2015.03.31 - 10Q

Table of Contents



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________
 Form 10-Q 
__________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015

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
 
(I.R.S. Employer
incorporation or organization)
 
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)
 
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 x  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 x  No 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 x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of May 6, 2015 there were 84,581,781 outstanding Common Shares, $0.175 par value per share, of the registrant.
 


Table of Contents



INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at March 31, 2015 (unaudited) and December 31, 2014
(Expressed in thousands of U.S. dollars, except share and per share information)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets


 


Fixed maturities, at fair value (amortized cost: 2015—$5,458,443; 2014—$5,534,494)
$
5,484,479

 
$
5,532,731

Short-term investments, at fair value (amortized cost: 2015—$1,183,410; 2014—$1,051,222)
1,183,342

 
1,051,074

Other investments, at fair value (cost: 2015—$908,405; 2014—$879,176)
881,995

 
813,011

Cash and cash equivalents
471,129

 
577,240

Restricted cash
186,423

 
173,003

Total investments and cash
8,207,368

 
8,147,059

Investments in affiliates
263,332

 
261,483

Premiums receivable
1,114,102

 
707,647

Deferred acquisition costs
240,835

 
161,295

Prepaid reinsurance premiums
192,694

 
81,983

Securities lending collateral
5,337

 
470

Loss reserves recoverable
375,882

 
377,466

Paid losses recoverable
27,034

 
38,078

Income taxes recoverable
10,597

 
—

Deferred tax asset
30,847

 
23,821

Receivable for investments sold
24,803

 
18,318

Intangible assets
125,508

 
126,924

Goodwill
195,897

 
195,897

Accrued investment income
23,230

 
24,865

Other assets
216,984

 
164,633

Total assets
$
11,054,450

 
$
10,329,939

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,199,362

 
$
3,234,394

Unearned premiums
1,452,179

 
990,564

Reinsurance balances payable
101,426

 
127,128

Securities lending payable
5,803

 
936

Deferred tax liability
13,265

 
5,541

Payable for investments purchased
123,556

 
68,574

Accounts payable and accrued expenses
177,944

 
318,245

Notes payable to operating affiliates
919,684

 
671,465

Senior notes payable
247,333

 
247,306

Debentures payable
537,561

 
539,277

Total liabilities
$
6,778,113

 
$
6,203,430

 
 
 
 
Commitments and contingent liabilities


 


Redeemable noncontrolling interest
98,777

 
79,956

 
 
 
 
Shareholders’ equity
 
 
 
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2015—156,749,783; 2014—155,554,224; Outstanding: 2015—83,634,915; 2014—83,869,845)
$
27,431

 
$
27,222

Treasury shares (2015—73,114,868; 2014—71,684,379)
(12,795
)
 
(12,545
)
Additional paid-in-capital
1,162,485

 
1,207,493

Accumulated other comprehensive loss
(12,641
)
 
(8,556
)
Retained earnings
2,518,629

 
2,374,344

Total shareholders’ equity available to Validus
3,683,109

 
3,587,958

Noncontrolling interest
494,451

 
458,595

Total shareholders’ equity
$
4,177,560

 
$
4,046,553

 
 
 
 
Total liabilities, noncontrolling interests and shareholders’ equity
$
11,054,450

 
$
10,329,939

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

2

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Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
 
(unaudited)
 
(unaudited)
Revenues
 
 
 
Gross premiums written
$
1,119,498

 
$
1,011,991

Reinsurance premiums ceded
(190,840
)
 
(194,908
)
Net premiums written
928,658

 
817,083

Change in unearned premiums
(350,904
)
 
(334,126
)
Net premiums earned
577,754

 
482,957

Net investment income
31,021

 
23,362

Net realized gains on investments
4,169

 
3,740

Change in net unrealized gains on investments
72,204

 
55,693

Income from investment affiliate
2,776

 
5,348

Other insurance related income and other income
4,832

 
13,830

Foreign exchange losses
(3,551
)
 
(6,478
)
Total revenues
689,205

 
578,452

 
 
 
 
Expenses
 
 
 
Losses and loss expenses
240,929

 
162,671

Policy acquisition costs
98,636

 
85,649

General and administrative expenses
85,028

 
74,445

Share compensation expenses
9,054

 
7,147

Finance expenses
19,852

 
15,900

Total expenses
453,499

 
345,812

 
 
 
 
Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
235,706

 
232,640

Tax (expense) benefit
(2,565
)
 
40

Income from operating affiliates
2,453

 
4,927

(Income) attributable to operating affiliate investors
(23,206
)
 
(31,710
)
Net income
$
212,388

 
$
205,897

Net (income) attributable to noncontrolling interest
(38,977
)
 
(43,509
)
Net income available to Validus
$
173,411

 
$
162,388

 
 
 
 
Other comprehensive (loss) income
 
 
 
Change in foreign currency translation adjustments
(3,019
)
 
462

Change in minimum pension liability, net of tax
(265
)
 
—

Change in fair value of cash flow hedge
(801
)
 
—

Other comprehensive (loss) income
$
(4,085
)
 
$
462

 
 
 
 
Comprehensive income available to Validus
$
169,326

 
$
162,850

 
 
 
 
Earnings per share
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 
 
 
Basic
83,251,243

 
93,451,999

Diluted
87,583,129

 
97,799,519

 
 
 
 
Basic earnings per share available to common shareholders
$
2.07

 
$
1.72

Earnings per diluted share available to common shareholders
$
1.98

 
$
1.66

 
 
 
 
Cash dividends declared per share
$
0.32

 
$
0.30

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

3

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
March 31,
2015
 
March 31,
2014
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
27,222

 
$
27,036

Common shares issued, net
209

 
19

Balance - End of period
$
27,431

 
$
27,055

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(12,545
)
 
$
(10,228
)
Repurchase of common shares
(250
)
 
(939
)
Balance - End of period
$
(12,795
)
 
$
(11,167
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
1,207,493

 
$
1,677,894

Common shares issued, net
3,796

 
2,011

Repurchase of common shares
(57,858
)
 
(196,400
)
Share compensation expenses
9,054

 
7,147

Balance - End of period
$
1,162,485

 
$
1,490,652

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance - Beginning of period
$
(8,556
)
 
$
(617
)
Other comprehensive (loss) income
(4,085
)
 
462

Balance - End of period
$
(12,641
)
 
$
(155
)
 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
2,374,344

 
$
2,010,009

Dividends
(29,126
)
 
(29,718
)
Net income
212,388

 
205,897

Net (income) attributable to noncontrolling interest
(38,977
)
 
(43,509
)
Balance - End of period
$
2,518,629

 
$
2,142,679

 
 
 
 
Total shareholders’ equity available to Validus
$
3,683,109

 
$
3,649,064

 
 
 
 
Noncontrolling interest
$
494,451

 
$
540,934

 
 
 
 
Total shareholders’ equity
$
4,177,560

 
$
4,189,998

 
 
 
 
The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

4

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
March 31, 2015
 
March 31, 2014
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
212,388

 
$
205,897

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Share compensation expenses
9,054

 
7,147

Gain on deconsolidation of subsidiary
—

 
(1,372
)
Amortization of discount on senior notes
27

 
27

Income from investment affiliate
(2,776
)
 
(5,348
)
Net realized gains on investments
(4,169
)
 
(3,740
)
Change in net unrealized gains on investments
(72,204
)
 
(55,693
)
Amortization of intangible assets
1,416

 
1,040

Income from operating affiliates
(2,453
)
 
(4,927
)
Foreign exchange losses (gains) included in net income
8,788

 
(4,347
)
Amortization of premium on fixed maturities
6,747

 
4,117

Change in:
 

 
 

Premiums receivable
(409,847
)
 
(393,543
)
Deferred acquisition costs
(79,540
)
 
(68,098
)
Prepaid reinsurance premiums
(110,711
)
 
(115,112
)
Loss reserves recoverable
(205
)
 
21,832

Paid losses recoverable
10,976

 
43,054

Income taxes recoverable
(10,759
)
 
—

Deferred tax asset
(7,132
)
 
—

Accrued investment income
1,558

 
2,366

Other assets
(53,575
)
 
13,558

Reserve for losses and loss expenses
(22,700
)
 
(105,842
)
Unearned premiums
461,615

 
449,238

Reinsurance balances payable
(24,646
)
 
57,765

Deferred tax liability
7,585

 
3,551

Accounts payable and accrued expenses
(147,978
)
 
(95,997
)
Net cash used in operating activities
(228,541
)
 
(44,427
)
 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
1,190,559

 
984,356

Proceeds on maturities of investments
93,732

 
124,716

Purchases of fixed maturities
(1,163,707
)
 
(782,290
)
Purchases of short-term investments, net
(133,104
)
 
(107,437
)
(Purchases) sales of other investments, net
(29,291
)
 
7,059

Increase in securities lending collateral
(4,867
)
 
(1,485
)
Investment in operating affiliates
(1,070
)
 
—

Redemption from operating affiliates
24,150

 
43,366

Investment in investment affiliates
(19,700
)
 
—

(Increase) decrease in restricted cash
(13,420
)
 
91,274

Net cash (used in) provided by investing activities
(56,718
)
 
359,559

 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Proceeds on issuance of notes payable to operating affiliates
621,864

 
154,028

Repayments on notes payable to operating affiliates
(365,883
)
 
(184,628
)
Issuance of common shares, net
4,005

 
2,030

Purchases of common shares under share repurchase program
(58,108
)
 
(197,339
)
Dividends paid
(28,217
)
 
(29,330
)
Increase in securities lending payable
4,867

 
1,485

Third party investment in redeemable noncontrolling interest
15,700

 
—

Third party redemption of redeemable noncontrolling interest
—

 
(10,496
)
Net cash provided by (used in) financing activities
194,228

 
(264,250
)
 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(15,080
)
 
4,890

 
 
 
 
Net (decrease) increase in cash
(106,111
)
 
55,772

 
 
 
 
Cash and cash equivalents - beginning of period
$
577,240

 
$
734,148

 
 
 
 
Cash and cash equivalents - end of period
$
471,129

 
$
789,920

 
 
 
 
Taxes paid during the period
$
7,187

 
$
152

 
 
 
 
Interest paid during the period
$
19,188

 
$
19,174

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)



1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the "Consolidated Financial Statements") include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the "SEC").
In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position and results of operations as at the end of and for the periods presented. The Consolidated Statement of Cash Flows for the three months ended March 31, 2014 includes a revision to increase net cash provided by investing activities by $94,768. There are no changes to the sub-totals of net cash used in operating activities, financing activities or the effect of foreign currency rate changes on cash and cash equivalents. This revision resulted in an increase in net cash of $94,768 for the three months ended March 31, 2014.
The effect of this revision does not impact any per-share amounts or other components of equity or net assets in the statement of financial position in the prior period presented. The Company does not believe this revision is material to the prior period. The Company has revised these prior period amounts to provide comparability with current period cash flows. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
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 materially 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 U.S. Financial Accounting Standards Board (“FASB”).
2. Recent accounting pronouncements
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.


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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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; however, it could have a material impact on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued Accounting Standard Update 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in this Update simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact of this guidance; however, it will not have a material impact on the Company's Consolidated Financial Statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


3. 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 changes in 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 March 31, 2015 were as follows:
 
Amortized Cost or Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
768,112

 
$
3,867

 
$
(278
)
 
$
771,701

Non-U.S. government and government agency
244,372

 
1,771

 
(2,610
)
 
243,533

U.S. states, municipalities and political subdivisions
347,348

 
3,749

 
(254
)
 
350,843

Agency residential mortgage-backed securities
522,951

 
11,725

 
(442
)
 
534,234

Non-agency residential mortgage-backed securities
32,393

 
360

 
(645
)
 
32,108

U.S. corporate
1,436,724

 
10,929

 
(1,507
)
 
1,446,146

Non-U.S. corporate
509,705

 
4,827

 
(3,951
)
 
510,581

Bank loans
464,761

 
1,417

 
(4,838
)
 
461,340

Catastrophe bonds
129,711

 
556

 
(3,050
)
 
127,217

Asset-backed securities
702,298

 
2,755

 
(788
)
 
704,265

Commercial mortgage-backed securities
300,068

 
2,828

 
(385
)
 
302,511

Total fixed maturities
5,458,443

 
44,784

 
(18,748
)
 
5,484,479

Total short-term investments (a)
1,183,410

 
11

 
(79
)
 
1,183,342

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,915

 
76

 
(921
)
 
1,070

Preferred stock
2,945

 
60

 
—

 
3,005

Hedge funds (b)
595,753

 
95,124

 
(129,559
)
 
561,318

Private equity investments
48,140

 
5,831

 
(1,119
)
 
52,852

Investment funds
253,453

 
561

 
—

 
254,014

Mutual funds
6,199

 
3,537

 
—

 
9,736

Total other investments
908,405

 
105,189

 
(131,599
)
 
881,995

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
7,550,258

 
$
149,984

 
$
(150,426
)
 
$
7,549,816

Assets managed on behalf of operating affiliates (a)
(751,473
)
 
—

 
—

 
(751,473
)
Catastrophe bonds
(129,711
)
 
(556
)
 
3,050

 
(127,217
)
Noncontrolling interest (b)
(525,330
)
 
(79,346
)
 
116,603

 
(488,073
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,143,744

 
$
70,082

 
$
(30,773
)
 
$
6,183,053

(a)
Included in the short-term investments balance are assets managed in support of 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 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 (unaudited)
(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, 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 managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
7,464,892

 
$
94,251

 
$
(162,327
)
 
$
7,396,816

Assets managed on behalf of operating affiliates (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
(75,822
)
 
(768
)
 
926

 
(75,664
)
Noncontrolling interest (b)
(502,830
)
 
(48,446
)
 
120,782

 
(430,494
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,189,316

 
$
45,037

 
$
(40,619
)
 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of 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 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.

9
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at March 31, 2015 and December 31, 2014.
 
March 31, 2015
 
December 31, 2014
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
2,473,674

 
45.1
 %
 
$
2,494,239

 
45.1
%
AA
660,150

 
12.0
 %
 
848,226

 
15.4
%
A
1,087,156

 
19.8
 %
 
1,086,091

 
19.6
%
BBB
570,464

 
10.4
 %
 
505,208

 
9.1
%
Total investment-grade fixed maturities
4,791,444

 
87.3
 %
 
4,933,764

 
89.2
%
 
 
 
 
 
 
 
 
BB
307,561

 
5.6
 %
 
362,972

 
6.6
%
B
247,983

 
4.5
 %
 
145,240

 
2.6
%
CCC
4,365

 
0.1
 %
 
12,733

 
0.2
%
CC
3,286

 
0.1
 %
 
3,926

 
0.1
%
C
—

 
—
 %
 
1,344

 
—
%
D/NR
129,840

 
2.4
 %
 
72,752

 
1.3
%
Total non-investment grade fixed maturities
693,035

 
12.7
 %
 
598,967

 
10.8
%
Total fixed maturities
$
5,484,479

 
100.0
 %
 
$
5,532,731

 
100.0
%
The amortized cost and estimated fair value amounts for fixed maturities held at March 31, 2015 and December 31, 2014 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.
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
291,651

 
$
292,276

 
$
312,843

 
$
313,248

Due after one year through five years
2,921,246

 
2,928,600

 
3,163,225

 
3,159,200

Due after five years through ten years
571,599

 
572,771

 
497,175

 
491,870

Due after ten years
116,237

 
117,716

 
112,858

 
111,655

 
3,900,733

 
3,911,363

 
4,086,101

 
4,075,973

Asset-backed and mortgage-backed securities
1,557,710

 
1,573,116

 
1,448,393

 
1,456,758

Total fixed maturities
$
5,458,443

 
$
5,484,479

 
$
5,534,494

 
$
5,532,731

(b)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
Fixed maturities and short-term investments
$
29,239

 
$
23,297

Other investments
3,188

 
—

Restricted cash and cash and cash equivalents
435

 
1,957

Securities lending income
3

 
2

Total gross investment income
32,865

 
25,256

Investment expenses
(1,844
)
 
(1,894
)
Total net investment income
$
31,021

 
$
23,362

Net investment income from other investments includes distributed and undistributed net income from certain investment funds.

10
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(c)
Net realized gains and change in net unrealized gains on investments
The following represents an analysis of net realized gains and the change in net unrealized gains on investments:
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
Fixed maturities, short-term and other investments
 
 
 
Gross realized gains
$
6,309

 
$
5,296

Gross realized (losses)
(2,140
)
 
(1,556
)
Net realized gains on investments
4,169

 
3,740

Change in net unrealized gains on investments (a)
72,204

 
55,693

Total net realized and change in net unrealized gains on investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
76,373

 
59,433

Assets managed on behalf of operating affiliates
—

 
—

Catastrophe bonds
2,336

 
797

Noncontrolling interest (a)
(35,079
)
 
(42,002
)
Total net realized and change in net unrealized gains on investments excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
43,630

 
$
18,228

(a)
Includes the change in net unrealized 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 and cash pledged as collateral under the Company's credit facilities. For further details on the credit facilities, please refer to Note 12: “Debt and financing arrangements.”
 
 
March 31, 2015
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
268,907

 
400,774

$30,000 secured bi-lateral letter of credit facility
 
30,000

 
14,747

 
27,019

Talbot FAL facility
 
25,000

 
25,000

 
31,221

PaCRe senior secured letter of credit facility
 
10,000

 
39

 
—

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,097

IPC bi-lateral facility
 
25,000

 
12,543

 
100,549

$230,000 Flagstone bi-lateral facility
 
230,000

 
209,070

 
373,664

Total
 
$
1,275,000

 
$
560,306

 
$
963,324


11
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
December 31, 2014
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash 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

Total
 
$
1,605,000

 
$
561,684

 
$
1,022,740

In addition, $3,267,654 of cash and cash equivalents, restricted cash, short-term investments and fixed maturities were pledged during the normal course of business as at March 31, 2015 (December 31, 2014: $3,150,295). Of those, $3,208,722 were held in trust (December 31, 2014: $3,122,074). 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.
4. 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.
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.

12
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At March 31, 2015, 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
$
—

 
$
771,701

 
$
—

 
$
771,701

Non-U.S. government and government agency
—

 
243,533

 
—

 
243,533

U.S. states, municipalities and political subdivisions
—

 
350,843

 
—

 
350,843

Agency residential mortgage-backed securities
—

 
534,234

 
—

 
534,234

Non-agency residential mortgage-backed securities
—

 
32,108

 
—

 
32,108

U.S. corporate
—

 
1,446,146

 
—

 
1,446,146

Non-U.S. corporate
—

 
510,581

 
—

 
510,581

Bank loans
—

 
381,621

 
79,719

 
461,340

Catastrophe bonds
—

 
124,217

 
3,000

 
127,217

Asset-backed securities
—

 
704,265

 
—

 
704,265

Commercial mortgage-backed securities
—

 
302,511

 
—

 
302,511

Total fixed maturities
—

 
5,401,760

 
82,719

 
5,484,479

Total short-term investments (a)
1,084,139

 
92,389

 
6,814

 
1,183,342

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,070

 
1,070

Preferred stock
—

 
3,005

 
—

 
3,005

Hedge funds (b)
—

 
—

 
561,318

 
561,318

Private equity investments
—

 
—

 
52,852

 
52,852

Investment funds
—

 
91,131

 
162,883

 
254,014

Mutual funds
—

 
9,736

 
—

 
9,736

Total other investments
—

 
103,872

 
778,123

 
881,995

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
1,084,139

 
$
5,598,021

 
$
867,656

 
$
7,549,816

Assets managed on behalf of operating affiliates (a)
(751,473
)
 
—

 
—

 
(751,473
)
Catastrophe bonds
—

 
(124,217
)
 
(3,000
)
 
(127,217
)
Noncontrolling interest (b)
—

 
—

 
(488,073
)
 
(488,073
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
332,666

 
$
5,473,804

 
$
376,583

 
$
6,183,053

(a)
Included in the short-term investments balance are assets managed in support of 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 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.


13
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 fund
—

 
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 managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
942,716

 
$
5,759,459

 
$
694,641

 
$
7,396,816

Assets managed on behalf of operating affiliates (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
—

 
(70,664
)
 
(5,000
)
 
(75,664
)
Noncontrolling interest (b)
—

 
—

 
(430,494
)
 
(430,494
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
245,792

 
$
5,688,795

 
$
259,147

 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of 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 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 March 31, 2015, Level 3 investments excluding the noncontrolling interests totaled $376,583 (December 31, 2014: $259,147), representing 6.1% (December 31, 2014: 4.2%) of total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interests, measured at fair value on a recurring basis.

14
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(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.
(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.

15
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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.
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.

16
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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 of 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 majority of 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. To the extent that these valuations are based on significant unobservable inputs, the relevant short term investments will be classified as a Level 3 asset.
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 March 31, 2015. 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.

17
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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 March 31, 2015 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at March 31, 2015 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 $561,318 at March 31, 2015 (December 31, 2014: $496,960). 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 March 31, 2015 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV as at March 31, 2015 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 March 31, 2015 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 or six month delay which are used as a basis for valuation in the Company's March 31, 2015 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 March 31, 2015 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.

18
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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 three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
Level 3 investments - Beginning of period
$
694,641

 
$
576,871

Purchases
145,789

 
—

Sales
(7,602
)
 
(3,589
)
Settlements
(3,995
)
 
—

Net realized (losses) gains
(11
)
 
10

Change in net unrealized gains
38,834

 
49,326

Transfers into Level 3
—

 
6,703

Level 3 investments - End of period
$
867,656

 
$
629,321

Catastrophe Bonds
(3,000
)
 
—

Noncontrolling interest (a)
(488,073
)
 
(531,403
)
Level 3 investments - End of period excluding catastrophe bonds and noncontrolling interest
$
376,583

 
$
97,918

(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.
There have not been any transfers into or out of Levels 1, 2 and 3 during the three months ended March 31, 2015. During the three months ended March 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.
5. Investments in affiliates
The following table presents the Company's investments in affiliates as at March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
Investment affiliates
$
85,982

 
$
63,506

Operating affiliates
177,350

 
197,977

Investments in affiliates
$
263,332

 
$
261,483

(a)
Investment affiliate
Aquiline Financial Services Fund II L.P.    
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 "Aquiline II 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"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement of the Fund dated January 9, 2013 (the "Aquiline II Limited Partnership Agreement").
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 also 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.

19
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 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.
The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliates balance for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Investment affiliates, beginning of period
$
63,506

 
$
34,500

Capital contributions
19,700

 
—

Income from investment affiliate
2,776

 
5,348

Investment affiliates, end of period
$
85,982

 
$
39,848

The following table presents the Company's investment in the Partnerships as at March 31, 2015:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
56,563

 
—
%
 
8.1
%
 
$
71,844

Aquiline Financial Services Fund III L.P.
$
14,138

 
—
%
 
13.7
%
 
$
14,138

Total
$
70,701

 
 
 
 
 
$
85,982

The following table presents the Company's investment in the Partnership as at December 31, 2014:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
51,001

 
—
%
 
8.1
%
 
$
63,506

(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 three months ended March 31, 2015 and 2014 are included in the tables below.

20
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 three months ended March 31, 2015 and 2014 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 three months ended March 31, 2015 and 2014 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.
The risk periods for a majority of the AlphaCat 2014 risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2014. The Company's portion of the returns made during the three months ended March 31, 2015 are included in the table below.
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.

21
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 March 31, 2015, no third party subscriptions had been received.
The following tables present a reconciliation of the beginning and ending investment in operating affiliates for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31, 2015
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at December 31, 2014
$
4,606

 
$
735

 
$
1,068

 
$
28,085

 
$
25,600

 
$
137,883

 
$
197,977

Purchase of shares
—

 
—

 
—

 
—

 
—

 
1,070

 
1,070

Return of investment
—

 
—

 
—

 
(24,150
)
 
—

 
—

 
(24,150
)
Income from operating affiliates
(10
)
 
(25
)
 
(14
)
 
(100
)
 
1,316

 
1,286

 
2,453

As at March 31, 2015
$
4,596

 
$
710

 
$
1,054

 
$
3,835

 
$
26,916

 
$
140,239

 
$
177,350

 
Three Months Ended March 31, 2014
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
 AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at December 31, 2013
$
9,809

 
$
1,313

 
$
51,744

 
$
21,982

 
$
21,895

 
$
106,743

Return of investment
(5,825
)
 
—

 
(37,541
)
 
—

 
—

 
(43,366
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
113,455

 
113,455

Income from operating affiliates
193

 
(36
)
 
1,475

 
1,611

 
1,684

 
4,927

As at March 31, 2014
$
4,177

 
$
1,277

 
$
15,678

 
$
23,593

 
$
137,034

 
$
181,759


22
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at March 31, 2015:
 
Investment in operating affiliates
 
Cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
4,596

 
43.7
%
 
22.3
%
 
$
4,596

AlphaCat Re 2012
710

 
49.0
%
 
37.9
%
 
710

AlphaCat 2013
1,054

 
40.9
%
 
19.7
%
 
1,054

AlphaCat 2014
3,835

 
42.3
%
 
19.6
%
 
3,835

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
26,916

AlphaCat ILS funds
134,161

 
n/a

 
(a)

 
140,239

Total
$
169,956

 
 
 
 
 
$
177,350

(a)
Equity ownership in the funds was 7.6%, 25.2% and 9.1%, respectively as at March 31, 2015.
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.
(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 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.

23
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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 three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31, 2015
 
AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at December 31, 2014
$
—

 
$
157,384

 
$
—

 
$
514,081

 
$
671,465

Issuance of notes payable to operating affiliates
—

 
—

 
137,540

 
484,324

 
621,864

Redemption of notes payable to operating affiliates
—

 
(148,893
)
 
—

 
(216,990
)
 
(365,883
)
Foreign exchange gain
—

 
(310
)
 
(246
)
 
(7,206
)
 
(7,762
)
As at March 31, 2015
$
—

 
$
8,181

 
$
137,294

 
$
774,209

 
$
919,684

 
Three Months Ended March 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
—

 
149,707

 
184,737

 
334,444

Redemption of notes payable to operating affiliates
(175,349
)
 
—

 
(215,766
)
 
(391,115
)
Foreign exchange (gain) loss
(297
)
 
109

 
123

 
(65
)
As at March 31, 2014
$
48,163

 
$
149,816

 
$
363,394

 
$
561,373

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 March 31, 2015 amounted to $152,891 and $766,793, respectively (December 31, 2014: $148,264 and $523,201).
The following table presents the (income) attributable to operating affiliate investors for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31,
2015

March 31,
2014
AlphaCat 2013
$
1

 
$
(10,476
)
AlphaCat 2014
(156
)
 
(10,789
)
AlphaCat 2015
(8,773
)
 
—

AlphaCat ILS funds
(14,278
)
 
(10,445
)
(Income) attributable to operating affiliate investors
$
(23,206
)
 
$
(31,710
)
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 three months ended March 31, 2015 amounted to $3,444 and $19,762, respectively (2014: $6,472 and $25,238).

24
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


6. 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 tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interest and noncontrolling interest for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2014
$
79,956

 
$
458,595

 
$
538,551

Issuance of shares
15,700

 
—

 
15,700

Income attributable to noncontrolling interest
3,121

 
35,856

 
38,977

As at March 31, 2015
$
98,777

 
$
494,451

 
$
593,228

 
Three Months Ended March 31, 2014
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2013
$
86,512

 
$
497,657

 
$
584,169

Income attributable to noncontrolling interest
232

 
43,277

 
43,509

Adjustment to noncontrolling interest as a result of deconsolidation
(78,354
)
 
—

 
(78,354
)
As at March 31, 2014
$
8,390

 
$
540,934

 
$
549,324

7. 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 March 31, 2015, 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 March 31, 2015, 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 March 31, 2015, 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.

25
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 March 31, 2015 and December 31, 2014:
 
 
As at March 31, 2015
 
As at December 31, 2014
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
 
$
22,039

 
$
—

 
$
225

 
$
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 net impact on earnings during the three months ended March 31, 2015, recognized in income within other income, relating to the foreign currency forward contract that was not designated as a hedging instrument was $1 (2014: $nil).
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 March 31, 2015 and December 31, 2014:
 
 
As at March 31, 2015
 
As at December 31, 2014
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
 
$
202,779

 
$
584

 
$
9,384

 
$
189,026

 
$
401

 
$
3,136

Interest rate swap contracts
 
$
552,263

 
$
21

 
$
1,915

 
$
552,263

 
$
25

 
$
1,169

(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.
The following table provides the total impact on earnings, recognized in income within foreign exchange gains (losses), relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the three months ended March 31, 2015 and 2014:
 
 
Three Months Ended
Foreign currency forward contracts
 
March 31, 2015
 
March 31, 2014
Amount of (loss) gain recognized in income on derivative
 
$
(10,113
)
 
$
3,303

Amount of gain (loss) on hedged item recognized in income attributable to risk being hedged
 
$
10,113

 
$
(3,303
)
Amount of gain (loss) recognized in income on derivative (ineffective portion)
 
$
—

 
$
—


26
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(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 three months ended March 31, 2015 and 2014:
 
 
Three Months Ended
Interest rate swap contracts
 
March 31, 2015
 
March 31, 2014
Amount of effective portion recognized in other comprehensive income
 
$
4,040

 
$
3,208

Amount of effective portion subsequently reclassified to earnings
 
$
(3,239
)
 
$
(3,208
)
Amount of ineffective portion excluded from effectiveness testing
 
$
(801
)
 
$
—

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 March 31, 2015 or December 31, 2014.
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.

27
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


8. 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.
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 three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Reserve for losses and loss expenses, beginning of period
$
3,234,394

 
$
3,030,399

Losses and loss expenses recoverable
(377,466
)
 
(370,154
)
Net reserves for losses and loss expenses, beginning of period
2,856,928

 
2,660,245

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
Current year
324,488

 
202,086

Prior years
(83,559
)
 
(39,415
)
Total incurred losses and loss expenses
240,929

 
162,671

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
Current year
(13,100
)
 
(7,967
)
Prior years
(236,003
)
 
(250,115
)
Total net paid losses
(249,103
)
 
(258,082
)
Foreign exchange (gain) loss
(25,274
)
 
11,818

Net reserve for losses and loss expenses, end of period
2,823,480

 
2,576,652

Losses and loss expenses recoverable
375,882

 
348,407

Reserve for losses and loss expenses, end of period
$
3,199,362

 
$
2,925,059

Incurred losses and loss expenses comprise:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Gross losses and loss expenses
$
264,796

 
$
181,975

Reinsurance recoverable
(23,867
)
 
(19,304
)
Net incurred losses and loss expenses
$
240,929

 
$
162,671


28
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


9. 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.
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 March 31, 2015, 98.4% (December 31, 2014: 98.0%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses and $241,983 of total IBNR recoverable (December 31, 2014: $231,129)) were fully collateralized or from reinsurers rated A- or better.
Reinsurance recoverables by reinsurer as at March 31, 2015 and December 31, 2014 are as follows:
 
 
March 31, 2015
 
December 31, 2014
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
317,056

 
78.7
%
 
$
312,205

 
75.1
%
Other reinsurers’ balances > $1 million
79,034

 
19.6
%
 
94,247

 
22.7
%
Other reinsurers’ balances < $1 million
6,826

 
1.7
%
 
9,092

 
2.2
%
Total
$
402,916

 
100.0
%
 
$
415,544

 
100.0
%
 
 
March 31, 2015
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
79,535

 
19.7
%
Lloyd's Syndicates
 
A+
 
61,406

 
15.2
%
Everest Re
 
A+
 
46,105

 
11.4
%
Hannover Re
 
AA-
 
41,330

 
10.3
%
Fully Collateralized
 
NR
 
29,979

 
7.4
%
Munich Re
 
AA-
 
21,632

 
5.4
%
Transatlantic Re
 
A+
 
11,605

 
2.9
%
XL Re
 
A+
 
9,897

 
2.5
%
Merrimack Mutual Fire Insurance
 
A+
 
8,076

 
2.0
%
Hamilton Re
 
A-
 
7,491

 
1.9
%
Total
 
 
 
$
317,056

 
78.7
%
NR: Not rated

29
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
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
%
NR: Not rated
At March 31, 2015 and December 31, 2014, the provision for uncollectible reinsurance relating to reinsurance recoverables was $4,834 and $4,755, 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.
10. 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 3, 2015, the Board of Directors of the Company approved an increase in the Company's common share purchase 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 has repurchased 71,475,993 common shares for an aggregate purchase price of $2,289,409 from the inception of its share repurchase program to March 31, 2015. The Company had $734,992 remaining under its authorized share repurchase program as of March 31, 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. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.

30
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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, 2014
155,554,224

Restricted share awards vested, net of shares withheld
14,447

Restricted share units vested, net of shares withheld
1,997

Options exercised
704,974

Warrants exercised
473,817

Direct issuance of common stock
324

Common shares issued, March 31, 2015
156,749,783

Treasury shares, March 31, 2015
(73,114,868
)
Common shares outstanding, March 31, 2015
83,634,915

 
Common Shares
Common shares issued, December 31, 2013
154,488,497

Restricted share awards vested, net of shares withheld
18,219

Options exercised
90,019

Direct issuance of common stock
359

Common shares issued, March 31, 2014
154,597,094

Treasury shares, March 31, 2014
(63,810,857
)
Common shares outstanding, March 31, 2014
90,786,237

(b)
Warrants
During the three months ended March 31, 2015, 798,575 warrants were exercised, which resulted in the issuance of 473,817 common shares. During the three months ended March 31, 2014, no warrants were exercised. Holders of the outstanding warrants are entitled to exercise the warrants in whole or in part at any time until the expiration date. The total outstanding warrants at March 31, 2015 were 4,375,538 (December 31, 2014: 5,174,114). No further warrants are anticipated to be issued.

31
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(c)
Dividends
On February 3, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on March 31, 2015 to holders of record on March 13, 2015.

32
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


11. 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 Plan (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares of which 905,848 shares remain available for issuance at March 31, 2015. 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 options since September 4, 2009.
There were no share compensation expenses in respect of options recognized for the three months ended March 31, 2015 and 2014.
Activity with respect to options for the three months ended March 31, 2015 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2014
1,160,057

 
$
7.12

 
$
17.74

Options exercised
(1,017,165
)
 
7.36

 
16.55

Options outstanding, March 31, 2015
142,892

 
$
5.45

 
$
26.24


33
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to options for the three months ended March 31, 2014 was as follows: 
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2013
1,572,713

 
$
6.66

 
$
18.88

Options exercised
(90,019
)
 
4.25

 
25.46

Options outstanding, March 31, 2014
1,482,694

 
$
6.81

 
$
18.48

At March 31, 2015 and December 31, 2014, there were no unrecognized share compensation expenses in respect of options.
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 $8,479 were recorded for the three months ended March 31, 2015 (2014: $7,001). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

34
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to unvested restricted share awards for the three months ended March 31, 2015 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2014
2,858,711

 
$
35.81

Restricted share awards vested
(19,682
)
 
32.25

Restricted share awards forfeited
(2,410
)
 
41.50

Restricted share awards outstanding, March 31, 2015
2,836,619

 
$
35.83

Activity with respect to unvested restricted share awards for the three months ended March 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
17,533

 
36.81

Restricted share awards vested
(27,353
)
 
29.31

Restricted share awards forfeited
(23,094
)
 
34.57

Restricted share awards outstanding, March 31, 2014
2,651,831

 
$
33.80

At March 31, 2015, there were $66,382 (December 31, 2014: $74,670) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.6 years (December 31, 2014: 2.7 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 $262 were recorded for the three months ended March 31, 2015 (2014: $166). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

35
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to unvested restricted share units for the three months ended March 31, 2015 was as follows:
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2014
103,484

 
$
36.54

Restricted share units vested
(1,997
)
 
38.24

Restricted share units issued in lieu of cash dividends
747

 
36.54

Restricted share units forfeited
(893
)
 
35.42

Restricted share units outstanding, March 31, 2015
101,341

 
$
36.51

Activity with respect to unvested restricted share units for the three months ended March 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 issued in lieu of cash dividends
495

 
33.74

Restricted share units outstanding, March 31, 2014
67,013

 
$
33.74

At March 31, 2015, there were $2,493 (December 31, 2014: $2,774) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.9 years (December 31, 2014: 3.1 years).

36
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 Diluted Book Value per Share (“DBVPS”) over a three-year period relative to the Company's peer group. For performance share awards granted during the period, the grant date Diluted Book Value per Share 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 $313 were recorded for the three months ended March 31, 2015 (2014: $(20)). 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 three months ended March 31, 2015 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2014
106,369

 
$
36.03

Performance share awards outstanding, March 31, 2015
106,369

 
$
36.03

Activity with respect to unvested performance share awards for the three months ended March 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 conversion adjustment
(15,344
)
 
$
31.38

Performance share awards outstanding, March 31, 2014
86,476

 
$
33.95

At March 31, 2015, there were $1,937 (December 31, 2014: $2,232) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 1.9 years (December 31, 2014: 2.1 years).
(b)
 Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Restricted share awards
$
8,479

 
$
7,001

Restricted share units
262

 
166

Performance share awards
313

 
(20
)
Total
$
9,054

 
$
7,147

 
12. Debt and financing arrangements
(a)
Financing structure
The financing structure at March 31, 2015 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
134,011

 
134,011

 
134,011

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
597,761

 
537,561

 
537,561

2010 Senior Notes due 2040
250,000

 
250,000

 
247,333

Total debentures and senior notes payable
847,761

 
787,561

 
784,894

$400,000 syndicated unsecured letter of credit facility
400,000

 
—

 
—

$525,000 syndicated secured letter of credit facility
525,000

 
268,907

 
—

$30,000 secured bi-lateral letter of credit facility
30,000

 
14,747

 
—

Talbot FAL facility
25,000

 
25,000

 
—

PaCRe senior secured letter of credit facility
10,000

 
39

 
—

AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

IPC bi-lateral facility
25,000

 
12,543

 
—

$230,000 Flagstone bi-lateral facility
230,000

 
209,070

 
—

Total credit and other facilities
1,275,000

 
560,306

 
—

Total debt and financing arrangements
$
2,122,761

 
$
1,347,867

 
$
784,894

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

(a)
Indicates utilization of commitment amount, not necessarily drawn borrowings.

37
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(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
$
134,011

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.
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at March 31, 2015:
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
$
134,011

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.

38
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 three months ended March 31, 2015 and 2014.
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 2020.
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 three months ended March 31, 2015 and 2014.
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 three months ended March 31, 2015 and 2014.
Future payments of principal of $537,561 on the debentures discussed above are all expected to be after 2020.
(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.

39
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


As of March 31, 2015, there were $268,907 in outstanding letters of credit under the Four Year Secured Facility (December 31, 2014: $276,455) and $nil (December 31, 2014: $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 March 31, 2015, 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 2015 and prior underwriting years of account (the “Restated Facility”). The Restated Facility was provided and arranged by Lloyds Bank plc and ING Bank 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 2015, 2016 and prior underwriting years of account under the Restated Facility.
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.

40
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 March 31, 2015, the Company had $25,000 (December 31, 2014: $25,000) in outstanding letters of credit under the Talbot FAL facility.
As of March 31, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL facility.
iii.
$25,000 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 March 31, 2015, there were $12,543 outstanding letters of credit issued under the IPC bi-lateral facility (December 31, 2014: $15,897). As of March 31, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.
iv.
$30,000 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 March 31, 2015, $14,747 (December 31, 2014: $15,649) 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 March 31, 2015, and throughout the reporting periods presented, the Company is in compliance with all terms and covenants thereof. During the period ended March 31, 2015 the size of the facility was decreased to $30,000 from $200,000.
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 March 31, 2015, $39 (December 31, 2014: $294) of letters of credit were outstanding under this facility. As of March 31, 2015, 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 March 31, 2015, $30,000 (December 31, 2014: $30,000) of letters of credit were outstanding under this facility. As of March 31, 2015, and throughout the reporting periods presented, AlphaCat Re was in compliance with all covenants and restrictions thereof.
vii.
$230,000 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 March 31, 2015, the Flagstone Bi-Lateral Facility had $209,070 (December 31, 2014: $198,389) letters of credit issued and outstanding. As of March 31, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility. During the period ended March 31, 2015 the size of the facility was decreased to $230,000 from $375,000.

41
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(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:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
2006 Junior Subordinated Deferrable Debentures
$
2,187

 
$
2,187

2007 Junior Subordinated Deferrable Debentures
1,809

 
1,809

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,218

 
2,223

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,758

 
1,750

2010 Senior Notes due 2040
5,597

 
5,597

Credit facilities
1,707

 
1,559

Bank charges
98

 
113

AlphaCat ILS funds fees (a)
4,428

 
677

Talbot FAL Facility
50

 
(15
)
Total finance expenses
$
19,852

 
$
15,900

(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.
13. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three months ended March 31, 2015 and 2014 is as follows:
Three Months Ended March 31, 2015
Foreign currency items
 
Decrease in minimum pension liability
 
Losses on cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(8,118
)
 
$
(210
)
 
$
(228
)
 
$
(8,556
)
Net current period other comprehensive income, net of tax
(3,019
)
 
(265
)
 
(801
)
 
(4,085
)
Balance end of period, net of tax
$
(11,137
)
 
$
(475
)
 
$
(1,029
)
 
$
(12,641
)
Three Months Ended March 31, 2014
Foreign currency items
 
Total
Balance beginning of period, net of tax
$
(617
)
 
$
(617
)
Net current period other comprehensive income, net of tax
462

 
462

Balance end of period, net of tax
$
(155
)
 
$
(155
)


42
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


14. 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 March 31, 2015, 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. As at March 31, 2015, 9.2% of the Company's total investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.9% of its investment portfolio, other than with respect to government and agency securities as at March 31, 2015.
(b)
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
Talbot FAL facility
$
25,000

 
$
25,000

Group funds
570,100

 
450,000

Total
$
595,100

 
$
475,000

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 3 (d) for investments pledged as collateral.
(c)
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, at the March 31, 2015 exchange rate of £1 equals $1.4861 and assuming the maximum 3% assessment, the Company would be assessed approximately $27,864.
(d)
Investment in affiliate commitments
As discussed in Note 5 "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 March 31, 2015 was $2,865 (December 31, 2014: $7,500).
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 March 31, 2015 was $572 (December 31, 2014: $1,499).

43
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 March 31, 2015 was $85,862 (December 31, 2014: $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 March 31, 2015 was $2,400 (December 31, 2014: $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 March 31, 2015 was $6,930 (December 31, 2014: $8,000).
(e)
Fixed maturity commitment
As at March 31, 2015, 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 March 31, 2015 was $16,343 (December 31, 2014: $7,539).
(f)
Other investment commitments
At March 31, 2015, the Company had capital commitments in other investments of $153,000 (December 31, 2014: $153,000). The Company's remaining commitment to these investments at March 31, 2015 was $81,157 (December 31, 2014: $83,712).
(g)
Multi-Beneficiary Reinsurance Trust ("MBRT")
In December 2014, the Company established an 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 reinsurance provided prospectively by the Company.

15. 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 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 three months ended March 31, 2015 of $1,870 (2014: $1,373) with $1,433 included in premiums receivable at March 31, 2015 (December 31, 2014: $335). The Company also recognized reinsurance premiums ceded during the three months ended March 31, 2015 of $29 (2014: $5) and had reinsurance balances payable of $4 at March 31, 2015 (December 31, 2014: $4). The Company recorded $1,067 of loss reserves recoverable at March 31, 2015 (December 31, 2014: $1,063). Earned premium adjustments of $783 were recorded during the three months ended March 31, 2015 (2014: $1,441).
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 three months ended March 31, 2015 were $285 (2014: $56), with $313 included in accounts payable and accrued expenses at March 31, 2015 (December 31, 2014: $515).

44
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 three months ended March 31, 2015, the Company incurred $448 (2014: $nil) in partnership fees and made capital contributions of $5,562 (2014: $nil), with $nil included in accounts payable and accrued expenses at March 31, 2015 (December 31, 2014: $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 three months ended March 31, 2015, the Company incurred $nil (2014: $nil) partnership fees and made capital contributions of $14,138 (2014: $nil), with $nil included in accounts payable and accrued expenses at March 31, 2015 (December 31, 2014: $nil).
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.


45
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


16. Earnings per share
The following table sets forth the computation of basic and earnings per diluted share for the three months ended March 31, 2015 and 2014:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Basic earnings per share
 
 
 
Net income
$
212,388


$
205,897

Income attributable to noncontrolling interest
(38,977
)

(43,509
)
Net income available to Validus
173,411


162,388

Less: Dividends and distributions declared on outstanding warrants
(1,405
)
 
(1,552
)
Income available to common shareholders
$
172,006

 
$
160,836

 
 
 
 
Weighted average number of common shares outstanding
83,251,243

 
93,451,999

 
 
 
 
Basic earnings per share available to common shareholders
$
2.07

 
$
1.72

 
 
 
 
Earnings per diluted share
 
 
 
Net income
$
212,388

 
$
205,897

Income attributable to noncontrolling interest
(38,977
)
 
(43,509
)
Net income available to Validus
173,411

 
162,388

Less: Dividends and distributions declared on outstanding warrants
—

 
—

Income available to common shareholders
$
173,411

 
$
162,388

 
 
 
 
Weighted average number of common shares outstanding
83,251,243

 
93,451,999

Share equivalents:
 
 
 
Warrants
2,745,066

 
2,716,010

Stock options
473,424

 
750,369

Unvested restricted shares
1,113,396

 
881,141

Weighted average number of diluted common shares outstanding
87,583,129

 
97,799,519

 
 
 
 
Earnings per diluted share available to common shareholders
$
1.98

 
$
1.66

Share equivalents that would result in the issuance of 645 common shares (2014: 12,498) were outstanding for the three months ended March 31, 2015, but were not included in the computation of earnings per diluted share because the effect would be antidilutive.

46
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


17. 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. 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 lines, 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.

47
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(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":
Three Months Ended March 31, 2015
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Corporate & Eliminations
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

 
 

Gross premiums written
 
$
711,212

 
$
102,564

 
$
270,077

 
$
56,947

 
$
(21,302
)
 
$
1,119,498

Reinsurance premiums ceded
 
(113,296
)
 
(4,538
)
 
(91,075
)
 
(3,233
)
 
21,302

 
(190,840
)
Net premiums written
 
597,916

 
98,026

 
179,002

 
53,714

 
—

 
928,658

Change in unearned premiums
 
(344,828
)
 
(63,831
)
 
43,587

 
14,168

 
—

 
(350,904
)
Net premiums earned
 
253,088

 
34,195

 
222,589

 
67,882

 
—

 
577,754

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
113,128

 
(844
)
 
78,128

 
50,517

 
—

 
240,929

Policy acquisition costs
 
42,094

 
3,660

 
49,104

 
4,279

 
(501
)
 
98,636

General and administrative expenses
 
19,509

 
4,002

 
36,494

 
10,627

 
14,396

 
85,028

Share compensation expenses
 
2,578

 
149

 
2,957

 
477

 
2,893

 
9,054

Total underwriting deductions
 
177,309

 
6,967

 
166,683

 
65,900

 
16,788

 
433,647

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
75,779

 
$
27,228

 
$
55,906

 
$
1,982

 
$
(16,788
)
 
$
144,107

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
18,776

 
1,585

 
6,305

 
5,303

 
(948
)
 
31,021

Other insurance related income (loss)
 
315

 
5,771

 
54

 
263

 
(1,571
)
 
4,832

Finance expenses
 
(3,871
)
 
(4,516
)
 
(87
)
 
—

 
(11,378
)
 
(19,852
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
90,999

 
30,068

 
62,178

 
7,548

 
(30,685
)
 
160,108

Tax benefit (expense)
 
1,880

 
—

 
(883
)
 
(3,723
)
 
161

 
(2,565
)
Income from operating affiliates
 
—

 
2,453

 
—

 
—

 
—

 
2,453

(Income) attributable to operating affiliate investors
 
—

 
(23,206
)
 
—

 
—

 
—

 
(23,206
)
Net operating income (loss)
 
$
92,879

 
$
9,315

 
$
61,295

 
$
3,825

 
$
(30,524
)
 
$
136,790

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on investments
 
1,809

 
(11
)
 
871

 
1,500

 
—

 
4,169

Change in net unrealized gains (losses) on investments
 
20,578

 
37,535

 
7,911

 
7,138

 
(958
)
 
72,204

Income from investment affiliate
 
1,933

 
—

 
—

 
843

 
—

 
2,776

Foreign exchange (losses) gains
 
(5,024
)
 
(95
)
 
(485
)
 
—

 
2,053

 
(3,551
)
Net income (loss)
 
$
112,175

 
$
46,744

 
$
69,592

 
$
13,306

 
$
(29,429
)
 
$
212,388

 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(38,977
)
 
—

 
—

 
—

 
(38,977
)
Net income (loss) available (attributable) to Validus
 
$
112,175

 
$
7,767

 
$
69,592

 
$
13,306

 
$
(29,429
)
 
$
173,411

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
84.1
%
 
95.6
 %
 
66.3
%
 
94.3
%
 
 
 
83.0
%
Losses and loss expenses
 
44.7
%
 
(2.5
)%
 
35.1
%
 
74.4
%
 
 
 
41.7
%
Policy acquisition costs
 
16.7
%
 
10.7
 %
 
22.1
%
 
6.3
%
 
 
 
17.1
%
General and administrative expenses (b)
 
8.7
%
 
12.1
 %
 
17.7
%
 
16.4
%
 
 
 
16.3
%
Expense ratio
 
25.4
%
 
22.8
 %
 
39.8
%
 
22.7
%
 
 
 
33.4
%
Combined ratio
 
70.1
%
 
20.3
 %
 
74.9
%
 
97.1
%
 
 
 
75.1
%
Total assets
 
$
4,567,449

 
$
1,954,260

 
$
2,933,104

 
$
1,512,848

 
$
86,789

 
$
11,054,450

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expenses ratio includes share compensation expenses.

48
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Three Months Ended March 31, 2014
 
Validus Re Segment (c)
 
AlphaCat Segment
 
Talbot Segment
 
Corporate & Eliminations (c)
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

Gross premiums written
 
$
666,163

 
$
84,347

 
$
290,695

 
$
(29,214
)
 
$
1,011,991

Reinsurance premiums ceded
 
(129,817
)
 
(3,700
)
 
(90,605
)
 
29,214

 
(194,908
)
Net premiums written
 
536,346

 
80,647

 
200,090

 
—

 
817,083

Change in unearned premiums
 
(297,960
)
 
(49,964
)
 
13,798

 
—

 
(334,126
)
Net premiums earned
 
238,386

 
30,683

 
213,888

 
—

 
482,957

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
68,155

 
(7,860
)
 
102,376

 
—

 
162,671

Policy acquisition costs
 
39,245

 
2,980

 
44,928

 
(1,504
)
 
85,649

General and administrative expenses
 
18,195

 
4,128

 
35,149

 
16,973

 
74,445

Share compensation expenses
 
2,208

 
(10
)
 
2,582

 
2,367

 
7,147

Total underwriting deductions
 
127,803

 
(762
)
 
185,035

 
17,836

 
329,912

 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
110,583

 
$
31,445

 
$
28,853

 
$
(17,836
)
 
$
153,045

 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
18,765

 
880

 
4,686

 
(969
)
 
23,362

Other insurance related income (loss)
 
977

 
9,497

 
17

 
(2,454
)
 
8,037

Finance expenses
 
(3,839
)
 
(683
)
 
(26
)
 
(11,352
)
 
(15,900
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
126,486

 
41,139

 
33,530

 
(32,611
)
 
168,544

Tax benefit (expense)
 
578

 
—

 
130

 
(668
)
 
40

Income from operating affiliates
 
—

 
4,927

 
—

 
—

 
4,927

(Income) attributable to operating affiliate investors
 
—

 
(31,710
)
 
—

 
—

 
(31,710
)
Net operating income (loss)
 
$
127,064

 
$
14,356

 
$
33,660

 
$
(33,279
)
 
$
141,801

 
 
 
 
 
 
 
 
 
 
 
Net realized (losses) gains on investments
 
2,446

 
1,225

 
69

 
—

 
3,740

Change in net unrealized losses on investments
 
11,898

 
45,872

 
2,577

 
(4,654
)
 
55,693

Income from investment affiliate
 
5,348

 
—

 
—

 
—

 
5,348

Foreign exchange gains (losses)
 
(6,176
)
 
38

 
(150
)
 
(190
)
 
(6,478
)
Other income
 
5,793

 
—

 
—

 
—

 
5,793

Net income (loss)
 
$
146,373

 
$
61,491

 
$
36,156

 
$
(38,123
)
 
$
205,897

 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(43,509
)
 
—

 
—

 
(43,509
)
Net income (loss) available (attributable) to Validus
 
$
146,373

 
$
17,982

 
$
36,156

 
$
(38,123
)
 
$
162,388

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
80.5
%
 
95.6
 %
 
68.8
%
 
 
 
80.7
%
Losses and loss expenses
 
28.6
%
 
(25.6
)%
 
47.9
%
 
 
 
33.7
%
Policy acquisition costs
 
16.5
%
 
9.7
 %
 
21.0
%
 
 
 
17.7
%
General and administrative expenses (b)
 
8.5
%
 
13.4
 %
 
17.6
%
 
 
 
16.9
%
Expense ratio
 
25.0
%
 
23.1
 %
 
38.6
%
 
 
 
34.6
%
Combined ratio
 
53.6
%
 
(2.5
)%
 
86.5
%
 
 
 
68.3
%
Total assets
 
$
5,730,615

 
$
1,582,014

 
$
2,975,533

 
$
94,788

 
$
10,382,950

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.
(c)
During the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written and reinsurance premiums ceded for the Validus Re segment and Corporate & Eliminations were reduced by $12,823 for the three months ended March 31, 2014 for comparative purposes. There was no impact to total gross premiums written and reinsurance premiums ceded on a consolidated basis.

49
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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:
 
Three Months Ended March 31, 2015
 
Gross Premiums Written
 
Validus Re
 
AlphaCat
 
Talbot
 
Western World
 
Eliminations
 
Total
 
%
United States
$
338,819

 
$
13,575

 
$
28,058

 
$
56,947

 
$
(1,494
)
 
$
435,905

 
38.9
%
Worldwide excluding
United States (a)
34,994

 
5,833

 
34,942

 
—

 
(1,029
)
 
74,740

 
6.7
%
Australia and New Zealand
9,868

 
—

 
1,876

 
—

 
(155
)
 
11,589

 
1.0
%
Europe
24,506

 
1,768

 
13,214

 
—

 
(844
)
 
38,644

 
3.5
%
Latin America and Caribbean
8,878

 
—

 
22,692

 
—

 
(3,524
)
 
28,046

 
2.5
%
Japan
1,384

 
—

 
754

 
—

 
(13
)
 
2,125

 
0.2
%
Canada
2,187

 
194

 
1,698

 
—

 
(78
)
 
4,001

 
0.4
%
Rest of the world (b)
18,726

 
—

 
23,006

 
—

 
(2,319
)
 
39,413

 
3.5
%
Sub-total, non United States
100,543

 
7,795

 
98,182

 
—

 
(7,962
)
 
198,558

 
17.8
%
Worldwide including
United States (a)
85,056

 
77,894

 
21,794

 
—

 
(11,854
)
 
172,890

 
15.4
%
Other location non-specific (c)
186,794

 
3,300

 
122,043

 
—

 
8

 
312,145

 
27.9
%
Total
$
711,212

 
$
102,564

 
$
270,077

 
$
56,947

 
$
(21,302
)
 
$
1,119,498

 
100.0
%
 
Three Months Ended March 31, 2014
 
Gross Premiums Written
 
Validus Re (d)
 
AlphaCat
 
Talbot
 
Eliminations (d)
 
Total
 
%
United States
$
243,032

 
$
8,698

 
$
26,311

 
$
(2,320
)
 
$
275,721

 
27.3
%
Worldwide excluding
United States (a)
58,523

 
7,678

 
37,182

 
(1,027
)
 
102,356

 
10.0
%
Australia and New Zealand
12,860

 
1,019

 
2,880

 
(326
)
 
16,433

 
1.6
%
Europe
35,878

 
1,301

 
18,791

 
(1,767
)
 
54,203

 
5.4
%
Latin America and Caribbean
14,337

 
—

 
31,239

 
(10,669
)
 
34,907

 
3.4
%
Japan
167

 
—

 
538

 
(61
)
 
644

 
0.1
%
Canada
2,547

 
216

 
3,145

 
(172
)
 
5,736

 
0.6
%
Rest of the world (b)
18,795

 
—

 
18,404

 
(2,387
)
 
34,812

 
3.4
%
Sub-total, non United States
143,107

 
10,214

 
112,179

 
(16,409
)
 
249,091

 
24.5
%
Worldwide including
United States (a)
102,284

 
65,435

 
23,653

 
(11,418
)
 
179,954

 
17.8
%
Other location non-specific (c)
177,740

 
—

 
128,552

 
933

 
307,225

 
30.4
%
Total
$
666,163

 
$
84,347

 
$
290,695

 
$
(29,214
)
 
$
1,011,991

 
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)
During the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written for the Validus Re segment and Corporate & Eliminations were reduced by $12,823 for the three months ended March 31, 2014 for comparative purposes. There was no impact to total gross premiums written on a consolidated basis.


50
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


18. Condensed consolidating financial information
The following tables present condensed consolidating balance sheets as at March 31, 2015 and December 31, 2014, condensed consolidating statements of comprehensive income and condensed consolidating statements of cash flows for the three months ended March 31, 2015 and 2014, respectively, for Validus Holdings, Ltd. (the “Parent Guarantor”), Validus Holdings (UK) plc (the “Subsidiary Issuer”) and the non-guarantor subsidiaries of Validus Holdings, Ltd. The Subsidiary Issuer is a wholly-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for under the equity method for purposes of the supplemental consolidating presentation and earnings of subsidiaries are reflected in the investment accounts and earnings. The Subsidiary Issuer is only allowed to issue senior notes that are fully and unconditionally guaranteed by the Parent Guarantor.

51
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Balance Sheet
As at March 31, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
28,817

 
$
—

 
$
5,515,862

 
$
(60,200
)
 
$
5,484,479

Short-term investments, at fair value
—

 
—

 
1,183,342

 
—

 
1,183,342

Other investments, at fair value
—

 
—

 
950,992

 
(68,997
)
 
881,995

Cash and cash equivalents
24,148

 
20

 
446,961

 
—

 
471,129

Restricted cash
—

 
—

 
186,423

 
—

 
186,423

Total investments and cash
52,965

 
20

 
8,283,580

 
(129,197
)
 
8,207,368

Investment in affiliates
—

 
—

 
263,332

 
—

 
263,332

Investment in subsidiaries on an equity basis
4,249,633

 
678,842

 
—

 
(4,928,475
)
 
—

Premiums receivable
—

 
—

 
1,114,102

 
—

 
1,114,102

Deferred acquisition costs
—

 
—

 
240,835

 
—

 
240,835

Prepaid reinsurance premiums
—

 
—

 
192,694

 
—

 
192,694

Securities lending collateral
—

 
—

 
5,337

 
—

 
5,337

Loss reserves recoverable
—

 
—

 
375,882

 
—

 
375,882

Paid losses recoverable
—

 
—

 
27,034

 
—

 
27,034

Income taxes recoverable
—

 
—

 
10,597

 
—

 
10,597

Deferred tax asset
—

 
—

 
30,847

 
—

 
30,847

Receivable for investments sold
—

 
—

 
24,803

 
—

 
24,803

Intangible assets
—

 
—

 
125,508

 
—

 
125,508

Goodwill
—

 
—

 
195,897

 
—

 
195,897

Accrued investment income
115

 
—

 
23,115

 
—

 
23,230

Intercompany receivable
—

 
—

 
7,592

 
(7,592
)
 
—

Other assets
2,758

 
—

 
214,226

 
—

 
216,984

Total assets
$
4,305,471

 
$
678,862

 
$
11,135,381

 
$
(5,065,264
)
 
$
11,054,450

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,199,362

 
$
—

 
$
3,199,362

Unearned premiums
—

 
—

 
1,452,179

 
—

 
1,452,179

Reinsurance balances payable
—

 
—

 
101,426

 
—

 
101,426

Securities lending payable
—

 
—

 
5,803

 
—

 
5,803

Deferred tax liability
—

 
—

 
13,265

 
—

 
13,265

Payable for investments purchased
—

 
—

 
123,556

 
—

 
123,556

Accounts payable and accrued expenses
17,495

 
—

 
160,449

 
—

 
177,944

Intercompany payable
7,534

 
58

 
—

 
(7,592
)
 
—

Notes payable to operating affiliates
—

 
—

 
919,684

 
—

 
919,684

Senior notes payable
247,333

 
—

 
—

 
—

 
247,333

Debentures payable
350,000

 
—

 
247,761

 
(60,200
)
 
537,561

Total liabilities
$
622,362

 
$
58

 
$
6,223,485

 
$
(67,792
)
 
$
6,778,113

Redeemable noncontrolling interest
—

 
—

 
98,777

 
—

 
98,777

Total shareholders' equity available to Validus
3,683,109

 
678,804

 
4,318,668

 
(4,997,472
)
 
3,683,109

Noncontrolling interest
—

 
—

 
494,451

 
—

 
494,451

Total liabilities, noncontrolling interests and shareholders' equity
$
4,305,471

 
$
678,862

 
$
11,135,381

 
$
(5,065,264
)
 
$
11,054,450

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

52
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Balance Sheet
As at December 31, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
—

 
$
—

 
$
5,592,931

 
$
(60,200
)
 
$
5,532,731

Short-term investments, at fair value
—

 
—

 
1,051,074

 
—

 
$
1,051,074

Other investments, at fair value
—

 
—

 
881,123

 
(68,112
)
 
$
813,011

Cash and cash equivalents
29,798

 
81

 
547,361

 
—

 
$
577,240

Restricted cash
—

 
—

 
173,003

 
—

 
173,003

Total investments and cash
29,798

 
81

 
8,245,492

 
(128,312
)
 
8,147,059

Investment in affiliates
—

 
—

 
261,483

 
—

 
261,483

Investment in subsidiaries on an equity basis
4,140,770

 
656,738

 
—

 
(4,797,508
)
 
—

Premiums receivable
—

 
—

 
707,647

 
—

 
707,647

Deferred acquisition costs
—

 
—

 
161,295

 
—

 
161,295

Prepaid reinsurance premiums
—

 
—

 
81,983

 
—

 
81,983

Securities lending collateral
—

 
—

 
470

 
—

 
470

Loss reserves recoverable
—

 
—

 
377,466

 
—

 
377,466

Paid losses recoverable
—

 
—

 
38,078

 
—

 
38,078

Deferred tax asset
—

 
—

 
23,821

 
—

 
23,821

Receivable for investments sold
—

 
—

 
18,318

 
—

 
18,318

Intangible assets
—

 
—

 
126,924

 
—

 
126,924

Goodwill
—

 
—

 
195,897

 
—

 
195,897

Accrued investment income
—

 
—

 
24,865

 
—

 
24,865

Intercompany receivable
41,078

 
—

 
20

 
(41,098
)
 
—

Other assets
3,239

 
—

 
161,394

 
—

 
164,633

Total assets
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,234,394

 
$
—

 
$
3,234,394

Unearned premiums
—

 
—

 
990,564

 
—

 
990,564

Reinsurance balances payable
—

 
—

 
127,128

 
—

 
127,128

Securities lending payable
—

 
—

 
936

 
—

 
936

Deferred tax liability
—

 
—

 
5,541

 
—

 
5,541

Payable for investments purchased
—

 
—

 
68,574

 
—

 
68,574

Accounts payable and accrued expenses
29,621

 
96

 
288,528

 
—

 
318,245

Intercompany payable
—

 
20

 
41,078

 
(41,098
)
 
—

Notes payable to operating affiliates
—

 
—

 
671,465

 
—

 
671,465

Senior notes payable
247,306

 
—

 
—

 
—

 
247,306

Debentures payable
350,000

 
—

 
249,477

 
(60,200
)
 
539,277

Total liabilities
$
626,927

 
$
116

 
$
5,677,685

 
$
(101,298
)
 
$
6,203,430

Redeemable noncontrolling interest
—

 
—

 
79,956

 
—

 
79,956

Total shareholders' equity available to Validus
3,587,958

 
656,703

 
4,208,917

 
(4,865,620
)
 
3,587,958

Noncontrolling interest
—

 
—

 
458,595

 
—

 
458,595

Total liabilities, noncontrolling interests and shareholders' equity
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

53
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating
Statement of Comprehensive Income
For the Three Months Ended March 31, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
577,754

 
$
—

 
$
577,754

Net investment income
57

 
—

 
31,969

 
(1,005
)
 
31,021

Net realized gains on investments
—

 
—

 
4,169

 
—

 
4,169

Change in net unrealized (losses) gains on investments
(73
)
 
—

 
73,162

 
(885
)
 
72,204

Income from investment affiliate
—

 
—

 
2,776

 
—

 
2,776

Other insurance related income and other income
—

 
—

 
19,623

 
(14,791
)
 
4,832

Foreign exchange gains (losses)
510

 
—

 
(4,061
)
 
—

 
(3,551
)
Total revenues
$
494

 
$
—

 
$
705,392

 
$
(16,681
)
 
$
689,205

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
240,929

 
—

 
240,929

Policy acquisition costs
—

 
—

 
98,636

 
—

 
98,636

General and administrative expenses
17,543

 
2

 
82,276

 
(14,793
)
 
85,028

Share compensation expenses
1,654

 
—

 
7,400

 
—

 
9,054

Finance expenses
11,858

 
—

 
8,475

 
(481
)
 
19,852

Total expenses
$
31,055

 
$
2

 
$
437,716

 
$
(15,274
)
 
$
453,499

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings of subsidiaries
(30,561
)
 
(2
)
 
267,676

 
(1,407
)
 
235,706

Tax expense
—

 
—

 
(2,565
)
 
—

 
(2,565
)
Income from operating affiliates
—

 
—

 
2,453

 
—

 
2,453

(Income) attributable to operating affiliate investors
—

 
—

 
(23,206
)
 
—

 
(23,206
)
Equity in net earnings of subsidiaries
203,972

 
20,195

 
—

 
(224,167
)
 
—

Net income (loss)
$
173,411

 
$
20,193

 
$
244,358

 
$
(225,574
)
 
$
212,388

Net (income) attributable to noncontrolling interest
—

 
—

 
(38,977
)
 
—

 
(38,977
)
Net income available to Validus
$
173,411

 
$
20,193

 
$
205,381

 
$
(225,574
)
 
$
173,411

Other comprehensive (loss)
(4,085
)
 
—

 
(3,284
)
 
3,284

 
(4,085
)
Comprehensive income available to Validus
$
169,326

 
$
20,193

 
$
202,097

 
$
(222,290
)
 
$
169,326

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

54
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating
Statement of Comprehensive Income
For the Three Months Ended March 31, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
482,957

 
$
—

 
$
482,957

Net investment income
3

 
—

 
24,331

 
(972
)
 
23,362

Net realized gains on investments
—

 
—

 
3,740

 
—

 
3,740

Change in net unrealized gains on investments
—

 
—

 
51,465

 
4,228

 
55,693

Income from investment affiliate
—

 
—

 
5,348

 
—

 
5,348

Other insurance related income and other income
—

 
—

 
31,792

 
(17,962
)
 
13,830

Foreign exchange losses
(168
)
 
—

 
(6,310
)
 
—

 
(6,478
)
Total revenues
$
(165
)
 
$
—

 
$
593,323

 
$
(14,706
)
 
$
578,452

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
162,671

 
—

 
162,671

Policy acquisition costs
—

 
—

 
85,649

 
—

 
85,649

General and administrative expenses
20,563

 
21

 
71,823

 
(17,962
)
 
74,445

Share compensation expenses
1,308

 
—

 
5,839

 
—

 
7,147

Finance expenses
11,823

 
—

 
4,557

 
(480
)
 
15,900

Total expenses
$
33,694

 
$
21

 
$
330,539

 
$
(18,442
)
 
$
345,812

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings of subsidiaries
(33,859
)
 
(21
)
 
262,784

 
3,736

 
232,640

Tax benefit
—

 
—

 
40

 
—

 
40

Income from operating affiliates
—

 
—

 
4,927

 
—

 
4,927

(Income) attributable to operating affiliate investors
—

 
—

 
(31,710
)
 
—

 
(31,710
)
Equity in net earnings (losses) of subsidiaries
196,247

 
(748
)
 
—

 
(195,499
)
 
—

Net income (loss)
$
162,388

 
$
(769
)
 
$
236,041

 
$
(191,763
)
 
$
205,897

Net (income) attributable to noncontrolling interest
—

 
—

 
(43,509
)
 
—

 
(43,509
)
Net income (loss) available (attributable) to Validus
$
162,388

 
$
(769
)
 
$
192,532

 
$
(191,763
)
 
$
162,388

Other comprehensive income
462

 
—

 
462

 
(462
)
 
462

Comprehensive income (loss) available (attributable) to Validus
$
162,850

 
$
(769
)
 
$
192,994

 
$
(192,225
)
 
$
162,850

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

55
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash provided by (used in) operating activities
$
5,572

 
$
(61
)
 
$
(234,052
)
 
$
—

 
$
(228,541
)
Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
1,190,559

 
—

 
1,190,559

Proceeds on maturities of investments
—

 
—

 
93,732

 
—

 
93,732

Purchases of fixed maturities
(28,902
)
 
—

 
(1,134,805
)
 
—

 
(1,163,707
)
Purchases of short-term investments, net
—

 
—

 
(133,104
)
 
—

 
(133,104
)
Purchases of other investments
—

 
—

 
(29,291
)
 
—

 
(29,291
)
Increase in securities lending collateral
—

 
—

 
(4,867
)
 
—

 
(4,867
)
Investment in operating affiliates
—

 
—

 
(1,070
)
 
—

 
(1,070
)
Redemption from operating affiliates
—

 
—

 
24,150

 
—

 
24,150

Investment in investment affiliates
—

 
—

 
(19,700
)
 
—

 
(19,700
)
Increase in restricted cash
—

 
—

 
(13,420
)
 
—

 
(13,420
)
Return of capital from subsidiaries
100,000

 
—

 
—

 
(100,000
)
 
—

Net cash provided by (used in) investing activities
71,098

 
—

 
(27,816
)
 
(100,000
)
 
(56,718
)
Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to operating affiliates
—

 
—

 
621,864

 
—

 
621,864

Repayments on notes payable to operating affiliates
—

 
—

 
(365,883
)
 
—

 
(365,883
)
Issuance of common shares, net
4,005

 
—

 
—

 
—

 
4,005

Purchases of common shares under share repurchase program
(58,108
)
 
—

 
—

 
—

 
(58,108
)
Dividends paid
(28,217
)
 
—

 
—

 
—

 
(28,217
)
Increase in securities lending payable
—

 
—

 
4,867

 
—

 
4,867

Third party investment in redeemable noncontrolling interest
—

 
—

 
15,700

 
—

 
15,700

Return of capital to parent
—

 
—

 
(100,000
)
 
100,000

 
—

Net cash (used in) provided by financing activities
(82,320
)
 
—

 
176,548

 
100,000

 
194,228

Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
(15,080
)
 
—

 
(15,080
)
Net decrease in cash
(5,650
)
 
(61
)
 
(100,400
)
 
—

 
(106,111
)
Cash and cash equivalents, beginning of year
29,798

 
81

 
547,361

 
—

 
577,240

Cash and cash equivalents, end of year
$
24,148

 
$
20

 
$
446,961

 
$
—

 
$
471,129

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

56
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash provided by (used in) operating activities
$
267,177

 
$
—

 
$
(311,604
)
 
$
—

 
$
(44,427
)
Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
984,356

 
—

 
984,356

Proceeds on maturities of investments
—

 
—

 
124,716

 
—

 
124,716

Purchases of fixed maturities
—

 
—

 
(782,290
)
 
—

 
(782,290
)
Purchases of short-term investments, net
—

 
—

 
(107,437
)
 
—

 
(107,437
)
Sales of other investments
—

 
—

 
7,059

 
—

 
7,059

Increase in securities lending collateral
—

 
—

 
(1,485
)
 
—

 
(1,485
)
Redemption from operating affiliates
—

 
—

 
43,366

 
—

 
43,366

Decrease in restricted cash
—

 
—

 
91,274

 
—

 
91,274

Net cash provided by investing activities
—

 
—

 
359,559

 
—

 
359,559

Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to operating affiliates
—

 
—

 
154,028

 
—

 
154,028

Repayments on notes payable to operating affiliates
—

 
—

 
(184,628
)
 
—

 
(184,628
)
Issuance of common shares, net
2,030

 
—

 
—

 
—

 
2,030

Purchases of common shares under share repurchase program
(197,339
)
 
—

 
—

 
—

 
(197,339
)
Dividends paid
(29,330
)
 
—

 
—

 
—

 
(29,330
)
Increase in securities lending payable
—

 
—

 
1,485

 
—

 
1,485

Third party redemption of redeemable noncontrolling interest
—

 
—

 
(10,496
)
 
—

 
(10,496
)
Net cash used in financing activities
(224,639
)
 
—

 
(39,611
)
 
—

 
(264,250
)
Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
4,890

 
—

 
4,890

Net increase in cash
42,538

 
—

 
13,234

 
—

 
55,772

Cash and cash equivalents, beginning of year
20,385

 
—

 
713,763

 
—

 
734,148

Cash and cash equivalents, end of year
$
62,923

 
$
—

 
$
726,997

 
$
—

 
$
789,920

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.


57
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


19. Subsequent events
Quarterly Dividend
On May 7, 2015, the Company announced a quarterly cash dividend of $0.32 per each common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on June 30, 2015 to holders of record on June 15, 2015.

58

Table of Contents



ITEM 2. 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 three months ended March 31, 2015 and 2014 and the Company's consolidated financial condition, liquidity and capital resources as at March 31, 2015 and December 31, 2014. This discussion and analysis should be read in conjunction with the Company's unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company's audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2014, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
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 Part I Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 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 segment operating within the U.S. commercial market.
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 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.

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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 (excluding U.S. agriculture premiums and 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 (excluding U.S. agriculture premiums and 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%. The Talbot segment experienced a whole account rate decrease of approximately 5% through March 31, 2015 and the Western World segment experienced a whole account rate increase of approximately 2% through March 31, 2015.

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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:
 
As at, or for the
 
Three Months Ended March 31,
 
Year Ended December 31,
 
2015
 
2014
 
2014
Book value per diluted common share plus accumulated dividends
$50.47
 
$45.56
 
$48.54
Book value per diluted common share
41.27
 
37.58
 
39.66
Underwriting income
144,107
 
153,045
 
526,934
Net operating income attributable to Validus
132,836
 
140,297
 
486,464
Annualized return on average equity
19.1%
 
17.7%
 
13.1%
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 $1.93, or 4.0%, from $48.54 at December 31, 2014 to $50.47 at March 31, 2015. Cash dividends per common share are an integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.32 per common share and common share equivalent during the three months ended March 31, 2015. On May 7, 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 June 30, 2015 to holders of record on June 15, 2015. Book value per diluted common share plus accumulated dividends 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 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 $1.61, or 4.1%, from $39.66 at December 31, 2014 to $41.27 at March 31, 2015. Growth in book value per diluted common share inclusive of dividends was 4.9% and 4.6% for the three months ended March 31, 2015 and 2014, respectively. 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), other income (loss), non-recurring items and net (income) loss attributable to noncontrolling interest. 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 three months ended March 31, 2015 and 2014 was $144.1 million and $153.0 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 net 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 three months ended March 31, 2015 and 2014 was $132.8 million and $140.3 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 rewards shareholders for the risks assumed. The annualized return on average equity for the three months ended March 31, 2015 and 2014 was 19.1% and 17.7%, respectively.

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First Quarter 2015 Summarized Consolidated Results of Operations
•
Gross premiums written for the three months ended March 31, 2015 were $1,119.5 million compared to $1,012.0 million for the three months ended March 31, 2014, an increase of $107.5 million, or 10.6%.
•
Net premiums earned for the three months ended March 31, 2015 were $577.8 million compared to $483.0 million for the three months ended March 31, 2014, an increase of $94.8 million, or 19.6%.
•
Underwriting income for the three months ended March 31, 2015 was $144.1 million compared to $153.0 million for the three months ended March 31, 2014, a decrease of $8.9 million, or 5.8%.
•
Combined ratio for the three months ended March 31, 2015 of 75.1% which included $83.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 14.5 percentage points compared to a combined ratio for the three months ended March 31, 2014 of 68.3% which included $39.4 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 8.2 percentage points. The favorable loss reserve development was primarily due to lower than expected emergence of attritional losses. Incurred losses for the three months ended March 31, 2015 were $240.9 million, which included $15.0 million of non-notable loss events.
•
Loss ratio for the three months ended March 31, 2015 of 41.7% compared to 33.7% for the three months ended March 31, 2014, an increase of 8.0 percentage points.
•
Loss ratios by line of business are as follows:
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
Percentage Point Change
Property (a)
19.5
%
 
14.3
%
 
5.2

Marine
36.9
%
 
40.1
%
 
(3.2
)
Specialty
59.9
%
 
55.2
%
 
4.7

Liability (a)
77.2
%
 
—
%
 
77.2

All lines
41.7
%
 
33.7
%
 
8.0

(a)    The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.
•
Losses and loss expenses from notable loss events, defined as consolidated losses which aggregate to a threshold greater than or equal to $30.0 million, for both the three months ended March 31, 2015 and 2014 were $nil.
•
Losses and loss expenses from non-notable loss events, defined as consolidated losses which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million, for the three months ended March 31, 2015 were $15.0 million compared to $nil for the three months ended March 31, 2014.
•
Net investment income for the three months ended March 31, 2015 was $31.0 million compared to $23.4 million for the three months ended March 31, 2014, an increase of $7.7 million, or 32.8%.
•
Net operating income available to Validus for the three months ended March 31, 2015 was $132.8 million compared to $140.3 million for the three months ended March 31, 2014, a decrease of $7.5 million, or 5.3%.
•
Net income available to Validus for the three months ended March 31, 2015 was $173.4 million, or $1.98 per diluted common share compared to $162.4 million or $1.66 per diluted common share for the three months ended March 31, 2014.
•
Investment yield for the three months ended March 31, 2015 was 1.83% compared to 1.42% for the three months ended March 31, 2014.
•
Annualized return on average equity and annualized net operating return on average equity for the three months ended March 31, 2015 were 19.1% and 14.6%, respectively, compared to 17.7% and 15.3% for the three months ended March 31, 2014.
•
Total investments and cash as at March 31, 2015 was $8.2 billion compared to $8.1 billion at December 31, 2014.
•
AlphaCat's assets under management were $1.9 billion as at both April 1, 2015 and January 1, 2015.

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Overview of the Results of Operations for the Three Months Ended March 31, 2015 compared to the Three Months Ended March 31, 2014.
The change in net operating income available to Validus for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the three months ended March 31
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
94,797

Notable and non-notable loss events (a)
 
(15,000
)
Incurred current year losses, excluding notable and non-notable loss events
 
(107,402
)
Prior period loss development
 
44,144

Other underwriting deductions (b)
 
(25,477
)
Underwriting income (c)
 
(8,938
)
(Income) attributable to operating affiliate investors
 
8,504

Other operating expenses and income, net (d)
 
(4,577
)
Net operating income (c)
 
(5,011
)
Net operating (income) attributable to noncontrolling interest
 
(2,450
)
Net operating income available to Validus (c)
 
$
(7,461
)
(a)
There were no notable loss events for either of the three months ended March 31, 2015 and 2014. Losses and loss expenses from non-notable loss events for the three months ended March 31, 2015 were $15.0 million compared to $nil for the three months ended March 31, 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
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.”
(d)
Other operating expenses and income, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Net operating income available to Validus for the three months ended March 31, 2015 was $132.8 million compared to $140.3 million for the three months ended March 31, 2014, a decrease of $7.5 million or 5.3%. The primary factors driving the decrease in net operating income available to Validus were:
•
An increase in losses and loss expenses of $122.4 million primarily due to the acquisition of Western World and a current quarter non-notable loss event of $15.0 million; offset by, an increase in favorable prior period loss development of $44.1 million; and,
•
An increase in other underwriting deductions of $25.5 million primarily due to the acquisition of Western World; offset by,
•
An increase in net premiums earned of $94.8 million primarily due to the acquisition of Western World and a significant new agriculture deal in the Validus Re segment; and,
•
A decrease in (income) attributable to operating affiliate investors of $8.5 million.
Segment Reporting
Management has determined that the Company operates in four reportable segments Validus Re, AlphaCat, Talbot and Western World.

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First Quarter 2015 Results of Operations - Validus Re Segment
The following table presents results of operations for the three months ended March 31, 2015 and 2014, respectively:
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
711,212

 
$
666,163

Reinsurance premiums ceded
 
(113,296
)
 
(129,817
)
Net premiums written
 
597,916

 
536,346

Change in unearned premiums
 
(344,828
)
 
(297,960
)
Net premiums earned
 
253,088

 
238,386

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
113,128

 
68,155

Policy acquisition costs
 
42,094

 
39,245

General and administrative expenses
 
19,509

 
18,195

Share compensation expenses
 
2,578

 
2,208

Total underwriting deductions
 
177,309

 
127,803

 
 
 
 
 
Underwriting income (a)
 
75,779

 
110,583

 
 
 
 
 
Net investment income
 
18,776

 
18,765

Other insurance related income
 
315

 
977

Finance expenses
 
(3,871
)
 
(3,839
)
 
 
 
 
 
Operating income before taxes
 
90,999

 
126,486

Tax benefit
 
1,880

 
578

Net operating income (a)
 
$
92,879

 
$
127,064

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
84.1
%
 
80.5
%
 
 
 
 
 
Losses and loss expenses
 
44.7
%
 
28.6
%
 
 
 
 
 
Policy acquisition costs
 
16.7
%
 
16.5
%
General and administrative expenses (b)
 
8.7
%
 
8.5
%
Expense ratio
 
25.4
%
 
25.0
%
Combined ratio
 
70.1
%
 
53.6
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net 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.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended March 31
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
14,702

Notable and non-notable loss events (a)
 
(15,000
)
Incurred current year losses, excluding notable and non-notable loss events
 
(44,641
)
Prior period loss development
 
14,668

Other underwriting deductions (b)
 
(4,533
)
Underwriting income (c)
 
(34,804
)
Other operating income and expenses, net (d)
 
619

Net operating income (c)
 
$
(34,185
)
(a)
There were no notable loss events for either of the three months ended March 31, 2015 and 2014. Losses and loss expenses from non-notable loss events for the three months ended March 31, 2015 were $15.0 million compared to $nil for the three months ended March 31, 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
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.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
219,346

 
$
261,679

 
$
(42,333
)
Marine
 
133,400

 
152,962

 
(19,562
)
Specialty
 
358,466

 
251,522

 
106,944

Total
 
$
711,212

 
$
666,163

 
$
45,049

The decrease in gross premiums written in the property lines of $42.3 million was primarily due to a reduction in business written in the catastrophe excess of loss lines of $49.2 million. This decrease is driven by reductions in our participation on various programs due to the current market conditions. The decrease in gross premiums written of $19.6 million in the marine lines was due to non-renewals as a result of the current market conditions and some business historically written in marine lines being renewed in specialty lines. This decrease was offset by a $4.9 million increase in premiums from marine proportional treaties incepting in the quarter. The increase in gross premiums written in the specialty lines of $106.9 million was primarily due to a significant new agriculture deal as well as a significant increase in an existing agriculture deal, offset by various non-renewals.
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
219,346

 
30.8
%
 
$
261,679

 
39.2
%
Marine
 
133,400

 
18.8
%
 
152,962

 
23.0
%
Specialty
 
358,466

 
50.4
%
 
251,522

 
37.8
%
Total
 
$
711,212

 
100.0
%
 
$
666,163

 
100.0
%
The changes in mix of business are consistent with the changes in gross premiums written discussed above.

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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
96,996

 
$
112,947

 
$
(15,951
)
Marine
 
5,284

 
13,365

 
(8,081
)
Specialty
 
11,016

 
3,505

 
7,511

Total
 
$
113,296

 
$
129,817

 
$
(16,521
)
Reinsurance premiums ceded in the property lines decreased by $16.0 million primarily as a result of renewing our main retro program at reduced rates. The decrease in reinsurance premiums ceded in the marine lines of $8.1 million is primarily due to a composite marine program being renewed in the specialty lines. The increase in reinsurance premiums ceded in the specialty lines of $7.5 million is driven by the renewal of the composite program as noted.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
122,350

 
$
148,732

 
$
(26,382
)
Marine
 
128,116

 
139,597

 
(11,481
)
Specialty
 
347,450

 
248,017

 
99,433

Total
 
$
597,916

 
$
536,346

 
$
61,570

The decrease in net premiums written was 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
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
122,350

 
55.8
%
 
$
148,732

 
56.8
%
Marine
 
128,116

 
96.0
%
 
139,597

 
91.3
%
Specialty
 
347,450

 
96.9
%
 
248,017

 
98.6
%
Total
 
$
597,916

 
84.1
%
 
$
536,346

 
80.5
%
The marine ratio increased by 4.7 percentage points primarily due to a composite marine program being renewed in the specialty lines.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
110,337

 
$
123,662

 
$
(13,325
)
Marine
 
38,231

 
42,857

 
(4,626
)
Specialty
 
104,520

 
71,867

 
32,653

Total
 
$
253,088

 
$
238,386

 
$
14,702



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The decreases in the property and marine lines net premiums earned of $13.3 million and $4.6 million, respectively, were as a result of lower gross premiums written during the quarter. This was offset by the earned impact of the reduced reinsurance premiums ceded. The increase in the specialty lines net premiums earned of $32.7 million was primarily due to an increase in gross premiums written during the quarter.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - All Lines
 
Three Months Ended March 31,
 
2015
 
2014
All lines—current period excluding items below
48.6
 %
 
32.8
 %
All lines—current period—notable loss events
0.0
 %
 
0.0
 %
All lines—current period—non-notable loss events
5.9
 %
 
0.0
 %
All lines—change in prior accident years
(9.8
)%
 
(4.2
)%
All lines—loss ratio
44.7
 %
 
28.6
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
122,824

 
$
78,183

 
$
44,641

All lines—current period—notable loss events
 
—

 
—

 
—

All lines—current period—non-notable loss events
 
15,000

 
—

 
15,000

All lines—change in prior accident years
 
(24,696
)
 
(10,028
)
 
(14,668
)
All lines—losses and loss expenses
 
$
113,128

 
$
68,155

 
$
44,973

Notable Loss Events
There were no notable loss events for either of the three months ended March 31, 2015 and 2014.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended March 31, 2015 were $15.0 million compared to $nil for the three months ended March 31, 2014.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended March 31,
 
2015
 
2014
Property—current period excluding items below
17.1
 %
 
13.5
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
13.6
 %
 
0.0
 %
Property—change in prior accident years
(13.5)
 %
 
(1.7)
 %
Property—loss ratio
17.2
 %
 
11.8
 %

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Losses and Loss Expenses - Property Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
18,916

 
$
16,696

 
$
2,220

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
15,000

 
—

 
15,000

Property—change in prior accident years
 
(14,896
)
 
(2,111
)
 
(12,785
)
Property—losses and loss expenses
 
$
19,020

 
$
14,585

 
$
4,435

During the three months ended March 31, 2015, the property lines incurred $15.0 million of losses and loss expenses from a single non-notable loss event, Windstorm Niklas which represented 13.6 percentage points of the property lines loss ratio.
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was higher by 3.6 percentage points, representing a higher level of attritional losses in the current quarter. The favorable development of $14.9 million on prior accident years for the three months ended March 31, 2015 was primarily due to lower claims emergence on attritional losses.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Three Months Ended March 31,
 
2015
 
2014
Marine—current period excluding items below
71.4
 %
 
38.8
 %
Marine—current period—notable loss events
0.0
 %
 
0.0
 %
Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
Marine—change in prior accident years
(11.9
)%
 
(31.5
)%
Marine—loss ratio
59.5
 %
 
7.3
 %
 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
27,301

 
$
16,619

 
$
10,682

Marine—current period—notable loss events
 
—

 
—

 
—

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(4,570
)
 
(13,513
)
 
8,943

Marine—losses and loss expenses
 
$
22,731

 
$
3,106

 
$
19,625

The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 32.6 percentage points as a result of higher attritional and event losses in the quarter, which included losses of $11.3 million from the Petrobras offshore platform fire that was below the non-notable loss event threshold. The favorable development of $4.6 million on prior accident years for the three months ended March 31, 2015 was primarily due to lower claims emergence on attritional losses; whereas, the favorable development of $13.5 million on prior accident years for the three months ended March 31, 2014 was primarily due to favorable loss emergence on the Gryphon Alpha mooring failure.

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Losses and Loss Expenses Ratio - Specialty Lines
 
Three Months Ended March 31,
 
2015
 
2014
Specialty—current period excluding items below
73.3
 %
 
62.4
%
Specialty—current period—notable loss events
0.0
 %
 
0.0
%
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
%
Specialty—change in prior accident years
(5.0
)%
 
7.8
%
Specialty—loss ratio
68.3
 %
 
70.2
%
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
76,607

 
$
44,868

 
$
31,739

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(5,230
)
 
5,596

 
(10,826
)
Specialty—losses and loss expenses
 
$
71,377

 
$
50,464

 
$
20,913

The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was higher by 10.9 percentage points, primarily due to a change in business mix to include more agriculture business and higher attritional losses in the current quarter. The favorable loss reserve development of $5.2 million during the three months ended March 31, 2015 was due primarily to lower claims emergence on attritional losses; whereas, the unfavorable development of $5.6 million on prior accident years in the three months ended March 31, 2014 was primarily due to an increase in the loss estimate on agriculture losses.
Policy Acquisition Costs
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
18,235

 
16.5
%
 
$
21,934

 
17.7
%
Marine
 
7,828

 
20.5
%
 
7,564

 
17.6
%
Specialty
 
16,031

 
15.3
%
 
9,747

 
13.6
%
Total
 
$
42,094

 
16.7
%
 
$
39,245

 
16.5
%
The acquisition cost ratio for the property lines decreased by 1.2% primarily due to the impact of retrocession business that has low or minimal acquisition costs. The acquisition cost ratio for the marine lines increased by 2.9% due to the impact of profit commissions as well as a higher level of proportional business which carries higher acquisition costs than excess of loss business. The increase in the acquisition cost ratio for the specialty lines of 1.7% was driven by adjustments to premium.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
19,509

 
7.7
%
 
$
18,195

 
7.6
%
Share compensation expenses
 
2,578

 
1.0
%
 
2,208

 
0.9
%
Total
 
$
22,087

 
8.7
%
 
$
20,403

 
8.5
%
General and administrative and share compensation expenses were comparable for the three months ended March 31, 2015 and 2014.

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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 cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the three months ended March 31, 2015 and 2014.
 
Three Months Ended March 31,
 
2015
 
2014
Losses and loss expenses ratio
44.7
%
 
28.6
%
Policy acquisition cost ratio
16.7
%
 
16.5
%
General and administrative expenses ratio (a)
8.7
%
 
8.5
%
Expense ratio
25.4
%
 
25.0
%
Combined ratio
70.1
%
 
53.6
%
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the three months ended March 31, 2015 of 16.5 percentage points compared to the three months ended March 31, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
17,386

 
$
18,212

 
$
(826
)
Other investments
 
2,390

 
490

 
1,900

Restricted cash and cash and cash equivalents
 
44

 
1,603

 
(1,559
)
Securities lending income
 
3

 
2

 
1

Total gross investment income
 
19,823

 
20,307

 
(484
)
Investment expenses
 
(1,047
)
 
(1,542
)
 
495

Total net investment income
 
$
18,776

 
$
18,765

 
$
11

Net investment income for the three months ended March 31, 2015 and 2014 was comparable. Net investment income from other investments includes distributed and undistributed net income from certain investments.
Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
315

 
$
977

 
$
(662
)
Other insurance related income for the three months ended March 31, 2015 and 2014 was comparable.
Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
3,871

 
$
3,839

 
$
32

Finance expenses for the three months ended March 31, 2015 and 2014 were comparable.

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First Quarter 2015 Results of Operations - AlphaCat Segment
The following table presents results of operations for the three months ended March 31, 2015 and 2014, respectively:
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
102,564

 
$
84,347

Reinsurance premiums ceded
 
(4,538
)
 
(3,700
)
Net premiums written
 
98,026

 
80,647

Change in unearned premiums
 
(63,831
)
 
(49,964
)
Net premiums earned
 
34,195

 
30,683

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
(844
)
 
(7,860
)
Policy acquisition costs
 
3,660

 
2,980

General and administrative expenses
 
4,002

 
4,128

Share compensation expenses
 
149

 
(10
)
Total underwriting deductions
 
6,967

 
(762
)
 
 
 
 
 
Underwriting income (a)
 
27,228

 
31,445

 
 
 
 
 
Net investment income
 
1,585

 
880

Other insurance related income
 
5,771

 
9,497

Finance expenses
 
(4,516
)
 
(683
)
 
 
 
 
 
Operating income before income from operating affiliates and (income) attributable to operating affiliate investors
 
30,068

 
41,139

Income from operating affiliates
 
2,453

 
4,927

(Income) attributable to operating affiliate investors
 
(23,206
)
 
(31,710
)
Net operating income (a)
 
9,315

 
14,356

Net operating (income) attributable to noncontrolling interest
 
(3,954
)
 
(1,504
)
Net operating income available to Validus (a)
 
$
5,361

 
$
12,852

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
95.6
 %
 
95.6
 %
 
 
 
 
 
Losses and loss expenses
 
(2.5
)%
 
(25.6
)%
 
 
 
 
 
Policy acquisition costs
 
10.7
 %
 
9.7
 %
General and administrative expenses (b)
 
12.1
 %
 
13.4
 %
Expense ratio
 
22.8
 %
 
23.1
 %
Combined ratio
 
20.3
 %
 
(2.5
)%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net 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.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the three months ended March 31
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
3,512

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
—

Prior period loss development
 
(7,016
)
Other underwriting deductions (b)
 
(713
)
Underwriting income (c)
 
(4,217
)
(Income) attributable to operating affiliate investors
 
8,504

Other operating income and expenses, net (d)
 
(9,328
)
Net operating income (c)
 
(5,041
)
Net operating (income) attributable to noncontrolling interest
 
(2,450
)
Net operating income available to Validus (c)
 
$
(7,491
)
(a)
There were no notable or non-notable loss events for either of the three months ended March 31, 2015 and 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
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.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, taxes and income from operating affiliates.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
102,564

 
$
84,347

 
$
18,217

The increase in gross premiums written in the property lines was primarily due to an increase in the capital base of the AlphaCat ILS Funds. This increase was offset by a decrease in the capital base of AlphaCat 2015 as compared to the capital base of AlphaCat 2014.
Reinsurance Premiums Ceded
AlphaCat reinsurance premiums ceded for the three months ended March 31, 2015 and 2014 were $4.5 million and $3.7 million, respectively.

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Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
98,026

 
$
80,647

 
$
17,379

The increase 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 was 95.6% for the three months ended March 31, 2015 and 2014, respectively.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
34,195

 
$
30,683

 
$
3,512

The increase in net premiums earned in the property lines was primarily due to the earnings patterns of gross premiums written.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended March 31,
 
2015
 
2014
Property—current period excluding items below
0.0
 %
 
0.0
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
0.0
 %
Property—change in prior accident years
(2.5
)%
 
(25.6
)%
Property—loss ratio
(2.5
)%
 
(25.6
)%
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
—

 
$
—

 
$
—

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
(844
)
 
(7,860
)
 
7,016

Property—losses and loss expenses
 
$
(844
)
 
$
(7,860
)
 
$
7,016

The favorable development of $0.8 million, on prior accident years for the three months ended March 31, 2015, relates to the partial release of a 2014 aggregate excess of loss contract. The favorable development of $7.9 million, on prior accident years for the three months ended March 31, 2014, relates to the partial release of a 2013 aggregate excess of loss contract.
Notable Loss Events
There were no notable loss events for either of the three months ended March 31, 2015 and 2014.
Non-notable Loss Events
There were no non-notable loss events for either of the three months ended March 31, 2015 and 2014.

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Policy Acquisition Costs
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
3,660

 
10.7
%
 
$
2,980

 
9.7
%
The policy acquisition cost ratios for the three months ended March 31, 2015 and 2014 were comparable.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
4,002

 
11.7
%
 
$
4,128

 
13.4
 %
Share compensation expenses
 
149

 
0.4
%
 
(10
)
 
—
 %
Total
 
$
4,151

 
12.1
%
 
$
4,118

 
13.4
 %
The general and administrative and share compensation expenses for the three months ended March 31, 2015 and 2014 were comparable.
Selected Underwriting Ratios
The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended March 31, 2015 and 2014, respectively.
 
Three Months Ended March 31,
 
2015
 
2014
Losses and loss expenses ratio
(2.5
)%
 
(25.6
)%
Policy acquisition cost ratio
10.7
 %
 
9.7
 %
General and administrative expenses ratio (a)
12.1
 %
 
13.4
 %
Expense ratio
22.8
 %
 
23.1
 %
Combined ratio
20.3
 %
 
(2.5
)%
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the three months ended March 31, 2015 of 22.8 percentage points compared to the three months ended March 31, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
1,566

 
$
865

 
$
701

Restricted cash and cash and cash equivalents
 
19

 
15

 
4

Total net investment income
 
$
1,585

 
$
880

 
$
705

The increase in net investment income of $0.7 million for the three months ended March 31, 2015 compared to 2014 was due to an increase in the size of the catastrophe bond portfolio during the three months ended March 31, 2015.


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Other Insurance Related Income
 
 
Other Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
5,771

 
$
9,497

 
$
(3,726
)
The decrease in other income of $3.7 million, or 39.2%, was primarily due to a reduction in performance fees in the current quarter and a gain on the deconsolidation of one of the AlphaCat ILS Funds in the prior year quarter.
Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
4,516

 
$
683

 
$
3,833

The increase in finance expenses of $3.8 million was due to placement fees incurred in the current quarter for new capital to be deployed in 2015.
Income From Operating Affiliates
 
 
Income from Operating Affiliates
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
AlphaCat Re 2011
 
$
(10
)
 
$
193

 
$
(203
)
AlphaCat Re 2012
 
(25
)
 
(36
)
 
11

AlphaCat 2013
 
(14
)
 
1,475

 
(1,489
)
AlphaCat 2014
 
(100
)
 
1,611

 
(1,711
)
AlphaCat 2015
 
1,316

 
—

 
1,316

AlphaCat ILS funds
 
1,286

 
1,684

 
(398
)
Total
 
$
2,453

 
$
4,927

 
$
(2,474
)
For details of voting and equity ownership interests of the above entities, refer to Note 5 to the Consolidated Financial Statements in Part I. The decrease in income from operating affiliates of $2.5 million for the three months ended March 31, 2015 was primarily due to the timing of capital deployment. Capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013.
(Income) Attributable To Operating Affiliate Investors
 
 
(Income) Attributable to Operating Affiliate Investors
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
(Income) attributable to operating affiliate investors
 
$
(23,206
)
 
$
(31,710
)
 
$
8,504

The decrease in income attributable to operating affiliate investors of $8.5 million for the three months ended March 31, 2015, was due primarily to the timing of capital deployment. As noted above, capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013, thus had a larger effect on first quarter 2014.

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Table of Contents



Net Operating Loss (Income) Attributable to Noncontrolling Interest
 
 
Net Operating (Income) Loss Attributable to Noncontrolling Interest
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net operating (income) attributable to noncontrolling interest
 
$
(3,954
)
 
$
(1,504
)
 
$
(2,450
)
For the three months ended March 31, 2015, net operating (income) attributable to noncontrolling interest was $4.0 million, which comprised $0.8 million relating to 90% of the net operating income in PaCRe for the quarter and $3.1 million of net operating income relating to the consolidated AlphaCat ILS funds.
Assets Under Management
 
 
Assets Under Management
(Dollars in thousands)
 
As at April 1, 2015
 
As at January 1, 2015
Related party
 
$
354,578

 
$
346,907

Third party
 
1,524,990

 
1,533,840

Total
 
$
1,879,568

 
$
1,880,747

Assets under management were $1.9 billion as at both April 1, 2015 and January 1, 2015. During the three months ended April 1, 2015, a total of $119.3 million of capital was raised, of which $91.0 million was raised from third parties. During the three months ended April 1, 2015, $169.6 million was returned to investors, of which $145.4 million was returned to third party investors.


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Table of Contents



First Quarter 2015 Results of Operations - Talbot Segment
The following table presents results of operations for the three months ended March 31, 2015 and 2014, respectively:
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
270,077

 
$
290,695

Reinsurance premiums ceded
 
(91,075
)
 
(90,605
)
Net premiums written
 
179,002

 
200,090

Change in unearned premiums
 
43,587

 
13,798

Net premiums earned
 
222,589

 
213,888

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
78,128

 
102,376

Policy acquisition costs
 
49,104

 
44,928

General and administrative expenses
 
36,494

 
35,149

Share compensation expenses
 
2,957

 
2,582

Total underwriting deductions
 
166,683

 
185,035

 
 
 
 
 
Underwriting income (a)
 
55,906

 
28,853

 
 
 
 
 
Net investment income
 
6,305

 
4,686

Other insurance related income
 
54

 
17

Finance expenses
 
(87
)
 
(26
)
 
 
 
 
 
Operating income before taxes
 
62,178

 
33,530

Tax (expense) benefit
 
(883
)
 
130

Net operating income (a)
 
$
61,295

 
$
33,660

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
66.3
%
 
68.8
%
 
 
 
 
 
Losses and loss expenses
 
35.1
%
 
47.9
%
 
 
 
 
 
Policy acquisition costs
 
22.1
%
 
21.0
%
General and administrative expenses (b)
 
17.7
%
 
17.6
%
Expense ratio
 
39.8
%
 
38.6
%
Combined ratio
 
74.9
%
 
86.5
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net 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.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended March 31
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
8,701

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
(5,912
)
Prior period loss development
 
30,160

Other underwriting deductions (b)
 
(5,896
)
Underwriting income (c)
 
27,053

Other operating income and expenses, net (d)
 
582

Net operating income (c)
 
$
27,635

(a)
There were no notable or non-notable loss events for either of the three months ended March 31, 2015 and 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
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.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
71,661

 
$
78,103

 
$
(6,442
)
Marine
 
110,369

 
119,571

 
(9,202
)
Specialty
 
88,047

 
93,021

 
(4,974
)
Total
 
$
270,077

 
$
290,695

 
$
(20,618
)
Talbot gross premiums written translated at 2014 exchange rates would have been $274.9 million, a decrease of $15.8 million.
The decrease in gross premiums written in the property lines of $6.4 million was primarily due to a decrease in the property treaty lines of $5.7 million, of which $4.4 million related to the Latin American business now being written directly through Validus Reinsurance Switzerland Ltd ("Validus Re Swiss"), a Validus Re segment entity. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. Also contributing to the decrease, was a reduction in the direct property and downstream energy and power classes of business of $2.7 million and $1.7 million, respectively. These decreases were offset by an increase in the construction class of $3.7 million primarily due to new business.
The decrease in gross premiums written in the marine lines of $9.2 million was primarily due to a decrease in the upstream energy lines of $7.3 million. This decrease resulted from a reduction in new policies as a result of the economic downturn in the oil and gas sector, price and participation reductions on renewal policies and a reduction in premium adjustments to prior years.
The decrease in gross premiums written in the specialty lines of $5.0 million was primarily due to a decrease in the political violence lines of $3.9 million due to downward movement in premium adjustments to prior years. Also contributing to the decrease was a reduction in the aviation treaty lines of $3.8 million as a result of clients buying less cover, programs being declined, or line sizes being reduced due to price and rate reductions together with the absence of reinstatement premiums receivable in 2015. These decreases were partially offset by an increase in the airlines direct lines of $3.6 million due to new business and upward movement in premium adjustments to prior years.


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Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
71,661

 
26.5
%
 
$
78,103

 
26.9
%
Marine
 
110,369

 
40.9
%
 
119,571

 
41.1
%
Specialty
 
88,047

 
32.6
%
 
93,021

 
32.0
%
Total
 
$
270,077

 
100.0
%
 
$
290,695

 
100.0
%
The changes in mix of business were consistent with the changes in gross premiums written discussed above.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
40,255

 
$
43,649

 
$
(3,394
)
Marine
 
17,829

 
18,473

 
(644
)
Specialty
 
32,991

 
28,483

 
4,508

Total
 
$
91,075

 
$
90,605

 
$
470

The decrease in reinsurance premiums ceded in the property lines of $3.4 million was due primarily to a decrease in the property treaty lines of $3.7 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 through the second quarter of 2014. The increase in reinsurance premiums ceded in the specialty lines of $4.5 million was due primarily to reinstatement premiums across a number of classes.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
31,406

 
$
34,454

 
$
(3,048
)
Marine
 
92,540

 
101,098

 
(8,558
)
Specialty
 
55,056

 
64,538

 
(9,482
)
Total
 
$
179,002

 
$
200,090

 
$
(21,088
)
The decrease in Talbot net premiums written was 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
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
31,406

 
43.8
%
 
$
34,454

 
44.1
%
Marine
 
92,540

 
83.8
%
 
101,098

 
84.6
%
Specialty
 
55,056

 
62.5
%
 
64,538

 
69.4
%
Total
 
$
179,002

 
66.3
%
 
$
200,090

 
68.8
%
The net retention ratios above are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
55,204

 
$
50,939

 
$
4,265

Marine
 
92,257

 
89,072

 
3,185

Specialty
 
75,128

 
73,877

 
1,251

Total
 
$
222,589

 
$
213,888

 
$
8,701

The changes in net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - All Lines
 
Three Months Ended March 31,
 
2015
 
2014
All lines—current period excluding items below
58.3
 %
 
57.9
 %
All lines—current period—notable loss events
0.0
 %
 
0.0
 %
All lines—current period—non-notable loss events
0.0
 %
 
0.0
 %
All lines—change in prior accident years
(23.2)
 %
 
(10.0)
 %
All lines—loss ratio
35.1
 %
 
47.9
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
129,815

 
$
123,903

 
$
5,912

All lines—current period—notable loss events
 
—

 
—

 
—

All lines—current period—non-notable loss events
 
—

 
—

 
—

All lines—change in prior accident years
 
(51,687
)
 
(21,527
)
 
(30,160
)
All lines - losses and loss expenses
 
$
78,128

 
$
102,376

 
$
(24,248
)
Notable Loss Events
There were no notable loss events for either of the three months ended March 31, 2015 and 2014.
Non-notable Loss Events
There were no non-notable loss events for either of the three months ended March 31, 2015 and 2014.

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Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended March 31,
 
2015
 
2014
Property—current period excluding items below
67.7
 %
 
71.2
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
0.0
 %
Property—change in prior accident years
(37.6)
 %
 
(26.8)
 %
Property—loss ratio
30.1
 %
 
44.4
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
37,372

 
$
36,284

 
$
1,088

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
(20,752
)
 
(13,667
)
 
(7,085
)
Property—losses and loss expenses
 
$
16,620

 
$
22,617

 
$
(5,997
)

The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 3.5 percentage points as a result of lower attritional losses in the current quarter. The favorable development of $20.8 million on prior accident years for the current quarter primarily relates to favorable development on attritional losses, favorable development on known events and lower emergence of new claims.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Three Months Ended March 31,
 
2015
 
2014
Marine—current period excluding items below
51.9
 %
 
49.5
%
Marine—current period—notable loss events
0.0
 %
 
0.0
%
Marine—current period—non-notable loss events
0.0
 %
 
0.0
%
Marine—change in prior accident years
(24.4
)%
 
6.4
%
Marine—loss ratio
27.5
 %
 
55.9
%
 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
47,877

 
$
44,064

 
$
3,813

Marine—current period—notable loss events
 
$
—

 
$
—

 
$
—

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(22,514
)
 
5,680

 
(28,194
)
Marine—losses and loss expenses
 
$
25,363

 
$
49,744

 
$
(24,381
)

The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 2.4 percentage points primarily due to higher attritional losses in the current quarter. The favorable development of $22.5 million on prior accident years for the current quarter primarily related to lower emergence of new claims combined with favorable development on attritional losses. The adverse development of $5.7 million on prior accident years for the three months ended March 31, 2014 primarily related to higher development on attritional claims as well as a higher than expected emergence of events.

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Losses and Loss Expenses Ratio - Specialty Lines
 
Three Months Ended March 31,
 
2015
 
2014
Specialty—current period excluding items below
59.3
 %
 
58.9
 %
Specialty—current period—notable loss events
0.0
 %
 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
Specialty—change in prior accident years
(11.2
)%
 
(18.3)
 %
Specialty—loss ratio
48.1
 %
 
40.6
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
44,566

 
$
43,555

 
$
1,011

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(8,421
)
 
(13,540
)
 
5,119

Specialty—losses and loss expenses
 
$
36,145

 
$
30,015

 
$
6,130

The specialty lines experienced favorable development of $8.4 million on prior accident years primarily due to favorable development on attritional losses.
Policy Acquisition Costs
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
7,868

 
14.3
%
 
$
6,271

 
12.3
%
Marine
 
23,352

 
25.3
%
 
21,990

 
24.7
%
Specialty
 
17,884

 
23.8
%
 
16,667

 
22.6
%
Total
 
$
49,104

 
22.1
%
 
$
44,928

 
21.0
%
The property acquisition cost ratio increased by 2.0 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 through the second quarter of 2014.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
36,494

 
16.4
%
 
35,149

 
16.4
%
Share compensation expenses
 
2,957

 
1.3
%
 
2,582

 
1.2
%
Total
 
$
39,451

 
17.7
%
 
$
37,731

 
17.6
%
General and administrative and share compensation expenses ratios were comparable for the three months ended March 31, 2015 and 2014.
General and administrative and share compensation expenses translated at 2014 exchange rates would have been $41.6 million, an increase of $3.9 million. This increase was due to a greater retention of costs within the segment together with increased staff costs.

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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 three months ended March 31, 2015 and 2014, respectively.
 
Three Months Ended March 31,
 
2015
 
2014
Losses and loss expenses ratio
35.1
%
 
47.9
%
Policy acquisition cost ratio
22.1
%
 
21.0
%
General and administrative expenses ratio (a)
17.7
%
 
17.6
%
Expense ratio
39.8
%
 
38.6
%
Combined ratio
74.9
%
 
86.5
%
(a)
Includes general and administrative expenses and share compensation expenses.
The decrease in the combined ratio for the three months ended March 31, 2015 of 11.6 percentage points compared to the three months ended March 31, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Investment Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
6,356

 
$
4,699

 
$
1,657

Restricted cash and cash and cash equivalents
 
371

 
339

 
32

Total gross investment income
 
6,727

 
5,038

 
1,689

Investment expenses
 
(422
)
 
(352
)
 
(70
)
Total net investment income
 
$
6,305

 
$
4,686

 
$
1,619

The increase in net investment income of $1.6 million for the three months ended March 31, 2015 compared to 2014 was primarily due to a change in asset allocation intended to improve yield.

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First Quarter 2015 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 and there are no comparatives for the first quarter of 2014.
The following table presents results of operations for the three months ended March 31, 2015:
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Underwriting income
 
 
Gross premiums written
 
$
56,947

Reinsurance premiums ceded
 
(3,233
)
Net premiums written
 
53,714

Change in unearned premiums
 
14,168

Net premiums earned
 
67,882

 
 
 
Underwriting deductions
 
 
Losses and loss expenses
 
50,517

Policy acquisition costs
 
4,279

General and administrative expenses
 
10,627

Share compensation expenses
 
477

Total underwriting deductions
 
65,900

 
 
 
Underwriting income (a)
 
1,982

Net investment income
 
5,303

Other insurance related income
 
263

Finance expenses
 
—

Operating income before taxes
 
7,548

Tax expense
 
(3,723
)
Net operating income (a)
 
$
3,825

 
 
 
Selected ratios:
 
 
Net premiums written / Gross premiums written
 
94.3
%
Losses and loss expenses
 
74.4
%
Policy acquisition costs
 
6.3
%
General and administrative expense (b)
 
16.4
%
Expense ratio
 
22.7
%
Combined ratio
 
97.1
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net 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.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended March 31, 2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
9,386

 
16.5
%
Liability
 
47,561

 
83.5
%
Total
 
$
56,947

 
100.0
%
The liability lines consists largely of commercial package liability, program and other liability business. During the three months ended December 31, 2014, Western World discontinued writing binding authority commercial auto business and a large bar and tavern program.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Property
 
$
566

Liability
 
2,667

Total
 
$
3,233

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
 
 
Three Months Ended March 31, 2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
8,820

 
94.0
%
Liability
 
44,894

 
94.4
%
Total
 
$
53,714

 
94.3
%
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
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Property
 
$
10,695

Liability
 
57,187

Total
 
$
67,882


Net premiums earned exceeded net premiums written as Western World discontinued writing binding authority commercial auto business and a large bar and tavern program during the three months ended December 31, 2014.

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Losses and Loss Expenses
 
 
Losses and Loss Expenses Ratio -
All Lines
 
 
Three Months Ended March 31, 2015
All lines—current period excluding items below
 
83.7
 %
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 (a)
 
(9.3
)%
All lines—loss ratio (a)
 
74.4
 %
(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 $3,223 during the three months ended March 31, 2015, benefiting the loss ratio by 4.7 percentage points. The remaining fair value adjustment of $7,756 will be amortized during the remainder of 2015.
 
 
Losses and Loss Expenses - All Lines
(Dollars in thousands)
 
Three Months Ended March 31, 2015
All lines—current period excluding items below
 
$
56,849

All lines—current period—notable loss events
 
—

All lines—current period—non-notable loss events
 
—

All lines—change in prior accident years (a)
 
(6,332
)
All lines—losses and loss expenses (a)
 
$
50,517

(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 $3,223 during the three months ended March 31, 2015. The remaining fair value adjustment of $7,756 will be amortized during the remainder of 2015.
Notable Loss Events
There were no notable loss events for the three months ended March 31, 2015.
Non-notable Loss Events
There were no non-notable loss events for the three months ended March 31, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expenses Ratio - Property Lines
 
 
Three Months Ended March 31, 2015
Property—current period excluding items below
 
84.8
 %
Property—current period—notable loss events
 
0.0
 %
Property—current period—non-notable loss events
 
0.0
 %
Property—change in prior accident years (a)
 
(25.5
)%
Property—loss ratio (a)
 
59.3
 %
(a)
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 $85 during the three months ended March 31, 2015, increasing the loss ratio by 0.8 percentage points. The remaining fair value adjustment of $203 will be amortized during the remainder of 2015.

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Losses and Loss Expenses - Property Lines
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Property—current period excluding items below
 
$
9,070

Property—current period—notable loss events
 
—

Property—current period—non-notable loss events
 
—

Property—change in prior accident years (a)
 
(2,728
)
Property—losses and loss expenses (a)
 
$
6,342

(a)
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 $85 during the three months ended March 31, 2015. The remaining fair value adjustment of $203 will be amortized during the remainder of 2015.
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was 84.8 percentage points, representing attritional claims experienced during the current quarter, which included losses of $2.4 million from winter weather related claims. The favorable development of $2.7 million on prior accident years for the three months ended March 31, 2015 primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expenses Ratio - Liability Lines
 
 
Three Months Ended March 31, 2015
Liability—current period excluding items below
 
83.5
 %
Liability—current period—notable loss events
 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
Liability—change in prior accident years (a)
 
(6.3
)%
Liability—loss ratio (a)
 
77.2
 %
(a)
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 $3,308 during the three months ended March 31, 2015, benefiting the loss ratio by 5.8 percentage points. The remaining fair value adjustment of $7,959 will be amortized during the remainder of 2015.
 
 
Losses and Loss Expenses - Liability Lines
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Liability—current period excluding items above
 
$
47,779

Liability—current period—notable loss events
 
—

Liability—current period—non-notable loss events
 
—

Liability—change in prior accident years (a)
 
(3,604
)
Liability—losses and loss expenses (a)
 
$
44,175

(a)
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 $3,308 during the three months ended March 31, 2015. The remaining fair value adjustment of $7,959 will be amortized during the remainder of 2015.
The liability lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was 83.5 percentage points, representing attritional claims experienced during the quarter. The liability lines experienced favorable loss reserve development of $3.6 million during the three months ended March 31, 2015 primarily due to the amortization of the fair value adjustment noted above.

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Policy Acquisition Costs
 
 
Policy Acquisition Costs
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Property
 
$
824

Liability
 
3,455

Total (a)
 
$
4,279

(a)
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 $10,408 during the three months ended March 31, 2015.
 
 
Acquisition Cost Ratio
 
 
Three Months Ended March 31, 2015
Property
 
7.7
%
Liability
 
6.0
%
Total (a)
 
6.3
%
(a)
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 $10,408 during the three months ended March 31, 2015, benefiting the policy acquisition cost ratio by 15.3 percentage points.
The property acquisition cost ratio for the three months ended March 31, 2015 was 7.7% and the liability acquisition cost ratio for the three months ended March 31, 2015 was 6.0%.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended March 31, 2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
10,627

 
15.7
%
Share compensation expenses
 
477

 
0.7
%
Total
 
$
11,104

 
16.4
%
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 three months ended March 31, 2015.
 
Three Months Ended March 31, 2015
Losses and loss expenses ratio
74.4
%
Policy acquisition cost ratio
6.3
%
General and administrative expenses ratio (a)
16.4
%
Expense ratio
22.7
%
Combined ratio
97.1
%
(a)
Includes general and administrative expenses and share compensation expenses.
The combined ratio for the three months ended March 31, 2015 reflects the underlying ratios highlighted above.

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Table of Contents



Net Investment Income
 
 
Investment Income
(Dollars in thousands)
 
Three Months Ended March 31, 2015
Fixed maturities and short-term investments
 
$
4,355

Other investments
 
1,322

Restricted cash and cash and cash equivalents
 
1

Total gross investment income
 
5,678

Investment expenses
 
(375
)
Total net investment income
 
$
5,303

First Quarter 2015 Non-Segment Discussion
Corporate Expenses
Corporate general and administrative expenses for the three months ended March 31, 2015, net of eliminations related to the operating segments, were $14.4 million compared to $17.0 million for the three months ended March 31, 2014, a decrease of $2.6 million or 15.2%. This decrease was due primarily to a reduction in the retention of certain costs within Corporate. 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 three months ended March 31, 2015 were $2.9 million compared to $2.4 million for the three months ended March 31, 2014, an increase of $0.5 million or 22.2%.
Corporate finance expenses, net of eliminations related to the operating segments, were $11.4 million for the three months ended March 31, 2015 and 2014, respectively.
First Quarter 2015 Non-Operating Income and Expenses
The following non-operating income and expense items are discussed on a consolidated basis, since the Company does not include these items when assessing the results of its operating segments.
Net Realized and Change in Net Unrealized Gains on Investments
 
 
Net Realized and Change in Net Unrealized Gains on Investments
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net realized gains on investments
 
$
4,169

 
$
3,740

 
$
429

Change in net unrealized gains on investments
 
72,204

 
55,693

 
16,511

Net realized and change in net unrealized gains on investments
 
$
76,373

 
$
59,433

 
$
16,940

The movement in the net realized and change in net unrealized gains on investments of $16.9 million was due to a favorable movement in the net realized and unrealized gains on fixed maturity and short term investments of $26.7 million and an unfavorable movement in net realized and unrealized gains on other investments of $9.7 million.
The favorable movement on fixed maturity and short term investments was primarily as a result of a shift in the yield curve during the quarter. The unfavorable movement on other investments was primarily due to the change in net unrealized gains of $7.7 million on the Paulson hedge funds held by PaCRe. This is offset by a 90% noncontrolling interest of $6.9 million.

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Income From Investment Affiliate
 
 
Income From Investment Affiliate
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Income from investment affiliate
 
$
2,776

 
$
5,348

 
$
(2,572
)
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 previous quarter.
Foreign Exchange Losses
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 exposures are to the following currencies, with the movement in the U.S. dollar against each currency shown in the table below:
U.S. dollar strengthened (weakened) against:
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
British Pound sterling
4.8
 %
 
(0.6
)%
Euro
12.2
 %
 
(0.2
)%
Canadian dollar
8.9
 %
 
4.0
 %
Swiss franc
(2.4
)%
 
(0.9
)%
Australian dollar
6.8
 %
 
(3.9
)%
New Zealand dollar
4.1
 %
 
(5.2
)%
Singapore dollar
3.3
 %
 
(0.3
)%
Japanese yen
(0.1
)%
 
(1.9
)%
 
 
Foreign Exchange Losses
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Foreign exchange losses
 
$
(3,551
)
 
$
(6,478
)
 
$
2,927

Foreign exchange losses for the three months ended March 31, 2015 were $3.6 million compared to $6.5 million for the three months ended March 31, 2014, a favorable movement of $2.9 million, or 45.2%, due primarily to the US Dollar strengthening against the British Pound sterling, the Euro and the Canadian and New Zealand dollars.
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 Income
 
 
Other Income
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other income
 
$
—

 
$
5,793

 
$
(5,793
)
Other income for the three months ended March 31, 2014 resulted primarily from adjustments related to assets acquired from Flagstone.

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Net (Income) Attributable to Noncontrolling Interest
 
 
Net (Income) Attributable to Noncontrolling Interest
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net (income) attributable to noncontrolling interest
 
$
(38,977
)
 
$
(43,509
)
 
$
4,532

For the three months ended March 31, 2015, the net income attributable to noncontrolling interest was $39.0 million, which was comprised of operating income of $4.0 million, as discussed in the AlphaCat Segment Results of Operations, and non-operating income of $35.0 million, primarily on the investment portfolio within PaCRe.
For the three months ended March 31, 2014, net income attributable to noncontrolling interest was $43.5 million, which was comprised of operating income of $1.5 million, as discussed in the AlphaCat Segment Results of Operations, and non-operating income of $42.0 million, primarily on the investment portfolio within PaCRe.

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Other 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 line items, as illustrated below.
(Dollars in thousands)
 
Three Months Ended
 
March 31, 2015
 
March 31, 2014
Net operating income
 
136,790

 
141,801

Net realized gains on investments
 
4,169

 
3,740

Change in net unrealized gains on investments
 
72,204

 
55,693

Income from investment affiliate
 
2,776

 
5,348

Foreign exchange losses
 
(3,551
)
 
(6,478
)
Other income
 
—

 
5,793

Net income
 
$
212,388

 
$
205,897

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.
The following tables present reconciliations of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, at March 31, 2015 and December 31, 2014.

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(Dollars in thousands, except share and per share amounts)
As at March 31, 2015
Equity Amount
 
Shares
 
Exercise Price
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
$
3,683,109

 
83,634,915

 
 
 
$
44.04

 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
3,683,109

 
83,634,915

 
 
 
 
Assumed exercise of outstanding warrants
76,975

 
4,375,538

 
$
17.59

 
 
Assumed exercise of outstanding stock options
3,749

 
142,892

 
$
26.24

 
 
Unvested restricted shares
—

 
3,044,329

 
 
 
 
Book value per diluted common share
$
3,763,833

 
91,197,674

 
 
 
$
41.27

Adjustment for accumulated dividends
 
 
 
 
 
 
$
9.20

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
$
50.47

(Dollars in thousands, except share and per share amounts)
As at December 31, 2014
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


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Liquidity and Capital Resources
Investments
At March 31, 2015, the Company held investments totaling $7.5 billion, compared to $7.4 billion at December 31, 2014, an increase of $0.2 billion, or 2.1%, primarily as a result of an increase in short-term and other investments. 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 March 31, 2015, the average duration of the Company’s fixed maturity and short term investment portfolio was 2.35 years (December 31, 2014: 2.16 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 with our overall enterprise-risk framework. At March 31, 2015, the Company’s total investment portfolio had an average credit quality rating of AA- (December 31, 2014: AA-) and an effective yield of 1.83% for the three months then ended (2014: 1.42%). The estimated fair value of investment grade fixed maturities, as at March 31, 2015 was $4.8 billion, or 87.3% of the fixed maturity portfolio, compared to $4.9 billion as at December 31, 2014, or 89.2%, a decrease of $0.1 billion, or 2.9%. The estimated fair value of non-investment grade fixed maturities as at March 31, 2015 was $693.0 million or 8.4% of consolidated cash and investments compared to $599.0 million or 7.4% of consolidated cash and investments as at December 31, 2014, an increase of $94.1 million, or 15.7%. Non-investment grade securities consist primarily of bank loans, catastrophe and corporate bonds.
The Company also has an allocation to other investments, primarily hedge funds and investment funds. At March 31, 2015, these other investments, excluding noncontrolling interests, totaled $393.9 million, or 5.6%, of total investments, excluding noncontrolling interest (December 31, 2014: $382.5 million or 5.5%). For further details related to the investment portfolio, including the extent of investments with fair values measured using unobservable inputs, see Notes 3 and 4 to the Consolidated Financial Statements in Part I, Item 1.
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.

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The estimated fair value of investments at March 31, 2015 and December 31, 2014 was as follows:
 
March 31, 2015
 
December 31, 2014
(Dollars in thousands)
Estimated Fair Value
 
% of Total Investments
 
Estimated Fair Value
 
% of Total Investments
U.S. government and government agency
$
771,701

 
12.5
 %
 
$
760,086

 
12.3
 %
Non-U.S. government and government agency
243,533

 
3.9
 %
 
278,728

 
4.5
 %
U.S. states, municipalities and political subdivisions
350,843

 
5.7
 %
 
449,623

 
7.3
 %
Agency residential mortgage-backed securities
534,234

 
8.6
 %
 
529,231

 
8.5
 %
Non-agency residential mortgage-backed securities
32,108

 
0.5
 %
 
37,807

 
0.6
 %
U.S. corporate
1,446,146

 
23.4
 %
 
1,499,706

 
24.2
 %
Non-U.S. corporate
510,581

 
8.3
 %
 
563,162

 
9.1
 %
Bank loans
461,340

 
7.5
 %
 
449,004

 
7.2
 %
Catastrophe bonds
127,217

 
2.1
 %
 
75,664

 
1.2
 %
Asset-backed securities
704,265

 
11.4
 %
 
647,482

 
10.5
 %
Commercial mortgage-backed securities
302,511

 
4.9
 %
 
242,238

 
3.9
 %
Total fixed maturities
5,484,479

 
88.8
 %
 
5,532,731

 
89.3
 %
Total short-term investments (a)
1,183,342

 
19.1
 %
 
1,051,074

 
17.1
 %
Total other investments (b)
881,995

 
14.3
 %
 
813,011

 
13.1
 %
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
7,549,816

 
122.2
 %
 
7,396,816

 
119.5
 %
Assets managed on behalf of operating affiliates (a)
(751,473
)
 
(12.2
)%
 
(696,924
)
 
(11.3
)%
Catastrophe bonds
(127,217
)
 
(2.1
)%
 
(75,664
)
 
(1.2
)%
Noncontrolling interest (b)
(488,073
)
 
(7.9
)%
 
(430,494
)
 
(7.0
)%
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,183,053

 
100.0
 %
 
$
6,193,734

 
100.0
 %
(a)
Included in the short-term investments balance are assets managed in support of 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.

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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:
 
March 31, 2015
 
December 31, 2014
(Dollars in thousands)
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Germany
$
52,649

 
7.0
%
 
$
49,738

 
5.9
%
Supranational
47,663

 
6.4
%
 
48,406

 
5.8
%
France
24,348

 
3.2
%
 
44,153

 
5.2
%
United Kingdom
23,155

 
3.1
%
 
18,851

 
2.2
%
Norway
16,023

 
2.1
%
 
24,218

 
2.9
%
Province of Ontario
13,130

 
1.7
%
 
17,063

 
2.0
%
Netherlands
11,053

 
1.5
%
 
11,011

 
1.3
%
Other (individual jurisdictions below $11,000)
55,512

 
7.3
%
 
65,288

 
7.8
%
Total Non-U.S. Government Securities
243,533

 
32.3
%
 
278,728

 
33.1
%
European Corporate Securities
206,547

 
27.4
%
 
197,095

 
23.4
%
United Kingdom Corporate Securities
158,274

 
21.0
%
 
185,307

 
22.0
%
Other Non-U.S. Corporate Securities
145,760

 
19.3
%
 
180,760

 
21.5
%
Total Non-U.S. Fixed Income Portfolio
$
754,114

 
100.0
%
 
$
841,890

 
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 March 31, 2015, the Company did not have an aggregate exposure to any single issuer of more than 0.9%, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at March 31, 2015 are as follows:
(Dollars in thousands)
 
March 31, 2015
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Total Cash and Investments
JPMorgan Chase & Co
 
$
71,544

 
 A-
 
0.9
%
HSBC Holdings Plc
 
57,491

 
 A
 
0.7
%
Morgan Stanley
 
53,423

 
 BBB+
 
0.7
%
Bank of America Corp
 
51,548

 
 BBB+
 
0.6
%
Citigroup Inc
 
49,378

 
 BBB+
 
0.6
%
Goldman Sachs Group
 
45,272

 
 BBB+
 
0.6
%
Wells Fargo & Company
 
44,518

 
 A-
 
0.5
%
US Bancorp
 
35,011

 
 AA-
 
0.4
%
Bank of New York Mellon Corp
 
34,578

 
 A+
 
0.4
%
Anheuser-Busch Inbev SA
 
33,539

 
 A
 
0.4
%
Total
 
$
476,302

 
 
 
5.8
%
(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.

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The tables below show the Company’s investments in affiliates, accounted for under the equity method:
 
March 31, 2015
(Dollars in thousands)
Investment at cost
 
Voting ownership
 
Equity ownership
 
Carrying value
AlphaCat Re 2011
$
4,596

 
43.7
%
 
22.3
%
 
$
4,596

AlphaCat Re 2012
710

 
49.0
%
 
37.9
%
 
710

AlphaCat 2013
1,054

 
40.9
%
 
19.7
%
 
1,054

AlphaCat 2014
3,835

 
42.3
%
 
19.6
%
 
3,835

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
26,916

AlphaCat ILS funds
134,161

 
n/a

 
(a)

 
140,239

Aquiline Financial Services Fund II L.P.
56,563

 
n/a

 
8.1
%
 
71,844

Aquiline Financial Services Fund III L.P.
14,138

 
n/a

 
13.7
%
 
14,138

Total
$
240,657

 
 
 
 
 
$
263,332

(a)
Equity ownership in the AlphaCat ILS funds was 7.6%, 25.2% and 9.1%, respectively as at March 31, 2015.
 
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 fund
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 AlphaCat ILS funds was 7.9%, 39.7% and 9.1%, respectively as at December 31, 2014.
During the three months ended March 31, 2015, the Company received partial returns of investment from AlphaCat 2014 of $24.2 million. The Company expects to receive further returns of investment during the year from AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013 and AlphaCat 2014.

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Reserves for Losses and Loss Expenses
At March 31, 2015, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section. 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 March 31, 2015
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for Losses and Loss Expenses
Property
 
$
547,639

 
$
454,978

 
$
1,002,617

Marine
 
409,938

 
409,640

 
819,578

Specialty
 
263,930

 
503,529

 
767,459

Liability
 
176,737

 
432,971

 
609,708

Total
 
$
1,398,244

 
$
1,801,118

 
$
3,199,362

 
 
As at March 31, 2015
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for Losses and Loss Expenses
Property
 
$
482,781

 
$
380,784

 
$
863,565

Marine
 
383,206

 
372,748

 
755,954

Specialty
 
230,427

 
454,031

 
684,458

Liability
 
167,931

 
351,572

 
519,503

Total
 
$
1,264,345

 
$
1,559,135

 
$
2,823,480


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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended March 31, 2015.
 
 
Three Months Ended March 31, 2015
(Dollars in thousands)
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,333,878

 
$
6,525

 
$
1,352,056

 
$
613,551

 
$
(71,616
)
 
$
3,234,394

Losses and loss expenses recoverable
 
(70,279
)
 
—

 
(290,581
)
 
(88,222
)
 
71,616

 
(377,466
)
Net reserves for losses and loss expenses, beginning of period
 
1,263,599

 
6,525

 
1,061,475

 
525,329

 
—

 
2,856,928

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
137,824

 
—

 
129,815

 
56,849

 
—

 
324,488

Prior years
 
(24,696
)
 
(844
)
 
(51,687
)
 
(6,332
)
 
—

 
(83,559
)
Total incurred losses and loss expenses
 
113,128

 
(844
)
 
78,128

 
50,517

 
—

 
240,929

 
 
 
 
 
 
 
 
 
 
 
 
 
Net paid losses
 
(109,974
)
 
(457
)
 
(96,817
)
 
(41,855
)
 
—

 
(249,103
)
Foreign exchange gain
 
(14,686
)
 
(46
)
 
(10,542
)
 
—

 
—

 
(25,274
)
Net reserve for losses and loss expenses, end of period
 
1,252,067

 
5,178

 
1,032,244

 
533,991

 
—

 
2,823,480

Losses and loss expenses recoverable
 
61,902

 
—

 
284,572

 
95,516

 
(66,108
)
 
375,882

Reserve for losses and loss expenses, end of period
 
$
1,313,969

 
$
5,178

 
$
1,316,816

 
$
629,507

 
$
(66,108
)
 
$
3,199,362

The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the three months ended March 31, 2015, favorable loss reserve development on prior accident years was $83.6 million of which $24.7 million related to the Validus Re segment, $0.8 million related to the AlphaCat segment, $51.7 million related to the Talbot segment and $6.3 million related to the Western World 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 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.
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.

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The reserves for notable loss events table below does not disclose 2010, 2011 or 2012 notable loss events. Deepwater Horizon, a 2010 event, had closing reserves of $64.1 million as at March 31, 2015. The New Zealand earthquakes of 2010 and 2011, had total closing reserves of $161.8 million as at March 31, 2015. Hurricane Sandy, a 2012 event, had total closing reserves of $124.1 million as at March 31, 2015 and Costa Concordia, also a 2012 event, had total closing reserves of $34.2 million as at March 31, 2015.
Reserves for Notable Loss Events (Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Notable Loss Events
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Three Months Ended March 31, 2015
 
 
 
 
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
 
December 31, 2013
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
March 31, 2015
European Floods
 
$
77,587

 
$
(16,762
)
 
—

 
$
60,825

 
$
(25,938
)
 
—

 
$
34,887

 
(1,066
)
 
—

 
$
33,821

Total 2013 Notable Loss Event
 
$
77,587

 
$
(16,762
)
 
$
—

 
$
60,825

 
$
(25,938
)
 
$
—

 
$
34,887

 
$
(1,066
)
 
$
—

 
$
33,821

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
December 31, 2013
 
 
 
 
December 31, 2014
 
 
 
 
March 31, 2015
European Floods
 
 
 
 
 
$
8,006

 
$
52,819

 
 
 
$
11,864

 
$
15,017

 
 
 
$
2,256

 
$
11,695

Total 2013 Notable Loss Event
 


 
$
8,006

 
$
52,819

 
 
 
$
11,864

 
$
15,017

 
 
 
$
2,256

 
$
11,695

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Notable Loss Events
 
 
 
Year Ended December 31, 2014
 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
March 31, 2015
Tripoli Airport (e)
 
$
28,134

 
 
 
 
 
 
 
$
6,810

 
—

 
$
34,944

 
$
2,008

 
—

 
$
36,952

Total 2014 Notable Loss Event
 
$
28,134

 
 
 
 
 
 
 
$
6,810

 
$
—

 
$
34,944

 
$
2,008

 
$
—

 
$
36,952

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2014
 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
March 31, 2015
Tripoli Airport (e)
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
34,944

 
 
 
$
8,922

 
$
28,030

Total 2014 Notable Loss Event
 
 
 
 
 
 
 
 
 
$
—

 
$
34,944

 
 
 
$
8,922

 
$
28,030

(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.
(e)
As at September 30, 2014, the initial estimate for Tripoli Airport was below the $30.0 million 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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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. 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 short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis.
 
 
Capital at
(Dollars in thousands)
 
March 31, 2015
Western World Insurance Group, Inc. (consolidated)
 
$
686,252

Validus Reinsurance, Ltd.
 
2,927,568

Validus Reinsurance, Ltd. (consolidated)
 
3,613,820

Noncontrolling interest in PaCRe, Ltd.
 
494,451

Redeemable noncontrolling interest in AlphaCat ILS fund
 
98,777

Talbot Holdings, Ltd. (consolidated)
 
867,289

Other, net
 
(13,106
)
Total consolidated capitalization
 
5,061,231

Senior notes payable
 
(247,333
)
Debentures payable
 
(537,561
)
Redeemable noncontrolling interest in AlphaCat ILS fund
 
(98,777
)
Total shareholders’ equity
 
$
4,177,560

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.

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There are three main sources 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 three months ended March 31, 2015 and 2014 is provided in the following table.
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net cash used in operating activities
 
$
(228,541
)
 
$
(44,427
)
 
$
(184,114
)
Net cash (used in) provided by investing activities
 
(56,718
)
 
359,559

 
(416,277
)
Net cash provided by (used in) financing activities
 
194,228

 
(264,250
)
 
458,478

Effect of foreign currency rate changes on cash and cash equivalents
 
(15,080
)
 
4,890

 
(19,970
)
Net (decrease) increase in cash
 
$
(106,111
)
 
$
55,772

 
$
(161,883
)
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 used in operating activities during the three months ended March 31, 2015 was $228.5 million compared to $44.4 million for three months ended March 31, 2014, an unfavorable movement of $184.1 million. This unfavorable movement reflects the returns on investments made to third party investors in operating affiliates as well as payments made in respect of certain retrocessional coverage.
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 March 31, 2015, the Company’s portfolio was composed of fixed income investments, short-term and other investments amounting to $7.5 billion or 92.0% of total cash and investments. For further details related to investments pledged as collateral, see Note 3 (d) to the Consolidated Financial Statements in Part I, Item 1.
Net cash (used in) provided by investing activities during the three months ended March 31, 2015 was ($56.7) million compared to $359.6 million for the three months ended March 31, 2014, an unfavorable movement of $416.3 million. This unfavorable movement was due primarily to an increase in the purchase of fixed maturity investments of $381.4 million and an increase in the change in restricted cash of $104.7 million.
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 payable to operating affiliates.
Net cash provided by (used in) financing activities during the three months ended March 31, 2015 was $194.2 million compared to ($264.3) million during the three months ended March 31, 2014, a favorable movement of $458.5 million. This favorable movement was driven primarily by an increase in the issuance of notes payable to operating affiliates of $467.8 million, a decrease of $139.2 million in the repurchase of common shares under the share repurchase program; offset by, an increase in the repayment of notes payable to operating affiliates of $181.3 million.

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Capital Resources
The following table details the Company's capital position as at March 31, 2015 and December 31, 2014.
Capitalization (Dollars in thousands)
March 31, 2015
 
December 31, 2014
Senior Notes (a)
$
247,333

 
$
247,306

Junior Subordinated Deferrable Debentures (JSDs) (b)
289,800

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (c)
247,761

 
249,477

Total debt
784,894

 
786,583

 
 
 
 
Redeemable noncontrolling interest
98,777

 
79,956

 
 
 
 
Ordinary shares, capital and surplus available to Validus
3,695,750

 
3,596,514

Accumulated other comprehensive loss
(12,641
)
 
(8,556
)
Noncontrolling interest
494,451

 
458,595

Total shareholders' equity (d)
4,177,560

 
4,046,553

 
 
 
 
Total capitalization (d) (f)
5,061,231

 
4,913,092

Total capitalization available to Validus (e) (f)
$
4,468,003

 
$
4,374,541

 
 
 
 
Debt to total capitalization
15.5
%
 
16.0
%
Debt (excluding JSDs) to total capitalization
4.9
%
 
5.0
%
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 March 31, 2015 was $3.7 billion.
On May 7, 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 June 30, 2015 to shareholders and warrant holders of record on June 15, 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.
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 $2.3 billion 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 borrowings and credit facilities as at March 31, 2015.
(Dollars in thousands)
Maturity Date /
Term (a)
Commitments
 
Issued and 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

 
268,907

$30,000 secured bi-lateral letter of credit facility
Evergreen
30,000

 
14,747

Talbot FAL Facility
December 31, 2017
25,000

 
25,000

PaCRe senior secured letter of credit facility
Evergreen
10,000

 
39

AlphaCat Re secured letter of credit facility
Evergreen
30,000

 
30,000

IPC Bi-Lateral Facility
Evergreen
25,000

 
12,543

$230,000 Flagstone bi-lateral facility
Evergreen
230,000

 
209,070

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
134,011

 
134,011

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
113,750

 
113,750

Total
 
$
2,122,761

 
$
1,347,867

(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 12 "Debt and financing arrangements" to the Consolidated Financial Statements in Part I, Item 1 for further details.

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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 May 8, 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 March 12, 2015 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 November 3, 2014 for Validus Holdings, Ltd, Validus Reinsurance, Ltd. and Validus Reinsurance (Switzerland) Ltd. 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 February 27, 2015 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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Recent accounting pronouncements
Please refer to Note 2 to the Consolidated Financial Statements (Part I, Item 1) for discussion of relevant recent accounting pronouncements.
Critical Accounting Policies and Estimates
There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of the Company's Consolidated Financial Statements:
•
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 premiums ceded and reinsurance recoverable balances including the provision for uncollectible amounts; and
•
Investment valuation of financial assets.
Critical accounting policies and estimates are discussed further in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
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;

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•
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;
•
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 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 the Company's 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.

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ITEM 3. 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 March 31, 2015, 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 2.3%, or approximately $133.3 million. As at March 31, 2015, 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 2.2% or approximately $128.1 million.
As at March 31, 2015, the Company held $1.6 billion (December 31, 2014: $1.5 billion), or 28.7% (December 31, 2014: 26.3%), 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, receivables and investments that are denominated in such currencies. As at March 31, 2015, approximately $602.1 million, or 5.4% of our total assets and $706.7 million, or 10.4% of our total liabilities were held in foreign currencies. As at March 31, 2015, approximately $95.3 million, or 1.4% 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, 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 denominated in foreign currencies were non-monetary items which do not require revaluation at each reporting date. 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 7 of Part I, Item 1 - 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.

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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. As at March 31, 2015, 9.2% of the Company's total investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.9% of its investment portfolio, other than with respect to government and agency securities as at March 31, 2015.
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 March 31, 2015, 98.4% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or above, (December 31, 2014: 98.0%, rated A-) or from reinsurers posting full collateral.
Liquidity risk: Certain of the Company's investments may become illiquid. Disruptions 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% (December 31, 2014: 6.0%) of total cash and investments at March 31, 2015. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include the payment of 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 March 31, 2015, the Company had $975.2 million (December 31, 2014: $999.8 million) of unrestricted, liquid assets, defined as unpledged cash and cash equivalents, short term investments and government and government agency securities. Details of the Company's debt and financing arrangements at March 31, 2015 are provided below.
(Dollars in thousands)
Maturity Date / Term
 
In Use / 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
 
268,907

$30,000 secured bi-lateral letter of credit facility
Evergreen
 
14,747

Talbot FAL facility
December 31, 2017
 
25,000

PaCRe senior secured letter of credit facility
Evergreen
 
39

AlphaCat Re secured letter of credit facility
Evergreen
 
30,000

IPC Bi-Lateral Facility
Evergreen
 
12,543

$230,000 Flagstone bi-lateral facility
Evergreen
 
209,070

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
 
134,011

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
 
113,750

Total debt and financing arrangements
 
 
$
1,347,867

Inflation Risk: We do not believe that inflation has had or will have a material effect on the Company's combined results of operations, except insofar as (a) inflation may affect interest rates, and (b) losses and loss expenses may be affected by inflation.

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ITEM 4. 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 recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
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.
PART II — OTHER INFORMATION
ITEM 1. 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 March 31, 2015, 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.
ITEM 1A. RISK FACTORS
Please refer to the discussion of Risk Factors in Part 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has repurchased approximately 71.5 million common shares for an aggregate purchase price of $2.3 billion from the inception of the share repurchase program to May 6, 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 a further 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 was $732.9 million as of May 6, 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 that 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
(Expressed in thousands of U.S. dollars except for share and per share information)
 
 
As at December 31, 2014
 
 
 
 
 
 
 
Quarter ended
Effect of share repurchases:
 
(cumulative)
 
January
 
February
 
March
 
March 31, 2015
Aggregate purchase price (a)
 
$
2,231,301

 
$
43,100

 
$
14,448

 
$
560

 
$
58,108

Shares repurchased
 
70,045,504

 
$
1,072,462

 
$
344,522

 
$
13,505

 
$
1,430,489

Average price (a)
 
$
31.86

 
$
40.19

 
$
41.94

 
$
41.47

 
$
40.62

 
 
 
 
 
 
 
 
 
 
 
Estimated cumulative net accretive (dilutive) impact on:
 
 

 
 

 
 

 
 

 
 

Diluted BV per common share (b)
 
 

 
 

 
 

 
 

 
$
4.06

Diluted EPS - Quarter (c)
 
 

 
 

 
 

 
 

 
$
0.83

 
 
Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
Effect of share repurchases:
 
As at March 31, 2015 (cumulative)
 
April
 
May
 
As at May 6, 2015
 
Cumulative to Date Effect
Aggregate purchase price (a)
 
$
2,289,409

 
$
—

 
$
2,078

 
$
2,078

 
$
2,291,487

Shares repurchased
 
71,475,993

 
—

 
49,458

 
49,458

 
71,525,451

Average price (a)
 
$
32.03

 
$
—

 
$
42.02

 
$
42.02

 
$
32.04

(a)
Share transactions are on a trade date basis through May 6, 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 2013 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.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.


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ITEM 6. EXHIBITS
Exhibit
Description
Exhibit 10.1*
Amendment to Employment Agreement between Edward J. Noonan and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.2*
Amendment to Employment Agreement between Jeffrey D. Sangster and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.3*
Amendment to Employment Agreement between Kean Driscoll and Validus Services (Bermuda) Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.4*
Amendment to Employment Agreement between John J. Hendrickson and Validus America, Inc. dated as of March 12, 2015.
 
 
Exhibit 10.5*
Amendment to Employment Agreement between Robert F. Kuzloski and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.6*
Amendment to Employment Agreement between Romel Salam and Validus America, Inc. dated as of March 12, 2015.
 
 
Exhibit 10.7*
Amendment to Employment Agreement between Michael Moore and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.8*
Amendment to Employment Agreement between Andrew E. Kudera and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.9*
Amendment to Employment Agreement between Jonathan P. Ritz and Validus America, Inc. dated as of March 12, 2015.
 
 
Exhibit 10.10*
Amendment to Employment Agreement between Lixin Zeng and Validus Holdings, Ltd. dated as of March 12, 2015.
 
 
Exhibit 10.11*
Amendment to Employment Agreement between C.N. Rupert Atkin and Talbot Underwriting Services Ltd. dated as of March 27, 2015.
 
 
Exhibit 31.1*
Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 31.2*
Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 32*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 101.1 INS*
XBRL Instance Document
 
 
Exhibit 101.SCH*
XBRL Taxonomy Extension Schema Document
 
 
Exhibit 101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
Exhibit 101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
 
 
Exhibit 101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
Exhibit 101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
*Filed herewith

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VALIDUS HOLDINGS, LTD.
 
 
(Registrant)
 
 
 
Date:
May 8, 2015
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
May 8, 2015
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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