Expense ratio	39.7		%	38.1		%	39.0		%
Combined ratio	87.8		%	79.8		%	89.9		%

(a)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Reconciliations of these measures to the most comparable U.S. GAAP financial measure, are presented in the section below entitled “Non-Operating Income and Expenses.”


(b)	The general and administrative expenses ratio includes share compensation expenses.

The change in net operating income for the years ended December 31, 2014 and December 31, 2013 as compared to the years ended December 31, 2013 and December 31, 2012, respectively, is described in the following table:



	Increase (decrease) to net operating income over the years ended
(Dollars in thousands)	2014 compared to 2013			2013 compared to 2012
Net premiums earned	$	49,080		$	(1,585	)
Notable and non-notable loss events (a)	(12,566		)	93,132
Incurred current year losses, excluding notable and non-notable loss events	(59,467		)	(59,221		)
Prior period loss development	(5,024		)	43,782
Other underwriting deductions (b)	(32,527		)	8,187
Underwriting income (d)	(60,504		)	84,295
Other operating income and expenses, net (c)	(947		)	(2,002		)
Net operating income (d)	$	(61,451	)	$	82,293


(a)	The notable loss event for the year ended December 31, 2014 was Tripoli Airport. The notable loss event for the year ended December 31, 2013 was the European Floods. Notable loss events for the year ended December 31, 2012 were Costa Concordia, Cat 67, Hurricane Isaac and Hurricane Sandy.


(b)	Other underwriting deductions consist of policy acquisition costs, general & administration expenses and share compensation expenses.


(c)	Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.

(d)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of the measures is presented in the section entitled “Non-GAAP Financial Measures.”

Gross Premiums Written



	Gross Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012
Property	$	337,210	$	(8,621	)	$	345,831	$	20,921		$	324,910
Marine	392,701		11,463			381,238		(14,969		)	396,207
Specialty	371,859		7,038			364,821		7,302			357,519
Total	$	1,101,770	$	9,880		$	1,091,890	$	13,254		$	1,078,636

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in gross premiums written in the property lines of $8.6 million was primarily due to a net decrease in the property treaty lines of $33.9 million, of which $28.2 million related to the Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re. This decrease was partially offset by an increase in the direct property and construction lines of $20.4 million and $5.2 million, respectively, due to new business and premium adjustments. The increase in gross premiums written in the marine lines of $11.5 million was due primarily to an increase in the cargo lines of $11.2 million as a result of additional premium signings. The increase in gross premiums written in the specialty lines of $7.0 million was partially due to an increase on political risk lines of $6.3 million. In particular, the political risk lines increase was in part due to the expanding crisis management book and the employment of two new underwriters.



	Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)		Gross Premiums Written		Gross Premiums Written (%)
Property	$	337,210	30.6	%	$	345,831	31.7	%	$	324,910	30.1	%
Marine	392,701		35.6	%	381,238		34.9	%	396,207		36.7	%
Specialty	371,859		33.8	%	364,821		33.4	%	357,519		33.2	%
Total	$	1,101,770	100.0	%	$	1,091,890	100.0	%	$	1,078,636	100.0	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The changes in mix of business were consistent with the changes in gross premiums written discussed above.

Reinsurance Premiums Ceded



	Reinsurance Premiums Ceded
	Years Ended December 31,
(Dollars in thousands)	2014		Change			2013		Change			2012
Property	$	111,948	$	(30,015	)	$	141,963	$	1,740		$	140,223
Marine	24,928		558			24,370		(6,341		)	30,711
Specialty	55,335		(4,443		)	59,778		2,026			57,752
Total	$	192,211	$	(33,900	)	$	226,111	$	(2,575	)	$	228,686

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The decrease in reinsurance premiums ceded in the property lines of $30.0 million was due primarily to a decrease in the property treaty lines of $22.7 million due to lower quota share premiums as a result of underlying Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re. Also contributing to the decrease was a reduction in the energy onshore lines of $6.0 million due to changes in the excess of loss program and structure. The decrease in the specialty lines of $4.4 million was primarily due to a decrease in the aviation direct lines of $4.3 million.

Net Premiums Written



	Net Premiums Written
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013		Change			2012
Property	$	225,262	$	21,394	$	203,868	$	19,181		$	184,687
Marine	367,773		10,905		356,868		(8,628		)	365,496
Specialty	316,524		11,481		305,043		5,276			299,767
Total	$	909,559	$	43,780	$	865,779	$	15,829		$	849,950

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The changes in Talbot net premiums written were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.



	Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Net Premiums Written		% of Gross Premiums Written		Net Premiums Written		% of Gross Premiums Written		Net Premiums Written		% of Gross Premiums Written
Property	$	225,262	66.8	%	$	203,868	59.0	%	$	184,687	56.8	%
Marine	367,773		93.7	%	356,868		93.6	%	365,496		92.2	%
Specialty	316,524		85.1	%	305,043		83.6	%	299,767		83.8	%
Total	$	909,559	82.6	%	$	865,779	79.3	%	$	849,950	78.8	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The property ratio increased by 7.8 percentage points due to the Latin American business being written directly through Validus Re Swiss. This business was previously written through Talbot and ceded to Validus Re.

Net Premiums Earned



	Net Premiums Earned
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013		Change			2012
Property	$	208,776	$	17,026	$	191,750	$	16,979		$	174,771
Marine	366,338		17,491		348,847		(6,073		)	354,920
Specialty	304,660		14,563		290,097		(12,491		)	302,588
Total	$	879,774	$	49,080	$	830,694	$	(1,585	)	$	832,279

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The changes in the net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the year ended December 31, 2014 compared to the year ended December 31, 2013.

Losses and Loss Expenses



	Losses and Loss Expenses Ratio - All Lines
	Years Ended December 31,
	2014		2013		2012
All lines—current period excluding items below	62.3	%	58.7	%	51.4	%
All lines—current period—notable loss events	1.4	%	0.6	%	11.8	%
All lines—current period—non-notable loss events	0.5	%	0.0	%	0.0	%
All lines—change in prior accident years	(16.1	)%	(17.6	)%	(12.3	)%
All lines—loss ratio	48.1	%	41.7	%	50.9	%



	Losses and Loss Expenses - All Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change		2013			Change			2012
All lines—current period excluding items below	$	547,300		$	59,467	$	487,833		$	59,221		$	428,612
All lines—current period—notable loss events	12,475			7,781		4,694			(93,132		)	97,826
All lines—current period—non-notable loss events	4,785			4,785		—			—			—
All lines—change in prior accident years	(141,166		)	5,024		(146,190		)	(43,782		)	(102,408		)
All lines—losses and loss expenses	$	423,394		$	77,057	$	346,337		$	(77,693	)	$	424,030

Notable Loss Events

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Losses and loss expenses from notable loss events for the year ended December 31, 2014 was $12.5 million from a single notable loss event, Tripoli Airport, which represented 1.4 percentage points of the loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.7 million. Losses and loss expenses from notable loss events for the year ended December 31, 2013 was $4.7 million also from a single notable loss event, the European Floods, which represented 0.6 percentage points of the loss ratio. Net of $0.3 million of reinstatement premiums, the effect of this event on net operating income was a $4.4 million reduction.

Losses and Loss Expenses by Line of Business



	Losses and Loss Expenses Ratio - Property Lines
	Years Ended December 31,
	2014		2013		2012
Property—current period excluding items below	70.8	%	61.6	%	55.6	%
Property—current period—notable loss events	0.0	%	1.9	%	27.2	%
Property—current period—non-notable loss events	2.3	%	0.0	%	0.0	%
Property—change in prior accident years	(25.8	)%	(23.8	)%	(15.0	)%
Property—loss ratio	47.3	%	39.7	%	67.8	%



	Losses and Loss Expenses - Property Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012
Property—current period excluding items below	$	147,672		$	29,520		$	118,152		$	20,891		$	97,261
Property—current period—notable loss events	—			(3,694		)	3,694			(43,762		)	47,456
Property—current period—non-notable loss events	4,785			4,785			—			—			—
Property—change in prior accident years	(53,779		)	(8,087		)	(45,692		)	(19,429		)	(26,263		)
Property—losses and loss expenses	$	98,678		$	22,524		$	76,154		$	(42,300	)	$	118,454

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The property lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2014. In comparison, for the year ended December 31, 2013 the property lines incurred $3.7 million of losses and loss expenses from a single notable loss event, the European Floods, which represented 1.9 percentage points of the property lines loss ratio. Net of $0.3 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $3.4 million.

The property lines current year loss ratio, excluding the impact of notable and non-notable loss events, increased by 9.2 percentage points as a result of higher attritional losses in the current year. The favorable development of $53.8 million, on prior accident years for the year ended December 31, 2014, primarily relates to favorable development on attritional losses, better experience on known events and lower emergence of events.



	Losses and Loss Expenses Ratio - Marine Lines
	Years Ended December 31,
	2014		2013		2012
Marine—current period excluding items below	51.4	%	56.6	%	50.5	%
Marine—current period—notable loss events	0.1	%	0.3	%	12.2	%
Marine—current period—non-notable loss events	0.0	%	0.0	%	0.0	%
Marine—change in prior accident years	(8.6	)%	(13.2	)%	(11.3	)%
Marine—loss ratio	42.9	%	43.7	%	51.4	%



	Losses and Loss Expenses - Marine Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012
Marine—current period excluding items below	$	188,383		$	(9,094	)	$	197,477		$	18,334		$	179,143
Marine—current period—notable loss events	191			(809		)	1,000			(42,294		)	43,294
Marine—current period—non-notable loss events	—			—			—			—			—
Marine—change in prior accident years	(31,397		)	14,695			(46,092		)	(6,032		)	(40,060		)
Marine—losses and loss expenses	$	157,177		$	4,792		$	152,385		$	(29,992	)	$	182,377

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

During the year ended December 31, 2014, the marine lines incurred $0.2 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 0.1 percentage point of the marine lines loss ratio. In comparison, for the year ended December 31, 2013 the marine lines incurred $1.0 million of losses and loss expenses from a single notable loss event, the European Floods, which represented 0.3% percentage points of the marine lines loss ratio.

The marine lines current year loss ratio, excluding the impact of notable and non-notable loss events, decreased by 5.2 percentage points as a result of lower attritional losses in the current year. The favorable development $31.4 million, on prior accident years for the year ended December 31, 2014, primarily relates to favorable development on attritional losses.



	Losses and Loss Expenses Ratio - Specialty Lines
	Years Ended December 31,
	2014		2013		2012
Specialty—current period excluding items below	69.4	%	59.4	%	50.3	%
Specialty—current period—notable loss events	4.0	%	0.0	%	2.3	%
Specialty—current period—non-notable loss events	0.0	%	0.0	%	0.0	%
Specialty—change in prior accident years	(18.4	)%	(18.8	)%	(11.9	)%
Specialty—loss ratio	55.0	%	40.6	%	40.7	%



	Losses and Loss Expenses - Specialty Lines
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012
Specialty—current period excluding items above	$	211,245		$	39,041		$	172,204		$	19,996		$	152,208
Specialty—current period—notable loss events	12,284			12,284			—			(7,076		)	7,076
Specialty—current period—non-notable loss events	—			—			—			—			—
Specialty—change in prior accident years	(55,990		)	(1,584		)	(54,406		)	(18,321		)	(36,085		)
Specialty—losses and loss expenses	$	167,539		$	49,741		$	117,798		$	(5,401	)	$	123,199

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

During the year ended December 31, 2014, the specialty lines incurred $12.3 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 4.0 percentage points of the specialty lines loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.5 million. In comparison, the specialty lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2013.

The specialty lines current year loss ratio, excluding the impact of notable and non-notable loss events, increased by 10.0 percentage points as a result of higher attritional losses in the current year. The favorable development $56.0 million, on prior accident years for the year ended December 31, 2014, primarily relates to favorable development on attritional losses.

Policy Acquisition Costs



	Policy Acquisition Costs
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013		Change			2012
Property	$	27,549	$	5,239	$	22,310	$	6,196		$	16,114
Marine	88,079		7,780		80,299		(16,283		)	96,582
Specialty	71,534		3,405		68,129		(3,101		)	71,230
Total	$	187,162	$	16,424	$	170,738	$	(13,188	)	$	183,926



	Acquisition Cost Ratio
	Years Ended December 31,
	2014		Percentage Point Change	2013		Percentage Point Change		2012
Property	13.2	%	1.6	11.6	%	2.4		9.2	%
Marine	24.0	%	1.0	23.0	%	(4.2	)	27.2	%
Specialty	23.5	%	0.0	23.5	%	0.0		23.5	%
Total	21.3	%	0.8	20.5	%	(1.6	)	22.1	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The property acquisition cost ratio increased by 1.6 percentage points due to lower ceded acquisition costs on quota share premiums as a result of the Latin American business being written directly through Validus Re Swiss. This business was previously written through Talbot and ceded to Validus Re. The increase in the marine acquisition cost ratio of 1.0 percentage points was due to profit commission adjustments that reduced costs for the year ended December 31, 2013.

General and Administrative and Share Compensation Expenses



	Year Ended December 31, 2014				Year Ended December 31, 2013				Year Ended December 31, 2012
(Dollars in thousands)	Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned		Expenses		% of Net Premiums Earned
General and administrative expenses	$	150,828	17.1	%	$	136,458	16.4	%	$	133,281	16.0	%
Share compensation expenses	11,346		1.3	%	9,613		1.2	%	7,789		0.9	%
Total	$	162,174	18.4	%	$	146,071	17.6	%	$	141,070	16.9	%

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

General and administrative expenses increased by $14.4 million due to salary increases, an increase in overall headcount from 306 employees at December 31, 2013 to 317 employees at December 31, 2014 and a strengthening of the British pound against the U.S. dollar compared to the prior year. The increase in share compensation expenses of $1.7 million or 18.0% was primarily due to a higher level of awards being issued in 2013 compared to earlier years.

Selected Underwriting Ratios



	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
Losses and loss expenses ratio	48.1	%	41.7	%	50.9	%
Policy acquisition costs ratio	21.3	%	20.5	%	22.1	%
General and administrative expenses ratio (a)	18.4	%	17.6	%	16.9	%
Expense ratio	39.7	%	38.1	%	39.0	%
Combined ratio	87.8	%	79.8	%	89.9	%


(a)	Includes general and administrative expenses and share compensation expenses.

The increase in the combined ratio for the year ended December 31, 2014 of 8.0 percentage points compared to the year ended December 31, 2013 was due to the movement in the underlying ratios as discussed above.

Net Investment Income



	Investment Income
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013			Change			2012
Fixed maturities and short-term investments	$	20,761		$	3,247		$	17,514		$	(2,147	)	$	19,661
Cash and cash equivalents	1,372			(529		)	1,901			(1,252		)	3,153
Total gross investment income	22,133			2,718			19,415			(3,399		)	22,814
Investment expenses	(1,558		)	(204		)	(1,354		)	150			(1,504		)
Total	$	20,575		$	2,514		$	18,061		$	(3,249	)	$	21,310

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Net investment income for the year ended December 31, 2014 increased by $2.5 million or 13.9% as a result of enhancements to our asset allocation strategy.

2014 Results of Operations - Western World Segment

The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition.

The following table presents results of operations for the year ended December 31, 2014:



	Year Ended December 31, (c)
(Dollars in thousands)	2014
Underwriting income
Gross premiums written	$	65,235
Reinsurance premiums ceded	(6,428		)
Net premiums written	58,807
Change in unearned premiums	14,189
Net premiums earned	72,996

Underwriting deductions
Losses and loss expenses	51,035
Policy acquisition costs	3,169
General and administrative expenses	11,121
Share compensation expenses	135
Total underwriting deductions	65,460

Underwriting income (a)	7,536
Net investment income	4,523
Finance expenses	—
Other insurance related income	264
Operating income before taxes	12,323
Tax expense	(1,422		)
Net operating income (a)	$	10,901

Selected ratios:
Net premiums written / Gross premiums written	90.1		%
Losses and loss expenses	69.9		%
Policy acquisition costs	4.4		%
General and administrative expense (b)	15.4		%
Expense ratio	19.8		%
Combined ratio	89.7		%

(a)

Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Reconciliations of these measures to the most comparable U.S. GAAP financial measure, are presented in the section below entitled “Non-Operating Income and Expenses.”


(b)	The general and administrative expenses ratio includes share compensation expenses.


(c)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Gross Premiums Written



	Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written (a)
	Year Ended December 31, 2014
(Dollars in thousands)	Gross Premiums Written		Gross Premiums Written (%)
Property	$	9,983	15.3	%
Liability	55,252		84.7	%
Total	$	65,235	100.0	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The liability lines consists largely of commercial package liability, program and other liability business. Western World discontinued writing binding authority commercial auto business during the three months ended December 31, 2014.

Reinsurance Premiums Ceded



	Reinsurance Premiums Ceded (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Property	$	1,535
Liability	4,893
Total	$	6,428


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The Western World reinsurance program includes various treaties: a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.

Net Premiums Written



	Net Retention - Ratio of Net Premiums Written to Gross Premiums Written (a)
	Year Ended December 31, 2014
(Dollars in thousands)	Net Premiums Written		% of Gross Premiums Written
Property	$	8,448	84.6	%
Liability	50,359		91.1	%
Total	$	58,807	90.1	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Net premiums written and the net retention ratio were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

Net Premiums Earned



	Net Premiums Earned (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Property	$	11,254
Liability	61,742
Total	$	72,996


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Net premiums earned exceeded net premiums written as Western World discontinued writing binding authority commercial auto business during the three months ended December 31, 2014.

Losses and Loss Expenses



	Losses and Loss Expenses Ratio - All Lines (a)
	Year Ended December 31,
	2014
All lines—current period excluding items below	85.3	%
All lines—current period—notable loss events	0.0	%
All lines—current period—non-notable loss events	0.0	%
All lines—change in prior accident years (b)	(15.4	)%
All lines—loss ratio (b)	69.9	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014, benefiting the loss ratio by 6.3% points. The remaining fair value adjustment will be amortized in 2015.



	Losses and Loss Expenses - All Lines (a)
	Year Ended December 31,
(Dollars in thousands)	2014
All lines—current period excluding items below	$	62,275
All lines—current period—notable loss events	—
All lines—current period—non-notable loss events	—
All lines—change in prior accident years (b)	(11,240		)
All lines—losses and loss expenses (b)	$	51,035


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

Notable Loss Events

There were no notable loss events for the year ended December 31, 2014.

Losses and Loss Expenses by Line of Business



	Losses and Loss Expenses Ratio - Property Lines (a)
	Year Ended December 31,
	2014
Property—current period excluding items below	69.8	%
Property—current period—notable loss events	0.0	%
Property—current period—non-notable loss events	0.0	%
Property—change in prior accident years (b)	9.1	%
Property—loss ratio (b)	78.9	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $121 during the year ended December 31, 2014, increasing the loss ratio by 1.1% points. The remaining fair value adjustment will be amortized in 2015.



	Losses and Loss Expenses - Property Lines (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Property—current period excluding items below	$	7,860
Property—current period—notable loss events	—
Property—current period—non-notable loss events	—
Property—change in prior accident years (b)	1,023
Property—losses and loss expenses (b)	$	8,883


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $121 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

The property lines current year loss ratio, excluding the impact of notable and non-notable loss events, was 69.8 percentage points, representing attritional claims experienced during the year. The property lines experienced adverse loss reserve development of $1.0 million during the year ended December 31, 2014.



	Losses and Loss Expenses Ratio - Liability Lines (a)
	Year Ended December 31,
	2014
Liability—current period excluding items below	88.2	%
Liability—current period—notable loss events	0.0	%
Liability—current period—non-notable loss events	0.0	%
Liability—change in prior accident years (b)	(19.9	)%
Liability—loss ratio (b)	68.3	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,728 during the year ended December 31, 2014, benefiting the loss ratio by 7.7% points. The remaining fair value adjustment will be amortized in 2015.



	Losses and Loss Expenses - Liability Lines (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Liability—current period excluding items above	$	54,415
Liability—current period—notable loss events	—
Liability—current period—non-notable loss events	—
Liability—change in prior accident years (b)	(12,263		)
Liability—losses and loss expenses (b)	$	42,152


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,728 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

The liability lines current year loss ratio, excluding the impact of notable and non-notable loss events, was 88.2 percentage points, representing attritional claims experienced during the year. The liability lines experienced favorable loss reserve development of $12.3 million during the year ended December 31, 2014 primarily due to lower than expected development on attritional losses and loss expenses in several liability lines.

Policy Acquisition Costs



	Policy Acquisition Costs (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Property	$	609
Liability	2,560
Total (b)	$	3,169


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amounts of $12,914 during the year ended December 31, 2014 and $21,822 million in 2015.



	Acquisition Cost Ratio (a)
	Year Ended December 31,
	2014
Property	5.4	%
Liability	4.1	%
Total (b)	4.4	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $12,914 during the year ended December 31, 2014, benefiting the policy acquisition cost ratio by 17.6% points. The remaining adjustment of $21,822 would have been expensed in 2015.

The property acquisition cost ratio for the year ended December 31, 2014 was 5.4% and the liability acquisition cost ratio for the year ended December 31, 2014 was 4.1%.

General and Administrative and Share Compensation Expenses



	Year Ended December 31, 2014 (a)
(Dollars in thousands)	Expenses		% of Net Premiums Earned
General and administrative expenses	$	11,121	15.2	%
Share compensation expenses	135		0.2	%
Total	$	11,256	15.4	%


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

General and administrative and share compensation expenses for the year ended December 31, 2014 were $11.1 million and $0.1 million, respectively.

Selected Underwriting Ratios

The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the year ended December 31, 2014.



	Year Ended December 31, 2014 (b)
Losses and loss expenses ratio	69.9	%
Policy acquisition cost ratio	4.4	%
General and administrative expenses ratio (a)	15.4	%
Expense ratio	19.8	%
Combined ratio	89.7	%


(a)	Includes general and administrative expenses and share compensation expenses.


(b)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The combined ratio for the year ended December 31, 2014 reflects the underlying ratios highlighted above.

Net Investment Income



	Investment Income (a)
	Year Ended December 31,
(Dollars in thousands)	2014
Fixed maturities and short-term investments	$	4,505
Other investments	324
Cash and cash equivalents	4
Total gross investment income	4,833
Investment expenses	(310		)
Total net investment income	$	4,523


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Non-Segment Discussion

Corporate Expenses

Corporate general and administrative expenses for the year ended December 31, 2014, net of eliminations related to the operating segments, were $73.5 million compared to $68.8 million for the year ended December 31, 2013, an increase of $4.7 million or 6.9%. General and administrative expenses have increased primarily due to an increase in the performance bonus accrual and headcount, from 169 employees at December 31, 2013 to 173 employees at December 31, 2014. Also, contributing to the increase was an increase in information technology expenses during the current year. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.

Corporate share compensation expenses for the year ended December 31, 2014 were $11.4 million compared to $9.9 million for the year ended December 31, 2013, an increase of $1.5 million or 14.9%. The increase of $1.5 million was primarily due to a higher level of awards being issued in 2013 compared to earlier years.

Corporate finance expenses for the year ended December 31, 2014, net of eliminations related to the operating segments, were $45.8 million compared to $42.1 million for the year ended December 31, 2013, an increase of $3.7 million or 8.8%.

Transaction expenses for the year ended December 31, 2014 were $8.1 million compared to $nil for the year ended December 31, 2013. The transaction expenses relate to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. Western World results have been included in the Company's consolidated results from the October 2, 2014 date of acquisition. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

Non-Operating Income and Expenses

The following non-operating income and expense items are discussed on a consolidated basis, since management does not include these items when assessing the results of its operating segments.

Net Realized and Change in Net Unrealized (Losses) Gains on Investments



	Net Realized and Change in Net Unrealized (Losses) Gains on Investments
	Years Ended December 31,
(Dollars in thousands)	2014			Change		2013			Change			2012
Net realized gains on investments	$	23,095		$	19,837	$	3,258		$	(14,975	)	$	18,233
Change in net unrealized (losses) gains on investments	(57,973		)	508		(58,481		)	(76,066		)	17,585
Net realized and change in unrealized (losses) gains on investments	$	(34,878	)	$	20,345	$	(55,223	)	$	(91,041	)	$	35,818

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

The movement in the net realized and change in net unrealized (losses) gains on investments of $20.3 million was due to a favorable movement in net realized and unrealized (losses) gains on fixed maturity and short term investments of $64.2 million and an unfavorable movement in net realized and unrealized (losses) gains on other investments of ($43.9) million.

The favorable movement on fixed maturity and short term investments was primarily as a result of a shift in the yield curve and a tightening of corporate bond spreads. The unfavorable movement on other investments was primarily due to the net realized and change in net unrealized (losses) gains of ($45.0) million on the Paulson hedge funds held by PaCRe. This is offset by a 90% noncontrolling interest of $40.5 million.

Income From Investment Affiliate



	Income From Investment Affiliate
	Years Ended December, 31
(Dollars in thousands)	2014		Change		2013		Change		2012
Income from investment affiliate	$	8,411	$	3,621	$	4,790	$	5,754	$	(964	)

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Income from investment affiliate for the year ended December 31, 2014 was $3.6 million higher than for the year ended December 31, 2013. The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the one year period ended September 30, 2014 and 2013, respectively.

Foreign Exchange (Losses) Gains

The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect period-to-period comparisons. The Company's largest foreign currency fluctuation exposure is to the following currencies, with the movement in each currency against the U.S. dollar for the years ended December 31, 2014, 2013 and 2012 shown in the table below:



U.S. dollar (weakened) strengthened against:	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
British Pound sterling	6.3	%	(1.9	)%	(4.4	)%
Euro	13.5	%	(4.0	)%	(1.7	)%
Canadian Dollar	9.4	%	6.8	%	(2.7	)%
Swiss Franc	11.3	%	(2.5	)%	(2.4	)%
Australian Dollar	9.1	%	16.6	%	(1.8	)%
New Zealand Dollar	5.5	%	0.6	%	(6.0	)%
Japanese Yen	13.7	%	21.4	%	12.5	%



	Foreign Exchange (Losses) Gains
	Years Ended December 31,
(Dollars in thousands)	2014			Change			2013		Change			2012
Foreign exchange (losses) gains	$	(10,630	)	$	(13,135	)	$	2,505	$	(2,293	)	$	4,798

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Foreign exchange losses for the year ended December 31, 2014 were $10.6 million compared to gains of $2.5 million for the year ended December 31, 2013, an unfavorable movement of $13.1 million, or 524.4%, due primarily to the U.S. dollar strengthening against the Australian and New Zealand dollars, the Euro, the Swiss Franc and the Japanese yen.

The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company aims to have a limited exposure to foreign exchange fluctuations.

Other (Loss) Income



	Other (Loss) Income
	Years Ended December 31,
(Dollars in thousands)	2014			Change		2013			Change			2012
Other (loss) income	$	(2,243	)	$	8,534	$	(10,777	)	$	(10,862	)	$	85

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

Other loss for the years ended December 31, 2014 and 2013 resulted primarily from adjustments related to assets acquired from Flagstone.

Net Loss (Income) Attributable to Noncontrolling Interest



	Net Loss (Income) Attributable to Noncontrolling Interest
	Years Ended December 31,
(Dollars in thousands)	2014		Change		2013			Change			2012
Net loss (income) attributable to noncontrolling interest	$	35,464	$	45,159	$	(9,695	)	$	(25,515	)	$	15,820

The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013

For the year ended December 31, 2014, net loss attributable to noncontrolling interest was $35.5 million, which was comprised of operating income of $6.8 million, as discussed in the AlphaCat Segment Results of Operations, and non-operating loss of $42.3 million, primarily on the investment portfolio within PaCRe.

For the year ended December 31, 2013, net income available to noncontrolling interest was $9.7 million, which was comprised of operating income of $11.6 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating loss of $1.9 million, primarily on the investment portfolio within PaCRe.

Non-GAAP Financial Measures

The operating results of an insurance or reinsurance company are also often measured by reference to its net operating income, which is a non-GAAP financial measure. Net operating income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income (Loss) line items, as illustrated below.



(Dollars in thousands)	Year Ended December 31, 2014 (a)			Year Ended December 31, 2013			Year Ended December 31, 2012 (b)
Net operating income	$	493,307		$	601,066		$	335,180
Gain on bargain purchase, net of expenses	—			—			17,701
Net realized gains on investments	23,095			3,258			18,233
Change in net unrealized (losses) gains on investments	(57,973		)	(58,481		)	17,585
Foreign exchange (losses) gains	(10,630		)	2,505			4,798
Income (loss) from investment affiliate	8,411			4,790			(964		)
Other (loss) income	(2,243		)	(10,777		)	85
Transaction expenses	(8,096		)	—			—
Net income	$	445,871		$	542,361		$	392,618


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


(b)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

Operating income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of operating income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.

The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of operating income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing operating income provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s underlying business performance.

Operating income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of operating income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of operating income with other companies, particularly as operating income may be defined or calculated differently by other companies. Therefore, the Company provides prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of operating income to net income.

The Company also uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the total annual incentive compensation.

In presenting the Company's results, management has also included and discussed certain schedules containing book value per diluted common share and book value per diluted common share plus accumulated dividends that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP and may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

Managed gross premiums written represents gross premiums written by the Company and its operating affiliates. Managed gross premiums written differs from total gross premiums written, which the Company believes is the most directly comparable GAAP measure, due to the inclusion of premiums written on behalf of the Company's operating affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, which are accounted for under the equity method of accounting. A reconciliation of managed gross premiums written to gross premiums written, the most comparable U.S. GAAP financial measure, for the years ended December 31, 2014, 2013 and 2012 is presented in the table below.



	Year Ended
	December 31,		December 31,			December 31,
(Dollars in thousands)	2014		2013			2012
Total gross premiums written	$	2,363,286	$	2,401,106		$	2,166,440
Adjustments for:
Gross premiums written on behalf of AlphaCat Re 2011	—		(3,468		)	94,317
Gross premiums written on behalf of AlphaCat Re 2012	—		(395		)	32,171
Total managed gross premiums written	$	2,363,286	$	2,397,243		$	2,292,928

100

The following tables present reconciliations of book value per diluted common share to book value per common share, the most comparable U.S. GAAP financial measure, at December 31, 2014 and December 31, 2013.



	As at December 31, 2014
(Dollars in thousands, except share and per share amounts)	Equity Amount		Shares	Exercise Price		Book Value Per Share
Book value per common share
Total shareholders' equity available to Validus	$	3,587,958	83,869,845			$	42.78

Book value per diluted common share
Total shareholders' equity available to Validus	3,587,958		83,869,845
Assumed exercise of outstanding warrants	90,950		5,174,114	$	17.58
Assumed exercise of outstanding stock options	20,581		1,160,057	$	17.74
Unvested restricted shares	—		3,068,564
Book value per diluted common share	$	3,699,489	93,272,580			$	39.66
Adjustment for accumulated dividends						8.88
Book value per diluted common share plus accumulated dividends						$	48.54



	As at December 31, 2013
(Dollars in thousands, except share and per share amounts)	Equity Amount		Shares	Exercise Price		Book Value Per Share
Book value per common share
Total shareholders' equity available to Validus	$	3,704,094	96,044,312			$	38.57

Book value per diluted common share
Total shareholders' equity available to Validus	3,704,094		96,044,312
Assumed exercise of outstanding warrants	98,513		5,296,056	$	18.60
Assumed exercise of outstanding stock options	29,688		1,572,713	$	18.88
Unvested restricted shares	—		2,853,083
Book value per diluted common share	$	3,832,295	105,766,164			$	36.23
Adjustment for accumulated dividends						7.68
Book value per diluted common share plus accumulated dividends						$	43.91

Liquidity and Capital Resources

Investments

At December 31, 2014, the Company held investments totaling $7.4 billion, compared to $7.0 billion at December 31, 2013, an increase of $0.4 billion, or 5.2%, primarily as a result of the acquisition of Western World. A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s investment policies specifically require certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures to provide necessary liquidity in a wide range of reasonable scenarios. At December 31, 2014, the average duration of the Company’s fixed maturity and short term investment portfolio, excluding assets held in trust on behalf of operating affiliates, was 2.16 years (December 31, 2013: 1.84 years). This duration is reviewed regularly based on changes in the duration of the Company's liabilities and in general market conditions.

The Company’s investment portfolio is also structured to preserve capital. The Company’s investment policies require certain minimum credit quality standards, including a minimum weighted average portfolio rating of A+. Further limits on securities rated BBB and below are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent

101

with our overall enterprise-risk framework. At December 31, 2014, the Company’s total investment portfolio had an average credit quality rating of AA- (December 31, 2013: AA-) and an effective yield of 1.53% for the year then ended (December 31, 2013: 1.38%). The estimated fair value of investment grade fixed maturities, as at December 31, 2014 was $4.9 billion, or 89.2% of the fixed maturity portfolio, compared to $4.8 billion as at December 31, 2013, or 86.0%, an increase of $0.2 billion, or 3.6%. The estimated fair value of non-investment grade fixed maturities as at December 31, 2014 was $599.0 million compared to $777.7 million as at December 31, 2013, a decrease of $178.7 million, or 23.0%.

The Company also has an allocation to other investments, primarily hedge funds, investment funds and private equity funds. At December 31, 2014, these other investments, excluding noncontrolling interests, totaled $382.5 million, or 5.5% of total investments, excluding noncontrolling interest (December 31, 2013: $214.7 million or 3.3%). For further details related to our investment portfolio, including the extent of investments with fair values measured using unobservable inputs, see Notes 7 and 8 to the Consolidated Financial Statements in Part II, Item 8.

The value of the Company’s fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, and prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans.

The estimated fair value of investments at December 31, 2014 and 2013 were as follows:



	December 31, 2014					December 31, 2013
(Dollars in thousands)	Estimated Fair Value			% of Total Investments		Estimated Fair Value			% of Total Investments
U.S. government and government agency	$	760,086		12.3	%	$	1,364,679		23.4	%
Non-U.S. government and government agency	278,728			4.5	%	459,068			7.9	%
U.S. states, municipalities and political subdivisions	449,623			7.3	%	43,120			0.7	%
Agency residential mortgage-backed securities	529,231			8.6	%	311,499			5.3	%
Non-agency residential mortgage-backed securities	37,807			0.6	%	15,759			0.3	%
U.S. corporate	1,499,706			24.4	%	1,332,484			22.8	%
Non-U.S. corporate	563,162			9.1	%	714,325			12.2	%
Bank loans	449,004			7.3	%	717,116			12.3	%
Catastrophe bonds	75,664			1.2	%	74,551			1.3	%
Asset-backed securities	647,482			10.5	%	509,657			8.7	%
Commercial mortgage-backed securities	242,238			3.9	%	—			—	%
Total fixed maturities	5,532,731			89.7	%	5,542,258			94.9	%
Total short-term investments (a)	1,051,074			17.2	%	787,714			13.6	%
Total other investments (b)	813,011			13.2	%	704,086			12.1	%
Total investments including noncontrolling interest	7,396,816			120.1	%	7,034,058			120.6	%
Assets held in Trust on behalf of operating affiliates (a)	(732,782		)	(11.9	)%	(651,715		)	(11.2	)%
Catastrophe bonds	(75,664		)	(1.2	)%	(55,544		)	(1.0	)%
Noncontrolling interest (b)	(430,494		)	(7.0	)%	(489,402		)	(8.4	)%
Total investments, excluding noncontrolling interest and assets held in trust	$	6,157,876		100.0	%	$	5,837,397		100.0	%

(a)

Included in the short-term investments balance are assets held in trust to support AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which is consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.


(b)	Included in the other investments balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

102

As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s fixed maturity portfolio:



	December 31, 2014				December 31, 2013
(Dollars in thousands)	Fair Value		% of Total		Fair Value		% of Total
United Kingdom	$	49,738	5.9	%	$	153,248	13.1	%
Supranational	48,406		5.8	%	74,834		6.4	%
Germany	44,153		5.2	%	59,274		5.1	%
Norway	18,851		2.2	%	29,395		2.5	%
France	24,218		2.9	%	24,340		2.1	%
Province of Ontario	17,063		2.0	%	24,097		2.1	%
Netherlands	11,011		1.3	%	22,430		1.9	%
Other (individual jurisdictions below $20,000)	65,288		7.8	%	71,450		6.1	%
Total Non-U.S. Government Securities	278,728		33.1	%	459,068		39.1	%
European Corporate Securities	197,095		23.4	%	248,613		21.2	%
United Kingdom Corporate Securities	185,307		22.0	%	165,845		14.1	%
Other Non-U.S. Corporate Securities	180,760		21.5	%	299,867		25.6	%
Total Non-U.S. Fixed Income Portfolio	$	841,890	100.0	%	$	1,173,393	100.0	%

The Company manages its corporate debt securities by limiting its exposure to any single issuer, excluding government and agency securities, based on credit rating, ranging from 3.5% to 0.5% of total cash and investments. At December 31, 2014, the Company did not have an aggregate exposure to any single issuer of more than 1.0% other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at December 31, 2014 are as follows:



(Dollars in thousands)	December 31, 2014
Issuer (a)	Fair Value (b)		S&P Rating (c)	% of Total Cash and Investments
JPMorgan Chase & Co	$	79,373	A-	1.0	%
Bank of America Corp	58,005		BBB+	0.7	%
Goldman Sachs Group Inc	49,130		BBB+	0.6	%
HSBC Holdings Plc	48,594		A	0.6	%
Wells Fargo & Company	44,571		A	0.5	%
Citigroup Inc	44,411		BBB	0.5	%
Morgan Stanley	44,013		BBB+	0.5	%
Bank of New York Mellon Corp	36,802		A+	0.5	%
General Electric Co	36,367		A+	0.4	%
US Bancorp	36,310		AA-	0.4	%
Total	$	477,576		5.7	%


(a)	Issuers exclude government-backed government-sponsored enterprises and cash and cash equivalents.


(b)	Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.


(c)	Investment ratings are the median of Moody's, Standard & Poor's and Fitch, presented in Standard & Poor's equivalent rating. For investments where three ratings are unavailable, the lower of the ratings shall apply, presented in Standard & Poor's equivalent rating.

103

The tables below show the Company’s investments in affiliates, accounted for under the equity method:



	December 31, 2014
(Dollars in thousands)	Investment at cost		Voting ownership		Equity ownership		Carrying value
AlphaCat Re 2011	$	4,606	43.7	%	22.3	%	$	4,606
AlphaCat Re 2012	735		49.0	%	37.9	%	735
AlphaCat 2013	1,068		40.9	%	19.7	%	1,068
AlphaCat 2014	22,000		42.3	%	19.6	%	28,085
AlphaCat 2015	25,600		40.0	%	20.0	%	25,600
AlphaCat ILS funds	133,091		n/a		(a)		137,883
Aquiline Financial Services Fund II L.P.	51,001		n/a		6.7	%	63,506
Total	$	238,101					$	261,483


(a)	Equity ownership in the three funds were 7.9%, 39.7% and 9.1% as at December 31, 2014.



	December 31, 2013
(Dollars in thousands)	Investment at cost		Voting ownership		Equity ownership		Carrying value
AlphaCat Re 2011	$	9,882	43.7	%	22.3	%	$	9,809
AlphaCat Re 2012	654		49.0	%	37.9	%	1,313
AlphaCat 2013	45,000		40.9	%	19.7	%	51,744
AlphaCat 2014	22,000		42.3	%	19.6	%	21,982
AlphaCat ILS fund	20,000		n/a		9.1	%	21,895
Aquiline Financial Services Fund II L.P.	32,110		n/a		6.7	%	34,500
Total	$	129,646					$	141,243

During 2014, the Company received partial returns of investment from AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013 and the AlphaCat ILS funds of $5.8 million, $1.5 million, $52.8 million and $12.4 million, respectively. Offsetting these returns were contributions of capital to AlphaCat 2015, the AlphaCat ILS funds and Aquiline of $25.6 million, $12.0 million and $12.5 million, respectively. The Company expects to receive further returns of investment in 2015 from AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013 and AlphaCat 2014.

Reserve for Losses and Loss Expenses

At December 31, 2014, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section below. The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.



	As at December 31, 2014
(Dollars in thousands)	Gross Case Reserves		Gross IBNR		Total Gross Reserve for Losses and Loss Expenses
Property (a)	$	628,289	$	472,122	$	1,100,411
Marine	426,631		399,417		826,048
Specialty	273,450		441,237		714,687
Liability (a)	166,953		426,295		593,248
Total	$	1,495,323	$	1,739,071	$	3,234,394


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

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	As at December 31, 2014
(Dollars in thousands)	Net Case Reserves		Net IBNR		Total Net Reserve for Losses and Loss Expenses
Property (a)	$	545,699	$	399,418	$	945,117
Marine	398,121		362,971		761,092
Specialty	246,693		394,296		640,989
Liability (a)	158,473		351,257		509,730
Total	$	1,348,986	$	1,507,942	$	2,856,928


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the year ended December 31, 2014.



	Year Ended December 31, 2014
(Dollars in thousands)	Validus Re Segment			AlphaCat Segment			Talbot Segment			Western World (a)			Eliminations			Total
Reserve for losses and loss expenses, beginning of year	$	1,723,465		$	17,612		$	1,362,574		$	—		$	(73,252	)	$	3,030,399
Losses and loss expenses recoverable	(105,601		)	—			(337,805		)	—			73,252			(370,154		)
Net reserves for losses and loss expenses, beginning of year	1,617,864			17,612			1,024,769			—			—			2,660,245
Net reserves acquired	—			—			—			525,091			—			525,091
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year	394,890			2,531			564,560			62,275			—			1,024,256
Prior years (b)	(87,600		)	(12,201		)	(141,166		)	(11,240		)	—			(252,207		)
Total incurred losses and loss expenses (b)	307,290			(9,670		)	423,394			51,035			—			772,049
Net paid losses	(637,847		)	(1,308		)	(371,955		)	(50,797		)	—			(1,061,907		)
Foreign exchange	(23,708		)	(109		)	(14,733		)	—			—			(38,550		)
Net reserves for losses and loss expenses, end of year	1,263,599			6,525			1,061,475			525,329			—			2,856,928
Losses and loss expenses recoverable	70,279			—			290,581			88,222			(71,616		)	377,466
Reserve for losses and loss expenses, end of year	$	1,333,878		$	6,525		$	1,352,056		$	613,551		$	(71,616	)	$	3,234,394


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(b)	Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. For the year ended December 31, 2014, favorable loss reserve development on prior accident years was $252.2 million, of which $87.6 million related to the Validus Re segment, $12.2 million related to the AlphaCat segment, $141.2 million related to the Talbot segment and $11.2 million related to the Western World segment. Current year incurred losses included $34.9 million of losses from notable loss events, of which $22.5 million related to the Validus Re segment and $12.5 million related to the Talbot segment.

The management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company's actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss

105

amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events. Any reserve for potential development on notable loss events (or “RDE”) is included as part of the Company's overall reserve as defined and disclosed in the Critical Accounting Policies and Estimates section.

As at December 31, 2012, the reserve for potential development on 2011 notable loss events was $42.2 million. During the year ended December 31, 2013, the Company allocated the full $42.2 million to the New Zealand earthquake and Gryphon Alpha mooring failure, both 2011 events. Contract complexity, the nature and number of perils arising from these events, limits and sub limits exposed, the quality, flow and timing of information received by the Company, information regarding retrocessional covers, assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices and potential changes in the legal environment led to complexity and volatility in the ultimate loss estimates for these events. As at December 31, 2012 and December 31, 2013, the reserve for potential development on 2010 and 2011 notable loss events had been fully allocated, respectively. No RDE has been established for 2012, 2013 or 2014 notable loss events; therefore, as at December 31, 2014 the Company had no remaining reserve for potential development on notable loss events.

For disclosure purposes, only those notable loss events which had an initial ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year. The Company increased the threshold for disclosure for notable loss events effective January 1, 2011, from $5.0 million to $15.0 million and further increased the threshold effective January 1, 2013 from $15.0 million to $30.0 million. Non-notable losses events which aggregate to more than $15.0 million but less than $30.0 million on a consolidated basis have been disclosed from January 1, 2013.

The reserves for notable loss events table below does not disclose 2010 or 2011 notable loss events. Deepwater Horizon, a 2010 event, had closing reserves of $63.4 million at December 31, 2014, excluding reserves assumed as part of the Flagstone acquisition. The New Zealand earthquakes of 2010 and 2011, had total closing reserves of $95.2 million at December 31, 2014, excluding reserves assumed as part of the Flagstone acquisition.



Reserves for Notable Loss Events (Dollars in thousands)

2012 Notable Loss Events			Year Ended December 31, 2012							Year Ended December 31, 2013							Year Ended December 31, 2014
			Development					Closing		Development					Closing		Development					Closing
	Initial		(Favorable) /			Allocations		Estimate (c)		(Favorable) /			Allocations		Estimate (c)		(Favorable) /			Allocations		Estimate (c)
Notable Loss Event	Estimate (a)		Unfavorable (b)			of RDE		31-Dec-12		Unfavorable (b)			of RDE		31-Dec-13		Unfavorable (b)			of RDE		31-Dec-14
Hurricane Sandy	$	361,036	$	—		$	—	$	361,036	$	(2,009	)	$	—	$	359,027	$	(14,106	)			$	344,921
Costa Concordia	76,197		(2,061		)	—		74,136		39,567			—		113,703		13,284					126,987
Cat 67	22,713		5,377			—		28,090		(8,817		)	—		19,273		(1,997		)			17,276
U.S. drought	22,021		—			—		22,021		4,619			—		26,640		100					26,740
Hurricane Isaac	15,209		67			—		15,276		(9,374		)	—		5,902		(17		)			5,885
Total 2012 Notable Loss Events	$	497,176	$	3,383		$	—	$	500,559	$	23,986		$	—	$	524,545	$	(2,736	)	$	—	$	521,809

			Year Ended December 31, 2012							Year Ended December 31, 2013							Year Ended December 31, 2014
								Closing							Closing							Closing
						Paid Loss (Recovery)		Reserve (d)					Paid Loss (Recovery)		Reserve (d)					Paid Loss (Recovery)		Reserve (d)
Notable Loss Event								31-Dec-12							31-Dec-13							31-Dec-14
Hurricane Sandy						$	38,515	$	322,521				$	134,978	$	185,534				$	55,313	$	116,115
Costa Concordia						13,040		61,096					36,456		64,207					39,644		37,847
Cat 67						13,432		14,658					2,332		3,509					215		1,297
U.S. drought						12,346		9,675					14,294		—					12		88
Hurricane Isaac						313		14,963					3,727		1,862					909		936
Total 2012 Notable Loss Events						$	77,646	$	422,913				$	191,787	$	255,112				$	96,093	$	156,283

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2013 Notable Loss Event			Year Ended December 31, 2013							Year Ended December 31, 2014
			Development					Closing		Development					Closing
	Initial		(Favorable) /			Allocations		Estimate (c)		(Favorable) /			Allocations		Estimate (c)
Notable Loss Event	Estimate (a)		Unfavorable (b)			of RDE		31-Dec-13		Unfavorable (b)			of RDE		31-Dec-14
European Floods	$	77,587	$	(16,762	)	$	—	$	60,825	$	(25,938	)	$	—	$	34,887
Total 2013 Notable Loss Event	$	77,587	$	(16,762	)	$	—	$	60,825	$	(25,938	)	$	—	$	34,887

			Year Ended December 31, 2013							Year Ended December 31, 2014
								Closing							Closing
						Paid Loss (Recovery)		Reserve (d)					Paid Loss (Recovery)		Reserve (d)
Notable Loss Event								31-Dec-13							31-Dec-14
European Floods						$	8,006	$	52,819				$	11,864	$	15,017
Total 2013 Notable Loss Event						$	8,006	$	52,819				$	11,864	$	15,017

2014 Notable Loss Event										Year Ended December 31, 2014
										Development					Closing
	Initial									(Favorable) /			Allocations		Estimate (c)
Notable Loss Event	Estimate (a)									Unfavorable (b)			of RDE		31-Dec-14
Tripoli Airport (e)	$	28,134								$	6,810		$	—	$	34,944
Total 2014 Notable Loss Event	$	28,134								$	6,810		$	—	$	34,944

										Year Ended December 31, 2014
															Closing
													Paid Loss (Recovery)		Reserve (d)
Notable Loss Event															31-Dec-14
Tripoli Airport													$	—	$	34,944
Total 2014 Notable Loss Event													$	—	$	34,944


(a)	Includes paid losses, case reserves and IBNR reserves.


(b)	Development other than allocation of RDE.


(c)	Excludes impact of movements in foreign exchange rates.


(d)	Closing Reserve for the period equals Closing Estimate for the period less cumulative Paid Losses (Recovery).


(e)	As at September 30, 2014, the initial estimate for Tripoli Airport was below the $30.0 notable loss event threshold; however, during the fourth quarter of 2014 adverse development caused this event to exceed the notable loss event threshold.

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Reserve for Development on Notable Loss Events (RDE) (d) (Dollars in thousands)	Reserve for potential development on 2010 notable loss events			Reserve for potential development on 2011 notable loss events			Reserve for potential development on 2012, 2013 and 2014 notable loss events		Total Reserve for potential development on notable loss events
As at December 31, 2011	$	18,617		$	78,000		$	—	$	96,617
Reserve for potential development additions (c)	—			27,926			—		27,926
Reserve for potential development allocations (a)	(18,617		)	(63,746		)	—		(82,363		)
Reserve for potential development releases	—			—			—		—
As at December 31, 2012 (b)	$	—		$	42,180		$	—	$	42,180

Reserve for potential development additions	—			—			—		—
Reserve for potential development allocations (a)	—			(42,180		)	—		(42,180		)
Reserve for potential development releases	—			—			—		—
As at December 31, 2013 (b)	$	—		$	—		$	—	$	—

Reserve for potential development additions	—			—			—		—
Reserve for potential development allocations	—			—			—		—
Reserve for potential development releases	—			—			—		—
As at December 31, 2014 (b)	$	—		$	—		$	—	$	—

(a)

During the year ended December 31, 2012, $18.6 million was allocated to Deepwater Horizon from the 2010 reserve for development on notable loss events. During the same period, $16.3 million was allocated to the Tohoku earthquake, $20.1 million was allocated to the New Zealand earthquake, $7.7 million was allocated to the Danish flood and $14.3 million was allocated to the Thailand floods and $5.4 million was allocated to the Gryphon Alpha mooring failure from the 2011 reserve for development on notable loss events.

During the year ended December 31, 2013, $40.2 million was allocated to the Christchurch earthquake and $2.0 million to the Gryphon Alpha mooring failure from the 2011 reserve for potential development on notable loss events.


(b)	Notable loss events for the year ended December 31, 2012 were Costa Concordia, Cat 67, U.S. drought, Hurricane Isaac and Hurricane Sandy.

Notable loss event for the year ended December 31, 2013 was the European floods.

Notable loss event for the year ended December 31, 2014 was the Tripoli Airport.

(c)

During the year ended December 31, 2012, several of the 2011 notable loss events, principally the Tohoku earthquake and the New Zealand earthquake, continued to experience adverse development. Therefore, rather than deteriorate the 2011 RDE proportionately, an additional allocation of $27.9 million was made to the 2011 RDE based on the potential for further adverse development on the 2011 notable loss events.


(d)	RDE is included as part of the Company's overall reserve requirement as defined and disclosed in the Critical Accounting Policies and Estimates section.

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Sources of Liquidity

Holding Company Liquidity

Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Validus Re, AlphaCat, Talbot and Western World segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. Please refer to Part I, Item 1, "Regulation" for further discussion on the regulatory requirements in the jurisdictions in which the Company operates. Please also refer to Part II, Item 5, “Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” for further discussion of the Company’s dividend policy. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet its short and long-term objectives.

The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:



(Dollars in thousands)	Capital at December 31, 2014
Western World Insurance Group, Inc. (consolidated)	$	701,456
Validus Reinsurance, Ltd. (excluding Western World)	2,877,648
Validus Reinsurance, Ltd. (consolidated)	3,579,104
Noncontrolling interest in PaCRe, Ltd.	458,595
Redeemable noncontrolling interest in AlphaCat ILS fund	79,956
Talbot Holdings, Ltd. (consolidated)	797,744
Other, net	(2,307		)
Total consolidated capitalization	4,913,092
Senior notes payable	(247,306		)
Debentures payable	(539,277		)
Redeemable noncontrolling interest in AlphaCat ILS fund	(79,956		)
Total shareholders’ equity	$	4,046,553

Sources and Uses of Cash

The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.

In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

109

There are three main sources (uses) of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the years ended December 31, 2014, 2013 and 2012 is provided in the following table.



	Years Ended December 31,
(Dollars in thousands)	2014 (a)			2013			2012 (b)
Net cash provided by operating activities	$	241,781		$	265,274		$	543,165
Net cash provided by (used in) investing activities	121,582			(321,436		)	(302,214		)
Net cash (used in) provided by financing activities	(489,507		)	(264,048		)	94,745
Effect of foreign currency rate changes on cash and cash equivalents	(30,764		)	(6,364		)	17,540
Net (decrease) increase in cash	$	(156,908	)	$	(326,574	)	$	353,236


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


(b)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

Operating Activities

Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.

Net cash provided by operating activities during the year ended December 31, 2014 was $241.8 million compared to $265.3 million for year ended December 31, 2013, an unfavorable movement of $23.5 million. This unfavorable movement reflects the lower level of business written in the current year and returns on investments made to third party investors in operating affiliates.

We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.

Investing Activities

Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s investment portfolio. As at December 31, 2014, the Company’s portfolio was composed of fixed income investments, short-term and other investments amounting to $7.4 billion or 90.8% of total cash and investments. For further details related to investments pledged as collateral, see Note 7 (d) to the Consolidated Financial Statements in Part II, Item 8.

Net cash provided by (used in) investing activities during the year ended December 31, 2014 was $121.6 million compared to ($321.4) million for the year ended December 31, 2013, a favorable movement of $443.0 million. This favorable movement was due primarily to a decrease in the purchase of fixed maturity investments of $1.0 billion and a decrease in the change in restricted cash of $200.5 million, offset by an increase in cash paid, net of cash acquired, of $643.5 million to purchase Western World.

Financing Activities

Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, and the issuance and repayment of notes to operating affiliates.

Net cash used in financing activities during the year ended December 31, 2014 was $489.5 million compared to $264.0 million during the year ended December 31, 2013, an unfavorable movement of $225.5 million. This unfavorable movement was driven primarily by a decrease in dividends paid of $243.0 million as a result of the special dividend that was paid in the first quarter of 2013, with no comparative dividend in 2014, and an increase in the issuance of notes payable to operating affiliates of $237.6 million; offset by, an increase in the repayment of notes payable to operating affiliates of $613.5 million.

110

Capital Resources

The following table details the Company's capital position as at December 31, 2014, 2013 and 2012.



Capitalization (Dollars in thousands)	December 31, 2014			December 31, 2013			December 31, 2012
Senior Notes (a)	$	247,306		$	247,198		$	247,090
Junior Subordinated Deferrable Debentures (JSDs) (b)	289,800			289,800			289,800
Flagstone Junior Subordinated Deferrable Debentures (JSDs) (c)	249,477			251,616			250,909
Total debt	786,583			788,614			787,799

Redeemable noncontrolling interest	79,956			86,512			—

Ordinary shares, capital and surplus available to Validus	3,596,514			3,704,711			4,023,780
Accumulated other comprehensive (loss)	(8,556		)	(617		)	(2,953		)
Noncontrolling interest	458,595			497,657			434,280
Total shareholders' equity (d)	4,046,553			4,201,751			4,455,107

Total capitalization (d) (f)	4,913,092			5,076,877			5,242,906
Total capitalization available to Validus (e) (f)	$	4,374,541		$	4,492,708		$	4,808,626

Debt to total capitalization	16.0		%	15.5		%	15.0		%
Debt (excluding JSDs) to total capitalization	5.0		%	4.9		%	4.7		%

Notes

(a)

On January 21, 2010, the Company offered and sold $250.0 million of Senior Notes due 2040 (the “2010 Senior Notes”) in a registered public offering. The 2010 Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole any time or in part from time to time at a make-whole redemption price. The net proceeds of $244.0 million from the sale of the 2010 Senior Notes, after the deduction of commissions paid to the underwriters in the transaction and other expenses, was used by the Company for general corporate purposes, which included the repurchase of our outstanding capital stock and dividends to our shareholders.

(b)

$150.0 million of Junior Subordinated Deferrable Debentures (the "2006 Junior Subordinated Deferrable Debentures") were issued on June 15, 2006, mature on June 15, 2036 and have been redeemable at the Company's option at par since June 15, 2011. $200.0 million of Junior Subordinated Deferrable Debentures ("2007 Junior Subordinated Deferrable Debentures") were issued on June 21, 2007, mature on June 15, 2037 and have been redeemable at the Company's option at par since June 15, 2012. During 2008 and 2009, the Company repurchased $60.2 million principal amount of its 2007 Junior Subordinated Deferrable Debentures due 2037 from an unaffiliated financial institution.

(c)

As part of the acquisition of Flagstone Reinsurance Holdings, S.A., the Company assumed $137.2 million of junior subordinated deferrable interest debentures due 2036 (the “Flagstone 2006 Junior Subordinated Deferrable Debentures”). The Flagstone 2006 Junior Subordinated Deferrable Debentures mature on September 15, 2036 and have been redeemable at the Company's option at par since September 15, 2011. In addition, the Company assumed $113.7 million of junior subordinated deferrable interest debentures due 2037 (the “Flagstone 2007 Junior Subordinated Deferrable Debentures”). $88.8 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on July 30, 2037 and have been redeemable at the Company's option at par since July 30, 2012. $25.0 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on September 15, 2037 and have been redeemable at the Company's option at par since September 15, 2012.


(d)	Total capitalization equals total shareholders' equity plus redeemable noncontrolling interest, Senior Notes and Junior Subordinated Deferrable Debentures.


(e)	Total capitalization available to Validus equals total shareholder's equity less noncontrolling interest plus Senior Notes and Junior Subordinated Deferrable Debentures.


(f)	The Company does not include notes payable to operating affiliate investors within total capitalization, since these are issued to some of the Company's operating affiliates specifically for the purpose of purchasing capital market products and writing collateralized reinsurance.

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Shareholders' Equity

Shareholders' equity available to Validus at December 31, 2014 was $3,588.0 million.

On February 3, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, which is payable on March 31, 2015 to shareholders and warrant holders of record on March 13, 2015. The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash flows, the Company's financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.

On February 6, 2013, the Company approved a special dividend in the amount of $2.00 per common share and common share equivalent. The dividend was paid on February 26, 2013 to shareholders and warrant holders of record on February 19, 2013.

The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved a further increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2,274.4 million of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.

The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company's capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.

Debt and financing arrangements

The following table details the Company’s debt and financing arrangements as at December 31, 2014.



(Dollars in thousands)	Maturity Date / Term (a)	Commitments		Issued/Outstanding (b)
2006 Junior Subordinated Deferrable Debentures	June 15, 2036	$	150,000	$	150,000
2007 Junior Subordinated Deferrable Debentures	June 15, 2037	200,000		139,800
2010 Senior Notes due 2040	January 26, 2040	250,000		250,000
$400,000 syndicated unsecured letter of credit facility	March 9, 2016	400,000		—
$525,000 syndicated secured letter of credit facility	March 9, 2016	525,000		276,455
$200,000 secured bi-lateral letter of credit facility	Evergreen	200,000		15,649
Talbot FAL facility	December 31, 2017	25,000		25,000
PaCRe senior secured letter of credit facility	Evergreen	10,000		294
AlphaCat Re secured letter of credit facility	Evergreen	30,000		30,000
IPC bi-lateral facility	Evergreen	40,000		15,897
$375,000 Flagstone bi-lateral facility	Evergreen	375,000		198,389
Flagstone 2006 Junior Subordinated Deferrable Debentures	September 15, 2036	135,727		135,727
Flagstone 2007 Junior Subordinated Deferrable Debentures	September 15, 2037	113,750		113,750
Total debt and financing arrangements		$	2,454,477	$	1,350,961


(a)	The arrangement is indicated as evergreen if, unless written notice to the contrary is given, it automatically renews on a regular basis.


(b)	Indicates utilization of commitment amount, not necessarily drawn borrowings.

For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, Please refer to Note 19 "Debt and financing arrangements" to the Consolidated Financial Statements in Part II, Item 8 for further details.

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Noncontrolling interest

On April 2, 2012, the Company joined with other investors in capitalizing PaCRe, a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. The total capital invested was $500.0 million, of which the Company has an equity interest of 10% and the remaining 90% interest is held by third party investors.

The Company has also joined with other investors in capitalizing the AlphaCat ILS funds. The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. AlphaCat ILS funds primarily deploy their capital through AlphaCat Master Fund and AlphaCat Re. All of the funds are variable interest entities, with one being consolidated by the Company as the primary beneficiary and the remaining funds being accounted for as equity method investments because the Company holds an equity interest of less than 50% and has significant influence. One of these funds had been consolidated by the Company as the primary beneficiary from its formation through to December 31, 2013. However, on January 1, 2014 the fund received $35,000 in additional third party subscriptions, resulting in a reduction of the Company’s equity interest below 50%. Since the Company retained significant influence, this fund was deconsolidated and accounted for as an equity method investment from January 1, 2014. The fair value of the retained interest, based on the fair value of the underlying instruments in AlphaCat Master Fund and AlphaCat Re, amounted to $113,455 as at January 1, 2014. The deconsolidation resulted in a gain of $1,372 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the year ended December 31, 2014. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.

As at December 31, 2014, the amount of the Company's total capitalization owed to these third parties as redeemable noncontrolling interest or noncontrolling interest was $538.6 million.

Please refer to Note 9 "Investments in affiliates" to the Consolidated Financial Statements in Part II, Item 8 for further details.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments as at December 31, 2014 are set out below:

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	Payment Due by Period
(Dollars in thousands)	Total		Less Than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years
Reserve for losses and loss expenses(a)	$	3,234,394	$	1,452,755	$	1,209,516	$	372,323	$	199,800
2010 Senior Notes due 2040—principal(b)	250,000		—		—		—		250,000
2010 Senior Notes due 2040—interest(b)	n/a		22,188		44,375		44,375		22,188 p.a.
2006 Junior Subordinated Deferrable Debentures—principal(c)	150,000		—		—		—		150,000
2006 Junior Subordinated Deferrable Debentures—interest(c)	n/a		8,747		17,494		17,494		8,747 p.a.
2007 Junior Subordinated Deferrable Debentures—principal(d)	139,800		—		—		—		139,800
2007 Junior Subordinated Deferrable Debentures—interest(d)	n/a		7,242		14,483		14,483		7,242 p.a.
Flagstone 2006 Junior Subordinated Deferrable Debentures—principal (e)	135,727		—		—		—		135,727
Flagstone 2006 Junior Subordinated Deferrable Debentures—interest (e)	n/a		8,765		17,531		17,531		8,765 p.a.
Flagstone 2007 Junior Subordinated Deferrable Debentures—principal (f)	113,750		—		—		—		113,750
Flagstone 2007 Junior Subordinated Deferrable Debentures—interest (f)	n/a		6,732		13,464		13,464		6,732 p.a.
Notes payable to operating affiliates (g)	671,465		642,788		28,677		—		—
Operating lease obligations	65,488		11,094		16,130		14,480		23,784
Aquiline Financial Services Fund II L.P. (h)	8,999		8,999		—		—		—
Aquiline Financial Services Fund III L.P. (h)	100,000		100,000
AlphaCat 2015 (i)	2,400		2,400		—		—		—
AlphaCat ILS fund (j)	8,000		8,000		—		—		—
Fixed maturity commitment (k)	7,539		7,539
Other investments (l)	83,712		83,712		—		—		—

(a)

The reserve for losses and loss expenses represents an estimate, including actuarial and statistical projections at a given point in time of an insurer’s or reinsurer’s expectations of the ultimate settlement and administration costs of claims incurred. As a result, it is likely that the ultimate liability will differ from such estimates, perhaps significantly. Such estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in loss severity and frequency and other variable factors such as inflation, litigation and tort reform. Moreover, in certain circumstances, the Company has necessitated the use of industry loss emergence patterns in deriving IBNR. Further, expected losses and loss ratios are typically developed using vendor and proprietary computer models and these expected loss ratios are a material component in the calculation deriving IBNR. Actual loss ratios will deviate from expected loss ratios and ultimate loss ratios will be greater or less than expected loss ratios. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability will exceed or be less than the revised estimates. The actual payment of the reserve for losses and loss expenses will differ from estimated payouts.

(b)

The 2010 Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole or any time or in part from time to time at a make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 2010 Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity or early redemption.

(c)

The 2006 Junior Subordinated Deferrable Debentures (the "2006 JSDs") mature on June 15, 2036, are redeemable at the Company’s option at par beginning June 15, 2011, and require quarterly interest payments by the Company to the holders of the 2006 Junior Subordinated Deferrable Debentures. Interest is payable at a floating rate of three-month LIBOR plus 355 basis points, reset quarterly. The Company has entered into an interest rate swap which fixed the rate of interest on the 2006 JSDs at 5.83125%. The term of the swap is matched to the maturity date of the 2006 JSDs. The interest payments in the table above reflect the Company's contractual obligations with respect to the swap.

(d)

The 2007 Junior Subordinated Deferrable Debentures (the "2007 JSDs") mature on June 15, 2037, are redeemable at the Company’s option at par beginning June 15, 2012, and require quarterly interest payments by the Company to the holders of the 2007 Junior Subordinated Deferrable Debentures. Interest is payable at a floating rate of three-month LIBOR plus 295 basis points, reset quarterly. The Company has entered into an interest rate swap which fixed the rate of interest on the 2007 JSDs at 5.18%. The term of the swap is matched to the maturity date of the 2007 JSDs. The interest payments in the table above reflect the Company's contractual obligations with respect to the swap.

(e)

The Flagstone 2006 Junior Subordinated Deferrable Debentures mature on September 15, 2036, are redeemable at the Company's option at par beginning September 15, 2011, and require quarterly interest payments by the Company to the holders of the Flagstone 2006 Junior Subordinated Deferrable Debentures. Interest is payable at a floating rate of three-month LIBOR plus 354 basis points, reset quarterly. The Company has entered into a $120,000 interest rate

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swap which fixed the rate of interest on the Flagstone 2006 Junior Subordinated Deferrable Debentures at 6.405%. In addition, the Company has entered into a cross currency interest rate swap which fixed the rate of interest at 6.8625% and the notional at $17,463. The interest payments in the table above reflect the Company's contractual obligations with respect to the swaps.

(f)

$88,750 of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on July 30, 2037, are redeemable at the Company's option at par beginning July 30, 2012, and require quarterly interest payments by the Company to the holders of the Flagstone 2007 Junior Subordinated Deferrable Debentures. Interest is payable at a floating rate of three-month LIBOR plus 300 basis points, reset quarterly. $25,000 of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on September 15, 2037, are redeemable at the Company's option at par beginning September 15, 2012, and require quarterly interest payments by the Company to the holders of the Flagstone 2007 Junior Subordinated Deferrable Debentures. Interest is payable at a floating rate of three-month LIBOR plus 310 basis points, reset quarterly. The Company has entered into a $100,000 interest rate swap which fixed the rate of interest at 5.9%, and also entered into a $25,000 interest rate swap which fixed the interest rate at 5.9825%. The interest payments in the table above reflect the Company's contractual obligations with respect to the swaps.

(g)

Contractual obligations related to the notes payable to operating affiliates, including the timing of any payment, are dependent upon the settlement of the relevant underlying transactions. The notes typically have at least a twelve month duration and do not have any principal amount, since the final amount payable is dependent on the income or loss generated by the transactions. They also do not have any stated maturity date, since full repayment is dependent on the complexity involved in the settlement of the underlying transactions. Please refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8 for further details describing the notes payable.


(h)	Please refer to Note 22 (f) to the Consolidated Financial Statements in Part II, Item 8 for further details describing the Aquiline commitments. There is no defined contractual commitment date, therefore it is included in the less than one year category.


(i)	Please refer to Note 22 (f) to the Consolidated Financial Statements in Part II, Item 8 for further details describing the AlphaCat 2015 commitment. The remaining commitment will be called and deployed throughout 2015, therefore it is included in the less than one year category.


(j)	Please refer to Note 22 (f) to the Consolidated Financial Statements in Part II, Item 8 for further details describing the AlphaCat ILS fund commitment. The remaining commitment will be called and deployed throughout 2015, therefore it is included in the less than one year category.


(k)	Please refer to Note 22 (g) to the Consolidated Financial Statements in Part II, Item 8 for further details describing the fixed maturity commitment. There is no defined contractual commitment date, therefore it is included in the less than one year category.


(l)	Please refer to Note 22 (h) to the Consolidated Financial Statements in Part II, Item 8 for further details describing the other investment commitments. There is no defined contractual commitment date, therefore it is included in the less than one year category.

Goodwill and Intangible Assets

The Company has performed an impairment analysis of its carried goodwill and indefinite-lived intangible assets as required by U.S. GAAP. Based on this analysis, management has concluded that an impairment valuation is not required against the carried goodwill and carried indefinite-lived intangible assets. For information about goodwill and intangible assets refer to Note 5, "Goodwill and other intangible assets" to the Consolidated Financial Statements in Part II, Item 8.

Off-Balance Sheet Arrangements

The Company is not party to any off-balance sheet transaction, agreement or other contractual arrangement as defined by Item 303(a) (4) of Regulation S-K to which an entity unconsolidated with the Company is a party that management believes is reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that the Company believes is material to investors.

For further details related to the Company's variable interest entities, see notes 9 and 10 to the Consolidated Financial Statements in Part II, Item 8.

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Ratings

The following table summarizes the financial strength ratings of the Company and its principal reinsurance and insurance subsidiaries from internationally recognized rating agencies as of February 24, 2015:



	A.M. Best(a)	S&P(b)	Moody’s(c)	Fitch(d)
Validus Holdings, Ltd.
Issuer credit rating	bbb	BBB+	Baa2	A-
Senior debt	bbb	BBB+	Baa2	BBB+
Subordinated debt	bbb-	BBB	Baa3	BBB-
Preferred stock	bb+	BBB-	Ba1	—
Outlook on ratings	Stable	Stable	Positive	Stable

Validus Reinsurance, Ltd.
Financial strength rating	A	A	A3	A
Outlook on ratings	Stable	Stable	Positive	Stable

Lloyd's of London
Financial strength rating applicable to all Lloyd's syndicates	A	A+	—	AA-
Outlook on ratings	Positive	Stable	—	Stable

Talbot Syndicate 1183
Financial strength rating	A	—	—	—
Outlook on ratings	Positive	—	—	—

Validus Reinsurance (Switzerland) Ltd
Financial strength rating	A	A-	—	—
Outlook on ratings	Stable	Stable	—	—

Western World Insurance Company
Financial strength rating	A	—	—	—
Outlook on ratings	Stable	—	—	—

PaCRe, Ltd.
Financial strength rating	A-	—	—	—
Outlook on ratings	(e)	—	—	—

(a)

The A.M. Best ratings were most recently affirmed on February 25, 2014 for Validus Holdings, Ltd, Validus Reinsurance, Ltd and Validus Reinsurance (Switzerland) Ltd. The A.M. Best rating for Lloyd's was most recently affirmed on July 24, 2014. The A.M. Best rating for Talbot Syndicate 1183 was assigned on June 18, 2014. The A.M. Best rating for Western World Insurance Company was downgraded from A+ to A on November 6, 2014.


(b)	The S&P ratings were most recently affirmed on August 23, 2012 for Validus Holdings, Ltd and Validus Reinsurance, Ltd. The S&P rating for Validus Reinsurance (Switzerland) Ltd was issued on December 11, 2013. On October 13, 2014, the S&P rating for Lloyd's was affirmed and the outlook was revised from positive to stable.


(c)	The Moody’s ratings were most recently affirmed on June 25, 2014 for Validus Holdings, Ltd and Validus Reinsurance, Ltd.


(d)	The Fitch ratings were most recently affirmed on August 19, 2014 for Validus Holdings, Ltd. and Validus Reinsurance, Ltd. The Fitch rating for Lloyd's was most recently affirmed on October 14, 2014.


(e)	A.M. Best placed the A- rating of PaCRe, Ltd. “under review with negative implications” on January 20, 2015.

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Critical Accounting Policies and Estimates

The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the following accounting policies are critical to the Company’s financial reporting as the application of these policies requires management to make significant judgments. Management believes the estimates that require the most subjective and complex judgments are (1) reserve for losses and loss expenses, (2) premiums, (3) reinsurance premiums ceded and reinsurance recoverables and (4) investment valuation.

Reserve for Losses and Loss Expenses

Description: We believe that the most significant accounting judgment made by management is our estimate of reserve for losses and loss expenses. The Company establishes its reserve for losses and loss expenses to cover the estimated remaining liability for both reported claims (“case reserves”) and unreported amounts (“incurred but not reported” or “IBNR" reserves). For insurance and reinsurance business, the IBNR reserves include provision for loss incidents that have occurred but have not yet been reported to the Company as well as for future variation in case reserves (where the claim has been reported but the ultimate cost is not yet known). The provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR at the aggregated line of business level. Additional individual claim IBNR amounts are sometimes calculated for larger claims within our insurance and reinsurance businesses. Within the reinsurance business, the portion of total IBNR related to future variation on known claims is calculated at the individual claim level in some instances (either as an additional case reserve or individual claim IBNR). Within the insurance business, the provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR, while individual claim IBNR amounts are sometimes calculated for larger claims. IBNR is established by the Company separately for certain large or catastrophe losses and smaller “attritional” losses. The Company has procedures in place to aggregate large or catastrophe losses on a consolidated basis for financial reporting and disclosure purposes. Loss events which aggregate to over $30.0 million on a consolidated basis are disclosed separately and included in the reserve for notable loss events and reserve for development on notable loss events tables. In addition, non-notable loss events which aggregate to more than $15.0 million but less than $30.0 million on a consolidated basis are disclosed separately and included in the Company's analysis of losses and loss expenses. Notable and non-notable loss events are first determined at the respective operating segments based on segment thresholds and are then aggregated and only disclosed if it is determined that they reach the respective consolidated threshold for notable and non-notable loss event disclosure.

For all lines of business, the Company’s reserve for losses and loss expenses and loss reserves recoverable consist of three categories: (1) case reserves, (2) in certain circumstances, additional case reserves ("ACR"), and (3) IBNR reserves. The reserves and recoverables for attritional and large or catastrophe losses are established on an annual and interim basis as follows:

1.Case reserves: Case reserves generally are analyzed and established by each segment’s claims department on all lines, making use of third party input where appropriate (including, for the reinsurance business, reports of losses from ceding companies). For insurance business where Talbot is not the lead underwriter on the business, the case reserves are established by the lead underwriter and validated by the central Lloyd’s market claims bureau, with a sample reviewed by Talbot.

2.ACR: ACR are established for Validus Re and AlphaCat business by our claims department in cases where we believe the case reserves reported by the cedant requires adjustment. ACR supplement case reserves based on information obtained through ceding company audits or other sources. ACR are not generally used at Talbot or Western World as claim volumes are generally greater and thus the potential for future variation in case reserve estimates on known claims often can be analyzed at an aggregate level using historical data.

3.IBNR reserves:

a.Large or catastrophe events—IBNR reserves are established for all lines based on each segment’s estimates for known loss events for which not all claims have been reported to the Company. In establishing such IBNR reserves, the Company accumulates loss information from modeling agencies, where possible, publicly available sources and information contained in client reports and estimates. The loss information is applied to the Company’s book of in-force contracts to establish an estimate of the Company’s ultimate exposure to the loss event. For the largest loss events, the Company estimates an ultimate loss expectation for the individual event. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the IBNR estimate for these individual large claims or catastrophe events. The size of event for which the Company establishes a separate ultimate loss estimate may vary based on an assessment of the materiality of the event, as well as on other factors.

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b.Attritional losses—IBNR reserves are established using some combination of the actuarial methods described above, including the Chain Ladder method, the Generalized Cape Cod method and the Bornhuetter-Ferguson method. In situations where limited historic development data is available and/or the year being analyzed is more recent (less mature), the expected loss method and the Bornhuetter-Ferguson method are more commonly used. Under all methods used, an ultimate loss amount is established. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the attritional IBNR reserves.

For all case reserves, ACR and IBNR, net reserves are estimated by first estimating gross reserves, then estimating reinsurance recoverables.

Judgments and Uncertainties: Loss reserve estimates for insurance and reinsurance business are not precise in that they deal with the inherent uncertainty in the outcome of insurance and reinsurance claims made on the Company, many of which have not yet been reported to the Company. Estimating loss reserves requires management to make assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices, potential changes in the legal environment and other factors. These estimates and judgments are based on numerous factors, and may be revised over time as additional experience or other data becomes available, as new or improved methodologies are developed or as current laws change.

As predominantly a broker market insurer and reinsurer, the Company must rely on loss information reported to us by brokers from clients, where such information is often incomplete or changing. The quality and type of information received varies by client and by the nature of the business, insurance or reinsurance.

For insurance business, the Company receives from brokers details of potential claims, on the basis of which the Company’s loss adjusters make estimates of the likely ultimate outcome of the claims. In determining these reserves, the Company takes into account a number of factors including the facts and circumstances of the individual claim, the nature of the coverage and historical information about its experience on similar types of claims. For insurance business where Talbot is not the lead underwriter, the case reserves are established by the lead underwriter and validated centrally by the Lloyd’s market claims bureau, with a sample reviewed by the Company. The sum of the individual claim estimates for lead and follow business constitutes the case reserves.

For reinsurance business, the Company typically receives from brokers details of paid losses and estimated case reserves recorded by the ceding company. In addition to this, the ceding company’s estimated provision for IBNR losses is sometimes also available, although this in itself introduces additional uncertainty owing to the differing and typically unknown reserving practices of ceding companies.

There will also be a time lag between a loss occurring and it being reported, first by the original claimant to its insurer, via the insurance broker, and, for reinsurance business, subsequently from the insurer to the reinsurer via the reinsurance broker.

The Company writes a mix of predominantly short-tail business, both insurance and reinsurance. The combination of low claim frequency and high claim severity that is characteristic of much of this short-tail business makes the available data more volatile and less reliable for predicting ultimate losses. For example, in property lines, there can be additional uncertainty in loss estimation related to large catastrophe events, whether natural or man-made. With wind events, such as hurricanes, the damage assessment process may take more than a year. The cost of claims is also subject to volatility due to supply shortages for construction materials and labor. In the case of earthquakes, the damage assessment process may take longer as buildings are discovered to have structural weaknesses not initially detected.

The Company also writes longer tail insurance lines of business through Talbot and Western World. Talbot's longer tail lines of business predominantly include financial institutions, marine and energy liabilities, aviation products and airports (aviation direct), construction and political risk. Western World's longer tail lines predominantly include liability coverages for contractors, manufacturers and health care related classes. These longer tail lines represent 11.6% of the Company's gross premiums written for the year ended December 31, 2014. In contrast to our short-tail business, the claim tail for our longer tail lines of business is expected to be notably longer as claims are often reported and ultimately paid or settled years after the related loss event occurs. In the intervening period between occurrence, reporting and settlement, additional facts regarding individual claims and trends will often become known and current laws and case law may change, affecting the ultimate value of the claim.

Taken together, these issues add considerable uncertainty to the process of estimating ultimate losses, hence loss reserves, and this uncertainty is increased for reinsurance business compared with insurance business due to the additional parties in the chain of reporting from the original claimant to the reinsurer.

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As a result of the uncertainties described above, the Company must estimate IBNR reserves, which consist of a provision for future development on known loss events, as well as a provision for claims which have occurred but which have not yet been reported to us by clients. Because of the degree of reliance that is necessarily placed on brokers and (re)insured companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business underwritten, the rapidly emerging and changing nature of facts and circumstances surrounding large events and, for reinsurance business, the varying reserving practices among ceding companies as described above, reserve estimates are highly dependent on management’s judgment and are subject to uncertainty.

The Company strives to take account of these uncertainties in the judgments and assumptions made when establishing loss reserves, but it is not possible to eliminate the uncertainties. As a result, there is a risk that the Company’s actual losses may be higher or lower than the reserves booked.

For the Company’s insurance business written by Talbot and Western World, where a longer reserving history exists, the Company examines the development of its own historical paid and incurred losses to identify trends, which it then incorporates into the reserving process where it deems appropriate.

For the Company’s reinsurance business, where the Company relies more heavily on information provided by clients in order to assist it in estimating reserves, the Company performs certain processes in order to help assess the completeness and accuracy of such information as follows:

1.In addition to information received from clients on reported claims, the Company also uses information on the patterns of client loss reporting and loss settlements from previous events in order to estimate the Company’s ultimate liability related to these events;

2.The Company uses reinsurance industry information in order to perform consistency checks on the data provided by ceding companies and to identify trends in loss reporting and settlement activity. Where it deems appropriate, the Company incorporates such information in establishing reinsurance reserves; and

3.For both insurance and reinsurance business, the Company supplements the loss information received from clients with loss estimates developed by market share techniques and third party catastrophe models when such information is available.

Although there is normally a lag in receiving reinsurance data from cedants, the Company currently has adequate procedures in place regarding the timeliness related to the processing of assumed reinsurance information and there is no significant backlog. The Company actively manages its relationships with brokers and clients and considers existing disputes with counterparties to be in the normal course of business.

As described above, the reserve for losses and loss expenses includes both a component for outstanding case reserves for claims which have been reported and a component for IBNR reserves. IBNR reserves are the difference between ultimate losses and reported losses, where reported losses are the sum of paid losses and outstanding case reserves. Ultimate losses are estimated by management using various actuarial methods, including exposure-based and loss-based methods, as well as other qualitative assessments regarding claim trends.

The Company uses a reserving methodology that establishes a point estimate for ultimate losses. The point estimate represents management’s best estimate of ultimate losses and loss expenses. The Company does not select a range as part of its loss reserving process. The extent of reliance on management judgment in the reserving process differs depending on the circumstances surrounding the estimations, including the volume and credibility of data, the perceived relevance of historical data to future conditions, the stability or level of stability in the Company’s operational processes for handling losses (including claims practices and systems) and other factors. The Company reviews its reserving assumptions and methodologies on a quarterly basis. Two of the most critical assumptions in establishing reserves are loss emergence patterns and expected loss ratios. Loss emergence patterns are critical to the reserving process as they can be one key indicator of the ultimate liability. A pattern of reported loss emergence which is different from expectations may indicate a change in the loss climate and may thus influence the estimate of future payments that should be reflected in reserves. Expected loss ratios are a primary component in the Company’s calculation of estimated ultimate losses for business at an early stage in its development.

Loss emergence patterns for the business written by Talbot and Western World are generally derived from its own historic loss development triangulations and in some instances, the business written by Talbot is also supplemented by Lloyd’s market data. For the business written by Validus Re and AlphaCat, where its own historic loss development triangulations are currently more limited, greater use is made of market data including reinsurance industry data available from organizations such as statistical bureaus and consulting firms, where appropriate. Expected loss ratios are estimated in a variety of ways, largely dependent upon the data available. Wherever it deems appropriate, management incorporates the Company’s own loss experience in establishing initial expected loss ratios and reserves. This is particularly true for the business written by Talbot and Western World where a

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longer reserving history exists and expected losses and loss ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. For reinsurance business, expected losses and loss ratios are typically developed using vendor and proprietary computer models. The information used in these models is collected by underwriters and actuaries during the initial pricing of the business.

The Company has large catastrophe event ultimate loss reserve estimation procedures for the investigation, analysis, and estimation of ultimate losses resulting from large catastrophe events. The determination regarding which events follow these procedures is made by members of senior management from relevant departments within the Company. The procedures are designed to facilitate the communication of information between various relevant functions and provide an efficient approach to determining the estimated loss for the event.

In developing estimates for large catastrophe events, the Company considers various sources of information including: specific loss estimates reported by our cedants and policyholders, ceding company and overall insurance industry loss estimates reported by our brokers and by claims reporting services, proprietary and third party vendor models and internal data regarding insured or reinsured exposures related to the geographical location of the event. Use of these various sources enables management to estimate the ultimate loss for known events with a higher degree of accuracy and timeliness than if the Company relied solely on one data source. Indicated ultimate loss estimates for catastrophe events are compiled by a committee of management, and these indicated ultimate losses are incorporated into the process of selecting management’s best estimate of reserves.

As with large catastrophe events, the Company separately estimates ultimate losses for certain large claims using a number of methods, including estimation based on vendor models, analyses of specific industry occurrences and facts, as well as information from cedants and policyholders on individual contract involvements.

During 2010 and 2011, given the complexity and severity of notable loss events, explicit reserves for potential development on 2010 and 2011 notable loss events (RDE) were included within the Company's IBNR reserving process. As uncertainties surrounding initial estimates on notable loss events developed, this reserve has been allocated to specific notable loss events. No RDE was established for 2012, 2013 or 2014 notable loss events.

The requirement for a reserve for potential development on notable loss events in a quarter is a function of (a) the number of significant events occurring in that quarter and (b) the complexity and volatility of those events. Complexity and volatility factors considered are as follows:

• Contract complexity;

• Nature and number of perils arising from an event;

• Limits and sub limits exposed;

• Quality, timing and flow of information received from each loss;

• Timing of receipt of information to the Company;

• Information regarding retrocessional covers;

• Assumptions, both explicit and implicit, regarding future paid and reported loss development patterns;

• Frequency and severity trends;

• Claims settlement practices; and

• Potential changes in the legal environment.

Each of these factors may lead to associated volatility for each notable loss event as well as consideration of the total reserve for loss events in the aggregate. Consequently, all of these factors are considered in the aggregate for the events occurring in the quarter, recognizing that it is more likely that one or some of the events may deteriorate significantly, rather than all deteriorating proportionately. The establishment of each quarter's requirement for a reserve for potential development on notable loss events takes place as part of the quarterly evaluation of the Company's overall reserve requirements. It is not directly linked in isolation to any one significant/notable loss in the quarter. The reserve for potential development on notable loss events is evaluated by our in-house actuaries as part of their normal process in setting of indicated reserves for the quarter. In ensuing quarters, senior management and the in-house actuaries revisit and re-estimate certain events previously considered in the catastrophe loss event process as well as events that have subsequently emerged in the current quarter. To the extent that there has been adverse development on a notable loss event, if there is RDE remaining from that accident year, an allocation from the respective accident year RDE will be made to the notable loss event. If there is no remaining RDE relating to the accident year of the loss, then adverse development will be recorded for the notable loss event.

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Changes to the reserve for potential development on notable loss events will be considered in light of changes to previous loss estimates from notable loss events in this re-estimation process. To the extent that there are continued complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year, as illustrated in the RDE roll forward table above.

Management’s loss estimates are subject to annual corroborative review by independent external actuaries using generally accepted actuarial techniques and other analytical and qualitative methods.

The Company’s reserving methodology was not changed materially in the year ended December 31, 2014 from the methodology used in the year ended December 31, 2013. Management’s best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2014 were $3.2 billion and $377.5 million, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2014.



	As at December 31, 2014
(Dollars in thousands)	Gross Case Reserves			Gross IBNR			Total Gross Reserve for Losses and Loss Expenses
Validus Re	$	722,163		$	611,715		$	1,333,878
AlphaCat	2,448			4,077			6,525
Talbot	637,229			714,827			1,352,056
Western World (a)	174,631			438,920			613,551
Eliminations	(41,148		)	(30,468		)	(71,616		)
Total	$	1,495,323		$	1,739,071		$	3,234,394


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

Management’s best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2013 were $3.0 billion and $370.2 million, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2013.



	As at December 31, 2013
(Dollars in thousands)	Gross Case Reserves			Gross IBNR			Total Gross Reserve for Losses and Loss Expenses
Validus Re	$	936,803		$	786,662		$	1,723,465
AlphaCat	1,774			15,838			17,612
Talbot	644,142			718,432			1,362,574
Eliminations	(44,838		)	(28,414		)	(73,252		)
Total	$	1,537,881		$	1,492,518		$	3,030,399

To the extent insurance and reinsurance industry data is relied upon to aid in establishing reserve estimates, there is a risk that the data may not match the Company’s risk profile or that the industry’s reserving practices overall differ from those of the Company and its clients. In addition, reserving can prove especially difficult should a significant loss event take place near the end of an accounting period, particularly if it involves a catastrophic event. These factors further contribute to the degree of uncertainty in the reserving process.

The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different from the reserves initially established. Changes to prior year reserves will affect current period underwriting income by increasing income if the prior year ultimate losses are reduced or decreasing income if the prior year ultimate losses are increased. The Company expects volatility in results in periods when significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have both occurred and are expected to give rise to a claim. As a result, the Company is not allowed to record contingency reserves to account for expected future losses. The Company anticipates that claims arising from future events will require the establishment of substantial reserves in future periods.

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Effect if Actual Results Differ From Assumptions: Given the risks and uncertainties associated with the process for estimating reserves for losses and loss expenses, management has performed an evaluation of the potential variability in loss reserves and the impact this variability may have on reported results, financial condition and liquidity. Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.

Management’s best estimate of the net reserve for losses and loss expenses at December 31, 2014 is $2.9 billion. The following tables show the effect on estimated net reserves for losses and loss expenses as of December 31, 2014 of a change in two of the most critical assumptions in establishing reserves: (1) loss emergence patterns, accelerated or decelerated by three and six months; and (2) expected loss ratios varied by plus or minus five and ten percent. Management believes that a reasonably likely scenario is represented by such a standard, as used by some professional actuaries as part of their review of an insurer’s or reinsurer’s reserves. Utilizing this standard as a guide, management has selected these variances to determine reasonably likely scenarios of variability in the loss emergence and loss ratio assumptions. These scenarios consider normal levels of catastrophe events. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.

Net reserve for losses and loss expenses at December 31, 2014—Sensitivity to loss emergence patterns



Change in assumption	Reserve for losses and loss expenses
	(Dollars in thousands)
Six month acceleration	$	2,561,273
Three month acceleration	2,697,464
No change (selected)	2,856,928
Three month deceleration	3,022,926
Six month deceleration	3,189,137

Net reserve for losses and loss expenses at December 31, 2014—Sensitivity to expected loss ratios



Change in assumption	Reserve for losses and loss expenses
	(Dollars in thousands)
10% favorable	$	2,648,559
5% favorable	2,752,770
No change (selected)	2,856,928
5% unfavorable	2,961,086
10% unfavorable	3,065,297

The most significant variance in the above scenarios, six month deceleration in loss emergence patterns, would have the effect of increasing losses and loss expenses by $332.2 million.

Management believes that the reserve for losses and loss expenses are sufficient to cover expected claims incurred before the reporting date on the basis of the methodologies and judgments used to support its estimates. However, there can be no assurance that actual payments will not vary significantly from total reserves. The reserve for losses and loss expenses and the methodology of estimating such reserve are regularly reviewed and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.

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Premiums

Description: For insurance business, written premium estimates are determined from the business plan estimates of premiums by class, the aggregate of underwriters’ estimates on a policy-by-policy basis, and projections of ultimate premiums using generally accepted actuarial methods. In particular, direct insurance premiums are recognized in accordance with the type of contract written. The majority of our insurance premium is accepted on a direct open market or facultative (proportional or non-proportional) basis. We receive a premium which is identified in the policy and this premium will typically adjust only if the underlying insured values adjust.

A limited portion of our insurance business is written on a line slip basis or binder, under which we assume a fixed percentage of the premiums and losses on a particular risk or group of risks along with numerous other unrelated insurers. Although premiums on this business are not contractually stated, we recognize gross premiums written based on an estimate provided by the client, via the broker.

For reinsurance business, where the assumed reinsurance premium is written on an excess of loss (non-proportional) or on a pro-rata (proportional) basis, reinsurance contracts are generally written prior to the time the underlying direct policies are written by cedants and accordingly cedants must estimate such premiums when purchasing reinsurance coverage. For excess of loss contracts, the deposit premium is defined in the contract. The deposit premium is based on the client’s estimated premiums, and this estimate is the amount recorded as written premium in the period the risk incepts. In the majority of cases, these contracts are adjustable to reflect the changes in underlying risks during the contract period. For pro-rata contracts, an estimate of written premium is recorded in the period in which the risk incepts. The written premiums estimate is based on the pro rata cession percentage, on information provided by ceding companies and on management’s judgment. Management critically evaluates the information provided by ceding companies based on experience with the cedant, broker and the underlying book of business and may modify the initial premium estimates provided by the cedant.

The table below identifies the extent of premiums that were written on a proportional and non-proportional basis:



	Year Ended December 31, 2014 (a)				Year Ended December 31, 2013				Year Ended December 31, 2012 (b)
(Dollars in thousands)	Gross Written Premiums		Gross Written Premiums (%)		Gross Written Premiums		Gross Written Premiums (%)		Gross Written Premiums		Gross Written Premiums (%)
Proportional	$	600,537	25.4	%	$	639,955	26.7	%	$	498,954	23.0	%
Non-proportional	1,762,749		74.6	%	1,761,151		73.3	%	1,667,486		77.0	%
Total	$	2,363,286	100.0	%	$	2,401,106	100.0	%	$	2,166,440	100.0	%


(a)	The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.


(b)	The results of operations for Flagstone are consolidated from the November 30, 2012 date of acquisition.

Premium earning: For contracts written on a losses occurring basis or claims made basis, being the majority of our insurance and excess of loss reinsurance business, premium income is generally earned proportionately over the expected risk period, usually 12 months. For contracts written on a risks attaching basis, being primarily our pro-rata reinsurance business, premiums are attached straight line over the period of the policy and generally earned over a 24 month period due to the fact that some of the underlying exposures may attach towards the end of the contract, and such underlying exposures generally have a 12 month coverage period. The portion of the premium related to the unexpired portion of the policy at the end of any reporting period is presented on the consolidated balance sheet as unearned premiums. Changes in circumstance subsequent to contract inception can impact the earning period. For example, when the exposure limit for a contract is reached, we fully earn any associated unearned premium.

Judgments and Uncertainties: On a quarterly basis, the Company evaluates the appropriateness of premium estimates based on the latest information available, which may include actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management’s professional judgment, underlying values as necessary, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. Past experience may not be indicative of how future premium estimates develop.

For business written on a facultative basis, endorsements, based on reports by our clients of changes in the original contractual cover, are recorded in the period in which the client reports are received, which would normally be over the life of the cover or shortly afterwards. Typically, the adjustment to the original premium is an insignificant portion of the total premium written.

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For business written on a facility basis, although a premium estimate is not contractually stated for the amount of business to be written under any particular facility, an initial estimate of the expected premium written is received from the coverholder via the broker. Our estimate of premium is derived by reference to one or more of the following: the historical premium volume experienced by any facility, historical premium volume of similar facilities, the estimates provided by the broker and industry information on the underlying business. We actively monitor the development of actual reported premium against the estimates made; where actual reported premiums deviate from the estimate, we carry out an analysis to determine the cause and may, if necessary, adjust the estimated premiums.

For business written on an excess of loss basis, premium adjustments, based on reports by the clients of actual premium, are recorded in the period in which the cedant reports are received, which would normally be within six months to one year subsequent to the expiration of the contract. Typically the adjustment to the deposit premium is an insignificant portion of the total premium written. Many of our excess of loss contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. Reinstatement premiums are recognized when a triggering loss event occurs and losses are recorded by us. While the reinstatement premium amount is defined by contract terms, our recognition of reinstatement premiums is dependent on our estimate of losses and loss expenses, which reflect management’s best judgment as described above in "Reserve for Losses and Loss Expenses".

For business written on a proportional basis, we review premium estimates on a quarterly basis and evaluate their reasonability in light of actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management’s professional judgment, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. Factors contributing to changes from the initial premium estimates may include changes in renewal rates, rates of new business or underlying exposures. As a result of this review process, any adjustments to estimates are recognized in gross premiums written during the period they are determined. Such changes in premium estimates may directly impact net premiums earned in the period they are determined because the adjustment may need to be substantially or fully earned.

The Company believes that reasonably likely changes in assumptions made in the estimation process would not have a significant impact on gross premiums written as recorded.

Credit risk: Management includes an assessment of the creditworthiness of cedants in the review process above, primarily based on market knowledge, reports from rating agencies, the timeliness of cedants’ payments and the status of current balances owing. Based on this assessment, management believes that as at December 31, 2014 no provision for doubtful accounts is necessary for receivables from cedants.

Reinsurance Premiums Ceded and Reinsurance Recoverables

Description: As discussed in Item 1 “Business” the Company primarily uses ceded reinsurance for risk mitigation purposes. Validus Re purchases reinsurance on an excess of loss and a proportional basis together with ILW coverage. Talbot purchases reinsurance on an excess of loss and a proportional basis together with a relatively small amount of facultative reinsurance and ILWs. Western World purchases reinsurance on an excess of loss basis with a relatively small amount of facultative reinsurance.

Judgments and Uncertainties: For excess of loss business, the amount of reinsurance premium payable is usually contractually documented at inception and management judgment is only necessary in respect of any loss-related elements of the reinsurance premium, for example, reinstatement or adjustment premiums and loss-related commissions. The full reinsurance premium ceded is recorded at inception and if the contract is purchased on a “losses occurring” basis, the reinsurance premium ceded is expensed on a straight line basis over the life of the contract. If the policy is purchased on a “risks attaching” basis, the reinsurance premium ceded is expensed in line with how the inwards gross premium, to which the risk attaching policy relates, is earned. After the contract has expired, a No Claims Bonus may be received for certain policies, and this is recorded as a reinsurance premium adjustment in the period in which it can be reasonably determined.

Paid losses recoverable and loss reserves recoverable balances include amounts owed to us in respect of paid and unpaid ceded losses and loss expenses, respectively. The balances are presented net of a provision for non-recoverability. As at December 31, 2014, loss reserves recoverable balances were $377.5 million and paid losses recoverable balances were $38.1 million. In establishing our reinsurance recoverable balances, significant judgment is exercised by management in determining the amount of unpaid losses and loss expenses to be ceded as well as our ability to cede losses and loss expenses under our reinsurance contracts.

The Company's ceded unpaid losses and loss expenses consists of two elements, those for reported losses and those for IBNR. Ceded amounts for IBNR are developed as part of our loss reserving process. Consequently, the estimation of ceded unpaid losses and loss expenses is subject to similar risks and uncertainties in the estimation of gross IBNR (see “Reserve for Losses and Loss Expenses” above). As at December 31, 2014, ceded IBNR recoverable balances were $231.1 million.

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Although our reinsurance recoverable balances are derived from our determination of contractual provisions, the recoverability of such amounts may ultimately differ due to the potential for a reinsurer to become financially impaired or insolvent or for a contractual dispute over contract language or coverage. Consequently, we review our reinsurance recoverable balances on a regular basis to determine if there is a need to establish a provision for non-recoverability. In performing this review, the Company uses judgment in assessing the credit worthiness of our reinsurers and the contractual provisions of our reinsurance agreements. As at December 31, 2014, the Company had a provision for non-recoverability of $4.8 million. In the event that the credit worthiness of our reinsurers were to deteriorate, actual uncollectible amounts could be significantly greater than our provision for non-recoverability.

The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

At December 31, 2014, the use of different assumptions within the model could have an effect on the provision for uncollectible reinsurance reflected in the Company’s Consolidated Financial Statements. To the extent the creditworthiness of the Company’s reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision.

Investment Valuation

Description: Consistent with U.S. GAAP, the Company recognizes investments at their fair value in the Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also established a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (“Level 1”) and unobservable inputs being the lowest level (“Level 3”). Generally, the degree of judgment used in measuring the fair value of financial instruments inversely correlates with the availability of observable inputs.

Judgments and Uncertainties: The Company’s external investment accounting service provider receives prices from independent pricing sources to measure the fair values of a majority of the Company's investments. These independent pricing sources are prioritized with respect to reliability to ensure that only the highest priority pricing inputs are used. The independent pricing sources are received via automated feeds from indices, pricing and broker-dealers services. Pricing is also obtained from other external investment managers. This information is applied consistently across all portfolios. The Company’s external investment accounting service provider confirms and documents all prices received from broker-dealers on a daily basis for quality control and audit purposes.

In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 Report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance. To date, management has not noted any issues or discrepancies related to investment valuation.

For further details on the valuation of the Company's remaining investment portfolio refer to Note 8, "Fair Value Measurements" to the Consolidated Financial Statements in Part II, Item 8.

Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of interest rate risk and a sensitivity analysis of the impact of interest rate variances on the valuation of the Company’s fixed maturity and short-term investments.

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Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of nets assets acquired from the acquisition of Talbot and Western World. Intangible assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful life are not amortized.

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Such events or circumstances may include an economic downturn in a geographic market or change in the assessment of future operations. In performing this test, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350 “Intangibles-Goodwill and Other.” Similarly, the Company may first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment described in ASC Topic 350 "Intangibles - Goodwill and Other - General Intangibles Other than Goodwill." If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in the Consolidated Statements of Comprehensive Income.

As at December 31, 2014, neither the Company’s initial valuation nor its subsequent valuations has indicated any impairment of the Company’s goodwill and intangible assets of $195.9 million and $126.9 million, respectively. For further details refer to Note 6 "Goodwill and intangible assets" to the Consolidated Financial Statements in Part II, Item 8.

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Regulation

Reference is made to Part I, Item 1 "Business" for a discussion with respect to the impact of regulation on the Company.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. Statements that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, “may”, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statement.

We believe that these factors include, but are not limited to, the following:


•	unpredictability and severity of catastrophic events;


•	our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;


•	adequacy of the Company’s risk management and loss limitation methods;


•	cyclicality of demand and pricing in the insurance and reinsurance markets;


•	the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;


•	adequacy of the Company’s loss reserves;


•	continued availability of capital and financing;


•	the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;


•	acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;


•	competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;


•	potential loss of business from one or more major insurance or reinsurance brokers;


•	the Company’s ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements;


•	general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate;


•	the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures;

•

accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;


•	the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;

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•	acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;


•	availability and cost of reinsurance and retrocession coverage;


•	the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;


•	the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;


•	changes in domestic or foreign laws or regulations, or their interpretations;


•	changes in accounting principles or the application of such principles by regulators;


•	statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers; and

•

the other factors set forth herein under Part I Item 1A “Risk Factors” and under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other sections of this Annual Report on Form 10-K for the year ended December 31, 2014, as well as the risk and other factors set forth in the Company’s other filings with the SEC, as well as management’s response to any of the aforementioned factors.

In addition, other general factors could affect our results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 7A. Quantitative And Qualitative Disclosures About Market Risk

We are principally exposed to five types of market risk:


•	interest rate risk;


•	foreign currency risk;


•	credit risk;


•	liquidity risk; and


•	inflation risk.

Interest Rate Risk: The Company’s fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise and credit spreads widen, the market value of the Company’s fixed maturity portfolio falls and the Company has the risk that cash outflows will have to be funded by selling assets, which will be trading at depreciated values. As interest rates decline and credit spreads tighten, the market value of the Company’s fixed income portfolio increases and the Company has reinvestment risk, as funds reinvested may earn less than is necessary to match anticipated liabilities. We manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of the insurance and reinsurance liabilities the Company assumes.

As at December 31, 2014, the impact on the Company’s fixed maturity and short-term investments from an immediate 100 basis point increase in market interest rates (based on U.S. treasury yield) would have resulted in an estimated decrease in market value of 2.1%, or approximately $127.2 million. As at December 31, 2014, the impact on the Company’s fixed maturity portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 2.0% or approximately $123.0 million.

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As at December 31, 2013, the impact on the Company’s fixed maturity and short-term investments from an immediate 100 basis point increase in market interest rates (based on U.S. treasury yield) would have resulted in an estimated decrease in market value of 1.6%, or approximately $106.0 million. As at December 31, 2013, the impact on the Company’s fixed maturity portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 1.5% or approximately $98.1 million.

As at December 31, 2014, the Company held $1.5 billion (December 31, 2013: $836.9 million), or 26.3% (December 31, 2013: 15.1%) of the Company’s fixed maturity portfolio in asset-backed and mortgage-backed securities. Some of these assets are exposed to prepayment risk, which occurs when the frequency with which holders of the underlying loans prepay the outstanding principal before the maturity date changes. The adverse impact of prepayment is more evident in a declining interest rate environment. As a result, the Company will be exposed to reinvestment risk, as cash flows received by the Company will be accelerated and will be reinvested at the prevailing interest rates.

Foreign Currency Risk: Certain of the Company’s reinsurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. Foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. Therefore, we manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash and investments that are denominated in such currencies. As of December 31, 2014, $606.3 million, or 5.9% of our total assets and $738.5 million, or 11.9% of our total liabilities were held in foreign currencies. As of December 31, 2014, $92.4 million, or 1.3% of our total liabilities held in foreign currencies were non-monetary items which do not require revaluation at each reporting date. As of December 31, 2013, $877.4 million, or 9.0% of our total assets and $912.8 million, or 16.4% of our total liabilities were held in foreign currencies. As of December 31, 2013, $133.4 million, or 2.4% of our total liabilities held in foreign currencies were non-monetary items. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts. For further information on the accounting treatment of our foreign currency derivatives, refer to Note 11 of Part II, Item 8 - Consolidated Financial Statements. To the extent foreign currency exposure is not hedged or otherwise matched, the Company may experience exchange losses, which in turn would adversely affect the results of operations and financial condition.

Credit Risk: The Company is exposed to credit risk from the possibility that counterparties may default on their obligations. The Company’s primary credit risks reside in investment in U.S. and non-U.S. corporate bonds and amounts recoverable from reinsurers. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets”, such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.5% of its investment portfolio or less, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's bank loan portfolio and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. In total, investments in below investment grade securities are limited to no more than 10% of the Company's investment portfolio. At December 31, 2014, 2.8% of the portfolio, excluding bank loans, was below Baa3/BBB- and there was no aggregate exposure to any single issuer of more than 1.0% of total investments, other than with respect to government and agency securities (December 31, 2013: 1.5%). Total investments including bank loans that were rated below Baa3/BBB- were 10.8% (December 31, 2013: 14.0%) of the Company’s investment portfolio.

The amount of the maximum exposure to credit risk is indicated by the carrying value of the Company’s financial assets. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by S & P or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At December 31, 2014, 98.0% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or above, (December 31, 2013: 96.7% rated A- or above) or from reinsurers posting full collateral.

Liquidity risk: Certain of the Company’s investments may become illiquid. Disruption in the credit markets may materially affect the liquidity of the Company’s investments, including non-agency residential mortgage-backed securities and bank loans which represent 6.0% at December 31, 2014 (December 31, 2013: 9.2%) of total cash and investments. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include claims on a major catastrophic event) in a period of market illiquidity, the investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under other conditions. At December 31, 2014, the Company had $963.8 million of unrestricted, liquid assets, defined as unpledged cash and cash equivalents, short term investments, government and government agency securities.

129

Details of the Company’s debt and financing arrangements at December 31, 2014 are provided below.



(Dollars in thousands)	Maturity Date / Term	Issued and Outstanding
2006 Junior Subordinated Deferrable Debentures	June 15, 2036	$	150,000
2007 Junior Subordinated Deferrable Debentures	June 15, 2037	139,800
2010 Senior Notes due 2040	January 26, 2040	250,000
$400,000 syndicated unsecured letter of credit facility	March 9, 2016	—
$525,000 syndicated secured letter of credit facility	March 9, 2016	276,455
$200,000 secured bi-lateral letter of credit facility	Evergreen	15,649
Talbot FAL facility	December 31, 2017	25,000
PaCRe senior secured letter of credit facility	Evergreen	294
AlphaCat Re secured letter of credit facility	Evergreen	30,000
IPC bi-lateral facility	Evergreen	15,897
$375,000 Flagstone bi-lateral facility	Evergreen	198,389
Flagstone 2006 Junior Subordinated Deferrable Debentures	September 15, 2036	135,727
Flagstone 2007 Junior Subordinated Deferrable Debentures	September 15, 2037	113,750
Total debt and financing arrangements		$	1,350,961

Inflation Risk: We do not believe that inflation has had or will have a material effect on our combined results of operations, except insofar as (a) inflation may affect interest rates, and (b) losses and loss expenses may be affected by inflation.

Item 8. Financial Statements and Supplementary Data

Reference is made to Item 15 (a) of this Report for the Consolidated Financial Statements of Validus Holdings, Ltd. and the Notes thereto, as well as the Schedules to the Consolidated Financial Statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been made known to them in a timely fashion.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.

The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013) (the “Framework”). Based on its assessment, management concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was effective based on the Framework criteria.

The Company acquired all of the outstanding shares of Western World on October 2, 2014. Western World’s total assets and total revenues represented approximately 14.5% and 3.8%, respectively of the Company’s related consolidated financial statement amounts as of and for the year ended December 31, 2014. Western World has been excluded from the Company's assessment scope

130

for the effectiveness of internal control over financial reporting as of December 31, 2014 because it was acquired by the Company in a purchase business combination during 2014.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers Ltd., an independent registered public accounting firm, as stated in their report included in this filing.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

131

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Certain of the information required by this item relating to the executive officers of the Company may be found starting at page 51. The balance of the information required by this item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.

Item 11. Executive Compensation

This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Equity Compensation Plan Information

The following table displays certain information regarding our equity compensation plans at December 31, 2014:



(Dollars in thousands)	Number of Securities to be Issued Upon Exercise of Outstanding Options and Restricted Stock	Weighted-Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity compensation plans
2005 Amended and Restated Long-Term Incentive Plan	4,154,404	$	17.74	903,292
Director Stock Compensation Plan	—			52,104

The balance of the information required by this item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

132

PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements, Financial Statement Schedules and Exhibits.


(a)	Financial Statements and Financial Statement Schedules are included as pages F-1 to F-88.


(b)	The exhibits numbers followed by an asterisk (*) indicate exhibits physically filed with this Annual Report on Form 10-K. All other exhibit numbers indicate exhibits filed by incorporation by reference.

EXHIBITS



Exhibit Number		Description of Document
2.1		Agreement and Plan of Merger, dated as of August 30, 2012, by and among Validus Holdings, Ltd., Validus UPS, Ltd., Flagstone Reinsurance Holdings, S.A. and Flagstone Reinsurance Holdings (Bermuda) Limited (incorporated by reference from the Company's Current Report on Form 8-K filed on September 4, 2012)

2.2		Stock Purchase Agreement, dated as of June 23, 2014, by and among Western World Insurance Group, Inc., the shareholders of Western World Insurance Group, Inc., Validus Specialty, Inc., Validus Holdings, Ltd. (solely for purposes of Article I, Section 5.08, Section 6.08, Section 9.03 and Article XI), and Andrew S. Frazier (in his capacity as the Sellers’ Representative) (Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2014)

3.1		Memorandum of Association dated October 10, 2005 (Incorporated by reference from S-1 SEC File No. 333-139989)

3.2		Amended and Restated Bye-laws (Incorporated by reference from S-1 SEC File No. 333-139989)

4.1		Specimen Common Share Certificate (Incorporated by reference from S-1 SEC File No. 333-139989)

4.2		Certificate of Deposit of Memorandum of Increase of Share Capital dated October 28, 2005 (Incorporated by reference from S-1 SEC File No. 333-139989)

4.3		Form of Warrant (Incorporated by reference from S-1 SEC File No. 333-139989)

4.4		Form of Amendment to Warrants dated as of December 21, 2007 (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on December 1, 2007)

4.5		9.069% Junior Subordinated Deferrable Debentures Indenture dated as of June 15, 2006 (Incorporated by reference from S-1 SEC File No. 333-139989)

4.6		Form of 9.069% Junior Subordinated Deferrable Debentures (Included in Exhibit 4.5 hereto) (Incorporated by reference from S-1 SEC File No. 333-139989)

4.7		First Supplemental Indenture to the 9.069% Junior Subordinated Deferrable Debentures Indenture dated as of September 15, 2006 (Incorporated by reference from S-1 SEC File No. 333-139989)

4.8		8.480% Junior Subordinated Deferrable Debentures Indenture dated as of June 29, 2007 (Incorporated by reference from S-1 SEC File No. 333-139989)

4.9		Form of 8.480% Junior Subordinated Deferrable Debentures (Included in Exhibit 4.8 hereto) (Incorporated by reference from S-1 SEC File No. 333-139989)

4.10		Senior Note Indenture, by and between Validus Holdings, Ltd. and The Bank of New York Mellon, dated January 26, 2010 (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on January 26, 2010)

4.11		8.875% Senior Notes Supplemental Indenture, by and between Validus Holdings, Ltd. and The Bank of New York Mellon, dated January 26, 2010 (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on January 26, 2010)

4.12		Form of 8.875% Senior Note (Included in Exhibit 4.10 hereto) (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on January 26, 2010)

4.13		Shareholders’ Agreement dated as of December 12, 2005 among Validus Holdings, Ltd. and the Shareholders Named Therein (Incorporated by reference from S-1 SEC File No. 333-139989)

133



4.14		Junior Subordinated Indenture dated as of August 23, 2006, between Flagstone Reinsurance Holdings Limited and JP Morgan Chase Bank, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.15		First Supplemental Indenture, dated as of May 17, 2010, among Flagstone Reinsurance Holdings, S.A., Flagstone Reinsurance Holdings Limited and The Bank of New York Mellon Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.16		Second Supplemental Indenture, dated as of November 30, 2012, among Flagstone Reinsurance Holdings (Bermuda) Limited, Flagstone Reinsurance Holding, S.A. and The Bank of New York Mellon Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.17		Third Supplemental Indenture, dated as of November 30, 2012, among Validus UPS, Ltd., Validus Holdings, Ltd. and The Bank of New York Mellon Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.18		Junior Subordinated Indenture, dated as of September 20, 2007, between Flagstone Reinsurance Holdings Limited and The Bank of New York Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.19		First Supplemental Indenture, dated as of May 17, 2010, among Flagstone Reinsurance Holdings, S.A., Flagstone Reinsurance Holdings Limited and The Bank of New York Mellon Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.20		Second Supplemental Indenture, dated as of November 30, 2012, among Flagstone Reinsurance Holdings (Bermuda) Limited, Flagstone Reinsurance Holdings, S.A. and The Bank of New York Mellon Trust Company, National Association, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.21		Third Supplemental Indenture, dated as of November 30, 2012, among Flagstone Finance S.A., Validus UPS, Ltd., Validus Holdings, Ltd. and Wilmington Trust Company, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.22		Junior Subordinated Indenture, dated as of June 8, 2007, among Flagstone Finance S.A., Flagstone Reinsurance Holdings Limited and Wilmington Trust Company, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.23		First Supplemental Indenture, dated as of May 17, 2010, among Flagstone Finance S.A., Flagstone Reinsurance Holdings, S.A. and Wilmington Trust Company, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.24		Second Supplemental Indenture, dated as of November 30, 2012, among Flagstone Finance S.A., Flagstone Reinsurance Holdings (Bermuda) Limited, Flagstone Reinsurance Holdings, S.A. and Wilmington Trust Company, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.25		Third Supplemental Indenture, dated as of November 30, 2012, among Flagstone Finance S.A, Validus UPS, Ltd., Validus Holdings, Ltd. and Wilmington Trust Company, as trustee (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.26		Note Purchase Agreement, dated as of August 23, 2006, between Flagstone Reinsurance Holdings Limited and Merrill Lynch International (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.27		Amendment No. 2, dated as of November 30, 2012, to the Note Purchase Agreement, among Validus UPS, Ltd., Validus Holdings, Ltd. and the noteholders named therein (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.28		Amendment No. 2, dated as of November 30, 2012, to the Note Purchase Agreement, among Validus UPS, Ltd., Validus Holdings, Ltd. and the noteholders named therein (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

4.29		Share Purchase Warrant, dated November 30, 2012, between Validus Holdings, Ltd. and Leyton Limited (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on November 30, 2012)

134



10.1		Amendment and Restatement Agreement dated November 19, 2013 relating to a $25 million Standby Letter of Credit Facility dated as of 28 November 2007 as amended, among Talbot Holdings Ltd., as Borrower, Validus Holdings, Ltd., as Guarantor, Lloyds Bank plc, as joint Mandated Lead Arranger, Agent, and Security Trustee, and ING Bank N.V., London Branch, as joint Mandated Lead Arranger. (Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 22, 2013)

10.2		Four-Year Unsecured Revolving Credit and Letter of Credit Facility, dated as of March 9, 2012, among Validus Holdings, Ltd., Validus Re Americas, Ltd., PaCRe, Ltd. and Validus Reinsurance, Ltd., the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and Deutsche Bank Securities Inc., as syndication agent. (Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012)

10.3		Four-Year Secured Letter of Credit Facility, dated as of March 9, 2012, among Validus Holdings, Ltd., Validus Re Americas, Ltd. and Validus Reinsurance, Ltd., the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and Deutsche Bank Securities Inc., as syndication agent. (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on March 13, 2012)

10.4		Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Lixin Zeng dated as of November 1, 2012 (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed with the SEC on November 6. 2012)

10.5		Amended and Restated Employment Agreement dated as of February 15, 2013 between Validus Holdings, Ltd. and Jeffrey D. Sangster (Incorporated by reference from the Company’s Annual Report on Form 10-K for year ended December 31, 2012, filed with the SEC on February 15, 2013).

10.6		Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Edward J. Noonan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.7		Amendment to Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Edward J. Noonan (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2008, filed with the SEC on November 13, 2008)

10.8		Amendment to Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Stuart W. Mercer (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2008, filed with the SEC on November 13, 2008)

10.8.1		Separation Agreement, dated as of May 31, 2013, between Validus Holdings, Ltd. and Stuart W. Mercer (Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2013)

10.9		Employment Agreement dated as of September 1, 2010 between Validus Holdings, Ltd. and Jonathan P. Ritz. (Incorporated by reference from the Company's Current Report on Form 8-K filed with the SEC on September 8, 2010)

10.9.1		Amendment No. 1 to Employment Agreement between Validus Holdings, Ltd. and Jonathan P. Ritz dated as of October 1, 2010 (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011)

10.10		Service Agreement between Talbot Underwriting Services, Ltd. and Charles Neville Rupert Atkin (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 6, 2008)

10.11		Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Robert F. Kuzloski dated as of April 1, 2011 (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2011, filed with the SEC on November 4, 2011)

10.11.1		Amendment No. 1 to Amended and Restated Employment Agreement between Validus Holdings, Ltd. and Robert F. Kuzloski dated as of August 1, 2012 (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed with the SEC on November 6, 2012)

10.12		Employment Agreement between Validus Holdings, Ltd. and Andrew Kudera dated as of February 2, 2010 (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2011, filed with the SEC on November 4, 2011)

10.13		Investment Manager Agreement with BlackRock Financial Management, Inc. (Incorporated by reference from S-1 SEC File No. 333-139989)

10.14		Risk Reporting & Investment Accounting Services Agreement with BlackRock Financial Management, Inc. (Incorporated by reference from S-1 SEC File No. 333-139989)

135



10.15		Validus Holdings, Ltd. 2005 Amended & Restated Long-Term Incentive Plan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.16		Form of Amended Post-IPO Restricted Share Award Agreement for Validus Executive Officers (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011)

10.17		Form of Pre-IPO Restricted Share Agreement for Executive Officers (Incorporated by reference from S-1 SEC File No. 333-139989)

10.18		Form of Amended Restricted Share Agreement for Talbot Executive Officers (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011)

10.19		Amended and Restated Restricted Share Agreement between Validus Holdings, Ltd. and Edward J. Noonan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.20		Stock Option Agreement between Validus Holdings, Ltd. and Edward J. Noonan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.21		Form of Stock Option Agreement for Executive Officers prior to 2008 (Incorporated by reference from S-1 SEC File No. 333-139989)

10.22		Form of Stock Option Agreement for Executive Officers commencing in 2008 (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 6, 2008)

10.23		Form of Performance Share Award Agreement for Validus Executive Officers (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011)

10.24		Form of Performance Share Award Agreement for Talbot Executive Officers (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011)

10.25		Nonqualified Supplemental Deferred Compensation Plan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.26		Validus Holdings, Ltd. Director Stock Compensation Plan (Incorporated by reference from S-1 SEC File No. 333-139989)

10.27		Amendment No. 1 to Validus Holdings, Ltd. Directors Stock Compensation Plan dated as of January 5, 2009 (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 27, 2009)

10.28		Subscription Agreement dated as of November 7, 2014 between Aquiline Capital Partners III GP (Offshore) Ltd. and Validus Reinsurance, Ltd. (Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on November 7, 2014)

10.29		Employment Agreement dated October 25 2012 between Validus America, Inc. and for purposes of Section 12.04, countersigned by Validus Holdings, Ltd. and John J. Hendrickson (Incorporated by reference from the Company’s Annual Report on Form 10-K for year ended December 31, 2012, filed with the SEC on February 15, 2013)

10.30		Employment Agreement dated as of April 2, 2013 between Validus America, Inc. and Romel Salam (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2013 filed with the SEC on May 6, 2013)

10.30.1		Amendment No. 1 to Employment Agreement between Validus America, Inc. and Romel Salam dated as of May 20, 2014 (Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014 filed with the SEC on August 7, 2014)

10.31		Amended and Restated Employment Agreement dated as of April 30, 2013 between Validus Services (Bermuda), Ltd. and Kean Driscoll (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2013 filed with the SEC on May 6, 2013)

10.32		Employment Agreement dated as of June 19, 2013, between Validus Holdings, Ltd. and Michael Moore (Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 24, 2013)

136



21	*	Subsidiaries of the Registrant

23	*	Consent of PricewaterhouseCoopers Ltd.

24		Power of attorney (Incorporated by Reference from signature page)

31	*	Rule 13a-14(a)/15d-14(a) Certifications

32	*	Section 1350 Certification

101.INS	*	XBRL Instance Document

101.SCH	*	XBRL Taxonomy Extension Schema Document

101.CAL	*	XBRL Taxonomy Calculation Linkbase Document

101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document

*Filed herewith

137

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Pembroke, Bermuda, on February 24, 2015.



Validus Holdings, Ltd.
By:	/s/ EDWARD J. NOONAN
	Name:	Edward J. Noonan
	Title:	Chief Executive Officer

By:	/s/ JEFFREY D. SANGSTER
	Name:	Jeffrey D. Sangster
	Title:	Executive Vice President and Chief Financial Officer

138

POWER OF ATTORNEY

We, the undersigned directors and executive officers of Validus Holdings, Ltd. hereby severally constitute Edward J. Noonan and Jeffrey D. Sangster, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature	Title	Date

/s/ EDWARD J. NOONAN	Chairman of the Board of Directors	February 24, 2015
Name: Edward J. Noonan	and Chief Executive Officer (Principal Executive Officer)

/s/ JEFFREY D. SANGSTER	Executive Vice President	February 24, 2015
Name: Jeffrey D. Sangster	and Chief Financial Officer (Principal Finance Officer)

/s/ MICHAEL R. MOORE	Executive Vice President	February 24, 2015
Name: Michael R. Moore	and Chief Accounting Officer (Principal Accounting Officer)

/s/ MAHMOUD ABDALLAH	Director	February 24, 2015
Name: Mahmoud Abdallah

/s/ MICHAEL CARPENTER	Director	February 24, 2015
Name: Michael Carpenter

/s/ MATTHEW J. GRAYSON	Director	February 24, 2015
Name: Matthew J. Grayson

/s/ JOHN J. HENDRICKSON	Director	February 24, 2015
Name: John J. Hendrickson


/s/ THERESE M. (TERRI) VAUGHAN	Director	February 24, 2015
Name: Therese M. (Terri) Vaughan

/s/ CHRISTOPHER E. WATSON	Director	February 24, 2015
Name: Christopher E. Watson

139

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES



	Page No.
Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	141

Consolidated Balance Sheets as at December 31, 2014 and 2013	F-1

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012	F-2

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012	F-3

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012	F-4

Notes to Consolidated Financial Statements	F-5

Financial Statement Schedules:

I. Summary of Investments Other than Investments in Related Parties	F-82

II. Condensed Financial Information of Registrant	F-83

III. Supplementary Insurance Information	F-86

IV. Reinsurance	F-87

VI. Supplemental Information Concerning Property/Casualty Insurance Operations	F-88

Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements, notes thereto, or elsewhere herein.

140

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Validus Holdings, Ltd.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Validus Holdings, Ltd. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management's Report on Internal Control Over Financial Reporting management has excluded Western World Insurance Group, Inc. ("Western World") from its assessment of internal control over financial reporting as of December 31, 2014 because it was acquired by the Company in a purchase business combination during 2014. We have also excluded Western World from our audit of internal control over financial reporting. Western World is a wholly-owned subsidiary whose total assets and total revenues represent 14.5% and 3.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.

/s/ PricewaterhouseCoopers Ltd.

PricewaterhouseCoopers Ltd.

Hamilton, Bermuda

February 24, 2015

141

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at December 31, 2014 and 2013

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2014			December 31, 2013

Assets
Fixed maturities, at fair value (amortized cost: 2014—$5,534,494; 2013—$5,522,853)	$	5,532,731		$	5,542,258
Short-term investments, at fair value (amortized cost: 2014—$1,051,222; 2013—$787,670)	1,051,074			787,714
Other investments, at fair value (cost: 2014—$879,176; 2013—$723,498)	813,011			704,086
Cash and cash equivalents	577,240			734,148
Restricted cash	173,003			200,492
Total investments and cash	8,147,059			7,968,698
Investments in affiliates	261,483			141,243
Premiums receivable	707,647			697,233
Deferred acquisition costs	161,295			134,269
Prepaid reinsurance premiums	81,983			103,251
Securities lending collateral	470			3,392
Loss reserves recoverable	377,466			370,154
Paid losses recoverable	38,078			80,080
Deferred tax asset	23,821			—
Intangible assets	126,924			106,407
Goodwill	195,897			20,393
Accrued investment income	24,865			18,876
Other assets	164,633			202,436
Total assets	$	10,311,621		$	9,846,432

Liabilities
Reserve for losses and loss expenses	$	3,234,394		$	3,030,399
Unearned premiums	990,564			824,496
Reinsurance balances payable	127,128			154,874
Securities lending payable	936			3,858
Deferred tax liability	5,541			19,086
Net payable for investments purchased	50,256			19,383
Accounts payable and accrued expenses	318,245			278,187
Notes payable to operating affiliates	671,465			439,272
Senior notes payable	247,306			247,198
Debentures payable	539,277			541,416
Total liabilities	$	6,185,112		$	5,558,169

Commitments and contingent liabilities
Redeemable noncontrolling interest	79,956			86,512

Shareholders’ equity
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2014—155,554,224; 2013—154,488,497; Outstanding: 2014—83,869,845; 2013—96,044,312)	$	27,222		$	27,036
Treasury shares (2014—71,684,379; 2013—58,444,185)	(12,545		)	(10,228		)
Additional paid-in-capital	1,207,493			1,677,894
Accumulated other comprehensive (loss)	(8,556		)	(617		)
Retained earnings	2,374,344			2,010,009
Total shareholders’ equity available to Validus	3,587,958			3,704,094
Noncontrolling interest	458,595			497,657
Total shareholders’ equity	$	4,046,553		$	4,201,751

Total liabilities, noncontrolling interests and shareholders’ equity	$	10,311,621		$	9,846,432

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-1

Validus Holdings, Ltd.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2014			December 31, 2013			December 31, 2012

Revenues
Gross premiums written	$	2,363,286		$	2,401,106		$	2,166,440
Reinsurance premiums ceded	(309,233		)	(372,585		)	(307,506		)
Net premiums written	2,054,053			2,028,521			1,858,934
Change in unearned premiums	(51,649		)	73,524			14,282
Net premiums earned	2,002,404			2,102,045			1,873,216
Gain on bargain purchase, net of expenses	—			—			17,701
Net investment income	100,076			96,072			107,936
Net realized gains on investments	23,095			3,258			18,233
Change in net unrealized (losses) gains on investments	(57,973		)	(58,481		)	17,585
Income (loss) from investment affiliate	8,411			4,790			(964		)
Other insurance related income and other income	19,739			8,343			22,396
Foreign exchange (losses) gains	(10,630		)	2,505			4,798
Total revenues	2,085,122			2,158,532			2,060,901
Expenses
Losses and loss expenses	772,049			793,932			999,446
Policy acquisition costs	340,556			360,310			334,698
General and administrative expenses	329,792			315,265			263,652
Share compensation expenses	33,073			27,630			26,709
Finance expenses	63,854			64,177			53,857
Transaction expenses	8,096			—			—
Total expenses	1,547,420			1,561,314			1,678,362

Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	537,702			597,218			382,539
Tax expense	(155		)	(383		)	(2,501		)
Income from operating affiliates	17,723			14,289			12,580
(Income) attributable to operating affiliate investors	(109,399		)	(68,763		)	—
Net income	$	445,871		$	542,361		$	392,618
Net loss (income) attributable to noncontrolling interest	35,464			(9,695		)	15,820
Net income available to Validus	$	481,335		$	532,666		$	408,438

Other comprehensive (loss) income
Change in foreign currency translation adjustments	$	(7,501	)	$	(1,954	)	$	3,648
Change in minimum pension liability, net of tax	(210		)	—			—
Change in fair value of cash flow hedge	(228		)	—			—
Other comprehensive (loss) income	(7,939		)	(1,954		)	3,648

Comprehensive income available to Validus	$	473,396		$	530,712		$	412,086

Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	90,354,745			102,202,274			97,184,110
Diluted	94,690,271			103,970,289			102,384,923

Basic earnings per share available to common shareholders	$	5.26		$	5.02		$	4.13
Earnings per diluted share available to common shareholders	$	5.08		$	4.94		$	3.99

Cash dividends declared per share	$	1.20		$	3.20		$	1.00

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-2

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2014			December 31, 2013			December 31, 2012

Common shares
Balance—Beginning of year	$	27,036		$	26,722		$	23,538
Common shares issued, net	186			314			3,184
Balance—End of year	$	27,222		$	27,036		$	26,722
Treasury shares
Balance—Beginning of year	$	(10,228	)	$	(7,836	)	$	(6,131	)
Repurchase of common shares	(2,317		)	(2,392		)	(1,705		)
Balance—End of year	$	(12,545	)	$	(10,228	)	$	(7,836	)
Additional paid-in capital
Balance—Beginning of year	$	1,677,894		$	2,160,478		$	1,893,890
Common shares issued, net	5,161			898			498,136
Repurchase of common shares	(508,635		)	(511,112		)	(258,257		)
Share compensation expenses	33,073			27,630			26,709
Balance—End of year	$	1,207,493		$	1,677,894		$	2,160,478
Accumulated other comprehensive (loss)
Balance—Beginning of year	$	(617	)	$	(2,953	)	$	(6,601	)
Amounts reclassified to retained earnings	—			4,290			—
Other comprehensive (loss) income	(7,939		)	(1,954		)	3,648
Balance—End of year	$	(8,556	)	$	(617	)	$	(2,953	)
Retained earnings
Balance—Beginning of year	$	2,010,009		$	1,844,416		$	1,543,729
Dividends	(117,000		)	(362,783		)	(107,751		)
Net income	445,871			542,361			392,618
Net loss (income) attributable to noncontrolling interest	35,464			(9,695		)	15,820
Amounts reclassified from accumulated other comprehensive (loss)	—			(4,290		)	—
Balance—End of year	$	2,374,344		$	2,010,009		$	1,844,416

Total shareholders’ equity available to Validus	$	3,587,958		$	3,704,094		$	4,020,827

Noncontrolling interest	$	458,595		$	497,657		$	434,280

Total shareholders' equity	$	4,046,553		$	4,201,751		$	4,455,107

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-3

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2014			December 31, 2013			December 31, 2012
Cash flows provided by (used in) operating activities
Net income	$	445,871		$	542,361		$	392,618
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses	33,073			27,630			26,709
(Gain) loss on sale / deconsolidation of subsidiary	(2,081		)	3,237			—
Bargain purchase gain	—			—			(49,702		)
Amortization of discount on senior notes	108			108			108
(Income) loss from investment affiliate	(8,411		)	(4,790		)	964
Net realized (gains) on investments	(23,095		)	(3,258		)	(18,233		)
Change in net unrealized losses (gains) on investments	57,973			58,481			(17,585		)
Amortization of intangible assets	4,538			4,162			10,159
(Income) from operating affiliates	(17,723		)	(14,289		)	(12,580		)
Foreign exchange losses (gains) included in net income	23,591			1,912			(16,123		)
Amortization of premium on fixed maturities	19,107			19,093			24,289
Change in:
Premiums receivable	22,810			127,442			19,860
Deferred acquisition costs	(27,026		)	12,319			(1,875		)
Prepaid reinsurance premiums	34,370			(3,658		)	3,116
Loss reserves recoverable	81,824			69,910			40,708
Paid losses recoverable	43,580			(33,807		)	54,248
Income taxes recoverable	—			—			522
Accrued investment income	2,417			2,499			7,404
Other assets	32,448			(80,718		)	(9,618		)
Reserve for losses and loss expenses	(395,499		)	(472,883		)	116,902
Unearned premiums	17,280			(69,866		)	(17,148		)
Reinsurance balances payable	(31,061		)	(4,724		)	(12,365		)
Deferred income taxes	(45,380		)	(1,008		)	1,040
Accounts payable and accrued expenses	(26,933		)	85,121			(253		)
Net cash provided by operating activities	241,781			265,274			543,165
Cash flows provided by (used in) investing activities
Proceeds on sales of investments	4,756,555			4,370,548			3,393,740
Proceeds on maturities of investments	554,619			490,459			548,226
Purchases of fixed maturities	(4,379,314		)	(5,392,728		)	(3,726,611		)
(Purchases) sales of short-term investments, net	(121,264		)	353,353			56,502
Purchases of other investments	(119,815		)	(38,492		)	(491,210		)
Decrease (increase) in securities lending collateral	2,922			(3,167		)	7,771
Investment in operating affiliates	(37,600		)	(22,000		)	(91,500		)
Redemption from operating affiliates	77,544			86,657			—
Investment in investment affiliates	(12,468		)	(14,492		)	(12,835		)
Decrease (increase) in restricted cash	27,489			(172,962		)	(3,493		)
Proceeds on sale of subsidiary, net of cash	16,459			21,388			—
Purchase of subsidiary, net of cash acquired	(643,545		)	—			17,196
Net cash provided by (used in) investing activities	121,582			(321,436		)	(302,214		)
Cash flows provided by (used in) financing activities
Proceeds on issuance of notes payable to operating affiliates	680,027			442,412			—
Repayments on notes payable to operating affiliates	(617,068		)	(3,553		)	—
Issuance of common shares, net	5,347			1,211			3,015
Purchases of common shares under share repurchase program	(510,952		)	(513,504		)	(259,962		)
Dividends paid	(117,043		)	(360,071		)	(110,037		)
(Decrease) increase in securities lending payable	(2,922		)	3,167			(7,771		)
Third party investment in redeemable noncontrolling interest	68,200			92,190			—
Third party redemption of redeemable noncontrolling interest	(10,496		)	(19,400		)	—
Investment in third party noncontrolling interest	—			58,500			450,100
Third party subscriptions received in advance	15,400			35,000			19,400
Net cash (used in) provided by financing activities	(489,507		)	(264,048		)	94,745
Effect of foreign currency rate changes on cash and cash equivalents	(30,764		)	(6,364		)	17,540
Net (decrease) increase in cash	(156,908		)	(326,574		)	353,236
Cash and cash equivalents—beginning of year	734,148			1,060,722			707,486
Cash and cash equivalents—end of year	$	577,240		$	734,148		$	1,060,722

Taxes paid during the year	$	42,689		$	5,407		$	3,832
Interest paid during the year	$	54,526		$	52,191		$	43,249

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-4

Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements

(Expressed in thousands of U.S. dollars, except share and per share information)

1. Nature of the business

Validus Holdings, Ltd. (together with its wholly and majority owned subsidiaries, the “Company”) was incorporated under the laws of Bermuda on October 19, 2005. The Company provides reinsurance coverage, insurance coverage and insurance linked securities management through four distinct global operating segments, Validus Re, AlphaCat, Talbot and Western World. Validus Re is a Bermuda-based reinsurance segment focused on short-tail lines of reinsurance. AlphaCat is a Bermuda-based investment adviser, managing capital from third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. Talbot is a specialty insurance segment, primarily operating within the Lloyd's insurance market through Syndicate 1183. Western World is a U.S. based specialty excess and surplus lines insurance segment.

On November 30, 2012, pursuant to a merger agreement, the Company acquired all of the outstanding common shares of Flagstone Reinsurance Holdings, S.A. ("Flagstone") in exchange for 0.1935 Company common shares and $2.00 cash per Flagstone common share (the "Flagstone Acquisition"). For segmental reporting purposes, the results of Flagstone’s operations since the acquisition date have been included within the Validus Re segment in the Consolidated Financial Statements. Refer to Note 5 "Business combinations" for further information.

On October 9, 2013, the Company completed the sale of its wholly-owned Cyprus-domiciled subsidiary, Flagstone Alliance Insurance and Reinsurance plc for net cash proceeds of $21,400.

On October 2, 2014, the Company acquired all of the outstanding shares of Western World Insurance Group Inc. ("Western World"), a U.S. based specialty excess and surplus lines insurance company. The results of operations for Western World are consolidated from the date of acquisition. Refer to Note 5 "Business combinations" for further information.

2. Basis of preparation and consolidation

These Consolidated Financial Statements include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain amounts with respect to cash and cash equivalents have been revised to correct certain prior period comparatives in these Consolidated Financial Statements.

The Consolidated Balance Sheet for the year ended December 31, 2013 includes revisions to reduce cash and cash equivalents by $322,198 and increase restricted cash, short-term investments and other investments by $200,492, $35,936 and $85,770, respectively. There is no change to the sub-total of total investments and cash, or the totals of total assets or total shareholders’ equity.

The Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012, includes revisions to (decrease) net cash provided by (used in) investing activities by ($163,541) and ($33,299), respectively. There are no changes to the sub-totals of net cash provided by (used in) operating activities or effect of foreign currency rate changes on cash and cash equivalents. These revisions resulted in a decrease in net (decrease) increase in cash of ($163,541) and ($33,299), for the years ended December 31, 2013 and 2012, respectively.

The effect of these revisions does not impact any per-share amounts or other components of equity or net assets in the statement of financial position in any of the prior periods presented. The Company does not believe these revisions are material to any prior periods. The Company has revised these prior period amounts to provide comparability with current period balances and cash flows. All significant intercompany accounts and transactions have been eliminated.

F-5

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

•reserve for losses and loss expenses;

•premium estimates for business written on a line slip or proportional basis;

•the valuation of goodwill and intangible assets;

•reinsurance recoverable balances including the provision for uncollectible amounts; and

•investment valuation of financial assets.

The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (“FASB”).

3. Significant accounting policies

The following is a summary of significant accounting policies adopted by the Company.


(a)	Premiums

Insurance premiums written are recorded in accordance with the terms of underlying policies. Reinsurance premiums written are recorded at the inception of the policy and are estimated based on information received from brokers, ceding companies and reinsureds, and any subsequent differences arising on such estimates will be recorded in the periods in which they are determined. Premiums written are earned on a pro-rated basis over the term of the policy. For contracts and policies written on a losses occurring basis, the risk period is generally the same as the contract or policy terms. For contracts written on a policies attaching basis, the risk period is based on the terms of the underlying contracts and policies and is generally assumed to be 24 months. The portion of the premiums written applicable to the unexpired terms of the underlying contracts and policies in force is recorded as unearned premiums.

Reinstatement premiums are recorded at the time a loss event occurs and coverage limits for the remaining life of the contract are reinstated under predefined contract terms. The accrual of reinstatement premiums is based on our estimate of losses and loss expenses, which reflects management’s judgment, as described in Note 3(c) "Reserve for losses and loss expenses" below.


(b)	Policy acquisition costs

Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition costs are shown net of commissions earned on reinsurance ceded. These costs are deferred and amortized over the periods in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums and anticipated claims expenses. The realizable value of the Company’s deferred acquisition costs is determined without consideration of investment income. Policy acquisition costs also include profit commissions. Profit commissions are recognized on a basis consistent with our estimate of losses and loss expenses.

F-6

Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(c)	Reserve for losses and loss expenses

The reserve for losses and loss expenses includes reserves for unpaid reported losses and for losses incurred but not reported (“IBNR”). The reserve for unpaid reported losses and loss expenses is established by management based on reports from brokers, ceding companies and insureds and represents the estimated ultimate cost of events or conditions that have been reported to, or specifically identified by, the Company. The reserve for incurred but not reported losses and loss expenses is established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the Consolidated Financial Statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to these estimates recognized in the current year that relate to reserves for losses and loss expenses established in previous calendar years.


(d)	Reinsurance

In the normal course of business, the Company seeks to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk assumed in various areas of exposure with other insurers or reinsurers. The accounting for reinsurance ceded depends on the method of reinsurance. If the policy is on a “losses occurring” basis, reinsurance premiums ceded are expensed (and any commissions thereon are earned) on a pro-rata basis over the period the reinsurance coverage is provided. If the policy is a “risks attaching” policy, reinsurance premiums ceded are expensed (and any commissions thereon are earned) in line with the earning of the gross premiums to which the risk attaching policy relates. Prepaid reinsurance premiums represent the portion of premiums ceded applicable to the unexpired term of policies in force. Mandatory reinstatement premiums ceded are recorded at the time the loss event occurs. Reinsurance recoverables are based on contracts in force at the time of the underlying loss event. The method for determining the reinsurance recoverable on unpaid losses and loss expenses involves the actuarial estimates of unpaid losses and loss expenses as well as a determination of the Company’s ability to cede unpaid losses and loss expenses under its reinsurance treaties. The use of different assumptions could have a material effect on the provision for uncollectible reinsurance. To the extent the creditworthiness of the Company’s reinsurers was to deteriorate due to adverse events affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.


(e)	Investments

All investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income for the year.

All investment transactions are recorded on a first-in-first-out basis and realized gains and losses on the sale of investments are determined on the basis of amortized cost. Interest on fixed maturity securities is recorded in net investment income when earned and is adjusted for any amortization of premium or accretion of discount.

For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized retrospectively. Prepayment fees or call premiums that are only payable to the Company when a security is called prior to its maturity, are earned when received and reflected in net investment income.

Short-term investments primarily comprise of investments with a remaining maturity of less than one year at time of purchase and money market funds held at the Company’s investment managers. Certain short-term investments relate to funds held in trust in support of collateralized reinsurance transactions.

Restricted cash primarily relates to funds held in trust for support of collateralized reinsurance transactions.

The fair value of other investments is generally recorded on the basis of the net asset valuation criteria established by the managers of the investments, normally based upon the governing documents of such investments. In addition, due to a lag in reporting, some of the fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company’s reporting date. In these circumstances, the Company estimates the fair value of these funds by starting with the prior month’s or prior quarter's fund valuation, adjusting these valuations for capital calls, redemptions or distributions and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return

F-7

Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

for the current period, it uses all credible information available. This includes utilizing preliminary estimates reported by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which the Company has reported results, or other valuation methods, as necessary. Actual final fund valuations may differ, perhaps materially so, from the Company’s estimates and these differences are recorded in the period they become known as a change in estimate.


(f)	Fair value of financial instruments

Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting the highest and best use valuation concepts. The guidance for “Fair Value Measurement and Disclosure” provides a framework for measuring fair value by creating a hierarchy of fair value measurements that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The guidance further expands disclosures about such fair value measurements. The guidance applies broadly to most existing accounting pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.


(g)	Derivative instruments

Fair Value Hedges

The Company uses derivative instruments in the form of foreign currency forward exchange contracts to manage foreign currency risk. A foreign currency forward exchange contract involves an obligation to purchase or sell a specified amount of a specified currency at a future date at a price set at the time of the contract. Foreign currency forward exchange contracts will not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies but rather allow the Company to establish a rate of exchange for a future point in time. The foreign currency forward exchange contracts are recorded as derivatives at fair value as either assets or liabilities, depending on their rights or obligations, with changes in fair value recorded as a net foreign exchange gain or loss in the Company’s Statements of Comprehensive Income.

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in value or cash flow of the hedged item. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The documentation process includes linking derivatives to specific assets or liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Company assesses the effectiveness of its designated hedges on an individual currency basis. If the ratio obtained with this method is within the range of 80% to 125%, the Company considers the hedge effective.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative is de-designated as a hedging instrument; or the derivative expires or is sold, terminated or exercised. To the extent that the Company discontinues hedge accounting, because, based on management’s assessment, the derivative no longer qualifies as an effective hedge, the derivative will continue to be carried in the Consolidated Balance Sheets at its fair value, with changes in its fair value recognized in current period net income through foreign exchange gains (losses).

Cash Flow Hedges

The Company uses derivative instruments in the form of interest rate swaps to manage the interest rate exposure associated with certain assets and liabilities. These derivatives are recorded at fair value. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income (“OCI”) and are reclassified into earnings when the variability of the cash flow of the hedged item impacts earnings. Gains and losses on derivative contracts that are reclassified from OCI to current period earnings are included in the line item in the Consolidated Statements of Comprehensive Income in which the cash flows of the hedged item are recorded. Any hedge ineffectiveness is recorded immediately in current period earnings.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in value or cash flow of the hedged item. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The documentation process includes linking derivatives to specific assets or liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis (when required), whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Company assesses the effectiveness of its designated hedges on an individual contract basis. The Company currently applies the long haul method when assessing the hedge's effectiveness.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative is de-designated as a hedging instrument; or the derivative expires or is sold, terminated or exercised. When hedge accounting is discontinued because the Company becomes aware that it is not probable that the forecasted transaction will occur, the derivative continues to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in earnings.


(h)	Cash and cash equivalents

The Company considers time deposits and money market funds with an original maturity of one month or less as equivalent to cash.


(i)	Foreign exchange

The U.S. dollar is the functional currency of the Company and the majority of its subsidiaries. For these companies, monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date and revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date with the resulting foreign exchange gains and losses included in earnings. Non-monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rate in effect at the time of the underlying transaction.

Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated at prevailing year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The net effect of translation differences between functional and reporting currencies in foreign operations, net of applicable deferred income taxes, is included in accumulated other comprehensive income ("AOCI").


(j)	Stock plans

The Company accounts for its stock plans in accordance with the U.S. GAAP fair value recognition provisions for “Stock Compensation.” Accordingly, the Company recognizes the compensation expense for stock option grants, restricted share grants and performance share awards based on the fair value of the award on the date of grant over the requisite service period.


(k)	Warrants

The Company has accounted for certain warrant contracts issued to our sponsoring investors in conjunction with the capitalization of the Company, and which may be settled by the Company using either the physical settlement or net-share settlement methods, in accordance with U.S. GAAP guidance for “Derivatives and Hedging, Contracts in Entity’s Own Equity.” Accordingly, the fair value of these warrants has been recorded in equity as an addition to additional paid-in capital.


(l)	Earnings per share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Earnings per diluted common share are based on the weighted average number of common shares and share equivalents excluding any anti-dilutive effects of warrants, options and other awards under stock plans.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(m)	Income taxes and uncertain tax provisions

Deferred tax assets and liabilities are recorded in accordance with U.S. GAAP “Income Taxes” guidance. Consistent with this guidance, the Company records deferred income taxes which reflect the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases.

The Company and its Bermuda domiciled subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has operations in subsidiary form in various other jurisdictions around the world, including but not limited to the U.K., U.S., Switzerland, Luxembourg and Canada that are subject to relevant taxes in those jurisdictions.

The Company recognizes the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained upon audit by tax authorities. The Company would recognize accruals for any interest and penalties related to uncertain tax positions in income tax expenses.


(n)	Goodwill and other intangible assets

The Company accounts for goodwill and other intangible assets recognized in business combinations in accordance with ASC Topic 805 “Business Combinations.”

A purchase price paid that is in excess of the fair value of the net assets (“goodwill”) arising from a business combination is recorded as an asset, and is not amortized. Where the total fair value of net assets acquired exceeds consideration paid (“negative goodwill”), the acquirer will record a gain as a result of the bargain purchase, to be recognized through the consolidated statements of comprehensive income at the close of the transaction.

Intangible assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful life are not amortized. Refer to Note 6 "Goodwill and other intangible assets" for further information.

Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Such events or circumstances may include an economic downturn in a geographic market or change in the assessment of future operations. In performing this test, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350 “Intangibles—Goodwill and Other.” Similarly, the Company may first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment described in ASC Topic 350 "Intangibles - Goodwill and Other - General Intangibles Other than Goodwill." The factors assessed in making this determination included the overall insurance industry outlook, business strategy, premium rates, earnings sustainability, market capitalization and the regulatory and political environment.

If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in the Consolidated Statements of Comprehensive Income.


(o)	Investments in affiliates

Investments in which the Company has significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss from such investments in its results for the period.


(p)	Variable interest entities

The Company determines whether it has relationships with entities defined as variable interest entities (“VIEs”) in accordance with ASC Topic 810 "Consolidation." Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities. A VIE is consolidated by the variable interest holder that is determined to be the primary beneficiary.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE, as well as following an event that requires reassessment, the Company determines whether it is the primary beneficiary based on an analysis of the Company's level of involvement in the VIE, the contractual terms, and the overall structure of the VIE. Those VIEs that have all the attributes of an investment company are assessed under ASC Topic 810, excluding the changes that were as a result of the issuance of FASB Statement No. 167 "Amendments to FASB Interpretation No. 46(R)."

The Company accounts for its investments in the AlphaCat Insurance Linked Securities (“ILS”) Funds and the BetaCat ILS Funds as variable interest entities. See Note 9 "Investments in affiliates" for further details.


(q)	Noncontrolling interests

The Company accounts for its noncontrolling interests in accordance with ASC Topic 810 “Consolidation.” Redeemable noncontrolling interests are presented as a mezzanine item, between liabilities and shareholders' equity, in the Company's Consolidated Balance Sheet and the non-redeemable noncontrolling interests are presented within shareholders' equity in the Company's Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity. The net (income) loss attributable to noncontrolling interest is presented separately in the Company's Consolidated Statements of Comprehensive Income. Refer to Note 9 "Investments in affiliates" for further details.

4. Recent accounting pronouncements


(a)	Adoption of New Accounting Standards

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

In March 2013, the FASB issued Accounting Standard Update No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (ASU 2013-05). The objective of this Update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary within a foreign entity. The amendments became effective for the Company on January 1, 2014. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

Financial Services - Investment Companies - Amendments to the Scope, Measurement, and Disclosure Requirements

In June 2013, the FASB issued Accounting Standard Update No. 2013-08, “Financial Services - Investment Companies - Amendments to the Scope, Measurement, and Disclosure Requirements” (ASU 2013-08). The amendments in this Update change the assessment of whether an entity is an investment company by developing a new two-tiered approach for that assessment, which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and determine whether it is an investment company. The amendments became effective for the Company on January 1, 2014. The Company performed an assessment and has concluded that the AlphaCat ILS funds meet the characteristics outlined in this Update and therefore will continue to be treated as investment companies. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued Accounting Standard Update No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (ASU 2013-11). This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward is not available to settle any additional income taxes that would result from the disallowance of a tax position at the

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments became effective for the Company on January 1, 2014. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.


(b)	Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In June 2014, the FASB issued Accounting Standard Update No. 2014-12, “Compensation - Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (ASU 2014-12). The amendments in this Update apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Earlier adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.

In August 2014, the FASB issued Accounting Standard Update 2014-13, “Consolidation (Topic 810) - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” (ASU 2014-13). The fair value of the financial assets of a collateralized financing entity, as determined under GAAP, may differ from the fair value of its financial liabilities even when the financial liabilities have recourse only to the financial assets. The amendments in this Update provide an alternative to Topic 820 for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity to eliminate that difference. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In August 2014, the FASB issued Accounting Standard Update 2014-15, “Presentation of Financial Statements - Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). The amendments in this Update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company has evaluated the impact of this guidance, it will not have a material impact on the Company's Consolidated Financial Statements.

In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” (ASU 2015-02). The amendments in this update modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. The amendment also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The amendment also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

F-12

Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

5. Business combinations


(a)	Western World Insurance Group, Inc. acquisition

On October 2, 2014, Validus Specialty, Inc., wholly owned subsidiary of the Company acquired all of the issued and outstanding capital stock of Western World for an aggregate purchase price of $692,305 in cash. The Western World acquisition was undertaken to enhance the Company's access to the specialty U.S. commercial insurance market. Additional factors that added to the value of Western World included its State Licenses, Brand Name, Distribution Network and Technology. These factors resulted in a market value greater than the value of net tangible and intangible assets which resulted in the recognition of goodwill. This goodwill is reflective of the strategic benefits that a U.S. based insurer can provide to the Company.

For reporting purposes, the results of Western World’s operations have been included in the Consolidated Financial Statements as a separate segment from the acquisition date.

The estimates of fair values for tangible and intangible assets acquired and liabilities assumed were determined by management based on various market and income analyses. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.

The fair value of net assets acquired, including pro forma GAAP adjustments, are summarized as follows:



Total purchase price				$	692,305
Assets acquired
	Cash and cash equivalents	$	48,760
	Investments	1,126,185
	Receivables	37,848
	Other assets	19,418
	Tangible assets acquired			1,232,211
	Intangible asset - State licenses	$	12,325
	Intangible asset - Brand name	5,756
	Intangible asset - Distribution network	4,651
	Intangible asset - Technology	2,323
	Intangible assets acquired			$	25,055
Liabilities acquired
	Net loss reserves and paid losses recoverable	$	523,315
	Unearned premiums, net of expenses	135,686
	Other liabilities	81,464
	Liabilities acquired			740,465
Excess purchase price (goodwill)				$	175,504

For details on the intangible assets acquired, refer to Note 6: "Goodwill and other intangible assets".

The Company also incurred transaction expenses related to the Western World acquisition. Transaction expenses included legal, financial advisory and audit related services.

Supplemental Pro Forma Information

Operating results of Western World have been included in the Consolidated Financial Statements from the October 2, 2014 acquisition date. The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Company and Western World, assuming the transaction had been effected on January 1, 2013.

The unaudited pro forma data is for informational purposes only and does not necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	Year ended		Year ended
	December 31, 2014		December 31, 2013
	(unaudited)		(unaudited)
Net premiums earned	$	2,216,349	$	2,325,407
Net operating income	$	481,179	$	645,696
Net income	$	448,071	$	561,832

The following selected audited information has been provided to present a summary of the results of Western World that have been included in the Consolidated Financial Statements for the year ended December 31, 2014.



	From Acquisition Date to
	December 31, 2014
Net premiums written	$	58,807
Total revenue	78,325
Total expenses	(66,882		)
Net income	$	11,443


(b)	Flagstone Reinsurance Holdings S.A. acquisition

On November 30, 2012, pursuant to a merger agreement, the Company acquired all of the outstanding common shares of Flagstone Reinsurance Holdings, S.A. ("Flagstone") in exchange for 0.1935 Company common shares and $2.00 cash per Flagstone common share (the "Flagstone Acquisition"). The Flagstone Acquisition was undertaken to enhance the Company's leadership position in the property catastrophe reinsurance industry and to create a company with greater size and economies of scale.

For segmental reporting purposes, the results of Flagstone’s operations since the acquisition date have been included within the Validus Re segment in the Consolidated Financial Statements.

The aggregate purchase price paid by the Company was $646,037 for adjusted tangible net assets acquired of $689,742. Reduced investment yields and lower returns on equity have led to many publicly traded reinsurance companies trading at discounts. This was the primary factor responsible for a purchase price less than the fair value of Flagstone's net assets, and the recognition of a bargain purchase gain on acquisition.

The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses and asset appraisals. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.

In addition, at closing, the Company recorded a $2,595 intangible asset for the acquired Flagstone customer relationships. This intangible asset was related to the acquired broker distribution network and was fair valued using a variation of the income approach. Under this approach, the Company estimated the present value of expected future cash flows to an assumed hypothetical market participant resulting from the existing Flagstone customer relationships, considering attrition, and discounting at a weighted average cost of capital. In addition, the Company also recorded a $3,402 intangible asset for the acquired Flagstone brand name.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The composition of the purchase price and the fair value of net assets acquired is summarized as follows:



Total allocable purchase price
	Flagstone shares outstanding at November 30, 2012	73,852,137
	Exchange ratio	0.1935
	Validus common shares issued, gross of taxes withheld	14,290,389
	Validus share price at acquisition	$	34.87
	Total value of Validus shares issued			$	498,306
	Total cash consideration paid at $2.00 per Flagstone share			147,731
	Total allocable purchase price			646,037

Tangible assets acquired
	Cash and cash equivalents	$	159,339
	Investments	1,323,002
	Receivables (a)	171,620
	Other assets	129,245
	Tangible assets acquired			$	1,783,206

Liabilities acquired
	Net loss reserves and paid losses recoverable	$	639,641
	Unearned premiums, net of expenses	104,592
	Debentures payable	250,657
	Other liabilities	98,574
	Liabilities acquired			$	1,093,464

Net tangible assets acquired, at fair value				689,742
Bargain purchase gain before establishment of intangible assets				43,705
	Intangible asset—customer relationships and brand name			5,997
Bargain purchase gain on acquisition of Flagstone				$	49,702


(a)	Premiums receivable of $171,620 were net of an allowance for doubtful accounts of $2,216.

The Company also incurred transaction and termination expenses related to the Flagstone Acquisition. Transaction expenses included legal and financial advisory services. Termination expenses are primarily comprised of severance costs in connection with certain Flagstone employment contracts that have been terminated. Finally, the customer relationships and brand name intangible assets have been fully amortized at the acquisition date as it was not expected to significantly contribute to the Company’s future cash flows beyond December 31, 2012. The gain on bargain purchase, net of expenses has been presented as a separate line item in the Company’s Consolidated Statements of Comprehensive Income, and is composed of the following:



	Year Ended
	December 31, 2012
Bargain purchase gain on acquisition of Flagstone	$	49,702
Transaction expenses	(5,760		)
Termination expenses	(20,244		)
Amortization of intangible asset—customer relationships and brand name	(5,997		)
Gain on bargain purchase, net of expenses	$	17,701

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Supplemental Pro Forma Information

Operating results of Flagstone have been included in the Consolidated Financial Statements from the November 30, 2012 acquisition date. The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Company and Flagstone, assuming the transaction had been effected on January 1, 2011. The unaudited pro forma data is for informational purposes only and does not necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above.



	Year ended			Year ended
	December 31, 2012			December 31, 2011
	(unaudited)			(unaudited)
Revenues
Gross premiums written	$	2,536,535		$	2,914,388
Reinsurance premiums ceded	(397,008		)	(520,506		)
Net premiums written	2,139,527			2,393,882
Change in unearned premiums	86,935			(20,261		)
Net premiums earned	2,226,462			2,373,621
Net investment income	126,140			143,472
Net realized gains on investments	63,601			37,366
Net unrealized gains (losses) on investments	5,654			(47,101		)
(Loss) from investment affiliate	(964		)	—
Other income	29,984			11,152
Foreign exchange gains (losses)	1,363			(26,605		)
Total revenues	2,452,240			2,491,905

Expenses
Losses and loss expenses	1,242,449			1,920,936
Policy acquisition costs	413,579			429,509
General and administrative expenses	323,061			282,183
Share compensation expenses	30,750			35,427
Transaction expenses	—			17,433
Finance expenses	64,306			66,485
Total expenses	2,074,145			2,751,973

Income before taxes and income from operating affiliates	378,095			(260,068		)
Tax (expense)	(3,385		)	(773		)
Income (loss) from operating affiliates	12,868			(922		)
Net income (loss) from continuing operations	$	387,578		$	(261,763	)

Net income (loss) from discontinued operations, net of taxes	19,366			(21,662		)
Net income (loss)	$	406,944		$	(283,425	)

Net loss (income) attributable to noncontrolling interest	14,685			(24,515		)
Net income (loss) available (attributable) to Validus	$	421,629		$	(307,940	)

Basic earnings (loss) per share	$	3.73		$	(3.20	)
Earnings (loss) per diluted share	$	3.62		$	(3.20	)

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following selected audited information has been provided to present a summary of the results of Flagstone that have been included within the Validus Re segment in the Consolidated Financial Statements for the year ended December 31, 2012.



	From Acquisition Date to
	December 31, 2012
Net premiums written	$	11,305
Total revenue	26,778
Total expenses	(17,061		)
Net income	$	9,717

6. Goodwill and other intangible assets

Following the acquisition of Western World on October 2, 2014, the Company recorded intangible assets for State Licenses, Brand Name, Distribution Network and Technology (including certain amortization thereon) and goodwill. Brand Name and Distribution Network were estimated to have finite useful economic lives of 10 years on acquisition and are being amortized on a straight line basis over such period. Technology was estimated to have a finite useful economic life of 5 years on acquisition and is being amortized on a straight line basis over such period. Indefinite-lived intangible assets recognized in conjunction with the acquisition consist of State Licenses that provide a legal right to transact insurance business in those jurisdictions indefinitely.

Following the acquisition of Flagstone on November 30, 2012, the Company recorded intangible assets (including certain amortization thereon) and a gain on bargain purchase, net of expenses. Intangible assets of $5,997 were recognized in the Validus Re segment as a result of the Flagstone Acquisition (relating to customer relationships and brand name). As of December 31, 2012, the customer relationships and brand name intangible assets have been fully amortized as they were not expected to significantly contribute to the Company’s future cash flows beyond December 31, 2012.

Following the acquisition of Talbot Holdings Ltd. on July 2, 2007, the Company recorded intangible assets for Syndicate Capacity, Trademark and Distribution Network (including certain amortization thereon) and goodwill. Syndicate Capacity represents Talbot’s authorized premium income limit to write insurance business in the Lloyd’s market. Talbot has owned 100% of Syndicate 1183’s capacity since 2002 and there are no third party tenure rights. The capacity is renewed annually at no cost to Talbot, but may be freely purchased or sold, subject to Lloyd’s approval. The ability to write insurance business under the syndicate capacity is indefinite with the premium income limit being set yearly by Talbot, subject to Lloyd’s approval. Trademark and Distribution Network were estimated to have finite useful economic lives of 10 years on acquisition and are being amortized on a straight line basis over such periods. Syndicate Capacity and goodwill are estimated to have indefinite useful lives. Goodwill includes amounts related to the value of the workforce.

The following table shows an analysis of goodwill by segment:



	Talbot		Western World		Total
Goodwill at December 31, 2012	$	20,393	$	—	$	20,393
Acquired during the year	—		—		—
Goodwill at December 31, 2013	$	20,393	$	—	$	20,393
Acquired during the year	—		175,504		175,504
Goodwill at December 31, 2014	$	20,393	$	175,504	$	195,897

There was no accumulated impairment loss at any of the dates indicated.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The gross carrying value and accumulated amortization of intangible assets by type at December 31, 2014 and 2013 are as follows:



	As of December 31, 2014					As of December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Finite-lived intangible assets
Trade name and customer relationships	$	18,189	$	(10,971	)	$	12,433	$	(10,183	)
Distribution network	39,831		(26,500		)	35,180		(22,866		)
Technology	2,323		(116		)	—		—
Total	$	60,343	$	(37,587	)	$	47,613	$	(33,049	)

Indefinite-lived intangible assets
Syndicate capacity	$	91,843	n/a			$	91,843	n/a
State licenses	12,325		n/a			—		n/a
Total	$	104,168				$	91,843

Amortization expense was $4,538, $4,162, and $10,159 for the years ended December 31, 2014, 2013 and 2012, respectively.

The estimated remaining amortization expense for the finite-lived intangible assets is as follows:



	Total
2015	$	5,663
2016	5,663
2017	3,579
2018	1,501
2019 and thereafter	6,350
	$	22,756

As described in Note 3(n) "Goodwill and other intangible assets," the Company performed an assessment and it was determined that it was more likely than not that neither goodwill or the indefinite-lived intangible assets were impaired. The factors assessed in making this determination included the overall insurance industry outlook, business strategy, premium rates, earnings sustainability, market capitalization and the regulatory and political environment.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

7. Investments


(a)	Fixed maturity, short-term and other investments

The Company's investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings.

The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2014 were as follows:



	Amortized Cost or Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government and government agency	$	759,232		$	1,755		$	(901	)	$	760,086
Non-U.S. government and government agency	279,493			1,215			(1,980		)	278,728
U.S. states, municipalities and political subdivisions	448,668			1,780			(825		)	449,623
Agency residential mortgage-backed securities	520,685			9,697			(1,151		)	529,231
Non-agency residential mortgage-backed securities	37,954			369			(516		)	37,807
U.S. corporate	1,500,963			3,960			(5,217		)	1,499,706
Non-U.S. corporate	564,386			2,765			(3,989		)	563,162
Bank loans	457,537			200			(8,733		)	449,004
Catastrophe bonds	75,822			768			(926		)	75,664
Asset-backed securities	647,422			1,250			(1,190		)	647,482
Commercial mortgage-backed securities	242,332			598			(692		)	242,238
Total fixed maturities	5,534,494			24,357			(26,120		)	5,532,731
Total short-term investments (a)	1,051,222			13			(161		)	1,051,074
Other investments
Fund of hedge funds	2,570			125			(920		)	1,775
Preferred stock	6,535			—			(201		)	6,334
Hedge funds (b)	570,371			60,792			(134,203		)	496,960
Private equity investments	48,995			4,987			(611		)	53,371
Investment funds	244,506			437			(111		)	244,832
Mutual funds	6,199			3,540			—			9,739
Total other investments	879,176			69,881			(136,046		)	813,011
Total investments including assets held in trust, catastrophe bonds and noncontrolling interest	$	7,464,892		$	94,251		$	(162,327	)	$	7,396,816
Assets held in trust on behalf of operating affiliates (a)	$	(732,782	)	$	—		$	—		$	(732,782	)
Catastrophe bonds	$	(75,822	)	$	(768	)	$	926		$	(75,664	)
Noncontrolling interest (b)	$	(502,830	)	$	(48,446	)	$	120,782		$	(430,494	)
Total investments, excluding assets held in trust, catastrophe bonds and noncontrolling interest	$	6,153,458		$	45,037		$	(40,619	)	$	6,157,876

(a)


(b)	Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2013 were as follows:



	Amortized Cost or Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government and government agency	$	1,368,826		$	2,589		$	(6,736	)	$	1,364,679
Non-U.S. government and government agency	454,578			6,511			(2,021		)	459,068
U.S. states, municipalities and political subdivisions	42,978			459			(317		)	43,120
Agency residential mortgage-backed securities	305,450			8,310			(2,261		)	311,499
Non-agency residential mortgage-backed securities	16,530			143			(914		)	15,759
U.S. corporate	1,328,960			9,208			(5,684		)	1,332,484
Non-U.S. corporate	711,581			5,917			(3,173		)	714,325
Bank loans	712,859			5,659			(1,402		)	717,116
Catastrophe bonds	72,000			2,551			—			74,551
Asset-backed securities	509,091			1,409			(843		)	509,657
Total fixed maturities	5,522,853			42,756			(23,351		)	5,542,258
Total short-term investments (a)	787,670			45			(1		)	787,714
Other investments
Fund of hedge funds	3,141			83			(921		)	2,303
Hedge funds (b)	584,518			71,641			(95,076		)	561,083
Private equity investments	12,333			1,410			(258		)	13,485
Investment funds	117,307			92			—			117,399
Mutual funds	6,199			3,617			—			9,816
Total other investments	723,498			76,843			(96,255		)	704,086
Total investments including assets held in trust, catastrophe bonds and noncontrolling interest	$	7,034,021		$	119,644		$	(119,607	)	$	7,034,058
Assets held in trust on behalf of operating affiliates (a)	$	(651,715	)	$	—		$	—		$	(651,715	)
Catastrophe bonds	$	(53,000	)	$	(2,544	)	$	—		$	(55,544	)
Noncontrolling interest (b)	$	(512,121	)	$	(62,850	)	$	85,569		$	(489,402	)
Total investments, excluding assets held in trust, catastrophe bonds and noncontrolling interest	$	5,817,185		$	54,250		$	(34,038	)	$	5,837,397

(a)

Included in the short-term investments balance are assets held in trust to support AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by two AlphaCat ILS funds which are consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.


(b)	Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

As of June 30, 2014, the Company changed the methodology of assigning investment ratings to its fixed maturities portfolio. In prior periods, investment ratings were the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. As of June 30, 2014, investment ratings are the median of Moody’s, Standard & Poor’s and Fitch, presented in Standard & Poor’s equivalent rating. For investments where only two ratings are available, the lower of the two ratings shall apply, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating. The December 31, 2013 comparative data was restated as a result, to conform to current period presentation.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table sets forth information regarding the investment ratings of the Company’s fixed maturities portfolio as at December 31, 2014 and 2013.



	December 31, 2014				December 31, 2013
	Estimated Fair Value		% of Total		Estimated Fair Value		% of Total
AAA	$	2,494,239	45.1	%	$	2,510,781	45.3	%
AA	848,226		15.4	%	696,998		12.6	%
A	1,086,091		19.6	%	1,233,716		22.3	%
BBB	505,208		9.1	%	323,085		5.8	%
Total investment-grade fixed maturities	4,933,764		89.2	%	4,764,580		86.0	%

BB	362,972		6.6	%	354,992		6.4	%
B	145,240		2.6	%	383,639		6.9	%
CCC	12,733		0.2	%	2,453		—	%
CC	3,926		0.1	%	2,496		0.1	%
C	1,344		—	%	235		—	%
D/NR	72,752		1.3	%	33,863		0.6	%
Total non-investment grade fixed maturities	598,967		10.8	%	777,678		14.0	%
Total fixed maturities	$	5,532,731	100.0	%	$	5,542,258	100.0	%

The amortized cost and estimated fair value amounts for fixed maturity securities held at December 31, 2014 and 2013 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.



	December 31, 2014				December 31, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	312,843	$	313,248	$	688,855	$	692,768
Due after one year through five years	3,163,225		3,159,200		3,603,459		3,613,847
Due after five years through ten years	497,175		491,870		396,389		395,633
Due after ten years	112,858		111,655		3,079		3,095
	4,086,101		4,075,973		4,691,782		4,705,343
Asset-backed and mortgage-backed securities	1,448,393		1,456,758		831,071		836,915
Total fixed maturities	$	5,534,494	$	5,532,731	$	5,522,853	$	5,542,258


(b)	Net investment income

Net investment income was derived from the following sources:



	Year Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Fixed maturities and short-term investments	$	97,248		$	99,216		$	105,937
Other investments	5,111			—			2,790
Restricted cash and cash and cash equivalents	5,178			4,713			7,259
Securities lending income	11			6			14
Total gross investment income	107,548			103,935			116,000
Investment expenses	(7,472		)	(7,863		)	(8,064		)
Total net investment income	$	100,076		$	96,072		$	107,936

Net investment income from other investments includes distributed and undistributed net income from certain investment funds.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(c)	Net realized gains (losses) and change in net unrealized (losses) gains on investments

The following represents an analysis of net realized gains (losses) and the change in net unrealized (losses) gains on investments:



	Year Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Fixed maturities, short-term and other investments
Gross realized gains (a)	$	31,316		$	31,402		$	38,905
Gross realized (losses)	(8,221		)	(28,144		)	(20,672		)
Net realized gains on investments	23,095			3,258			18,233
Change in net unrealized (losses) gains on investments (a)	(57,973		)	(58,481		)	17,585
Total net realized and change in net unrealized (losses) gains on investments including assets held in trust, catastrophe bonds and noncontrolling interest	(34,878		)	(55,223		)	35,818
Assets held in trust on behalf of operating affiliates	—			88			(88		)
Catastrophe bonds	2,702			(2,258		)	416
Noncontrolling interest (a)	42,258			1,836			17,263
Total net realized and change in net unrealized (losses) gains on investments excluding assets held in trust, catastrophe bonds and noncontrolling interest	$	10,082		$	(55,557	)	$	53,409


(a)	Includes change in net unrealized gains (losses) and realized gains on investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and is included in the Consolidated Statements of Comprehensive Income as net loss (income) attributable to noncontrolling interest.


(d)	Pledged investments

The following tables outline investments pledged as collateral under the Company's credit and other facilities. For further details of the facilities, please refer to Note 19: “Debt and financing arrangements”:



	December 31, 2014
Description	Commitment		Issued and Outstanding		Investments pledged as collateral
$400,000 syndicated unsecured letter of credit facility	$	400,000	$	—	$	—
$525,000 syndicated secured letter of credit facility	525,000		276,455		395,750
$200,000 secured bi-lateral letter of credit facility	200,000		15,649		35,645
Talbot FAL facility	25,000		25,000		31,048
PaCRe senior secured letter of credit facility	10,000		294		—
AlphaCat Re secured letter of credit facility	30,000		30,000		30,078
IPC bi-lateral facility	40,000		15,897		99,437
$375,000 Flagstone bi-lateral facility	375,000		198,389		430,782
	$	1,605,000	$	561,684	$	1,022,740

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2013
Description	Commitment		Issued and Outstanding		Investments pledged as collateral
$400,000 syndicated unsecured letter of credit facility	$	400,000	$	—	$	—
$525,000 syndicated secured letter of credit facility	525,000		358,567		507,620
$200,000 secured bi-lateral letter of credit facility	200,000		16,726		130,256
Talbot FAL facility	25,000		25,000		30,801
PaCRe senior secured letter of credit facility	10,000		294		—
AlphaCat Re secured letter of credit facility	24,800		24,800		24,806
IPC bi-lateral facility	40,000		20,177		98,465
$375,000 Flagstone bi-lateral facility	375,000		305,686		454,458
	$	1,599,800	$	751,250	$	1,246,406

In addition, $3,285,692 of cash and cash equivalents, restricted cash, short-term investments and fixed maturities were pledged during the normal course of business as at December 31, 2014 (2013: $2,991,322). Of those, $3,233,872 were held in trust (2013: $2,982,152). Pledged assets are generally for the benefit of the Company's cedants and policyholders, to support AlphaCat's fully collateralized reinsurance transactions and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators.


(e)	Securities lending

The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party.

8. Fair value measurements


(a)	Classification within the fair value hierarchy

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The three levels of the fair value hierarchy are described below:

Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.

There have been no material changes in the Company's valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

At December 31, 2014, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:



	Level 1			Level 2			Level 3			Total
U.S. government and government agency	$	—		$	760,086		$	—		$	760,086
Non-U.S. government and government agency	—			278,728			—			278,728
U.S. states, municipalities and political subdivisions	—			449,623			—			449,623
Agency residential mortgage-backed securities	—			529,231			—			529,231
Non-agency residential mortgage-backed securities	—			37,807			—			37,807
U.S. corporate	—			1,499,706			—			1,499,706
Non-U.S. corporate	—			563,162			—			563,162
Bank loans	—			416,256			32,748			449,004
Catastrophe bonds	—			70,664			5,000			75,664
Asset-backed securities	—			647,482			—			647,482
Commercial mortgage-backed securities	—			242,238			—			242,238
Total fixed maturities	—			5,494,983			37,748			5,532,731
Total short-term investments (a)	942,716			108,358			—			1,051,074
Other investments
Fund of hedge funds	—			—			1,775			1,775
Preferred stock	—			6,334			—			6,334
Hedge funds (b)	—			—			496,960			496,960
Private equity investments	—			—			53,371			53,371
Investment funds	—			140,045			104,787			244,832
Mutual funds	—			9,739			—			9,739
Total other investments	—			156,118			656,893			813,011
Total investments including assets held in trust, catastrophe bonds and noncontrolling interest	$	942,716		$	5,759,459		$	694,641		$	7,396,816
Assets held in trust on behalf of operating affiliates (a)	$	(732,782	)	$	—		$	—		$	(732,782	)
Catastrophe bonds	$	—		$	(70,664	)	$	(5,000	)	$	(75,664	)
Noncontrolling interest (b)	$	—		$	—		$	(430,494	)	$	(430,494	)
Total investments, excluding assets held in trust, catastrophe bonds and noncontrolling interest	$	209,934		$	5,688,795		$	259,147		$	6,157,876

(a)


(b)	Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

At December 31, 2013, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:



	Level 1			Level 2			Level 3			Total
U.S. government and government agency	$	—		$	1,364,679		$	—		$	1,364,679
Non-U.S. government and government agency	—			459,068			—			459,068
U.S. states, municipalities and political subdivisions	—			43,120			—			43,120
Agency residential mortgage-backed securities	—			311,499			—			311,499
Non-agency residential mortgage-backed securities	—			15,759			—			15,759
U.S. corporate	—			1,332,484			—			1,332,484
Non-U.S. corporate	—			714,325			—			714,325
Bank loans	—			717,116			—			717,116
Catastrophe bonds	—			74,551			—			74,551
Asset-backed securities	—			509,657			—			509,657
Total fixed maturities	—			5,542,258			—			5,542,258
Total short-term investments (a)	783,151			4,563			—			787,714
Other investments
Fund of hedge funds	—			—			2,303			2,303
Hedge funds (b)	—			—			561,083			561,083
Private equity investments	—			—			13,485			13,485
Investment fund	—			117,399			—			117,399
Mutual funds	—			9,816			—			9,816
Total other investments	—			127,215			576,871			704,086
Total investments including assets held in trust, catastrophe bonds and noncontrolling interest	$	783,151		$	5,674,036		$	576,871		$	7,034,058
Assets held in trust on behalf of operating affiliates (a)	$	(651,715	)	$	—		$	—		$	(651,715	)
Catastrophe bonds	$	—		$	(55,544	)	$	—		$	(55,544	)
Noncontrolling interest (b)	$	—		$	—		$	(489,402	)	$	(489,402	)
Total investments, excluding assets held in trust, catastrophe bonds and noncontrolling interest	$	131,436		$	5,618,492		$	87,469		$	5,837,397

(a)

Included in the short-term investments balance are assets held in trust to support AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by two AlphaCat ILS funds which are consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.


(b)	Included in the Hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

At December 31, 2014, Level 3 investments excluding assets held in trust on behalf of operating affiliates, catastrophe bonds and noncontrolling interests totaled $259,147 (December 31, 2013: $87,469), representing 4.2% (December 31, 2013: 1.5%) of total investments, excluding assets held in trust on behalf of operating affiliates, catastrophe bonds and noncontrolling interests, measured at fair value on a recurring basis.


(b)	Level 1 assets measured at fair value

Short term investments

Short term investments categorized as Level 1 consist primarily of highly liquid securities, all with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value. The Company has determined that certain of its short-term investments, held in highly liquid money market-type funds, should be included in Level 1 as their fair values are based on quoted market prices in active markets.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(c)	Level 2 assets measured at fair value

Fixed maturity investments

Fixed maturity investments included in Level 2 include U.S. government and government agency, non-U.S. government and government agency, U.S. states, municipalities and political subdivisions, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, U.S. corporate, non-U.S. corporate, bank loans, catastrophe bonds, asset-backed securities and commercial mortgage-backed securities.

In general, valuation of the Company's fixed maturity investment portfolios is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.

In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.

The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company's fixed maturity investments are detailed below by asset class.

U.S. government and government agency

U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.

Non-U.S. government and government agency

Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

U.S. states, municipalities and political subdivisions

The Company's U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.

Agency residential mortgage-backed securities

The Company's agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Non-agency residential mortgage-backed securities

The Company's non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.

U.S. corporate

Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company's corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.

Non-U.S. corporate

Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company's non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.

Bank loans

The Company's bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company's bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.

Catastrophe bonds

Catastrophe bonds are based on broker or underwriter bid indications. To the extent that these indications are based on significant unobservable inputs, the relevant bonds will be classified as a Level 3 asset.

Asset-backed securities

Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Commercial mortgage-backed securities

Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

Short term investments

Short term investments consist primarily of highly liquid securities, all with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments is generally determined using amortized cost which approximates fair value. The Company has determined that, other than highly liquid money market-type funds, the remaining securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.

Preferred stock

The Company's preferred stock portfolio contains preferred term securities typically sold by non public financial services companies, through a collateralized debt obligation product and are classified as Level 2 assets. The fair value of these investments is determined based on quoted market prices in active markets.

Investment funds

Investment funds classified as Level 2 assets includes one pooled investment which is invested in fixed income securities with high credit ratings. The investment fund is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the net asset value of the fund as reported by Lloyd’s Treasury & Investment Management.

Also included within investment funds is the Company's share of a portfolio of Lloyd's overseas deposits, which is also classified as a Level 2 asset. The underlying deposits are managed centrally by Lloyd's and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd's.

Mutual funds

Mutual funds consist of two investment funds which are invested in various quoted investments. The fair value of units in the mutual funds is based on the net asset value of the fund as reported by the fund manager.


(d)	Level 3 assets measured at fair value

Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. The Company's hedge funds, a fund of hedge funds, private equity investments, certain bank loans, an investment fund and certain catastrophe bonds are the only financial instruments in this category as at December 31, 2014. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).

Within the hedge fund industry, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager and regular evaluation of fund performance against applicable benchmarks.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Bank loans

Included in the bank loans portfolio is a collection of loan participations held through an intermediary. These investments are classified as Level 3 assets. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary.

Fund of hedge funds

The fund of hedge funds includes a side pocket. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund's administrator provides a monthly reported NAV with a one month delay in its valuation which was used as a basis for fair value measurement in the Company's December 31, 2014 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at December 31, 2014 based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compares the one month delayed fund administrator's NAV to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.

Hedge funds

The hedge funds were valued at $496,960 at December 31, 2014 (2013: $561,083). The hedge funds consist of investments in five Paulson & Co. managed funds (the "Paulson hedge funds") and one hedge fund assumed in the acquisition of Flagstone Reinsurance Holdings, S.A. (the "Flagstone Acquisition") (the "Flagstone hedge fund").

The Paulson hedge funds' administrator provides monthly reported NAVs with a one month delay in its valuation which was used as a partial basis for fair value measurement in the Company's December 31, 2014 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV as at December 31, 2014 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. Historically, the Company's valuation estimates have not materially differed from the subsequent NAVs.

The Flagstone hedge fund's administrator provides quarterly NAVs with a three-month delay in valuation which was used as a basis for fair value measurement in the Company's December 31, 2014 Consolidated Balance Sheet.

As these valuation techniques incorporate both observable and significant unobservable inputs, both the Paulson hedge funds and the Flagstone hedge fund are classified as Level 3 assets. The Paulson hedge funds are subject to quarterly liquidity.

Private equity investments

The private equity funds provide quarterly or semi-annual partnership capital statements with a three month or a six month delay which are used as a basis for valuation in the Company's December 31, 2014 Consolidated Balance Sheet. These private equity investments vary in investment strategies and are not actively traded in any open markets. As this valuation technique can incorporate significant unobservable inputs, the private equity investments are classified as Level 3 assets.

Investment funds

Investment funds classified as Level 3 assets consists of one structured securities fund that invests across asset backed securities, residential mortgage backed securities and commercial mortgage backed securities. The fair value of units in the investment fund is based on the NAV of the fund as reported by the independent fund administrator. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation which was used as a basis for fair value measurement in the Company's December 31, 2014 Consolidated Balance Sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the investment fund investment is classified as a Level 3 asset.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2014 and 2013:



	Total Fair Market Value
	Year Ended December 31, 2014			Year Ended December 31, 2013
Level 3 investments—Beginning of year	$	576,871		$	556,234
Additions to level 3 investments due to Western World acquisition	23,620			—
Purchases	175,129			99,037
Sales	(52,351		)	(82,000		)
Issuances	—			—
Settlements	(1,500		)	—
Realized gains	8,216			6,132
Unrealized losses	(42,047		)	(2,532		)
Transfers into Level 3 during the year	6,703			—
Level 3 investments—End of year	$	694,641		$	576,871
Catastrophe bonds	(5,000		)	—
Noncontrolling interest (a)	(430,494		)	(489,402		)
Level 3 investments excluding noncontrolling interest	$	259,147		$	87,469


(a)	Includes Level 3 investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

During the year ended December 31, 2014 there was a transfer of investments from Level 2 into Level 3 of the fair value hierarchy. This transfer was due to a reassessment of the extent of unobservable inputs used in establishing the fair value of certain catastrophe bonds. There were no transfers into or out of Level 3 during the year ended December 31, 2013.


(e)	Financial Instruments Not Carried at Fair Value

U.S. GAAP guidance in relation to the fair value of financial instruments is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of cash and cash equivalents (including restricted amounts), accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at December 31, 2014, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

9. Investments in affiliates

The following table presents the Company's investments in affiliates as at December 31, 2014 and 2013:



	December 31, 2014		December 31, 2013
Investment affiliate	$	63,506	$	34,500
Operating affiliates	197,977		106,743
Investments in affiliates	$	261,483	$	141,243


(a)	Investment affiliate

Aquiline Financial Services Fund II L.P.

On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is governed by the terms of the Aquiline II Limited Partnership Agreement.

The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.

Aquiline Financial Services Fund III L.P.

On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company is committing and agreeing to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of November 7, 2014 (the “Aquiline III Limited Partnership Agreement”).

The following table presents a reconciliation of the beginning and ending investments in the Company’s investment affiliate balances for the years ended December 31, 2014 and 2013:



	Year Ended December 31, 2014		Year Ended December 31, 2013
Investment in affiliate, beginning of year	$	34,500	$	15,218
Addition due to Western World acquisition	8,127		—
Capital contributions	12,468		14,492
Income from investment affiliate	8,411		4,790
Investment in affiliate, end of year	$	63,506	$	34,500

F-31

Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table presents the Company’s investment in the Partnership as at December 31, 2014:



	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline Financial Services Fund II L.P.	$	51,001	—	%	8.1	%	$	63,506

The following table presents the Company’s investment in the Partnership as at December 31, 2013:



	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline Financial Services Fund II L.P.	$	32,110	—	%	6.7	%	$	34,500


(b)	Operating affiliates

AlphaCat Re 2011 Ltd.

On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011 Ltd. ("AlphaCat Re 2011"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. AlphaCat Re 2011 was a market facing entity and the Company's investment in AlphaCat Re 2011 has been treated as an equity method investment.

AlphaCat Re 2011 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2011.The Company's portion of the returns made during the years ended December 31, 2014 and 2013 are included in the tables below.

AlphaCat Re 2012 Ltd.

On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012 Ltd. ("AlphaCat Re 2012"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. AlphaCat Re 2012 was a market facing entity and the Company's investment in AlphaCat Re 2012 has been treated as an equity method investment.

AlphaCat Re 2012 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2012.The Company's portion of the returns made during the years ended December 31, 2014 and 2013 are included in the tables below.

AlphaCat 2013, Ltd.

On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, Ltd. ("AlphaCat 2013"), an entity formed for the purpose of investing in collateralized reinsurance and retrocession on a worldwide basis. AlphaCat 2013 deployed its capital through transactions entered into by AlphaCat Reinsurance Ltd. ("AlphaCat Re") and the Company's investment in AlphaCat 2013 has been treated as an equity method investment.

AlphaCat 2013 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2013. The Company's portion of the returns made during the years ended December 31, 2014 and 2013 are included in the tables below.

AlphaCat 2014, Ltd.

On December 20, 2013, the Company joined with other investors in capitalizing AlphaCat 2014, Ltd. ("AlphaCat 2014"), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2014 renewal season. AlphaCat 2014 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2014 has been treated as an equity method investment.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

AlphaCat 2015, Ltd.

On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, Ltd. ("AlphaCat 2015"), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2015 renewal season. AlphaCat 2015 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2015 has been treated as an equity method investment.

AlphaCat ILS funds

The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and insurance linked securities ("ILS") contracts. AlphaCat ILS funds primarily deploy their capital through the AlphaCat Master Fund Ltd. (the "AlphaCat Master Fund") and AlphaCat Re. All of the funds are variable interest entities, with one being consolidated by the Company as the primary beneficiary and the remaining funds being accounted for as equity method investments because the Company holds an equity interest of less than 50% and has significant influence. One of these funds had been consolidated by the Company as the primary beneficiary from its formation through to December 31, 2013. However, on January 1, 2014 the fund received $35,000 in additional third party subscriptions, resulting in a reduction of the Company’s equity interest below 50%. Since the Company retained significant influence, this fund was deconsolidated and accounted for as an equity method investment from January 1, 2014. The fair value of the retained interest, based on the fair value of the underlying instruments in AlphaCat Master Fund and AlphaCat Re, amounted to $113,455 as at January 1, 2014. The deconsolidation resulted in a gain of $1,372 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the year ended December 31, 2014. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.

AlphaCat Master Fund Ltd. and AlphaCat Reinsurance Ltd.

The Company utilizes AlphaCat Master Fund and AlphaCat Re for the purpose of investing in capital market products and writing collateralized reinsurance, respectively, on behalf of certain entities within the AlphaCat operating segment. AlphaCat Master Fund and AlphaCat Re are market facing entities which enter into transactions on behalf of AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds. The Company owns all of the voting equity interest in AlphaCat Master Fund and AlphaCat Re and, as a result, their financial statements are included in the Consolidated Financial Statements of the Company.

BetaCat ILS funds

The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk issued under Rule 144A of the Securities Act of 1933, following a passive buy-and-hold investment strategy. One of the funds is a variable interest entity and is consolidated by the Company as the primary beneficiary. The remaining fund is consolidated by the Company as it owns all of the voting equity interest. The Company's maximum exposure to either of the funds is the amount of capital invested at any given time. As at December 31, 2014, no third party subscriptions had been received.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following tables present a reconciliation of the beginning and ending investment in operating affiliates for the years ended December 31, 2014 and 2013:



	Year Ended December 31, 2014
	AlphaCat Re 2011			AlphaCat Re 2012			AlphaCat 2013			AlphaCat 2014		AlphaCat 2015		AlphaCat ILS funds			Total
As at December 31, 2013	$	9,809		$	1,313		$	51,744		$	21,982	$	—	$	21,895		$	106,743
Purchase of shares	—			—			—			—		25,600		12,000			37,600
Gain on redemption of shares	—			—			—			—		—		(5,077		)	(5,077		)
Return of investment	(5,825		)	(1,516		)	(52,762		)	—		—		(12,364		)	(72,467		)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund	—			—			—			—		—		113,455			113,455
Income from operating affiliates	622			938			2,086			6,103		—		7,974			17,723
As at December 31, 2014	$	4,606		$	735		$	1,068		$	28,085	$	25,600	$	137,883		$	197,977



	Year Ended December 31, 2013
	AlphaCat Re 2011			AlphaCat Re 2012			AlphaCat 2013		AlphaCat 2014			AlphaCat ILS fund		Total
As at December 31, 2012	$	62,792		$	29,319		$	45,000	$	—		$	20,000	$	157,111
Purchase of shares	—			—			—		22,000			—		22,000
Return of investment	(54,914		)	(31,743		)	—		—			—		(86,657		)
Income (loss) from operating affiliates	1,931			3,737			6,744		(18		)	1,895		14,289
As at December 31, 2013	$	9,809		$	1,313		$	51,744	$	21,982		$	21,895	$	106,743

The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at December 31, 2014:



	Investment in operating affiliates
	Cost		Voting ownership %		Equity ownership %		Carrying value
AlphaCat Re 2011	$	4,606	43.7	%	22.3	%	$	4,606
AlphaCat Re 2012	735		49.0	%	37.9	%	735
AlphaCat 2013	1,068		40.9	%	19.7	%	1,068
AlphaCat 2014	22,000		42.3	%	19.6	%	28,085
AlphaCat 2015	25,600		40.0	%	20.0	%	25,600
AlphaCat ILS funds	133,091		n/a		(a)		137,883
Total	$	187,100					$	197,977


(a)	Equity ownership in the funds was 7.9%, 39.7% and 9.1%, respectively as at December 31, 2014.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014 and the AlphaCat ILS fund in the Consolidated Financial Statements as at December 31, 2013:



	Investment in operating affiliates
	Investment at cost		Voting ownership %		Equity ownership %		Share of net asset value
AlphaCat Re 2011	$	9,882	43.7	%	22.3	%	$	9,809
AlphaCat Re 2012	654		49.0	%	37.9	%	1,313
AlphaCat 2013	45,000		40.9	%	19.7	%	51,744
AlphaCat 2014	22,000		42.3	%	19.6	%	21,982
AlphaCat ILS fund	20,000		n/a		9.1	%	21,895
Total	$	97,536					$	106,743

The following table presents certain summarized financial information of the AlphaCat entities as at December 31, 2014 and for the year then ended:



	Combined investees summarized financial data
	Total assets		Total liabilities		Total revenue		Net income
AlphaCat Re 2011	$	20,469	$	7,931	$	3	$	2,794
AlphaCat Re 2012	$	3,098	$	1,136	$	—	$	2,477
AlphaCat 2013	$	5,490	$	65	$	14,221	$	10,595
AlphaCat 2014	$	193,702	$	4,102	$	45,333	$	31,070
AlphaCat 2015	$	142,843	$	—	$	—	$	—
AlphaCat ILS funds (a)	$	1,026,222	$	175,376	$	65,320	$	54,421
BetaCat ILS funds	22,010		61		32		(51		)


(a)	AlphaCat ILS funds information includes all funds, including those where the Company is not the primary beneficiary.


(c)	Notes payable and (income) attributable to operating affiliates

Notes are issued during the course of a year by AlphaCat Master Fund and AlphaCat Re to AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds (collectively the "feeder funds") in order to fund the purchase of capital market products and to write collateralized reinsurance on their behalf. The underlying capital market products and collateralized reinsurance typically have at least a twelve month duration; however, they do not have a stated maturity date. Since repayment is dependent on the settlement of the underlying transactions, the notes are subsequently redeemed as the underlying transactions are settled. The Company’s investments in the feeder funds, together with investments made by third parties, are provided as consideration for these notes to AlphaCat Master Fund and AlphaCat Re, which are consolidated in the Company’s Consolidated Financial Statements. The effective economic interest in AlphaCat Master Fund and AlphaCat Re that results from these transactions is represented on the Consolidated Balance Sheet as notes payable to operating affiliates. The subsequent income or loss generated by the relevant capital market products or collateralized reinsurance is transferred to the operating affiliates as (income) loss attributable to operating affiliate investors in the Company’s Consolidated Statements of Comprehensive Income. The notes do not have any principal amount, since the final amount payable is dependent on the income or loss. To the extent that the (income) loss attributable to operating affiliate investors has not been returned to investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following tables present a reconciliation of the beginning and ending notes payable to operating affiliates for the year ended December 31, 2014 and 2013:



	Year Ended December 31, 2014
	AlphaCat 2013			AlphaCat 2014			AlphaCat ILS funds			Total
As at December 31, 2013	$	223,809		$	—		$	215,463		$	439,272
Notes payable to operating affiliates recognized on deconsolidation of AlphaCat ILS fund	—			—			178,837			178,837
Issuance of notes payable to operating affiliates	—			157,914			522,113			680,027
Redemption of notes payable to operating affiliates	(223,512		)	—			(393,556		)	(617,068		)
Foreign exchange gains	(297		)	(530		)	(8,776		)	(9,603		)
As at December 31, 2014	$	—		$	157,384		$	514,081		$	671,465



	Year Ended December 31, 2013
	AlphaCat 2013		AlphaCat ILS funds			Total
As at December 31, 2012	$	—	$	—		$	—
Issuance of notes payable to operating affiliates	223,082		218,044			441,126
Redemption of notes payable to operating affiliates	—		(3,553		)	(3,553		)
Foreign exchange losses	727		972			1,699
As at December 31, 2013	$	223,809	$	215,463		$	439,272

The portion of notes payable to operating affiliates that were due to the Company, as an investor in the affiliates, and third party investors as at December 31, 2014 amounted to $148,264 and $523,201, respectively (December 31, 2013: $63,654 and $375,618).

The following table presents the (income) attributable to operating affiliate investors for the year ended December 31, 2014, 2013 and 2012:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
AlphaCat 2013	$	(14,577	)	$	(47,329	)	$	—
AlphaCat 2014	(46,100		)	—			—
AlphaCat ILS funds	(48,722		)	(21,434		)	—
(Income) attributable to operating affiliate investors	$	(109,399	)	$	(68,763	)	$	—

The portion of income attributable to operating affiliate investors that was due to the Company, as an investor in the affiliates, and third party investors for the year ended December 31, 2014 amounted to $21,756 and $87,643, respectively (2013: $11,437 and $57,326).

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

10. Noncontrolling interest

On April 2, 2012, the Company joined with other investors in capitalizing PaCRe Ltd. ("PaCRe"), a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. The Company has an equity interest of 10% and the remaining 90% interest is held by third party investors. The Company has a majority voting equity interest in PaCRe and as a result, the financial statements of PaCRe are included in the Consolidated Financial Statements of the Company. The portion of PaCRe’s earnings attributable to third party investors is recorded in the Consolidated Statements of Comprehensive Income as net (income) loss attributable to noncontrolling interest. PaCRe's shareholder rights do not include redemption features within the control of the third party shareholders. The third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interest.

The portion of earnings from the one consolidated AlphaCat ILS fund attributable to third party investors is recorded in the Consolidated Statements of Comprehensive Income as net (income) loss attributable to noncontrolling interest. The AlphaCat ILS funds have rights that enable shareholders, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interest. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability.

The following table presents a reconciliation of the beginning and ending balances of redeemable noncontrolling interest and noncontrolling interest for the years ended December 31, 2014 and 2013:



	Year Ended December 31, 2014
	Redeemable noncontrolling interest			Noncontrolling interest			Total
As at December 31, 2013	$	86,512		$	497,657		$	584,169
Issuance of shares	68,200			—			68,200
Income (loss) attributable to noncontrolling interest	3,598			(39,062		)	(35,464		)
Adjustment to noncontrolling interest as a result of deconsolidation	(78,354		)	—			(78,354		)
As at December 31, 2014	$	79,956		$	458,595		$	538,551



	Year Ended December 31, 2013
	Redeemable noncontrolling interest			Noncontrolling interest		Total
As at December 31, 2012	$	—		$	434,280	$	434,280
Issuance of shares	92,190			58,500		150,690
Income attributable to noncontrolling interest	4,818			4,877		9,695
Redemption of shares	(10,496		)	—		(10,496		)
As at December 31, 2013	$	86,512		$	497,657	$	584,169

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

11. Derivative instruments

The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures and interest rate exposures. As at December 31, 2014, the Company held foreign currency forward contracts to mitigate the risk of fluctuations in the U.S. dollar against a number of foreign currencies. As at December 31, 2014, the Company held two interest rate swaps to fix the payment of interest on the Company's 2006 and 2007 Junior Subordinated Deferrable Debentures, as well as three interest rate swaps and one cross-currency interest rate swap to fix the payment of interest and mitigate the foreign exchange rate impact on Flagstone's 2006 and 2007 Junior Subordinated Deferrable Debentures.

As at December 31, 2014, the Company held one foreign currency forward contract to mitigate the risk of fluctuations in the U.S. dollar against the Euro that was not designated as a hedging instrument.

The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments on the Consolidated Balance Sheets at December 31, 2014 and December 31, 2013:



	As at December 31, 2014						As at December 31, 2013
Derivatives not designated as hedging instruments:	Net Notional Exposure		Asset Derivative at Fair Value (a)		Liability Derivative at Fair Value (a)		Net Notional Exposure		Asset Derivative at Fair Value (a)		Liability Derivative at Fair Value (a)
Foreign currency forward contracts	$	26,755	$	1,685	$	—	$	—	$	—	$	—

(a)

Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses respectively on the Consolidated Balance Sheets. The total impact on earnings during the year ended December 31, 2014, recognized in income within other insurance related income and other income, relating to the foreign currency forward contract that was not designated as a hedging instrument was $1,685.

The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments on the Consolidated Balance Sheets at December 31, 2014 and December 31, 2013:



	As at December 31, 2014						As at December 31, 2013
Derivatives designated as hedging instruments:	Net Notional Exposure		Asset Derivative at Fair Value (a)		Liability Derivative at Fair Value (a)		Net Notional Exposure		Asset Derivative at Fair Value (a)		Liability Derivative at Fair Value (a)
Foreign currency forward contracts	$	189,026	$	401	$	3,136	$	163,576	$	1,167	$	2,313
Interest rate swap contracts	$	552,263	$	25	$	1,169	$	552,263	$	—	$	911


(a)	Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses respectively on the Consolidated Balance Sheets.


(a)	Classification within the fair value hierarchy

As described in Note 4: "Fair value measurements" under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The assumptions used within the valuation of the Company's derivative instruments are observable in the marketplace, can be derived from observable data or are supported by observable levels at which other similar transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.


(b)	Derivative instruments designated as a fair value hedge

The Company designates its foreign currency derivative instruments as fair value hedges and formally and contemporaneously documents all relationships between the derivative instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table provides the total impact on earnings, recognized in income within foreign exchange (losses) gains, relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the years ended December 31, 2014, 2013 and 2012:



	Year Ended
Foreign currency forward contracts	December 31, 2014			December 31, 2013			December 31, 2012
Amount of (loss) gain recognized in income on derivative	$	(11,789	)	$	1,947		$	1,017
Amount of gain (loss) on hedged item recognized in income attributable to risk being hedged	$	11,789		$	(1,947	)	$	(912	)
Amount of gain recognized in income on derivative (ineffective portion)	$	—		$	—		$	105


(c)	Derivative instruments designated as a cash flow hedge

The Company designates its interest rate derivative instruments as cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items. The Company currently applies the long haul method when assessing the hedge's effectiveness.

The following table provides the total impact on other comprehensive income (loss) and earnings relating to the derivative instruments formally designated as cash flow hedges along with the impact of the related hedged items for the years ended December 31, 2014, 2013 and 2012:



	Year Ended
Interest rate swap contracts	December 31, 2014			December 31, 2013			December 31, 2012
Amount of effective portion recognized in other comprehensive income	$	13,302		$	11,107		$	1,588
Amount of effective portion subsequently reclassified to earnings	$	(13,074	)	$	(11,107	)	$	(1,588	)
Amount of ineffective portion excluded from effectiveness testing	$	228		$	—		$	—

The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Comprehensive Income.


(d)	Balance sheet offsetting

There was no balance sheet offsetting activity as at December 31, 2014 or December 31, 2013.

The Company currently provides cash collateral as security for interest rate swap contracts. The Company does not provide cash collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.

The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

12. Premiums receivable

Premiums receivable are composed of premiums in the course of collection, net of commissions and brokerage, and premiums accrued but unbilled, net of commissions and brokerage. It is common practice in the insurance and reinsurance industry for premiums to be paid on an installment basis, therefore significant amounts will be considered unbilled and will not become due until a future date, which is typically no later than expiration of the underlying coverage period. The following is a breakdown of the components of premiums receivable at December 31, 2014 and 2013:



	Premiums in course of collection			Premiums accrued but unbilled			Total
Balance as at December 31, 2013	$	73,702		$	623,531		$	697,233
Change during 2014	11,347			(933		)	10,414
Balance as at December 31, 2014	$	85,049		$	622,598		$	707,647

Balance as at December 31, 2012	$	214,891		$	587,268		$	802,159
Change during 2013	(141,189		)	36,263			(104,926		)
Balance as at December 31, 2013	$	73,702		$	623,531		$	697,233

13. Reserve for losses and loss expenses

Reserves for losses and loss expenses are based in part upon the estimation of case reserves from broker, insured and ceding company reported data. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses, from which incurred but not reported losses can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to the settlement of the Company's liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed and adjusted regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed this estimate.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the years ended December 31, 2014, 2013 and 2012:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Reserve for losses and loss expenses, beginning of year	$	3,030,399		$	3,517,573		$	2,631,143
Losses and loss expenses recoverable	(370,154		)	(439,967		)	(372,485		)
Net reserves for losses and loss expenses, beginning of year	2,660,245			3,077,606			2,258,658
Net reserves acquired (disposed)	525,091			(36,519		)	639,641
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year	1,024,256			999,380			1,174,415
Prior years (a)	(252,207		)	(205,448		)	(174,969		)
Total incurred losses and loss expenses (a)	772,049			793,932			999,446
Less net losses and loss expenses paid in respect of losses occurring in:
Current year	(245,084		)	(244,682		)	(182,146		)
Prior years	(816,823		)	(916,796		)	(653,874		)
Total net paid losses	(1,061,907		)	(1,161,478		)	(836,020		)
Foreign exchange (gain) loss	(38,550		)	(13,296		)	15,881
Net reserve for losses and loss expenses, end of year	2,856,928			2,660,245			3,077,606
Losses and loss expenses recoverable	377,466			370,154			439,967
Reserve for losses and loss expenses, end of year	$	3,234,394		$	3,030,399		$	3,517,573


(a)	Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

Incurred losses and loss expenses comprise:



	Years Ended
	December 31, 2014 (a)			December 31, 2013			December 31, 2012
Gross losses and loss expenses (a)	$	833,860		$	924,986		$	1,192,494
Reinsurance recoverable	(61,811		)	(131,054		)	(193,048		)
Net incurred losses and loss expenses (a)	$	772,049		$	793,932		$	999,446


(a)	Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The December 31, 2014 and 2013 gross reserves balances comprise reserves for reported claims of $1,495,323 and $1,537,881, respectively, and reserves for claims incurred but not reported of $1,739,071 and $1,492,518, respectively. The net favorable development on prior years by segment and line of business is as follows:



	Year Ended December 31, 2014
	Property			Marine			Specialty			Liability			Total
Validus Re	$	(76,064	)	$	(6,830	)	$	(4,706	)	$	—		$	(87,600	)
AlphaCat	(12,201		)	—			—			—			(12,201		)
Talbot	(53,779		)	(31,397		)	(55,990		)	—			(141,166		)
Western World (a)	$	1,023		$	—		$	—		$	(12,263	)	$	(11,240	)
Net favorable development (a)	$	(141,021	)	$	(38,227	)	$	(60,696	)	$	(12,263	)	$	(252,207	)


(a)	Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $4,607 during the year ended December 31, 2014. The remaining fair value adjustment will be amortized in 2015.

The Validus Re property lines experienced favorable development primarily due to lower claims emergence on attritional losses and favorable loss development on Hurricane Sandy. The Validus Re marine and specialty lines experienced favorable development primarily due to lower claims emergence on attritional losses. The AlphaCat property lines experienced favorable development primarily due to the release of reserves on one aggregate excess of loss contract. Talbot experienced favorable development across all lines, primarily due to lower than expected claims development on attritional losses. Western World experienced unfavorable development on the property lines and favorable development on the liability lines, primarily due to claims development on attritional losses.



	Year Ended December 31, 2013
	Property			Marine			Specialty			Total (a)
Validus Re	$	(81,610	)	$	26,705		$	(4,353	)	$	(59,258	)
Talbot	(45,692		)	(46,092		)	(54,406		)	(146,190		)
Net favorable development	$	(127,302	)	$	(19,387	)	$	(58,759	)	$	(205,448	)


(a)	AlphaCat has not had any development on prior accident years.

The Validus Re property and specialty lines experienced favorable development primarily due to lower claims emergence on attritional losses, although the property lines experienced unfavorable development due to increased estimate of ultimate losses on the New Zealand earthquakes. The Validus Re marine lines experienced unfavorable development primarily due to an increased estimate of ultimate losses on Costa Concordia. Talbot experienced favorable development across all lines, primarily due to lower than expected claims development on attritional losses.



	Year Ended December 31, 2012
	Property			Marine			Specialty			Total (a)
Validus Re	$	(45,733	)	$	(11,298	)	$	(15,530	)	$	(72,561	)
Talbot	(26,263		)	(40,060		)	(36,085		)	(102,408		)
Net favorable development	$	(71,996	)	$	(51,358	)	$	(51,615	)	$	(174,969	)


(a)	AlphaCat has not had any development on prior accident years.

The Validus Re property and marine lines experienced favorable development primarily due to a reduction in the loss estimates on attritional losses, partially offset by increases in loss estimates on notable loss events. The Validus Re specialty lines experienced favorable development primarily due to lower than expected claims development on attritional losses. Talbot experienced favorable development across all lines, primarily due to lower than expected development on attritional losses.

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

14. Accounts payable and accrued expenses

The following are the components of accounts payable and accrued expenses:



	Years Ended
	December 31, 2014		December 31, 2013
Accrued interest on debt	$	12,224	$	10,686
Subscriptions received in advance on AlphaCat ILS funds	15,400		35,000
Accrued income attributable to operating affiliates	109,399		68,763
Trade and compensation payables	181,222		163,738
Total accounts payable and accrued expenses	$	318,245	$	278,187

15. Reinsurance

The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits and increase its aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocession agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.


(a)	Effects of reinsurance on premiums written and earned

The effects of reinsurance on premiums written and earned for the years ended December 31, 2014, 2013 and 2012 are as follows:



	Year Ended December 31, 2014
	Validus Re						AlphaCat						Talbot						Western World						Eliminations						Total
	Written			Earned			Written			Earned			Written			Earned			Written			Earned			Written			Earned			Written			Earned
Direct	$	—		$	—		$	—		$	—		$	617,793		$	576,136		$	65,235		$	80,838		$	—		$	—		$	683,028		$	656,974
Assumed	1,136,910			1,127,894			135,181			135,884			483,977			508,634			—			—			(75,810		)	(83,168		)	1,680,258			1,689,244
Ceded	(182,056		)	(210,610		)	(4,348		)	(3,534		)	(192,211		)	(204,996		)	(6,428		)	(7,842		)	75,810			83,168			(309,233		)	(343,814		)
Total	$	954,854		$	917,284		$	130,833		$	132,350		$	909,559		$	879,774		$	58,807		$	72,996		$	—		$	—		$	2,054,053		$	2,002,404



	Year Ended December 31, 2013
	Validus Re						AlphaCat						Talbot						Eliminations						Total
	Written			Earned			Written			Earned			Written			Earned			Written			Earned			Written			Earned
Direct	$	—		$	—		$	—		$	—		$	544,722		$	519,045		$	—		$	—		$	544,722		$	519,045
Assumed	1,242,522			1,360,735			147,009			137,939			547,168			532,069			(80,315		)	(78,833		)	1,856,384			1,951,910
Ceded	(226,264		)	(226,798		)	(525		)	(525		)	(226,111		)	(220,420		)	80,315			78,833			(372,585		)	(368,910		)
Total	$	1,016,258		$	1,133,937		$	146,484		$	137,414		$	865,779		$	830,694		$	—		$	—		$	2,028,521		$	2,102,045



	Year Ended December 31, 2012
	Validus Re						AlphaCat				Talbot						Eliminations						Total
	Written			Earned			Written		Earned		Written			Earned			Written			Earned			Written			Earned
Direct	$	1,551		$	364		$	—	$	—	$	548,940		$	535,508		$	—		$	—		$	550,491		$	535,872
Assumed	1,130,408			1,174,681			21,603		17,666		529,696			529,544			(65,758		)	(73,934		)	1,615,949			1,647,957
Ceded	(144,578		)	(151,774		)	—		—		(228,686		)	(232,773		)	65,758			73,934			(307,506		)	(310,613		)
Total	$	987,381		$	1,023,271		$	21,603	$	17,666	$	849,950		$	832,279		$	—		$	—		$	1,858,934		$	1,873,216

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(b)	Credit risk

The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better as rated by Standard & Poor's or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At December 31, 2014, 98.0% (December 31, 2013: 96.7%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses and $231,129 of total IBNR recoverable (December 31, 2013: $196,840)) were fully collateralized or from reinsurers rated A- or better.

Reinsurance recoverables by reinsurer are as follows:



	December 31, 2014				December 31, 2013
	Reinsurance Recoverable		% of Total		Reinsurance Recoverable		% of Total
Top 10 reinsurers	$	312,205	75.1	%	$	340,938	75.7	%
Other reinsurers’ balances > $1 million	94,247		22.7	%	100,784		22.4	%
Other reinsurers’ balances < $1 million	9,092		2.2	%	8,512		1.9	%
Total	$	415,544	100.0	%	$	450,234	100.0	%



	December 31, 2014
Top 10 Reinsurers	Rating	Reinsurance Recoverable		% of Total
Swiss Re	AA-	$	70,848	17.0	%
Lloyd's Syndicates	A+	62,318		15.0	%
Everest Re	A+	51,425		12.4	%
Hannover Re	AA-	40,927		9.8	%
Fully Collateralized	NR	23,315		5.6	%
Munich Re	AA-	19,384		4.7	%
Transatlantic Re	A+	12,418		3.0	%
XL Re	A+	11,114		2.7	%
Berkshire Hathaway Homestate	AA+	10,372		2.5	%
Merrimack Mutual Fire Insurance	A+	10,084		2.4	%
Total		$	312,205	75.1	%

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Table of Contents

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2013
Top 10 Reinsurers	Rating	Reinsurance Recoverable		% of Total
Lloyd's Syndicates	A+	$	73,398	16.3	%
National Indemnity	AA+	51,037		11.3	%
Everest Re	A+	48,113		10.7	%
Hannover Re	AA-	41,483		9.2	%
Fully Collateralized	NR	36,683		8.1	%
Third Point Re	A-	30,428		6.8	%
Swiss Re	AA-	20,022		4.5	%
Transatlantic Re	A+	14,114		3.1	%
XL Re	A+	13,300		3.0	%
Munich Re	AA-	12,360		2.7	%
Total		$	340,938	75.7	%

NR: Not rated

At December 31, 2014 and December 31, 2013, the provision for uncollectible reinsurance relating to reinsurance recoverables was $4,755 and $5,794, respectively. To estimate the provision for uncollectible reinsurance, the reinsurance recoverable is first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied, especially in relation to ceded IBNR. The Company then uses default factors to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined in part using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

16. Share capital


(a)	Authorized and issued

The Company’s authorized share capital is 571,428,571 common shares with a par value of $0.175 per share. The holders of common shares are entitled to receive dividends. Holders of common shares are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.

The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 5, 2014, the Board of Directors of the Company approved an increase in the Company's common share repurchase authorization to $500,000. This amount was in addition to the $1,774,436 of common shares repurchased by the Company through February 5, 2014 under its previously authorized share repurchase programs.

The Company has repurchased approximately 70,045,504 common shares for an aggregate purchase price of $2,231,301 from the inception of its share repurchase program to December 31, 2014. The Company had $43,135 remaining under its authorized share repurchase program as of December 31, 2014.

On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone from a group of institutional and other investors. Pursuant to a merger agreement, the Company acquired all of Flagstone's outstanding common shares in exchange for the Company's common shares and cash. The Company issued 14,202,664 common shares, net of 87,725 shares withheld for income taxes, valued at $34.87 per share as partial consideration for the acquisition. In addition, 1,638,875 common shares recorded in treasury are owned by Validus UPS, Ltd., a wholly-owned subsidiary of the Company. As part of the Flagstone Acquisition, warrants to acquire Flagstone shares were converted into 121,942 warrants to acquire the Company's common shares. In accordance with the merger agreement, these warrants had a $62.02 strike price and expired without being exercised.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table is a summary of the common shares issued and outstanding:



	Common Shares
Common shares issued, December 31, 2013	154,488,497
Restricted share awards vested, net of shares withheld	615,659
Restricted share units vested, net of shares withheld	10,265
Options exercised	412,656
Direct issuance of common stock	1,380
Performance shares vested, net of shares withheld	25,767
Common shares issued, December 31, 2014	155,554,224
Treasury shares, December 31, 2014	(71,684,379	)
Common shares outstanding, December 31, 2014	83,869,845



	Common Shares
Common shares issued, December 31, 2012	152,698,191
Restricted share awards vested, net of shares withheld	796,838
Restricted share units vested, net of shares withheld	14,381
Options exercised	351,509
Warrants exercised	591,480
Direct issuance of common stock	1,266
Performance shares vested, net of shares withheld	31,897
Deferred share units vested, net of shares withheld	2,935
Common shares issued, December 31, 2013	154,488,497
Treasury shares, December 31, 2013	(58,444,185	)
Common shares outstanding, December 31, 2013	96,044,312



	Common Shares
Common shares issued, December 31, 2011	134,503,065
Restricted share awards vested, net of shares withheld	1,572,634
Restricted share units vested, net of shares withheld	15,173
Options exercised	439,065
Warrants exercised	326,715
Direct issuance of common stock	15,841,539
Common shares issued, December 31, 2012	152,698,191
Treasury shares, December 31, 2012	(44,776,932	)
Common shares outstanding, December 31, 2012	107,921,259


(b)	Warrants

The Company had total outstanding warrants as at December 31, 2014 of 5,174,114 (2013: 5,296,056), with each warrant providing the holder with the option to purchase a common share. No further warrants are anticipated to be issued.

The warrants may be settled using either the physical settlement or net-share settlement methods. The warrants have been classified as equity instruments, in accordance with U.S. GAAP guidance for “Derivatives and Hedging, Contracts in Entity’s own Equity.” The warrants were measured at fair value and recorded in additional paid-in capital.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The fair value of each warrant issued was estimated on the date of grant using the Black-Scholes option-pricing model. The volatility assumption used, of approximately 30.0%, was derived from the historical volatility of the share price of a range of publicly-traded Bermuda reinsurance companies of a similar business nature to the Company. No allowance was made for any potential illiquidity associated with the private trading of the Company’s shares. The other assumptions in the warrant-pricing model were as follows:



	July 24, 2007 Issuance			February 3, 2006 Issuance			December 15, 2005 Issuance
Warrants issued	256,409			8,593			8,446,727
Average strike price	$	20.00		$	17.50		$	17.50
Volatility	30.0		%	30.0		%	30.0		%
Risk-free rate	4.5		%	4.5		%	4.5		%
Expected dividend yield	0.0		%	0.0		%	0.0		%
Expected term (years)	8			10			10
Calculated fair value per warrant	$	11.28		$	8.89		$	8.89

During the year ended December 31, 2014, no warrants were exercised, while 121,942 warrants related to the Flagstone Acquisition expired without being exercised. During the year ended December 31, 2013, 1,114,416 warrants were exercised which resulted in the issuance of 591,480 common shares. Holders of the outstanding warrants are entitled to exercise the warrant in whole or in part at any time until the expiration date.


(c)	Deferred share units

Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director retainer fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. There were no outstanding deferred share units at December 31, 2014 (2013: nil).

As of February 16, 2013, John Hendrickson became an employee director. As a result, his 5,039 deferred share units vested and 2,935 common shares were issued to him, net of shares withheld for taxes.


(d)	Dividends

The Company announced four quarterly cash dividends of $0.30 per common share and $0.30 per common share equivalent for which each outstanding warrant is exercisable, during the year ended December 31, 2014 (2013: $0.30). These dividends were paid on March 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014 to holders of record on March 14, 2014, June 13, 2014, September 15, 2014 and December 15, 2014, respectively.

17. Retirement and pension plans


(a)	Defined benefit plans

Senior executives and retired selected key employees of Western World participate in non-qualified, unfunded, defined benefit plans. Benefits for these plans are based on final average earnings, social security benefits earned at retirement date and years of service.

The assumptions used to determine net periodic pension expense for the year ended December 31, 2014 are as follows:



	Year Ended December 31, 2014
Discount rate	3.00	%
Increase in compensation levels rate	5.00	%

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The assumptions used to determine benefit obligations as at December 31, 2014 are as follows:



	As at December 31, 2014
Discount rate	2.75	%
Increase in compensation levels rate	5.00	%

The following tables present a reconciliation of the beginning and ending funded status and the net amounts recognized for the defined benefit plans for the year ended December 31, 2014:



	Year Ended December 31, 2014 (a)
Change in benefit obligation:
Projected benefit obligation as at October 2, 2014	$	20,885
Service cost	295
Interest cost	145
Actuarial losses	1
Benefit payments	(24		)
Settlements	(4,809		)
Projected benefit obligation as at December 31, 2014	$	16,493

Change in plan assets:
Fair value of plan assets as at October 2, 2014	$	—
Employer contributions	6,495
Benefit payments	(24		)
Settlements	(6,471		)
Fair value of plan assets as at December 31, 2014	—
Funded status as at December 31, 2014	$	(16,493	)

Current liabilities	$	(559	)
Noncurrent liabilities	(15,934		)
Net amount recognized	$	(16,493	)

Amounts recognized in accumulated other comprehensive (loss) income consist of:
Net loss	$	4,505
Prior service credit	(4		)
Net amount recognized	$	4,501

	As at December 31, 2014
Projected benefit obligation	$	16,493
Accumulated benefit obligation	$	11,971
Fair value of plan assets	$	—


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The components of net periodic pension expense for the year ended December 31, 2014 are as follows:



	Year Ended December 31, 2014
Service cost	$	295
Interest cost	145
Amortization of prior service cost	(1		)
Amortization of net loss	79
Net periodic benefit cost	518
Settlement loss	1,322
Net periodic pension expense	$	1,840

Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income are as follows for the year ended December 31, 2014:



	Year Ended December 31, 2014
Net loss	$	1,961
Amortization of loss	(317		)
Amortization of prior service cost	2
Settlement loss	(1,322		)
Total recognized in other comprehensive (loss) income	$	324
Total recognized in net pension expense and other comprehensive (loss) income (before tax effects)	$	2,164

The estimated amount of net loss and prior service cost expected to be amortized from accumulated other comprehensive (loss) income into net periodic pension expense over the next fiscal year is $2.

The employer benefit payments/settlements for the year ended December 31, 2014 were $4,834. As at December 31, 2014, the projected benefits are as follows:



2015	$	559
2016	93
2017	6,921
2018	85
2019	2,160
2020-2024	5,228
Total benefit payments required	$	15,046


(b)	Other pension plans

The Company provides pension benefits to eligible employees through various plans which are managed externally and sponsored by the Company. The Company’s contributions are expensed as incurred. The Company’s expenses for its defined contribution retirement plans for the years ended December 31, 2014, 2013 and 2012 were $10,606, $7,621 and $9,233, respectively.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

18. Stock plans


(a)	Long Term Incentive Plan and Short Term Incentive Plan

The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Program (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares of which 903,292 shares are remaining. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs have been granted to date. Grant prices are established at the fair market value of the Company’s common shares at the date of grant.


i.	Options

Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.

Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.

The Company has not granted any stock option awards since September 4, 2009.

Share compensation expenses in respect of options of $nil were recorded for the year ended December 31, 2014 (2013: $nil, 2012: $142). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

A modification event was triggered as a result of a $2.00 per share special dividend declared and paid in 2013 (the "Special Dividend"). In accordance with the terms of the LTIP under which the options were issued, an adjustment was required to protect the holders of such stock options from changes in the value of the stock options following the declaration of the 2013 Special Dividend. The modification of the options included a decrease in the exercise price of each stock option and an increase in the number of shares underlying each stock option. The fair value of the options before and after the modification was unchanged.

Activity with respect to options for the year ended December 31, 2014 was as follows:



	Options		Weighted Average Grant Date Fair Value		Weighted Average Grant Date Exercise Price		Total Intrinsic Value (a)		Company Proceeds Received
Options outstanding and exercisable, December 31, 2013	1,572,713		$	6.66	$	18.88
Options exercised	(412,656	)	5.36		22.07		$	7,459	$	9,107
Options outstanding and exercisable, December 31, 2014	1,160,057		$	7.12	$	17.74

Activity with respect to options for the year ended December 31, 2013 was as follows:



	Options		Weighted Average Grant Date Fair Value		Weighted Average Grant Date Exercise Price		Total Intrinsic Value (a)		Company Proceeds Received
Options outstanding and exercisable, December 31, 2012	1,823,947		$	6.52	$	20.69
Options regranted (modified)	1,833,414		6.76		19.02
Options exercised	(351,509	)	5.94		22.91		$	4,963	$	8,052
Options cancelled (modified)	(1,733,139	)	6.76		20.12
Options outstanding and exercisable, December 31, 2013	1,572,713		$	6.66	$	18.88

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Activity with respect to options for the year ended December 31, 2012 was as follows:



	Options		Weighted Average Grant Date Fair Value		Weighted Average Grant Date Exercise Price		Total Intrinsic Value (a)		Company Proceeds Received
Options outstanding and exercisable, December 31, 2011	2,263,012		$	6.69	$	20.12
Options exercised	(439,065	)	7.44		17.73		$	6,574	$	7,785
Options outstanding and exercisable, December 31, 2012	1,823,947		$	6.52	$	20.69


(a)	The total intrinsic value in the tables above represent the amount by which the market price of the Company's common stock is greater than the option strike price multiplied by the number of options exercised during the year.

There were no unamortized share compensation expenses in respect of options since December 31, 2012. The aggregate intrinsic value of the options outstanding and exercisable at December 31, 2014 was $27,573.


ii.	Restricted share awards

Restricted shares granted under the LTIP and STIP vest either pro rata or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $31,335 were recorded for the year ended December 31, 2014 (2013: $27,750; 2012: $25,145). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

Activity with respect to unvested restricted share awards for the year ended December 31, 2014 was as follows:



	Restricted Share Awards		Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2013	2,684,745		$	33.74
Restricted share awards granted	1,051,348		37.81
Restricted share awards vested	(797,446	)	31.44
Restricted share awards forfeited	(79,936	)	36.09
Restricted share awards outstanding, December 31, 2014	2,858,711		$	35.81

Activity with respect to unvested restricted share awards for the year ended December 31, 2013 was as follows:



	Restricted Share Awards		Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2012	2,170,547		$	29.24
Restricted share awards granted	1,594,672		36.07
Restricted share awards vested	(969,562	)	28.12
Restricted share awards forfeited	(110,912	)	28.34
Restricted share awards outstanding, December 31, 2013	2,684,745		$	33.74

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Activity with respect to unvested restricted share awards for the year ended December 31, 2012 was as follows:



	Restricted Share Awards		Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2011	3,003,547		$	25.77
Restricted share awards granted	921,506		31.47
Restricted share awards vested	(1,719,855	)	24.40
Restricted share awards forfeited	(34,651	)	27.85
Restricted share awards outstanding, December 31, 2012	2,170,547		$	29.24

At December 31, 2014, there were $74,670 (2013: $69,219; 2012: $43,952) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.7 years (2013: 3.2 years; 2012: 2.6 years).


iii.	Restricted share units

Restricted share units under the LTIP and STIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $876 were recorded for the year ended December 31, 2014 (2013: $585; 2012: $499). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

Activity with respect to unvested restricted share units for the year ended December 31, 2014 was as follows:



	Restricted Share Units		Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2013	66,518		$	33.74
Restricted share units granted	53,025		38.10
Restricted share units vested	(18,325	)	30.71
Restricted share units issued in lieu of cash dividends	2,266		35.00
Restricted share units outstanding, December 31, 2014	103,484		$	36.54

Activity with respect to unvested restricted share units for the year ended December 31, 2013 was as follows:



	Restricted Share Units		Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2012	47,238		$	29.61
Restricted share units granted	36,635		36.11
Restricted share units vested	(21,814	)	28.17
Restricted share units issued in lieu of cash dividends	4,459		30.70
Restricted share units outstanding, December 31, 2013	66,518		$	33.74

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Activity with respect to unvested restricted share units for the year ended December 31, 2012 was as follows:



	Restricted Share Units		Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2011	53,312		$	27.60
Restricted share units granted	16,633		31.77
Restricted share units vested	(22,818	)	26.49
Restricted share units issued in lieu of cash dividends	1,504		28.66
Restricted share units forfeited	(1,393	)	28.57
Restricted share units outstanding, December 31, 2012	47,238		$	29.61

At December 31, 2014, there were $2,774 (2013: $1,678; 2012: $978) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 3.1 years (2013: 3.4 years; 2012: 2.6 years).


iv.	Performance share awards

The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Book Value per Diluted Share (“DBVPS”) over a three year period. For performance share awards granted during the period, the grant date is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the consolidated statements of comprehensive income in the period in which they are determined.

Share compensation expenses of $862 were recorded for the year ended December 31, 2014 (2013: ($705); 2012: $923). The share compensation expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period. The negative expense is due to a reversal of expenses on unvested performance share awards based on a review of current and projected performance criteria.

Activity with respect to unvested performance share awards for the year ended December 31, 2014 was as follows:



	Performance Share Awards		Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2013	101,820		$	33.56
Performance share awards granted	52,639		37.33
Performance share awards vested	(32,746	)	32.62
Performance share awards conversion adjustment	(15,344	)	31.38
Performance share awards outstanding, December 31, 2014	106,369		$	36.03

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Activity with respect to unvested performance share awards for the year ended December 31, 2013 was as follows:



	Performance Share Awards		Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2012	220,845		$	31.81
Performance share awards granted	38,386		36.11
Performance share awards vested	(39,094	)	28.70
Performance share awards forfeited	(18,701	)	31.05
Performance share awards conversion adjustment	(99,616	)	33.05
Performance share awards outstanding, December 31, 2013	101,820		$	33.56

Activity with respect to unvested performance share awards for the year ended December 31, 2012 was as follows:



	Performance Share Awards		Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2011	279,019		$	30.77
Performance share awards granted	41,128		31.38
Performance share awards forfeited	(99,302	)	28.70
Performance share awards outstanding, December 31, 2012	220,845		$	31.81

At December 31, 2014, there were $2,232 (2013: $1,642; 2012: $3,328) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.1 years (2013: 2.0 years; 2012: 1.7 years).


(b)	Total share compensation expenses

The breakdown of share compensation expenses by award type was as follows:



	Years Ended
	December 31, 2014		December 31, 2013			December 31, 2012
Options	$	—	$	—		$	142
Restricted share awards	31,335		27,750			25,145
Restricted share units	876		585			499
Performance share awards	862		(705		)	923
Total	$	33,073	$	27,630		$	26,709

In addition, the Company recorded $1,610 of associated tax benefits for the year ended December 31, 2014 (2013: $1,423; 2012: $1,380). The Company also recognized $3,513 of net windfall taxes at December 31, 2014 for share vestings and option exercises from inception to date.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

19. Debt and financing arrangements


(a)	Financing structure

The financing structure at December 31, 2014 was:



	Commitment		Issued and outstanding (a)		Drawn
2006 Junior Subordinated Deferrable Debentures	$	150,000	$	150,000	$	150,000
2007 Junior Subordinated Deferrable Debentures	200,000		139,800		139,800
Flagstone 2006 Junior Subordinated Deferrable Debentures	135,727		135,727		135,727
Flagstone 2007 Junior Subordinated Deferrable Debentures	113,750		113,750		113,750
Total debentures payable	599,477		539,277		539,277
2010 Senior Notes due 2040	250,000		250,000		247,306
Total debentures and senior notes payable	849,477		789,277		786,583
$400,000 syndicated unsecured letter of credit facility	400,000		—		—
$525,000 syndicated secured letter of credit facility	525,000		276,455		—
$200,000 secured bi-lateral letter of credit facility	200,000		15,649		—
Talbot FAL facility	25,000		25,000		—
PaCRe senior secured letter of credit facility	10,000		294		—
AlphaCat Re secured letter of credit facility	30,000		30,000		—
IPC bi-lateral facility	40,000		15,897		—
$375,000 Flagstone bi-lateral facility	375,000		198,389		—
Total credit and other facilities	1,605,000		561,684		—
Total debt and financing arrangements	$	2,454,477	$	1,350,961	$	786,583

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The financing structure at December 31, 2013 was:



	Commitment		Issued and outstanding (a)		Drawn
2006 Junior Subordinated Deferrable Debentures	$	150,000	$	150,000	$	150,000
2007 Junior Subordinated Deferrable Debentures	200,000		139,800		139,800
Flagstone 2006 Junior Subordinated Deferrable Debentures	137,866		137,866		137,866
Flagstone 2007 Junior Subordinated Deferrable Debentures	113,750		113,750		113,750
Total debentures payable	601,616		541,416		541,416
2010 Senior Notes due 2040	250,000		250,000		247,198
Total debentures and senior notes payable	851,616		791,416		788,614
$400,000 syndicated unsecured letter of credit facility	400,000		—		—
$525,000 syndicated secured letter of credit facility	525,000		358,567		—
$200,000 secured bi-lateral letter of credit facility	200,000		16,726		—
Talbot FAL facility	25,000		25,000		—
PaCRe senior secured letter of credit facility	10,000		294		—
AlphaCat Re secured letter of credit facility	24,800		24,800		—
IPC bi-lateral facility	40,000		20,177		—
$375,000 Flagstone bi-lateral facility	375,000		305,686		—
Total credit and other facilities	1,599,800		751,250		—
Total debt and financing arrangements	$	2,451,416	$	1,542,666	$	788,614


(a)	Indicates utilization of commitment amount, not necessarily drawn borrowings.


(b)	Senior notes and junior subordinated deferrable debentures

The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at the issuance date for each placement.



Description	Issuance date	Commitment		Maturity date	Fixed/Spread			Interest payments due
2006 Junior Subordinated Deferrable Debentures	June 15, 2006	$	150,000	June 15, 2036	9.069	%	(a)	Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures	August 23, 2006	$	135,727	September 15, 2036	3.540	%	(b)	Quarterly
2007 Junior Subordinated Deferrable Debentures	June 21, 2007	$	200,000	June 15, 2037	8.480	%	(a)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	June 8, 2007	$	88,750	July 30, 2037	3.000	%	(b)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	September 20, 2007	$	25,000	September 15, 2037	3.100	%	(b)	Quarterly
2010 Senior Notes due 2040	January 26, 2010	$	250,000	January 26, 2040	8.875	%	(a)	Semi-annually in arrears


(a)	Fixed interest rate.


(b)	Variable interest rate is the three-month LIBOR, reset quarterly, plus spread as noted in the table.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at December 31, 2014:



Description	Issuance date	Commitment		Maturity date	Fixed/Spread			Interest payments due
2006 Junior Subordinated Deferrable Debentures	June 15, 2006	$	150,000	June 15, 2036	5.831	%	(b)	Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures	August 23, 2006	$	135,727	September 15, 2036	6.463	%	(b)	Quarterly
2007 Junior Subordinated Deferrable Debentures	June 21, 2007	$	200,000	June 15, 2037	5.180	%	(b)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	June 8, 2007	$	88,750	July 30, 2037	5.900	%	(b)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	September 20, 2007	$	25,000	September 15, 2037	5.983	%	(b)	Quarterly
2010 Senior Notes due 2040	January 26, 2010	$	250,000	January 26, 2040	8.875	%	(a)	Semi-annually in arrears


(a)	Fixed interest rate.


(b)	Interest rate has been fixed as a result of interest rate swap contracts entered into by the Company.

Senior Notes

The Senior Notes due 2040 (the “2010 Senior Notes”) were part of a registered public offering. The 2010 Senior Notes mature on January 26, 2040. The Company may redeem the notes, in whole at any time, or in part from time to time, at the Company's option on not less than 30 nor more than 60 days’ notice, at a make-whole redemption price as described in “Description of the Notes - Optional Redemption” in the 2010 Senior Notes prospectus supplement. In addition, the Company may redeem the notes, in whole, but not in part, at any time upon the occurrence of certain tax events as described in “Description of the Notes - Redemption for Tax Purposes” in the prospectus supplement.

Debt issuance costs were deferred as an asset and are amortized over the life of the 2010 Senior Notes. There were no redemptions made during the years ended December 31, 2014 and 2013.

The 2010 Senior Notes are unsecured and unsubordinated obligations of the Company and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 2010 Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 2010 Senior Notes are structurally subordinated to all obligations of the Company’s subsidiaries.

Future payments of principal of $250,000 on the 2010 Senior Notes are all expected to be after 2019.

Junior subordinated deferrable debentures

The Company participated in private placements of junior subordinated deferrable interest debentures due 2036 and 2037 (respectively, the “2006 Junior Subordinated Deferrable Debentures” and “2007 Junior Subordinated Deferrable Debentures”).

Debt issuance costs for the 2006 and 2007 Junior Subordinated Deferrable Debentures were deferred as an asset and were amortized to income over the five year optional redemption periods. They are redeemable at the Company's option at par. There were no redemptions made during the years ended December 31, 2014 and 2013.

As part of the acquisition of Flagstone, the Company assumed junior subordinated deferrable debentures due 2036 and 2037 (respectively, the “Flagstone 2006 Junior Subordinated Deferrable Debentures” and “Flagstone 2007 Junior Subordinated Deferrable Debentures”). These debentures are redeemable quarterly at par. There were no redemptions made during the years ended December 31, 2014 and 2013.

Future payments of principal of $539,277 on the debentures discussed above are all expected to be after 2019.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(c)	Credit facilities


i.	$400,000 syndicated unsecured letter of credit facility and $525,000 syndicated secured letter of credit facility

On March 9, 2012, the Company entered into a $400,000 four-year unsecured credit facility with various counter parties as co-documentation agents and the lenders party thereto, which provides for letter of credit and revolving credit availability for the Company (the “Four Year Unsecured Facility”) (the full $400,000 of which is available for letters of credit and/or revolving loans). The Four Year Unsecured Facility was provided by a syndicate of commercial banks. Letters of credit under the Four Year Unsecured Facility are available to support obligations in connection with the insurance business of the Company and its subsidiaries. Loans under the Four Year Unsecured Facility are available for the general corporate and working capital purposes of the Company. The Company may request that existing lenders under the Four Year Unsecured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Unsecured Facility do not exceed $500,000.

Also on March 9, 2012, the Company entered into a $525,000 four-year secured credit facility, with the same parties, which provides for letter of credit availability for the Company (the “Four Year Secured Facility” and together with the Four Year Unsecured Facility, the “Credit Facilities”). The Four Year Secured Facility was also provided by a syndicate of commercial banks. Letters of credit under the Four Year Secured Facility will be available to support obligations in connection with the insurance business of the Company. The Company may request that existing lenders under the Four Year Secured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Secured Facility do not exceed $700,000. The obligations of the Company under the Four Year Secured Facility are secured by cash and securities deposited into cash collateral accounts from time to time with The Bank of New York Mellon.

As of December 31, 2014, there were $276,455 in outstanding letters of credit under the Four Year Secured Facility (December 31, 2013: $358,567) and $nil (2013: $nil) outstanding under the Four Year Unsecured Facility.

The Credit Facilities contain covenants that include, among other things (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $2,600,000 and, commencing with the end of the fiscal quarter ending March 31, 2012, to be increased quarterly by an amount equal to 50.0% of the Company’s consolidated net income (if positive) for such quarter plus 50.0% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Reinsurance, Ltd. and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). In addition, the Credit Facilities contain customary negative covenants applicable to the Company, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type. As of December 31, 2014, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.


ii.	$25,000 Talbot FAL facility

On November 19, 2013, Validus Holdings, Ltd. (“Validus Holdings”), as Guarantor, and its wholly-owned subsidiary, Talbot Holdings Ltd. (“Talbot Holdings”), as Borrower, entered into an Amendment and Restatement Agreement relating to its $25,000 Funds-at-Lloyd’s Standby Letter of Credit Facility (the “Facility”) which amends the Facility to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2014, 2015 and prior underwriting years of account (the “Restated Facility”). The Restated Facility was provided and arranged by Lloyds Bank plc and INGBank N.V., London Branch. The Restated Facility provides for the issuance of up to $25,000 (denominated in US Dollars or Pound Sterling) of secured letters of credit to be issued for the benefit of Lloyd’s of London. The existing $25,000 secured letter of credit will be extended to provide for an extended termination date covering the 2014, 2015 and prior underwriting years of account under the Restated Facility.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The Restated Facility contains affirmative covenants that include, among other things, (i) the requirement that Validus Holdings and its subsidiaries initially maintain a minimum level of consolidated net worth of at least $3,225,727, and commencing with the fiscal quarter ending September 30, 2013, to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of the aggregate increases in our consolidated shareholder’s equity interests by reason of issuance and sale of Validus Holdings’ common equity interests including upon any conversion of Validus Holdings’ debt securities into equity interests during such quarter and (ii) the requirement that Validus Holdings and its subsidiaries maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00. The Restated Facility defines net worth to include preferred and preference securities and “hybrid” securities (which includes Validus Holdings’ and its Flagstone subsidiaries’ Junior Subordinated Deferrable Debentures). The Restated Facility also requires that Talbot Holdings maintain at least $300,000 of its own Funds at Lloyd’s, and to obtain a letter of comfort from Lloyd’s of London confirming that Lloyd’s of London will take into account a requested order of drawdown to drawdown Talbot Holdings’ own Funds at Lloyd’s ahead of letters of credit issued under the Facility.

The Restated Facility also contains restrictions on Validus Holdings’ ability to pay dividends and other payments in respect of equity interests at any time that it is otherwise in default under the Facility (with certain exceptions for dividends in respect of preferred securities and hybrid securities, which are only limited during the continuance of certain specified defaults), incur debt at its subsidiaries level, transact with affiliates, incur liens, sell assets and merge or consolidate with others and other restrictions customary for transactions of this type, in each case subject to agreed exceptions.

Secured letter of credit availability under the Restated Facility is subject to a borrowing base limitation comprised of (a) the aggregate amount of cash and eligible securities owned by Validus Reinsurance, Ltd. and placed in a collateral account subject to a customary account control agreement in favor of the lenders and agents under the Restated Facility multiplied by (b) an agreed upon advance rate applicable for each category of cash and eligible securities. Obligations in respect of secured letters of credit under the Restated Facility are secured by a first-priority security interest on the cash and eligible securities comprising the borrowing base in favor of the trustee under the Restated Facility.

The Restated Facility contains representations and warranties customary for facilities of this type. The Restated Facility also contains customary events of default including without limitation, with agreed grace periods and thresholds, failure to make payments due under the Restated Facility, material inaccuracy of representations and warranties, breach of covenants, cross defaults to material indebtedness, bankruptcy defaults, judgments defaults, and failure to maintain certain material insurance licenses.

As of December 31, 2014, the Company had $25,000 (December 31, 2013: $25,000) in outstanding letters of credit under the Talbot FAL facility.

As of December 31, 2014, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL facility.


iii.	$40,000 IPC bi-lateral facility

The Company assumed an existing evergreen letter of credit facility through the acquisition of IPC Holdings, Ltd. (the “IPC bi-lateral facility”). As of December 31, 2014, there were $15,897 outstanding letters of credit issued under the IPC bi-lateral facility (December 31, 2013: $20,177). As of December 31, 2014, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.


iv.	$200,000 secured bi-lateral letter of credit facility

The Company is party to an evergreen secured bi-lateral letter of credit facility with Citibank Europe plc (the “Secured bi-lateral letter of credit facility”). As of December 31, 2014, $15,649 (December 31, 2013: $16,726) of letters of credit were outstanding under the Secured bi-lateral letter of credit facility. The Secured bi-lateral letter of credit facility has no fixed termination date and as of December 31, 2014, and throughout the reporting periods presented, the Company is in compliance with all terms and covenants thereof.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


v.	$10,000 PaCRe senior secured letter of credit facility

On May 11, 2012, PaCRe and its subsidiary, PaCRe Investments, Ltd. entered into a secured evergreen credit and letter of credit facility with JPMorgan Chase Bank, N.A. This facility provides for revolving borrowings by PaCRe and for letters of credit issued by PaCRe to be used to support its reinsurance obligations in aggregate amount of $10,000. As of December 31, 2014, $294 (December 31, 2013: $294) of letters of credit were outstanding under this facility. As of December 31, 2014, and throughout the reporting periods presented, PaCRe was in compliance with all covenants and restrictions thereof.


vi.	$30,000 AlphaCat Re secured letter of credit facility

In 2013, AlphaCat Re entered into a secured evergreen letter of credit facility with Comerica Bank. This facility provided for letters of credit issued by AlphaCat Re to be used to support its reinsurance obligations in the aggregate amount of $24,800. During the period ended March 31, 2014 the size of the facility was increased to $30,000 from $24,800. As of December 31, 2014, $30,000 (December 31, 2013: $24,800) of letters of credit were outstanding under this facility. As of December 31, 2014, and throughout the reporting periods presented, AlphaCat Re was in compliance with all covenants and restrictions thereof.


vii.	$375,000 Flagstone bi-lateral facility

As part of the Flagstone Acquisition, the Company assumed an evergreen Letters of Credit Master Agreement between Citibank Europe Plc and Flagstone Reassurance Suisse, S.A. (the “Flagstone Bi-Lateral Facility”). At December 31, 2014, the Flagstone Bi-Lateral Facility had $198,389 (December 31, 2013: $305,686) letters of credit issued and outstanding. As of December 31, 2014, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility.


(d)	Finance expenses

Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facilities fees, bank charges, AlphaCat financing fees and Talbot FAL costs as follows:



	Year Ended
	December 31, 2014			December 31, 2013		December 31, 2012
2006 Junior Subordinated Deferrable Debentures	$	8,868		$	8,868	$	6,964
2007 Junior Subordinated Deferrable Debentures	7,341			7,341		8,922
Flagstone 2006 Junior Subordinated Deferrable Debentures	9,001			8,259		459
Flagstone 2007 Junior Subordinated Deferrable Debentures	7,129			6,222		327
2010 Senior Notes due 2040	22,388			22,388		22,388
Credit facilities	5,516			6,544		11,999
Bank charges	427			507		269
AlphaCat ILS funds fees (a)	3,530			3,866		2,432
Talbot FAL Facility	(346		)	182		97
Total finance expenses	$	63,854		$	64,177	$	53,857


(a)	Includes finance expenses incurred by AlphaCat Managers, Ltd. in relation to fund raising for the AlphaCat ILS funds, AlphaCat 2015, AlphaCat 2014 and AlphaCat 2013.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

20. Income taxes

The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from such taxes until March 31, 2035.

The Company has subsidiaries and branches with operations in several jurisdictions outside Bermuda, including but not limited to the United Kingdom (U.K.), the United States (U.S.), Switzerland, Luxembourg and Canada that are subject to relevant taxes in those jurisdictions. Within Note 25 "Segment information" of these Consolidated Financial Statements, gross premiums written are allocated to the territory of coverage exposure and therefore do not correlate to pre-tax income generated in any of the territories identified.

The Company’s income (loss) before income tax for the years ended December 31, 2014, 2013 and 2012 was generated in the following jurisdictions:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Income before tax—Bermuda	$	496,840		$	601,583		$	369,675
Income before tax—United Kingdom	10,824			4,668			10,277
(Loss) income before tax—United States	(11,752		)	(464		)	3,075
Income (loss) before tax—Switzerland	9,941			(225		)	(3,381		)
Income before tax—Canada	2,773			57			391
Income (loss) before tax—Other	29,076			(8,401		)	2,502
Income before tax—Total	$	537,702		$	597,218		$	382,539

Income tax expense (benefit) is comprised of current and deferred tax. Income tax expense (benefit) is as follows:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Current income tax expense (benefit)
U.S.	$	21,257		$	—		$	(54	)
Non-U.S.	26,179			1,781			1,382
Total current income tax expense	$	47,436		$	1,781		$	1,328

Deferred income tax (benefit) expense
U.S.	$	(24,998	)	$	880		$	134
Non-U.S.	(22,283		)	(2,278		)	1,039
Total deferred income tax (benefit) expense	$	(47,281	)	$	(1,398	)	$	1,173

Total income tax expense (benefit)
U.S.	$	(3,741	)	$	880		$	80
Non-U.S.	3,896			(497		)	2,421
Total income tax expense	$	155		$	383		$	2,501

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The table below is a reconciliation of the actual income tax expense for the years ended December 31, 2014, 2013 and 2012 to the amount computed by applying the effective tax rate of 0% under Bermuda law to income before taxes:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Expected tax expense at Bermuda statutory rate of 0%	$	—		$	—		$	—
Foreign tax rate differential	7,993			(2,399		)	4,882
Change in valuation allowance	(7,284		)	4,967			—
Tax exempt income and expenses not deductible	(6,055		)	(263		)	—
Share compensation tax windfall	3,513			—			—
Impact of enacted changes in tax rates	250			(407		)	(1,611		)
Prior years tax adjustments	666			(461		)	(770		)
Other	1,072			(1,054		)	—
Actual income tax expense	$	155		$	383		$	2,501

Deferred tax assets and liabilities primarily represent the tax effect of temporary differences between the carrying value of assets and liabilities for financial statement purposes and such values as measured by tax laws and regulations in countries in which the operations are taxable. Deferred tax assets may also represent the tax effect of tax loss carryforwards

In assessing whether deferred tax assets can be realized, the Company considers whether it is more likely than not that the tax benefit of the deferred tax asset will be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income in the period during which those temporary differences and tax loss carryforwards become deductible. The Company considers the reversal of the deferred tax liabilities and projected future taxable income in making this assessment. The amount of the deferred tax asset considered realizable could be reduced in the future if estimates of future taxable income are reduced.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows:



	Years Ended
	December 31, 2014		December 31, 2013
Deferred tax asset
Tax losses carried forward	$	158,789	$	185,955
Deferred compensation	5,527		6,119
Tax credits carried forward	4,016		—
Discounting of loss reserves	13,721		—
Risk premium reserve	3,842		—
Unearned premiums reserve	8,505		—
Pension	5,864		—
Other	6,023		128
Deferred tax asset, gross of valuation allowance	206,287		192,202
Valuation allowance	158,099		177,656
Net deferred tax asset	$	48,188	$	14,546

Deferred tax liability
Lloyd's underwriting profit taxable in future periods	$	636	$	28,945
Deferred acquisition costs	3,348		—
Intangibles	8,638		—
Unrealized appreciation on investments	9,101		—
Properties and fixed assets	4,993		3,179
Other	3,192		1,508
Deferred tax liability	29,908		33,632
Net deferred tax asset (liability)	$	18,280	$	(19,086	)

The Company has undistributed earnings in several foreign subsidiaries. If such earnings were to be distributed, as dividends or otherwise, they may be subject to income and withholding taxes. As a general rule, the Company will try to only distribute earnings that can be distributed in a tax free manner and indefinitely reinvest any other earnings. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable due to different possible methods for repatriating earnings.

As of December 31, 2014, the Company had net operating and capital loss carry forwards inclusive of cumulative currency translation adjustments as follows:



Tax Jurisdiction	Losses carried forward	Tax effect	Expiration
United Kingdom	547	118	None
United States	6,634	2,322	2029 - 2033
Switzerland	267,420	56,426	2018 - 2020
Luxembourg	340,245	99,352	None
Singapore	5,723	572	None

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The valuation allowance as at December 31, 2014 of $158,099 (2013: $177,656), relates to tax loss carry forwards of subsidiaries in Switzerland, Luxembourg, and the United States. The Company believes it is necessary to establish a full valuation allowance against the tax assets primarily related to losses of its Swiss and Luxembourg operations due to uncertainty regarding the ability of these operations to generate sufficient future taxable income to utilize the loss carryforwards and realize the deferred tax assets. There was no change in the position taken during the years ended December 31, 2014, 2013 or 2012.

At December 31, 2014 and 2013, the Company has no accrued liabilities for tax, interest and penalties relating to uncertain tax positions.

The Company has open examinations by the U.K. HM Revenue and Customs for the tax year 2012 and by the New York State Department of Taxation and Finance for tax years 2011 to 2013. The Company believes that these examinations will be concluded within the next 36 months. The Company has open tax years that are potentially subject to examinations by local tax authorities, in the following major tax jurisdictions: the United Kingdom, 2013 and 2014; the United States, 2011 to 2014; Switzerland, 2010 to 2014; and Canada, 2010 to 2014.

21. Accumulated other comprehensive (loss)

The changes in accumulated other comprehensive loss, by component for the years ended December 31, 2014, 2013 and 2012 are as follows:



	Foreign currency items			Decrease in minimum pension liability			Gains and losses on cash flow hedge			Total
Balance, net of tax December 31, 2011	$	(6,601	)	$	—		$	—		$	(6,601	)
Net current period other comprehensive income, net of tax	3,648			—			—			3,648
Balance, net of tax December 31, 2012	$	(2,953	)	$	—		$	—		$	(2,953	)
Amounts reclassified to retained earnings	4,290			—			—			4,290
Net current period other comprehensive loss, net of tax	(1,954		)	—			—			(1,954		)
Balance, net of tax December 31, 2013	$	(617	)	$	—		$	—		$	(617	)
Net current period other comprehensive loss, net of tax	(7,501		)	(210		)	(228		)	(7,939		)
Balance, net of tax December 31, 2014	$	(8,118	)	$	(210	)	$	(228	)	$	(8,556	)

22. Commitments and contingencies


(a)	Concentrations of credit risk

The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets,” such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.5% of its investment portfolio or less, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's bank loan portfolio, which represents 6.1% of the Company's total investments as at December 31, 2014, and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. In total, investments in below investment grade securities are limited to no more than 10% of the Company's investment portfolio. Excluding bank loans, 2.8% of the portfolio had a split rating below Baa3/BBB- as at December 31, 2014. The Company did not have an aggregate exposure to any single issuer of more than 1.0% of its investment portfolio, other than with respect to government and agency securities as at December 31, 2014.

The Company underwrites a significant amount of its reinsurance business through three particular brokers as set out below. There is credit risk associated with payments of insurance and reinsurance balances to the Company if these brokers are unable to fulfill their contractual obligations. These companies are large, well established, and there are no indications they are financially distressed. There were no other brokers or parties insured or reinsured that accounted for more than 10% of gross premiums written for the periods mentioned.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table shows the percentage of gross premiums written by broker for the years ended December 31, 2014, 2013 and 2012:



	Years Ended
	December 31, 2014		December 31, 2013		December 31, 2012
Marsh & McLennan	28.5	%	21.8	%	30.1	%
Aon Benfield Group Ltd.	20.1	%	27.7	%	24.2	%
Willis Group Holdings Ltd.	18.0	%	19.4	%	16.4	%


(b)	Employment agreements

The Company has entered into employment agreements with certain individuals that provide for executive benefits and severance payments under certain circumstances.


(c)	Operating leases

The Company leases office space and office equipment under operating leases. Total rent expense with respect to these operating leases for the year ended December 31, 2014 was approximately $10,540 (2013: $10,214, 2012: $7,670). Future minimum lease commitments are as follows:



2015	$	11,094
2016	8,616
2017	7,514
2018	7,350
2019	7,130
2020 and thereafter	23,784
	$	65,488


(d)	Funds at Lloyd’s

The amounts provided under the Talbot FAL Facility would become a liability of the Company in the event of Syndicate 1183 declaring a loss at a level which would call on this arrangement.

Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.

The amounts of cash, investments and letters of credit provided for each year of account as follows:



	2015 Underwriting Year		2014 Underwriting Year		2013 Underwriting Year
Talbot FAL facility	$	25,000	$	25,000	$	25,000
Group funds	570,100		450,000		403,700
Total	$	595,100	$	475,000	$	428,700

The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends. See Note 7 (d) for investments pledged as collateral.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(e)	Lloyd’s Central Fund

Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2015 estimated premium income at Lloyd’s of £625,000, the December 31, 2014 exchange rate of £1 equals $1.5578 and assuming the maximum 3% assessment, the maximum the Company could be assessed as a levy would be approximately $29,209.


(f)	Investment in affiliate commitments

As discussed in Note 9 "Investments in affiliates," on December 20, 2011 the Company entered into an Assignment and Assumption Agreement with Aquiline Capital Partners LLC, pursuant to which it assumed total capital commitments of $50,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company’s remaining commitment at December 31, 2014 was $7,500 (December 31, 2013: $17,890).

On October 2, 2014, the Company assumed an additional investment in Aquiline Capital Partners II GP (Offshore) Ltd. as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company's remaining capital commitment at December 31, 2014 was $1,499.

On November 7, 2014 the Company entered into a Subscription Agreement with Aquiline Capital Partners III GP (Offshore) Ltd., pursuant to which it assumed total capital commitments of $100,000 in respect of Limited Partnership Interests in Aquiline Financial Services Fund III L.P. (the "Fund"). The Limited Partnership Interests are governed by the terms of the Aquiline III Limited Partnership Agreement dated November 7, 2014. The Company’s remaining commitment at December 31, 2014 was $100,000.

On December 29, 2014, the Company entered into an agreement with AlphaCat 2015 pursuant to which it assumed total capital commitments of $28,000. The Company’s remaining commitment at December 31, 2014 was $2,400.

On December 29, 2014, the Company entered into an agreement with an AlphaCat ILS fund pursuant to which it assumed total capital commitments of $20,000. The Company’s remaining commitment at December 31, 2014 was $8,000.


(g)	Fixed maturity commitment

As at December 31, 2014, the Company had an outstanding commitment to participate in certain revolver loan facilities through participation agreements with an established loan originator. The undrawn amount under the revolver facility participations as at December 31, 2014 was $7,539.


(h)	Other investment commitments

At December 31, 2014, the Company had capital commitments in other investments of $153,000 (December 31, 2013: $30,000). The Company's remaining commitment to these investments at December 31, 2014 was $83,712 (December 31, 2013: $5,045).


(i)	Multi-Beneficiary Reinsurance Trusts


(j)	Structured settlements

As at December 31, 2014, the Company is contingently liable for the present value of amounts not yet due under annuities purchased by Western World where the claimant is the payee for the amount of $3,412.


(k)	Income tax examinations

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

23. Related party transactions

The transactions listed below are classified as related party transactions as each counter party has either a direct or indirect shareholding in the Company.

Aquiline Capital Partners, LLC and its related companies ("Aquiline"), which own 523,180 shares in the Company, hold warrants to purchase 2,756,088 shares, and have two employees on the Company's Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. ("Group Ark"). Christopher E. Watson, a director of the Company, serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the year ended December 31, 2014 of $2,073 (2013: $2,899, 2012: $7,582) respectively, with $335 included in premiums receivable at December 31, 2014 (December 31, 2013: $238). The Company also recognized reinsurance premiums ceded during the year ended December 31, 2014 of $126 (2013: $85, 2012: $90) and had reinsurance balances payable of $4 at December 31, 2014 (December 31, 2013: $4). The Company recorded $1,063 of loss reserves recoverable at December 31, 2014 (December 31, 2013: $3,698). Earned premium adjustments of $1,982 were recorded during the year ended December 31, 2014 (2013: $2,911, 2012: $7,625).

On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. ("Conning") to manage a portion of the Company's investment portfolio. Aquiline acquired Conning on June 16, 2009. Jeffrey W. Greenberg, a director of the Company, serves as a director of Conning Holdings Corp., the parent company of Conning. Investment management fees earned by Conning for the year ended December 31, 2014 were $1,125 (2013: $500, 2012: $809), with $515 included in accounts payable and accrued expenses at December 31, 2014 (December 31, 2013: $283).

On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. Messrs. Greenberg and Watson, directors of the Company, serve as managing principal and senior principal, respectively, of Aquiline Capital Partners LLC. For the year ended December 31, 2014, the Company incurred $342 (2013: $1,236, 2012: $2,979) in partnership fees and made capital contributions of $12,468 (2013: $14,492, 2012: $14,365), with $nil included in accounts payable and accrued expenses at December 31, 2014 (December 31, 2013: $nil).

On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company is committing and agreeing to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline Financial Services III Partnership. For the year ended December 31, 2014, the Company incurred no partnership fees and made no capital contributions.

Certain shareholders of the Company and their affiliates, as well as employers of entities associated with directors or officers have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company believes these transactions were settled for arm's length consideration.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

24. Earnings per share

The following table sets forth the computation of basic earnings per share and earnings per diluted share available to common shareholders for the years ended December 31, 2014, 2013 and 2012:



	Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
Basic earnings per share
Net income	$	445,871		$	542,361		$	392,618
Loss (income) attributable to noncontrolling interest	35,464			(9,695		)	15,820
Net income available to Validus	$	481,335		$	532,666		$	408,438
Less: Dividends and distributions declared on outstanding warrants	(6,208		)	(19,214		)	(6,693		)
Income available to common shareholders	$	475,127		$	513,452		$	401,745
Weighted average number of common shares outstanding	90,354,745			102,202,274			97,184,110
Basic earnings per share available to common shareholders	$	5.26		$	5.02		$	4.13

Earnings per diluted share
Net income	$	445,871		$	542,361		$	392,618
Loss (income) attributable to noncontrolling interest	35,464			(9,695		)	15,820
Net income available to Validus	$	481,335		$	532,666		$	408,438
Less: Dividends and distributions declared on outstanding warrants	—			(19,214		)	—
Income available to common shareholders	$	481,335		$	513,452		$	408,438
Weighted average number of common shares outstanding	90,354,745			102,202,274			97,184,110
Share equivalents:
Warrants	2,789,032			—			3,137,956
Stock options	745,561			1,026,543			769,618
Unvested restricted shares	800,933			741,472			1,293,239
Weighted average number of diluted common shares outstanding	94,690,271			103,970,289			102,384,923
Earnings per diluted share available to common shareholders	$	5.08		$	4.94		$	3.99

Share equivalents that would result in the issuance of common shares of 199,740, 366,821 and 199,446 were outstanding for the years ended December 31, 2014, 2013 and 2012, respectively but were not included in the computation of earnings per diluted share because the effect would be antidilutive.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

25. Segment information

The Company conducts its operations worldwide through four operating segments, which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. During the first quarter of 2012, to better align the Company’s operating and reporting structure with its current strategy, there was a change in the segment structure. This change included the AlphaCat group of companies as a separate operating segment. The AlphaCat segment currently includes the Company’s investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015, PaCRe, the AlphaCat ILS funds and the BetaCat ILS funds. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment requires different strategies.

Validus Re Segment

The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers’ compensation, crisis management, contingency, motor, technical lines, composite and trade credit.

AlphaCat Segment

The AlphaCat segment manages strategic relationships that leverage the Company’s underwriting and investment expertise and earns management, performance and underwriting fees primarily from the Company’s operating affiliates, AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014 and AlphaCat 2015, as well as PaCRe, the AlphaCat ILS funds and the BetaCat ILS funds.

Talbot Segment

The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial institutions, contingency, accident & health and aviation classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.

Western World Segment

The Western World segment is focused on providing commercial insurance products on a surplus lines and specialty admitted basis. Western World specializes in underwriting classes of business that are not easily placed in the standard insurance market due to their complexity, high hazard, or unusual nature; including general liability, property and professional liability classes of business.

Corporate and eliminations

The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group. Corporate includes ‘non-core’ underwriting expenses, predominantly general and administrative and stock compensation expenses. Corporate also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, corporate is reflected separately, however corporate is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of inter segment revenues and expenses and unusual items that are not allocated to segments. Corporate also includes the gain on bargain purchase, net of expenses in connection with the acquisition of Flagstone in 2012 and transaction expenses related to the Western World acquisition in 2014.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following tables summarize the results of our operating segments and "Corporate":



Year Ended December 31, 2014	Validus Re Segment			AlphaCat Segment			Talbot Segment			Western World Segment (d)			Corporate & Eliminations			Total
Underwriting income
Gross premiums written	$	1,136,910		$	135,181		$	1,101,770		$	65,235		$	(75,810	)	$	2,363,286
Reinsurance premiums ceded	(182,056		)	(4,348		)	(192,211		)	(6,428		)	75,810			(309,233		)
Net premiums written	954,854			130,833			909,559			58,807			—			2,054,053
Change in unearned premiums	(37,570		)	1,517			(29,785		)	14,189			—			(51,649		)
Net premiums earned	917,284			132,350			879,774			72,996			—			2,002,404
Underwriting deductions
Losses and loss expenses	307,290			(9,670		)	423,394			51,035			—			772,049
Policy acquisition costs	141,670			12,673			187,162			3,169			(4,118		)	340,556
General and administrative expenses	74,739			19,590			150,828			11,121			73,514			329,792
Share compensation expenses	9,739			501			11,346			135			11,352			33,073
Total underwriting deductions	533,438			23,094			772,730			65,460			80,748			1,475,470

Underwriting income (loss)	$	383,846		$	109,256		$	107,044		$	7,536		$	(80,748	)	$	526,934

Net investment income	74,599			4,276			20,575			4,523			(3,897		)	100,076
Other insurance related income (loss)	3,159			27,122			1,095			264			(9,658		)	21,982
Finance expenses	(14,727		)	(3,545		)	213			—			(45,795		)	(63,854		)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	446,877			137,109			128,927			12,323			(140,098		)	585,138
Tax benefit (expense)	5,512			—			(3,880		)	(1,422		)	(365		)	(155		)
Income from operating affiliates	—			17,723			—			—			—			17,723
(Income) attributable to operating affiliate investors	—			(109,399		)	—			—			—			(109,399		)
Net operating income (loss)	$	452,389		$	45,433		$	125,047		$	10,901		$	(140,463	)	$	493,307

Net realized gains on investments	7,611			10,935			3,852			697			—			23,095
Change in net unrealized gains (losses) on investments	8,404			(56,943		)	1,685			(155		)	(10,964		)	(57,973		)
Income from investment affiliate	8,411			—			—			—			—			8,411
Foreign exchange (losses) gains	(6,404		)	70			(5,961		)	—			1,665			(10,630		)
Other (loss)	(2,243		)	—			—			—			—			(2,243		)
Transaction expenses (a)	—			—			—			—			(8,096		)	(8,096		)
Net income (loss)	$	468,168		$	(505	)	$	124,623		$	11,443		$	(157,858	)	$	445,871

Net loss attributable to noncontrolling interest	—			35,464			—			—			—			35,464
Net income (loss) available (attributable) to Validus	$	468,168		$	34,959		$	124,623		$	11,443		$	(157,858	)	$	481,335
Selected ratios (b):
Net premiums written / Gross premiums written	84.0		%	96.8		%	82.6		%	90.1		%				86.9		%
Losses and loss expenses	33.5		%	(7.3		)%	48.1		%	69.9		%				38.6		%
Policy acquisition costs	15.5		%	9.6		%	21.3		%	4.4		%				17.0		%
General and administrative expenses (c)	9.2		%	15.2		%	18.4		%	15.4		%				18.1		%
Expense ratio	24.7		%	24.8		%	39.7		%	19.8		%				35.1		%
Combined ratio	58.2		%	17.5		%	87.8		%	89.7		%				73.7		%
Total assets	$	4,209,289		$	1,656,326		$	2,890,123		$	1,492,179		$	63,704		$	10,311,621


(a)	The transaction expenses relate to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.


(b)	Ratios are based on net premiums earned.


(c)	The general and administrative expenses ratio includes share compensation expenses.


(d)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



Year Ended December 31, 2013	Validus Re Segment			AlphaCat Segment			Talbot Segment			Corporate & Eliminations			Total
Underwriting income
Gross premiums written	$	1,242,522		$	147,009		$	1,091,890		$	(80,315	)	$	2,401,106
Reinsurance premiums ceded	(226,264		)	(525		)	(226,111		)	80,315			(372,585		)
Net premiums written	1,016,258			146,484			865,779			—			2,028,521
Change in unearned premiums	117,679			(9,070		)	(35,085		)	—			73,524
Net premiums earned	1,133,937			137,414			830,694			—			2,102,045
Underwriting deductions
Losses and loss expenses	430,026			17,569			346,337			—			793,932
Policy acquisition costs	180,779			13,853			170,738			(5,060		)	360,310
General and administrative expenses	91,260			18,765			136,458			68,782			315,265
Share compensation expenses	7,668			468			9,613			9,881			27,630
Total underwriting deductions	709,733			50,655			663,146			73,603			1,497,137

Underwriting income (loss)	$	424,204		$	86,759		$	167,548		$	(73,603	)	$	604,908

Net investment income	81,346			3,865			18,061			(7,200		)	96,072
Other insurance related income (loss)	19,222			26,424			1,819			(28,345		)	19,120
Finance expenses	(16,111		)	(5,734		)	(259		)	(42,073		)	(64,177		)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	508,661			111,314			187,169			(151,221		)	655,923
Tax benefit (expense)	272			—			(671		)	16			(383		)
Income from operating affiliates	—			14,289			—			—			14,289
(Income) attributable to operating affiliate investors	—			(68,763		)	—			—			(68,763		)
Net operating income (loss)	$	508,933		$	56,840		$	186,498		$	(151,205	)	$	601,066

Net realized (losses) gains on investments	(1,382		)	4,084			556			—			3,258
Change in net unrealized losses on investments	(41,388		)	(3,893		)	(13,200		)	—			(58,481		)
Income from investment affiliate	4,790			—			—			—			4,790
Foreign exchange gains (losses)	7,394			(816		)	(3,531		)	(542		)	2,505
Other income	(10,777		)	—			—			—			(10,777		)
Net income (loss)	$	467,570		$	56,215		$	170,323		$	(151,747	)	$	542,361

Net (income) attributable to noncontrolling interest	—			(9,695		)	—			—			(9,695		)
Net income (loss) available (attributable) to Validus	$	467,570		$	46,520		$	170,323		$	(151,747	)	$	532,666
Selected ratios (a):
Net premiums written / Gross premiums written	81.8		%	99.6		%	79.3		%				84.5		%
Losses and loss expenses	37.9		%	12.8		%	41.7		%				37.8		%
Policy acquisition costs	16.0		%	10.1		%	20.5		%				17.1		%
General and administrative expenses (b)	8.7		%	14.0		%	17.6		%				16.3		%
Expense ratio	24.7		%	24.1		%	38.1		%				33.4		%
Combined ratio	62.6		%	36.9		%	79.8		%				71.2		%
Total assets	$	5,326,076		$	1,558,453		$	2,891,682		$	70,221		$	9,846,432


(a)	Ratios are based on net premiums earned.


(b)	The general and administrative expenses ratio includes share compensation expenses.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



Year Ended December 31, 2012	Validus Re Segment			AlphaCat Segment			Talbot Segment			Corporate & Eliminations			Total
Underwriting income
Gross premiums written	$	1,131,959		$	21,603		$	1,078,636		$	(65,758	)	$	2,166,440
Reinsurance premiums ceded	(144,578		)	—			(228,686		)	65,758			(307,506		)
Net premiums written	987,381			21,603			849,950			—			1,858,934
Change in unearned premiums	35,890			(3,937		)	(17,671		)	—			14,282
Net premiums earned	1,023,271			17,666			832,279			—			1,873,216
Underwriting deductions
Losses and loss expenses	575,416			—			424,030			—			999,446
Policy acquisition costs	154,362			1,774			183,926			(5,364		)	334,698
General and administrative expenses	63,048			7,532			133,281			59,791			263,652
Share compensation expenses	7,763			279			7,789			10,878			26,709
Total underwriting deductions	800,589			9,585			749,026			65,305			1,624,505

Underwriting income (loss)	$	222,682		$	8,081		$	83,253		$	(65,305	)	$	248,711

Net investment income	88,727			3,748			21,310			(5,849		)	107,936
Other insurance related income (loss)	5,000			23,229			2,033			(7,951		)	22,311
Finance expenses	(8,943		)	(3,061		)	(162		)	(41,691		)	(53,857		)
Operating income (loss) before taxes and income from operating affiliates	307,466			31,997			106,434			(120,796		)	325,101
Tax (expense)	(168		)	—			(2,229		)	(104		)	(2,501		)
Income from operating affiliates	—			12,580			—			—			12,580
Net operating income (loss)	$	307,298		$	44,577		$	104,205		$	(120,900	)	$	335,180
Gain on bargain purchase, net of expenses (a)	—			—			—			17,701			17,701
Net realized gains on investments	12,026			216			5,991			—			18,233
Net unrealized (losses) on investments	35,033			(19,509		)	2,061			—			17,585
Loss from investment affiliate	(964		)	—			—			—			(964		)
Foreign exchange (losses) gains	2,664			44			2,527			(437		)	4,798
Other income	85			—			—			—			85
Net income (loss)	$	356,142		$	25,328		$	114,784		$	(103,636	)	$	392,618
Net loss attributable to noncontrolling interest	—			15,820			—			—			15,820
Net income (loss) available (attributable) to Validus	$	356,142		$	41,148		$	114,784		$	(103,636	)	$	408,438
Selected ratios: (b)
Net premiums written / Gross premiums written	87.2		%	100.0		%	78.8		%				85.8		%
Losses and loss expenses	56.2		%	—		%	50.9		%				53.4		%
Policy acquisition costs	15.1		%	10.0		%	22.1		%				17.9		%
General and administrative expenses (c)	6.9		%	44.2		%	16.9		%				15.5		%
Expense ratio	22.0		%	54.2		%	39.0		%				33.4		%
Combined ratio	78.2		%	54.2		%	89.9		%				86.8		%
Total assets	$	6,206,084		$	805,513		$	2,968,224		$	40,443		$	10,020,264


(a)	The gain on bargain purchase, net of expenses, arose from the acquisition of Flagstone Reinsurance Holdings S.A. on November 30, 2012 and is net of transaction related expenses which included legal, financial advisory, audit related services and termination expenses.


(b)	Ratios are based on net premiums earned.


(c)	The general and administrative expenses ratio includes share compensation expenses.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table sets forth the gross premiums written by line of business for the periods indicated:



	Gross Premiums Written (a)
	Year Ended December 31, 2014		Year Ended December 31, 2013		Year Ended December 31, 2012
Property	$	1,054,530	$	1,164,687	$	1,060,297
Marine	576,478		570,008		649,421
Specialty	677,026		666,411		456,722
Liability	55,252		—		—
	$	2,363,286	$	2,401,106	$	2,166,440


(a)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:



	Gross Premiums Written
	Year Ended December 31, 2014
	Validus Re		AlphaCat		Talbot		Western World (d)		Eliminations			Total		%
United States	$	442,314	$	30,987	$	108,458	$	65,235	$	(11,026	)	$	635,968	27.0	%

Worldwide excluding United States (a)	76,129		7,331		139,570		—		(1,334		)	221,696		9.4	%
Australia and New Zealand	20,257		1,019		9,736		—		—			31,012		1.3	%
Europe	58,236		3,005		45,615		—		(2,305		)	104,551		4.4	%
Latin America and Caribbean	54,053		—		116,281		—		(23,958		)	146,376		6.2	%
Japan	43,310		608		4,116		—		(608		)	47,426		2.0	%
Canada	3,670		215		10,194		—		(214		)	13,865		0.6	%
Rest of the world (b)	21,467		—		93,012		—		—			114,479		4.8	%
Sub-total, non United States	277,122		12,178		418,524		—		(28,419		)	679,405		28.7	%
Worldwide including United States (a)	179,564		92,016		96,187		—		(22,463		)	345,304		14.6	%
Other locations non-specific (c)	237,910		—		478,601		—		(13,902		)	702,609		29.7	%
Total	$	1,136,910	$	135,181	$	1,101,770	$	65,235	$	(75,810	)	$	2,363,286	100.0	%

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	Gross Premiums Written
	Year Ended December 31, 2013
	Validus Re		AlphaCat		Talbot		Eliminations			Total		%
United States	$	524,776	$	50,848	$	93,357	$	(6,565	)	$	662,416	27.7	%

Worldwide excluding United States (a)	63,643		14,801		142,294		(1,485		)	219,253		9.1	%
Australia and New Zealand	22,275		2,216		11,097		—			35,588		1.5	%
Europe	65,861		2,533		51,667		(1,446		)	118,615		4.9	%
Latin America and Caribbean	50,522		—		155,798		(52,267		)	154,053		6.4	%
Japan	42,729		653		5,971		(653		)	48,700		2.0	%
Canada	3,688		818		10,768		(818		)	14,456		0.6	%
Rest of the world (b)	24,337		—		92,652		—			116,989		4.9	%
Sub-total, non United States	273,055		21,021		470,247		(56,669		)	707,654		29.4	%
Worldwide including United States (a)	177,539		75,140		80,538		(8,996		)	324,221		13.5	%
Other locations non-specific (c)	267,152		—		447,748		(8,085		)	706,815		29.4	%
Total	$	1,242,522	$	147,009	$	1,091,890	$	(80,315	)	$	2,401,106	100.0	%



	Gross Premiums Written
	Year Ended December 31, 2012
	Validus Re		AlphaCat		Talbot		Eliminations			Total		%
United States	$	463,384	$	12,638	$	77,561	$	(1,942	)	$	551,641	25.4	%

Worldwide excluding United States (a)	24,119		279		156,593		—			180,991		8.4	%
Australia and New Zealand	—		217		12,851		—			13,068		0.6	%
Europe	87,805		1,332		50,262		—			139,399		6.4	%
Latin America and Caribbean	80,432		—		149,091		(53,565		)	175,958		8.1	%
Japan	30,386		—		6,630		—			37,016		1.7	%
Canada	—		—		12,243		—			12,243		0.6	%
Rest of the world (b)	68,754		—		91,130		—			159,884		7.4	%
Sub-total, non United States	291,496		1,828		478,800		(53,565		)	718,559		33.2	%
Worldwide including United States (a)	102,080		7,137		65,084		(4,038		)	170,263		7.9	%
Other locations non-specific (c)	274,999		—		457,191		(6,213		)	725,977		33.5	%
Total	$	1,131,959	$	21,603	$	1,078,636	$	(65,758	)	$	2,166,440	100.0	%


(a)	Represents risks in two or more geographic zones.


(b)	Represents risks in one geographic zone.


(c)	The Other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable, such as marine and aerospace risks, since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.


(d)	The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

26. Statutory and regulatory requirements

Validus Holdings, Ltd. has operations which are subject to laws and regulations in the jurisdictions in which they operate, the most significant of which are Bermuda, the United Kingdom, the United States and Switzerland.

As a holding company, Validus Holdings, Ltd.’s principal sources of income are dividends or other sources of permitted distributions from its subsidiaries. These funds provide the cash flow required for dividend payments to the Company’s shareholders. The holding company has no material restrictions on its ability to make distributions to shareholders however, the ability of our (re)insurance subsidiaries to make distributions is limited by the applicable laws and regulations of the various countries in which we operate. The Company’s subsidiaries are required to maintain certain measures of solvency and liquidity which provide restrictions on declaring dividends and distributions. The statutory capital and surplus in certain of our most significant regulatory jurisdictions as at December 31, 2014 and 2013 was as follows:



	Bermuda (a)				United States (b)				Switzerland (c)
	December 31,				December 31,				December 31,
	2014		2013		2014		2013		2014		2013
Required statutory capital and surplus	$	586,641	$	1,390,179	$	95,963	$	—	$	205,563	$	312,563
Actual statutory capital and surplus	3,793,329		3,884,572		452,089		—		701,010		939,609

(a)

The Company's Bermuda based insurance subsidiaries are required to maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin ("MSM") and the Enhanced Capital Requirement ("ECR") where applicable. The ECR is equal to the higher of each insurer's MSM or the Bermuda Solvency Capital Requirement ("BSCR") model or approved internal capital model. The BSCR for the relevant insurers for the year ended December 31, 2014 will not be filed with the BMA until April 2015. As a result, the required statutory capital and surplus as at December 31, 2014 is based on the MSM of all relevant insurers, whereas the required statutory capital and surplus as at December 31, 2013 is based on the MSM and ECR where applicable for all relevant insurers. Required statutory capital and surplus includes Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd (Bermuda Branch), PaCRe, Ltd., IPCRe Limited, Validus Re Americas, Ltd., Talbot Insurance (Bermuda), Ltd., AlphaCat Reinsurance, Ltd. and Mont Fort Re Ltd. Actual statutory capital and surplus includes Validus Reinsurance, Ltd., AlphaCat Reinsurance, Ltd. and Talbot Insurance (Bermuda), Ltd. Validus Reinsurance, Ltd. is the parent company of the other five Bermuda based insurance subsidiaries.

(b)

Required statutory capital and surplus is based on the Risk-Based Capital ("RBC") requirements and includes Western World Insurance Company, Tudor Insurance Company and Stratford Insurance Company. Actual statutory capital and surplus includes Western World Insurance Company. Western World Insurance Company is the parent Company of the other two U.S. based insurance subsidiaries. The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(c)	Required statutory capital and surplus is based on the Target Capital ("TC") requirements calculated under the Swiss Solvency Test ("SST"). Required and actual statutory capital and surplus includes Validus Reinsurance (Switzerland) Ltd (formerly Flagstone Réassurance Suisse SA).

During 2015, the Company's regulated subsidiaries have the ability to distribute up to $1,013,379 of unrestricted net assets as dividend payments and/or return of capital to Validus Holdings, Ltd. (2014: $516,854) without prior regulatory approval. During the year ended December 31, 2014, actual dividends and distributions to Validus Holdings, Ltd. from its subsidiaries were $773,966 (2013: $1,009,000).

Statutory net income for the years ended December 31, 2014, 2013 and 2012 was as follows:



	Bermuda (a)						United States (b)						Switzerland (c)
	Year ended December 31,						Year ended December 31,						Year ended December 31,
	2014		2013		2012		2014		2013		2012		2014		2013			2012
Statutory net income (loss)	$	509,559	$	688,001	$	496,227	$	105,210	$	—	$	—	$	60,308	$	(17,655	)	$	(1,559	)


(a)	Statutory net income includes Validus Reinsurance, Ltd., PaCRe, Ltd. (at the Company's effective 10% equity interest), IPCRe Limited, Validus Re Americas, Ltd., Talbot Insurance (Bermuda), Ltd., AlphaCat Reinsurance, Ltd. and Mont Fort Re Ltd.


(b)	Statutory net income includes Western World Insurance Company, Tudor Insurance Company and Stratford Insurance Company. The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.


(c)	Statutory net income (loss) includes Validus Reinsurance (Switzerland) Ltd (formerly Flagstone Réassurance Suisse SA). The results of Validus Reinsurance (Switzerland) Ltd, a former Flagstone subsidiary, have been included in the Company's consolidated results from the November 30, 2012 date of acquisition.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)


(a)	Bermuda

The Company has eight Bermuda based insurance subsidiaries: Validus Reinsurance, Ltd., a Class 4 insurer; Validus Reinsurance (Switzerland) Ltd (Bermuda Branch) (formerly known as Flagstone Réassurance Suisse S.A. (Bermuda Branch)), a Class 4 insurer; PaCRe, Ltd., a Class 4 insurer; IPCRe Limited ("IPCRe") (formerly known as Validus Re Americas, Ltd.), a Class 3A insurer; Validus Re Americas, Ltd. (formerly known as Longhorn Re, Ltd.), a Class 3A insurer; Talbot Insurance (Bermuda), Ltd. ("TIBL"), a Class 3 insurer; AlphaCat Reinsurance, Ltd., a Class 3 insurer; and Mont Fort Re Ltd., a Class 3 insurer. The Company also has investments in two Bermuda based insurance affiliates, AlphaCat Re 2011, Ltd. and AlphaCat Re 2012, Ltd., each licensed as a Special Purpose Insurer (“SPI”) under the Insurance Act. Each of these Bermuda insurance subsidiaries and affiliates is registered under the Insurance Act. The Bermuda subsidiaries have to meet certain requirements for minimum solvency and liquidity ratios and all statutory filings are prepared in accordance with prescribed regulatory accounting practices required by The Insurance Act 1978. At December 31, 2014 and 2013, the actual statutory capital and surplus of the Bermuda based insurance subsidiaries exceeded the relevant regulatory requirements.

The ability of certain of these subsidiaries to pay dividends to us is limited under Bermuda law and regulations. The Insurance Act provides that each of the Class 4 Bermuda subsidiaries may not declare or pay, in any financial year, dividends of more than 25% of its total statutory capital and surplus (as shown on its statutory balance sheet in relation to the previous financial year) unless it files with the BMA at least seven days prior to the payment, an affidavit signed by at least two directors and such insurance subsidiary's principal representative, stating that in their opinion such subsidiary will continue to satisfy the required margins following declaration of those dividends, however, there is no additional requirement for BMA approval. In addition, before reducing its total statutory capital by 15% or more (as set out in its previous year's statutory financial statements) each of the Class 3A and Class 4 Bermuda insurance subsidiaries must make application to the BMA for permission to do so; such application shall consist of an affidavit signed by at least two directors and such insurance subsidiary's principal representative stating that in their opinion the proposed reduction in capital will not cause such subsidiaries to fail to meet its relevant margins, and such other information as the BMA may require. The Insurance Act permits each of the insurance subsidiaries to declare or pay any dividends during any financial year so long as it does not cause the insurance subsidiary to fail to meet its relevant margins subject to the restrictions set out herein and other than in respect of IPCRe. The Class 3 insurers, before reducing by 15% or more of its total statutory capital, as set out in its previous year's financial statements, shall apply to the BMA for its approval and shall provide such information as the BMA may require. The Company's primary restrictions on net assets of insurance subsidiaries consist of regulatory requirements placed upon the regulated insurance subsidiaries to hold minimum amounts of total statutory capital and surplus and other than the restriction on IPCRe noted above, there were no other material restrictions on net assets in place as of December 31, 2014.

The Company's principal operating subsidiary in Bermuda, Validus Reinsurance Ltd., maintains a branch office in Singapore. As the branch office is not considered a separate entity for regulatory purposes, the required and actual statutory capital and surplus amount includes amounts, as set out above, related to the applicable branch office. The branch office is subject to additional minimum capital or asset requirements in their country of domicile. At December 31, 2014 and 2013, the actual capital and assets for the branch exceeded the relevant local regulatory requirements.


(b)	United Kingdom

As disclosed in Note 22 “Commitments and contingencies (d) Funds at Lloyd’s,” Syndicate 1183 and Talbot 2002 Underwriting Capital Ltd (“T02”) are subject to regulation by the Council of Lloyd’s. Syndicate 1183 and T02 are also subject to regulation by the U.K. Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) under the Financial Services and Market Act 2000.

T02 is a corporate member of Lloyd’s. As a corporate member of Lloyd’s, T02 is bound by the rules of the Society of Lloyd’s, which are prescribed by Bye-laws and Requirements made by the Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules (among other matters) prescribe T02’s membership subscription, the level of its contribution to the Lloyd’s central fund and the assets it must deposit with Lloyd’s in support of its underwriting. The Council of Lloyd’s has broad power to sanction breaches of its rules, including the power to restrict or prohibit a member’s participation on Lloyd’s syndicates. The capital required to support a Syndicate’s underwriting capacity, or “Funds at Lloyd’s”, is assessed annually and is determined by Lloyd’s in accordance with the rules of the Society of Lloyd’s. The capital to support the underwriting of Syndicate 1183 is provided in the form of a letter of credit and funds held at Lloyd’s. The amount provided as Funds at Lloyd’s is not available for distribution to the Company for the payment of dividends.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

Each year, during the second quarter, the corporate member applies to Lloyd’s to release accumulated funds, whether syndicate profits, interest on Funds at Lloyd’s or other which are in excess of the agreed Funds at Lloyd’s amount. At December 31, 2014 and 2013, the actual capital and assets exceeded the relevant local regulatory requirements. The release for the year ended December 31, 2014 enabled a dividend payment of $100,000 (2013: $190,000) to the Company. For further details on Funds at Lloyd's refer to Note 22 (d) "Commitments and contingencies" to the Consolidated Financial Statements.


(c)	United States

The Company has three U.S. based insurance subsidiaries domiciled in New Hampshire: Western World Insurance Company, Tudor Insurance Company and Stratford Insurance Company. New Hampshire insurance laws limit the amount of dividends Western World may pay to the Company in a 12-month period without the approval of the New Hampshire State Insurance Department (Insurance Department). These limitations are based on the lesser of: a maximum of 10.0% of prior year end statutory surplus as determined under statutory accounting practices or the net income, not including realized capital gains, for the 12-month period ending December 31, next preceding, but shall not include pro rata distributions of any class of the insurer's own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carry-forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years. During 2015, the maximum dividend that may be paid to the Company by Western World without obtaining prior approval is $45,209.

The Company’s U.S. based insurance company subsidiaries are required to file financial statements prepared in accordance with accounting practices prescribed or permitted by the Insurance Department to which the insurance company subsidiaries are subject (statutory basis). Such accounting practices vary in certain respects from GAAP.

The Company’s U.S. based insurance company subsidiaries are subject to certain Risk-Based Capital ("RBC") requirements as specified by the National Association of Insurance Commissioners. Under those requirements, the minimum amount of capital and surplus required to be maintained by a property/casualty insurance company is based on various risk factors. At December 31, 2014, the Company’s U.S. based insurance company subsidiaries met the RBC requirements.

State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from such prescribed practices. The Company’s insurance company subsidiaries did not use such permitted practices in 2014.


(d)	Switzerland

Validus Reinsurance (Switzerland) Ltd ("Validus Re Swiss") (formerly Flagstone Réassurance Suisse SA), is a société anonyme headquartered in Zurich, Switzerland as of February 1, 2014. The conduct of reinsurance business by a company headquartered in Switzerland requires a license granted by the Swiss Financial Market Supervisory Authority ("FINMA").

Validus Re Swiss is funded by equity in the form of paid in capital by shares and in share premium. Under Swiss corporate law as modified by insurance supervisory law, a non-life insurance company is obliged to contribute to statutory legal reserves a minimum of 20% of any annual profit up to 50% of statutory capital, being paid in share capital. Validus Re Swiss has been substantially funded by share premium. Share premium can be distributed to shareholders without being subject to withholding tax. However, the distribution of any special dividend to shareholders remains subject to the approval of FINMA which has regard to the maintenance of solvency and the interests of reinsureds and creditors. At December 31, 2014 and 2013, the actual capital and assets exceeded the relevant local regulatory requirements.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

27. Subsequent events


(a)	Quarterly dividend


(b)	Share repurchase authorization

On February 3, 2015, the Board of Directors of the Company announced an increase in the Company's common share repurchase authorization to $750,000. This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs. The Company expects the repurchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company's capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)

28. Condensed unaudited quarterly financial data



	Quarters Ended
	December 31, 2014			September 30, 2014			June 30, 2014			March 31, 2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Underwriting income
Gross premiums written	$	336,647		$	358,974		$	655,674		$	1,011,991
Reinsurance premiums ceded	(33,623		)	(30,137		)	(50,565		)	(194,908		)
Net premiums written	303,024			328,837			605,109			817,083
Change in unearned premiums	255,724			165,859			(139,106		)	(334,126		)
Net premiums earned	558,748			494,696			466,003			482,957
Underwriting deductions
Losses and loss expenses	226,508			224,125			158,745			162,671
Policy acquisition costs	89,550			86,404			78,953			85,649
General and administrative expenses	98,186			83,319			73,842			74,445
Share compensation expenses	8,821			8,764			8,341			7,147
Total underwriting deductions	423,065			402,612			319,881			329,912
Underwriting income	$	135,683		$	92,084		$	146,122		$	153,045
Net investment income	30,167			25,261			21,286			23,362
Other insurance related income	5,524			3,610			4,811			8,037
Finance expenses	(16,474		)	(15,354		)	(16,126		)	(15,900		)
Operating income before taxes, (income) from operating affiliates and (income) loss attributable to operating affiliate investors	$	154,900		$	105,601		$	156,093		$	168,544
Tax benefit (expense)	243			953			(1,391		)	40
Income from operating affiliates	4,143			3,761			4,892			4,927
(Income) attributable to operating affiliate investors	(26,566		)	(25,807		)	(25,316		)	(31,710		)
Net operating income	$	132,720		$	84,508		$	134,278		$	141,801
Net realized gains on investments	6,902			4,595			7,858			3,740
Net unrealized (losses) gains on investments	(74,119		)	(84,974		)	45,427			55,693
Income from investment affiliate	530			1,754			779			5,348
Foreign exchange gains (losses)	4,131			(11,441		)	3,158			(6,478		)
Other (loss) income	(770		)	(7,690		)	424			5,793
Transaction expenses	(4,695		)	(149		)	(3,252		)	—
Net income (loss)	$	64,699		$	(13,397	)	$	188,672		$	205,897
Net loss (income) attributable to noncontrolling interest	61,209			53,069			(35,305		)	(43,509		)
Net income available to Validus	$	125,908		$	39,672		$	153,367		$	162,388
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	86,421,127			90,593,329			90,952,523			93,451,999
Diluted	90,948,156			91,939,610			95,276,836			97,799,519
Basic earnings per share available to common shareholders	$	1.44		$	0.42		$	1.67		$	1.72
Earnings per diluted share available to common shareholders	$	1.38		$	0.41		$	1.61		$	1.66
Selected ratios:
Losses and loss expenses	40.5		%	45.3		%	34.1		%	33.7		%
Expense ratio	35.2		%	36.1		%	34.5		%	34.6		%
Combined ratio	75.7		%	81.4		%	68.6		%	68.3		%

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	Quarters Ended
	December 31, 2013			September 30, 2013			June 30, 2013			March 31, 2013
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Underwriting income
Gross premiums written	$	237,273		$	356,760		$	702,313		$	1,104,760
Reinsurance premiums ceded	(24,558		)	(39,415		)	(121,396		)	(187,216		)
Net premiums written	212,715			317,345			580,917			917,544
Change in unearned premiums	279,523			213,943			(33,459		)	(386,483		)
Net premiums earned	492,238			531,288			547,458			531,061
Underwriting deductions
Losses and loss expenses	206,152			177,965			265,044			144,771
Policy acquisition costs	84,647			94,900			87,152			93,611
General and administrative expenses	82,930			81,089			70,967			80,279
Share compensation expenses	8,147			10,527			6,638			2,318
Total underwriting deductions	381,876			364,481			429,801			320,979
Underwriting income	$	110,362		$	166,807		$	117,657		$	210,082
Net investment income	24,204			20,009			26,210			25,649
Other insurance related income	7,743			943			5,512			4,922
Finance expenses	(16,925		)	(15,317		)	(17,566		)	(14,369		)
Operating income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	$	125,384		$	172,442		$	131,813		$	226,284
Tax (expense) benefit	(603		)	(5		)	(93		)	318
Income from operating affiliates	5,510			1,463			3,793			3,523
(Income) attributable to operating affiliate investors (a)	(26,607		)	(11,815		)	(20,264		)	(10,077		)
Net operating income	$	103,684		$	162,085		$	115,249		$	220,048
Net realized gains (losses) on investments	4,448			(6,320		)	3,409			1,721
Net unrealized gains (losses) on investments	20,137			69,967			(141,348		)	(7,237		)
Income from investment affiliate	516			1,044			1,753			1,477
Foreign exchange (losses) gains	(2,230		)	6,036			(8,223		)	6,922
Other loss	(3,697		)	(3,749		)	(1,094		)	(2,237		)
Net income (loss)	$	122,858		$	229,063		$	(30,254	)	$	220,694
Net (income) loss (available) attributable to noncontrolling interest	(27,526		)	(45,694		)	60,976			2,549
Net income available to Validus	$	95,332		$	183,369		$	30,722		$	223,243
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	98,454,907			99,834,563			103,133,188			107,386,438
Diluted	102,928,482			103,613,766			104,734,643			110,052,999
Basic earnings per share available to common shareholders	$	0.95		$	1.82		$	0.28		$	1.94
Earnings per diluted share available to common shareholders	$	0.93		$	1.77		$	0.28		$	1.90
Selected Ratios:
Losses and loss expenses	41.9		%	33.5		%	48.4		%	27.3		%
Expense ratio	35.7		%	35.1		%	30.1		%	33.2		%
Combined ratio	77.6		%	68.6		%	78.5		%	60.5		%


(a)	This amount had been shown within finance expenses for each of the three months ended March 31, June 30 and September 30, 2013.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Continued)

(Expressed in thousands of U.S. dollars, except share and per share information)



	Quarters Ended
	December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Underwriting income
Gross premiums written	$	311,847		$	390,215		$	627,089		$	837,289
Reinsurance premiums ceded	(35,659		)	(45,743		)	(119,052		)	(107,052		)
Net premiums written	276,188			344,472			508,037			730,237
Change in unearned premiums	223,098			130,632			(60,410		)	(279,038		)
Net premiums earned	499,286			475,104			447,627			451,199
Underwriting deductions
Losses and loss expenses	458,310			155,455			153,692			231,989
Policy acquisition costs	81,814			98,623			76,129			78,132
General and administrative expenses	65,095			70,547			61,635			66,375
Share compensation expenses	7,126			7,345			6,800			5,438
Total underwriting deductions	612,345			331,970			298,256			381,934
Underwriting (loss) income	$	(113,059	)	$	143,134		$	149,371		$	69,265
Net investment income	28,802			25,489			25,885			27,760
Other insurance related income	144			7,324			6,606			8,237
Finance expenses	(14,510		)	(9,362		)	(13,706		)	(16,279		)
Operating (loss) income before taxes and (loss) income from operating affiliates	$	(98,623	)	$	166,585		$	168,156		$	88,983
Tax expense	(615		)	(1,343		)	(404		)	(139		)
(Loss) income from operating affiliates	$	(614	)	$	6,235		$	3,592		$	3,367
Net operating (loss) income	$	(99,852	)	$	171,477		$	171,344		$	92,211
Gain on bargain purchase, net of expenses (a)	21,485			(3,784		)	—			—
Net realized (losses) gains on investments	(4,516		)	9,063			6,154			7,532
Net unrealized (losses) gains on investments	(35,857		)	86,345			(53,574		)	20,671
Loss from investment affiliate	(406		)	(160		)	(398		)	—
Foreign exchange gains (losses)	1,181			1,103			(652		)	3,166
Other income (loss)	43			—			(612		)	654
Net (loss) income	$	(117,922	)	$	264,044		$	122,262		$	124,234
Net loss (income) attributable (available) to noncontrolling interest	27,206			(56,746		)	45,360			—
Net (loss) income (attributable) available to Validus	$	(90,716	)	$	207,298		$	167,622		$	124,234
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	97,688,338			93,368,775			98,254,186			99,425,140
Diluted	97,688,338			98,236,490			103,667,967			105,096,090
Basic (loss) earnings per share (attributable) available to common shareholders	$	(0.94	)	$	2.20		$	1.69		$	1.23
(Loss) earnings per diluted share (attributable) available to common shareholders	$	(0.94	)	$	2.11		$	1.62		$	1.18
Selected Ratios:
Losses and loss expenses	91.8		%	32.7		%	34.3		%	51.4		%
Expense ratio	30.9		%	37.2		%	32.3		%	33.2		%
Combined ratio	122.7		%	69.9		%	66.6		%	84.6		%


(a)	The gain on bargain purchase, net of expenses, arose from the acquisition of Flagstone Reinsurance Holdings S.A. on November 30, 2012 and is net of transaction related expenses which included legal, financial advisory, audit related services and termination expenses.

F-81

SCHEDULE I

VALIDUS HOLDINGS, LTD.

SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES

At December 31, 2014

(Expressed in thousands of U.S. dollars)



	Amortized cost		Fair value		Amount shown on the Balance Sheet
U.S. government and government agency	$	759,232	$	760,086	$	760,086
Non-U.S. government and government agency	279,493		278,728		278,728
U.S. states, municipalities and political subdivisions	448,668		449,623		449,623
Agency residential mortgage-backed securities	520,685		529,231		529,231
Non-agency residential mortgage-backed securities	37,954		37,807		37,807
U.S. corporate	1,500,963		1,499,706		1,499,706
Non-U.S. corporate	564,386		563,162		563,162
Bank loans	457,537		449,004		449,004
Catastrophe bonds	75,822		75,664		75,664
Asset-backed securities	647,422		647,482		647,482
Commercial mortgage-backed securities	242,332		242,238		242,238
Total fixed maturities	5,534,494		5,532,731		5,532,731
Total short-term investments	1,051,222		1,051,074		1,051,074
Total other investments	879,176		813,011		813,011
Total	$	7,464,892	$	7,396,816	$	7,396,816

F-82

SCHEDULE II

VALIDUS HOLDINGS, LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

As at December 31, 2014 and 2013

(Expressed in thousands of U.S. dollars, except share and per share information)



	December 31, 2014			December 31, 2013
ASSETS
Cash and cash equivalents	$	29,798		$	20,385
Investment in subsidiaries on an equity basis	4,140,770			4,273,592
Balances due from subsidiaries	41,078			29,048
Other assets	3,239			3,767
Total assets	$	4,214,885		$	4,326,792
LIABILITIES
Accounts payable and accrued expenses	$	29,621		$	25,500
Senior notes payable	247,306			247,198
Debentures payable	350,000			350,000
Total liabilities	$	626,927		$	622,698
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2014—155,554,224; 2013—154,488,497; Outstanding: 2014—83,869,845; 2013—96,044,312)	$	27,222		$	27,036
Treasury shares (2014—71,684,379; 2013—58,444,185)	(12,545		)	(10,228		)
Additional paid-in capital	1,207,493			1,677,894
Accumulated other comprehensive loss	(8,556		)	(617		)
Retained earnings	2,374,344			2,010,009
Total shareholders’ equity	$	3,587,958		$	3,704,094
Total liabilities and shareholders’ equity	$	4,214,885		$	4,326,792

F-83

VALIDUS HOLDINGS, LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

STATEMENTS OF OPERATIONS

For the years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars)



	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
Revenues
Net investment income	$	14		$	14		$	3
Other income	—			36			—
Foreign exchange gains (losses)	648			(382		)	(469		)
Total revenues	662			(332		)	(466		)
Expenses
General and administrative expenses	86,108			84,143			66,576
Share compensation expenses	6,424			6,329			8,503
Finance expenses	47,689			45,868			45,203
Total expenses	140,221			136,340			120,282
(Loss) before equity in net earnings of subsidiaries	(139,559		)	(136,672		)	(120,748		)
Equity in net earnings of subsidiaries	620,894			669,338			529,186
Net income	$	481,335		$	532,666		$	408,438
Other comprehensive (loss) income
Change in foreign currency translation adjustments	$	(7,501	)	$	(1,954	)	$	3,648
Change in minimum pension liability, net of tax	(210		)	—			—
Change in fair value of cash flow hedge	(228		)	—			—
Other comprehensive (loss) income	(7,939		)	(1,954		)	3,648
Comprehensive income	$	473,396		$	530,712		$	412,086

F-84

VALIDUS HOLDINGS, LTD.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars)



	Year Ended December 31, 2014			Year Ended December 31, 2013			Year Ended December 31, 2012
Cash flows provided by (used in) operating activities
Net income	$	481,335		$	532,666		$	408,438
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net earnings of subsidiaries	(620,894		)	(669,338		)	(529,186		)
Dividends received from subsidiaries	100,000			1,009,000			734,000
Share compensation expenses	6,424			6,329			8,503
Amortization of discount on senior notes	108			108			108
Change in:
Other assets	528			865			115
Balances due from subsidiaries	(12,030		)	4,329			(35,522		)
Balances due to subsidiaries	—			—			(45,808		)
Accounts payable and accrued expenses	2,624			(10,876		)	7,640
Net cash (used in) provided by operating activities	(41,905		)	873,083			548,288
Cash flows provided by (used in) investing activities
Return of capital from subsidiaries	673,966			—			—
Investment in subsidiaries	—			—			(166,582		)
Net cash provided by (used in) investing activities	673,966			—			(166,582		)
Cash flows provided by (used in) financing activities
Issuance of common shares, net	5,347			1,211			3,015
Purchases of common shares under repurchase program	(510,952		)	(513,504		)	(259,962		)
Dividends paid	(117,043		)	(360,071		)	(110,037		)
Net cash (used in) financing activities	(622,648		)	(872,364		)	(366,984		)

Net increase in cash	9,413			719			14,722
Cash and cash equivalents—beginning of year	20,385			19,666			4,944
Cash and cash equivalents—end of year	$	29,798		$	20,385		$	19,666

F-85

SCHEDULE III

VALIDUS HOLDINGS, LTD.

SUPPLEMENTARY INSURANCE INFORMATION

As at and for the years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars)



	As at and for the year ended December 31, 2014
	Deferred Acquisition Costs			Reserve for Losses and Loss Expenses			Unearned Premiums			Net Premiums Earned		Net Investment Income			Losses and Loss Expenses			Amortization of Deferred Acquisition Costs			Other Operating Expenses		Net Premiums Written
Validus Re	$	59,091		$	1,333,878		$	305,138		$	917,284	$	74,599		$	307,290		$	141,670		$	84,478	$	954,854
AlphaCat	1,554			6,525			15,360			132,350		4,276			(9,670		)	12,673			20,091		130,833
Talbot	95,246			1,352,056			552,660			879,774		20,575			423,394			187,162			162,174		909,559
Western World	9,566			613,551			133,185			72,996		4,523			51,035			3,169			11,256		58,807
Corporate & Eliminations	(4,162		)	(71,616		)	(15,779		)	—		(3,897		)	—			(4,118		)	84,866		—
Total	$	161,295		$	3,234,394		$	990,564		$	2,002,404	$	100,076		$	772,049		$	340,556		$	362,865	$	2,054,053



	As at and for the year ended December 31, 2013
	Deferred Acquisition Costs			Reserve for Losses and Loss Expenses			Unearned Premiums			Net Premiums Earned		Net Investment Income			Losses and Loss Expenses		Amortization of Deferred Acquisition Costs			Other Operating Expenses		Net Premiums Written
Validus Re	$	52,835		$	1,723,465		$	296,115		$	1,133,937	$	81,346		$	430,026	$	180,779		$	98,928	$	1,016,258
AlphaCat	1,755			17,612			16,062			137,414		3,865			17,569		13,853			19,233		146,484
Talbot	88,656			1,362,574			535,659			830,694		18,061			346,337		170,738			146,071		865,779
Corporate & Eliminations	(8,977		)	(73,252		)	(23,340		)	—		(7,200		)	—		(5,060		)	78,663		—
Total	$	134,269		$	3,030,399		$	824,496		$	2,102,045	$	96,072		$	793,932	$	360,310		$	342,895	$	2,028,521



	As at and for the year ended December 31, 2012
	Deferred Acquisition Costs			Reserve for Losses and Loss Expenses			Unearned Premiums			Net Premiums Earned		Net Investment Income			Losses and Loss Expenses		Amortization of Deferred Acquisition Costs			Other Operating Expenses		Net Premiums Written
Validus Re	$	75,138		$	2,122,895		$	414,343		$	1,023,271	$	88,727		$	575,416	$	154,362		$	70,811	$	987,381
AlphaCat	713			5,000			6,992			17,666		3,748			—		1,774			7,811		21,603
Talbot	79,747			1,480,307			494,883			832,279		21,310			424,030		183,926			141,070		849,950
Corporate & Eliminations	(9,010		)	(90,629		)	(21,856		)	—		(5,849		)	—		(5,364		)	70,669		—
Total	$	146,588		$	3,517,573		$	894,362		$	1,873,216	$	107,936		$	999,446	$	334,698		$	290,361	$	1,858,934

F-86

SCHEDULE IV

VALIDUS HOLDINGS, LTD.

REINSURANCE

As at and for the years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars)



	Direct gross		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
Year Ended December 31, 2014	$	683,028	$	309,233	$	1,680,258	$	2,054,053	82	%
Year Ended December 31, 2013	544,722		372,585		1,856,384		2,028,521		92	%
Year Ended December 31, 2012	550,491		307,506		1,615,949		1,858,934		87	%

F-87

SCHEDULE VI

VALIDUS HOLDINGS, LTD.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY

INSURANCE OPERATIONS

As at and for the years ended December 31, 2014, 2013 and 2012

(Expressed in thousands of U.S. dollars)



Affiliation with registrant	Deferred acquisition costs		Reserves for losses and loss expenses		Reserves for unearned premiums		Net earned premiums		Net investment income		Losses and loss expenses incurred related to					Net paid losses and loss expenses		Amortization of deferred acquisition costs		Net premiums written
Affiliation with registrant	Deferred acquisition costs		Reserves for losses and loss expenses		Reserves for unearned premiums		Net earned premiums		Net investment income		Current year		Prior year			Net paid losses and loss expenses		Amortization of deferred acquisition costs		Net premiums written
Consolidated Subsidiaries
2014	$	161,295	$	3,234,394	$	990,564	$	2,002,404	$	100,076	$	1,024,256	$	(252,207	)	$	1,061,907	$	340,556	$	2,054,053
2013	134,269		3,030,399		824,496		2,102,045		96,072		999,380		(205,448		)	1,161,478		360,310		2,028,521
2012	146,588		3,517,573		894,362		1,873,216		107,936		1,174,415		(174,969		)	836,020		334,698		1,858,934

F-88