Document
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 June 30, 2016

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 August 3, 2016 there were 80,337,635 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 June 30, 2016 (unaudited) and December 31, 2015
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets


 


Fixed maturities trading, at fair value (amortized cost: 2016—$5,524,027; 2015—$5,556,900)
$
5,551,586

 
$
5,510,331

Short-term investments trading, at fair value (amortized cost: 2016—$2,369,704; 2015—$1,941,615)
2,369,654

 
1,941,635

Other investments, at fair value (cost: 2016—$338,669; 2015—$315,963)
359,526

 
336,856

Cash and cash equivalents
568,798

 
723,109

Restricted cash
96,022

 
73,270

Total investments and cash
8,945,586

 
8,585,201

Investments in affiliates, equity method (cost: 2016—$86,101; 2015—$70,186)
99,278

 
88,065

Premiums receivable
1,372,000

 
658,682

Deferred acquisition costs
283,213

 
181,002

Prepaid reinsurance premiums
145,567

 
77,992

Securities lending collateral
10,224

 
4,863

Loss reserves recoverable
442,987

 
350,586

Paid losses recoverable
27,648

 
23,071

Income taxes recoverable
8,526

 
16,228

Deferred tax asset
23,745

 
21,661

Receivable for investments sold
13,736

 
39,766

Intangible assets
118,426

 
121,258

Goodwill
196,758

 
196,758

Accrued investment income
24,925

 
23,897

Other assets
105,625

 
126,782

Total assets
$
11,818,244

 
$
10,515,812

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,122,717

 
$
2,996,567

Unearned premiums
1,621,563

 
966,210

Reinsurance balances payable
92,488

 
75,380

Securities lending payable
10,690

 
5,329

Deferred tax liability
3,552

 
3,847

Payable for investments purchased
52,718

 
77,475

Accounts payable and accrued expenses
149,593

 
627,331

Notes payable to AlphaCat investors
370,982

 
75,493

Senior notes payable
245,261

 
245,161

Debentures payable
537,987

 
537,668

Total liabilities
$
6,207,551

 
$
5,610,461

 
 
 
 
Commitments and contingent liabilities


 


Redeemable noncontrolling interest
1,532,283

 
1,111,714

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2016—6,000; 2015—nil)
$
150,000

 
$
—

Common shares (Issued: 2016—161,252,871; 2015—160,570,772; Outstanding: 2016—80,772,238; 2015—82,900,617)
28,219

 
28,100

Treasury shares (2016—80,480,633; 2015—77,670,155)
(14,084
)
 
(13,592
)
Additional paid-in capital
883,701

 
1,002,980

Accumulated other comprehensive loss
(18,182
)
 
(12,569
)
Retained earnings
2,836,602

 
2,634,056

Total shareholders’ equity available to Validus
3,866,256

 
3,638,975

Noncontrolling interest
212,154

 
154,662

Total shareholders’ equity
$
4,078,410

 
$
3,793,637

 
 
 
 
Total liabilities, noncontrolling interests and shareholders’ equity
$
11,818,244

 
$
10,515,812

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

2
Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
764,042

 
$
726,168

 
$
1,936,833

 
$
1,845,392

Reinsurance premiums ceded
(36,229
)
 
(55,418
)
 
(204,064
)
 
(246,743
)
Net premiums written
727,813

 
670,750

 
1,732,769

 
1,598,649

Change in unearned premiums
(154,090
)
 
(98,062
)
 
(587,778
)
 
(450,071
)
Net premiums earned
573,723

 
572,688

 
1,144,991

 
1,148,578

Net investment income
39,257

 
33,611

 
68,718

 
64,640

Net realized gains on investments
2,724

 
2,244

 
2,140

 
6,413

Change in net unrealized gains (losses) on investments
31,428

 
(34,676
)
 
78,872

 
(1,449
)
(Loss) income from investment affiliate
(589
)
 
284

 
(4,702
)
 
3,060

Other insurance related income and other income
824

 
100

 
2,237

 
1,040

Foreign exchange gains (losses)
6,286

 
(2,671
)
 
12,531

 
(6,936
)
Total revenues
653,653

 
571,580

 
1,304,787

 
1,215,346

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
307,130

 
266,146

 
531,577

 
507,075

Policy acquisition costs
107,966

 
104,323

 
215,159

 
202,734

General and administrative expenses
89,688

 
84,025

 
175,896

 
168,260

Share compensation expenses
10,727

 
9,242

 
21,964

 
18,296

Finance expenses
14,166

 
18,682

 
29,369

 
39,649

Total expenses
529,677

 
482,418

 
973,965

 
936,014

 
 
 
 
 
 
 
 
Income before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
123,976

 
89,162

 
330,822

 
279,332

Tax (expense) benefit
(1,706
)
 
(2,549
)
 
412

 
(5,114
)
Income (loss) from operating affiliates
—

 
1,738

 
(23
)
 
5,722

(Income) attributable to AlphaCat investors
(6,114
)
 
—

 
(10,714
)
 
—

Net income
$
116,156

 
$
88,351

 
$
320,497

 
$
279,940

Net (income) attributable to noncontrolling interest
(21,193
)
 
(22,561
)
 
(58,724
)
 
(40,739
)
Net income available to Validus
94,963

 
65,790

 
261,773

 
239,201

Dividends on preferred shares
—

 
—

 
—

 
—

Net income available to Validus common shareholders
$
94,963

 
$
65,790

 
$
261,773

 
$
239,201

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
116,156

 
$
88,351

 
$
320,497

 
$
279,940

Other comprehensive (loss) income
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
(3,287
)
 
2,763

 
(5,315
)
 
(256
)
Change in minimum pension liability, net of tax
479

 
422

 
396

 
157

Change in fair value of cash flow hedge
64

 
390

 
(694
)
 
(411
)
Other comprehensive (loss) income
(2,744
)
 
3,575

 
(5,613
)
 
(510
)
Comprehensive (income) attributable to noncontrolling interest
(21,193
)
 
(22,561
)
 
(58,724
)
 
(40,739
)
Comprehensive income available to Validus
$
92,219

 
$
69,365

 
$
256,160

 
$
238,691

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 
 

 
 
 
 
Basic
81,950,833

 
84,003,549

 
82,386,047

 
83,627,396

Diluted
83,373,003

 
87,313,154

 
83,785,659

 
87,448,142

 
 
 
 
 
 
 
 
Basic earnings per share available to Validus common shareholders
$
1.16

 
$
0.77

 
$
3.18

 
$
2.83

Earnings per diluted share available to Validus common shareholders
$
1.14

 
$
0.75

 
$
3.12

 
$
2.74

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.32

 
$
0.70

 
$
0.64

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

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Preferred shares
 
 
 
Balance - beginning of period
$
—

 
$
—

Preferred shares issued
150,000

 
—

Balance - end of period
$
150,000

 
$
—

 
 
 
 
Common shares
 

 
 

Balance - beginning of period
$
28,100

 
$
27,222

Common shares issued, net
119

 
494

Balance - end of period
$
28,219

 
$
27,716

 
 
 
 
Treasury shares
 

 
 

Balance - beginning of period
$
(13,592
)
 
$
(12,545
)
Repurchase of common shares
(492
)
 
(595
)
Balance - end of period
$
(14,084
)
 
$
(13,140
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - beginning of period
$
1,002,980

 
$
1,207,493

Offering expenses on preferred shares
(5,148
)
 
—

Common shares issued, net
(7,504
)
 
14,366

Repurchase of common shares
(128,591
)
 
(142,628
)
Share compensation expenses
21,964

 
18,296

Balance - end of period
$
883,701

 
$
1,097,527

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance - beginning of period
$
(12,569
)
 
$
(8,556
)
Other comprehensive loss
(5,613
)
 
(510
)
Balance - end of period
$
(18,182
)
 
$
(9,066
)
 
 
 
 
Retained earnings
 

 
 

Balance - beginning of period
$
2,634,056

 
$
2,372,972

Dividends on preferred shares
—

 
—

Dividends on common shares
(59,227
)
 
(57,874
)
Net income
320,497

 
279,940

Net (income) attributable to noncontrolling interest
(58,724
)
 
(40,739
)
Balance - end of period
$
2,836,602

 
$
2,554,299

 
 
 
 
Total shareholders’ equity available to Validus
$
3,866,256

 
$
3,657,336

 
 
 
 
Noncontrolling interest
$
212,154

 
$
153,523

 
 
 
 
Total shareholders’ equity
$
4,078,410

 
$
3,810,859

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

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Cash flows provided by operating activities
 

 
 

Net income
$
320,497

 
$
279,940

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Share compensation expenses
21,964

 
18,296

Amortization of discount on senior notes
54

 
54

Loss (income) from investment affiliate
4,702

 
(3,060
)
Net realized gains on investments
(2,140
)
 
(6,413
)
Change in net unrealized (gains) losses on investments
(78,872
)
 
1,449

Amortization of intangible assets
2,832

 
2,832

Loss (income) from operating affiliates
23

 
(5,722
)
Foreign exchange (gains) losses included in net income
(6,289
)
 
7,729

Amortization of premium on fixed maturity investments
8,710

 
12,395

Change in:
 

 
 

Premiums receivable
(719,070
)
 
(566,100
)
Deferred acquisition costs
(102,211
)
 
(92,020
)
Prepaid reinsurance premiums
(67,575
)
 
(79,304
)
Loss reserves recoverable
(95,429
)
 
644

Paid losses recoverable
(4,571
)
 
(2,253
)
Income taxes recoverable
7,423

 
(13,931
)
Deferred tax asset
(2,529
)
 
908

Accrued investment income
(1,183
)
 
984

Other assets
(5,272
)
 
90,625

Reserve for losses and loss expenses
147,305

 
(50,240
)
Unearned premiums
655,353

 
529,374

Reinsurance balances payable
18,610

 
(34,472
)
Deferred tax liability
(308
)
 
2,329

Accounts payable and accrued expenses
(32,581
)
 
(61,570
)
Net cash provided by operating activities
69,443

 
32,474

 
 
 
 
Cash flows used in investing activities
 

 
 

Proceeds on sales of fixed maturity investments
1,376,077

 
2,237,966

Proceeds on maturities of fixed maturity investments
184,413

 
186,594

Purchases of fixed maturity investments
(1,537,608
)
 
(2,337,990
)
Purchases of short-term investments, net
(428,040
)
 
(154,804
)
(Purchases) sales of other investments, net
(19,796
)
 
4,101

Increase in securities lending collateral
(5,361
)
 
(6,551
)
Redemption from operating affiliates
369

 
—

Investment in investment affiliates, net
(16,305
)
 
(23,115
)
(Increase) decrease in restricted cash
(22,752
)
 
32,984

Net cash used in investing activities
(469,003
)
 
(60,815
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of notes payable to AlphaCat investors
294,748

 
—

Net proceeds on issuance of preferred shares
144,852

 
—

Issuance of common shares, net
(7,385
)
 
14,860

Purchases of common shares under share repurchase program
(129,083
)
 
(143,223
)
Dividends paid on preferred shares
—

 
—

Dividends paid on common shares
(59,961
)
 
(58,718
)
Increase in securities lending payable
5,361

 
6,551

Third party investment in redeemable noncontrolling interest
381,250

 
452,700

Third party redemption of redeemable noncontrolling interest
(10,800
)
 
(80,433
)
Third party investment in noncontrolling interest
171,674

 
9,600

Third party distributions of noncontrolling interest
(127,103
)
 
(158,175
)
Third party subscriptions deployed on AlphaCat Funds and Sidecars
(411,336
)
 
(117,400
)
Net cash provided by (used in) financing activities
252,217

 
(74,238
)
 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(6,968
)
 
(8,730
)
Net decrease in cash and cash equivalents
(154,311
)
 
(111,309
)
Cash and cash equivalents - beginning of period
723,109

 
550,401

Cash and cash equivalents - end of period
$
568,798

 
$
439,092

Taxes paid during the period
$
3,837

 
$
14,192

Interest paid during the period
$
27,552

 
$
27,248

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

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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)



1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the "Consolidated Financial Statements") 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, 2015, as filed with the U.S. Securities and Exchange Commission (the "SEC").
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
During the fourth quarter of 2015, the Company early adopted Accounting Standards Update ("ASU") 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” issued by the United States Financial Accounting Standards Board (“FASB”), which changed the method in which the Company determines whether entities are consolidated by the Company. The adoption of this amended accounting guidance was implemented utilizing a full retrospective application for all periods presented in the Company's Consolidated Financial Statements.
The amended guidance includes changes in the identification of the primary beneficiary of investment companies considered to be VIEs. These changes resulted in the Company concluding that it is considered to be the primary beneficiary of the AlphaCat sidecars, the AlphaCat ILS funds and the BetaCat ILS funds and therefore the Company is required to consolidate these entities. The adoption of the amended guidance also resulted in the Company concluding that it was no longer required to consolidate PaCRe Ltd. ("PaCRe") due to the change in the VIE definition of "kick-out" rights under the amended guidance. The cumulative effect of these changes on the Company's retained earnings through the six months ended June 30, 2015 was a gain of $405.
The following tables present the impact of the application of the amended accounting guidance on the Company's Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and Consolidated Statement of Cash Flows for the six months ended June 30, 2015:
 
Three Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
591,492

 
$
(19,912
)
 
$
571,580

Total expenses
480,511

 
1,907

 
482,418

Net income
81,657

 
6,694

 
88,351

Net (income) attributable to noncontrolling interest
(17,644
)
 
(4,917
)
 
(22,561
)
Net income available to Validus
64,013

 
1,777

 
65,790

Comprehensive income available to Validus
67,588

 
1,777

 
69,365

 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.75

 
$
0.02

 
$
0.77

Earnings per diluted share available to common shareholders
$
0.73

 
$
0.02

 
$
0.75


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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)


 
Six Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
1,280,697

 
$
(65,351
)
 
$
1,215,346

Total expenses
934,010

 
2,004

 
936,014

Net income
294,045

 
(14,105
)
 
279,940

Net (income) attributable to noncontrolling interest
(56,621
)
 
15,882

 
(40,739
)
Net income available to Validus
237,424

 
1,777

 
239,201

Comprehensive income available to Validus
236,914

 
1,777

 
238,691

 
 
 


 
 
Basic earnings per share available to common shareholders
$
2.81

 
$
0.02

 
$
2.83

Earnings per diluted share available to common shareholders
$
2.72

 
$
0.02

 
$
2.74

 
Six Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Net cash (used in) provided by operating activities
$
(228,841
)
 
$
261,315

 
$
32,474

Net cash used in investing activities
(290,517
)
 
229,702

 
(60,815
)
Net cash provided by (used in) financing activities
389,593

 
(463,831
)
 
(74,238
)
Effect of foreign currency rate changes on cash and cash equivalents
(13,765
)
 
5,035

 
(8,730
)
Net decrease in cash
(143,530
)
 
32,221

 
(111,309
)
Cash and cash equivalents - beginning of period
577,240

 
(26,839
)
 
550,401

Cash and cash equivalents - end of period
433,710

 
5,382

 
439,092

In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company's financial position and results of operations as at the end of and for the periods presented. 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 FASB.

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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)


2. Recent accounting pronouncements
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). The guidance in this ASU 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. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing”. The amendments in these ASU's clarify the implementation guidance within ASU 2014-09 on principal versus agent considerations and the aspects of identifying performance obligations, respectively, while retaining the related principals in those areas. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients”. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments provide clarifying guidance in a few narrow areas and add practical expedients to reduce the potential for diversity in practice as well as the cost and complexity of applying the guidance. The original effective date for the amendments in ASU 2014-09 was for annual reporting periods beginning after December 15, 2016; however, in August 2015, the FASB delayed the effective date by one year through the issuance of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. As such, the new effective date is for interim and annual reporting periods beginning after December 15, 2017. Entities may adopt the standard as of the original effective date; however, earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The amendments in this ASU increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring the disclosure of key information about leasing arrangements. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting”. The amendments in this ASU simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.


8
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)


3. Investments
During the fourth quarter of 2015, the Company enhanced disclosures around the allocation of invested assets and the related returns between managed and non-managed investments. Managed investments represent assets governed by the Company’s investment policy statement (“IPS”), whereas non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 5, "Variable interest entities," for further details. As such, prior period disclosures have been revised to conform to current period presentation.
The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with U.S. GAAP guidance for "Financial Instruments." As such, all investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income for the period.
The amortized cost (or cost), gross unrealized gains and (losses) and fair value of the Company's investments as at June 30, 2016 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
924,350

 
$
7,536

 
$
(83
)
 
$
931,803

Non-U.S. government and government agency
217,796

 
2,146

 
(4,692
)
 
215,250

U.S. states, municipalities, political subdivisions
278,756

 
7,049

 
(393
)
 
285,412

Agency residential mortgage-backed securities
662,468

 
14,713

 
(398
)
 
676,783

Non-agency residential mortgage-backed securities
23,858

 
271

 
(740
)
 
23,389

U.S. corporate
1,539,711

 
20,350

 
(4,014
)
 
1,556,047

Non-U.S. corporate
367,473

 
3,264

 
(6,331
)
 
364,406

Bank loans
613,414

 
574

 
(16,926
)
 
597,062

Asset-backed securities
429,890

 
2,352

 
(2,902
)
 
429,340

Commercial mortgage-backed securities
308,712

 
6,048

 
(727
)
 
314,033

Total fixed maturities
5,366,428

 
64,303

 
(37,206
)
 
5,393,525

Short-term investments
189,678

 
—

 
(50
)
 
189,628

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,457

 
—

 
(498
)
 
959

Hedge funds
12,463

 
6,162

 
—

 
18,625

Private equity investments
62,119

 
14,457

 
(3,270
)
 
73,306

Investment funds
203,128

 
743

 
—

 
203,871

Overseas deposits
55,301

 
—

 
—

 
55,301

Mutual funds
4,201

 
3,263

 
—

 
7,464

Total other investments
338,669

 
24,625

 
(3,768
)
 
359,526

Total managed investments
$
5,894,775

 
$
88,928

 
$
(41,024
)
 
$
5,942,679

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
157,599

 
$
2,114

 
$
(1,652
)
 
$
158,061

Short-term investments
2,180,026

 
—

 
—

 
2,180,026

Total non-managed investments
2,337,625

 
2,114

 
(1,652
)
 
2,338,087

Total investments
$
8,232,400

 
$
91,042

 
$
(42,676
)
 
$
8,280,766


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 amortized cost (or cost), gross unrealized gains and (losses) and fair value of the Company's investments as at December 31, 2015 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
940,428

 
$
333

 
$
(3,559
)
 
$
937,202

Non-U.S. government and government agency
241,549

 
257

 
(3,838
)
 
237,968

U.S. states, municipalities, political subdivisions
299,929

 
2,322

 
(962
)
 
301,289

Agency residential mortgage-backed securities
606,676

 
6,361

 
(2,455
)
 
610,582

Non-agency residential mortgage-backed securities
27,025

 
310

 
(415
)
 
26,920

U.S. corporate
1,503,614

 
1,594

 
(15,257
)
 
1,489,951

Non-U.S. corporate
453,178

 
797

 
(7,405
)
 
446,570

Bank loans
592,981

 
275

 
(17,045
)
 
576,211

Asset-backed securities
440,363

 
344

 
(3,583
)
 
437,124

Commercial mortgage-backed securities
263,310

 
131

 
(3,306
)
 
260,135

Total fixed maturities
5,369,053

 
12,724

 
(57,825
)
 
5,323,952

Short-term investments
237,349

 
20

 
—

 
237,369

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,457

 
—

 
(40
)
 
1,417

Hedge funds
14,018

 
6,962

 
—

 
20,980

Private equity investments
53,489

 
12,751

 
(2,469
)
 
63,771

Investment funds
188,121

 
600

 
—

 
188,721

Overseas deposits
54,484

 
—

 
—

 
54,484

Mutual funds
4,394

 
3,089

 
—

 
7,483

Total other investments
315,963

 
23,402

 
(2,509
)
 
336,856

Total managed investments
$
5,922,365

 
$
36,146

 
$
(60,334
)
 
$
5,898,177

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
187,847

 
$
635

 
$
(2,103
)
 
$
186,379

Short-term investments
1,704,266

 
—

 
—

 
1,704,266

Total non-managed investments
1,892,113

 
635

 
(2,103
)
 
1,890,645

Total investments
$
7,814,478

 
$
36,781

 
$
(62,437
)
 
$
7,788,822


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)


(a)
Fixed maturity investments
The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investments as at June 30, 2016 and December 31, 2015.
 
June 30, 2016
 
December 31, 2015
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,446,839

 
44.1
%
 
$
2,367,642

 
43.0
%
AA
508,086

 
9.2
%
 
569,386

 
10.3
%
A
1,045,965

 
18.8
%
 
1,031,326

 
18.7
%
BBB
741,800

 
13.4
%
 
691,538

 
12.6
%
Total investment grade managed fixed maturities
4,742,690

 
85.5
%
 
4,659,892

 
84.6
%
 
 
 
 
 
 
 
 
BB
227,436

 
4.0
%
 
235,724

 
4.3
%
B
183,127

 
3.3
%
 
179,069

 
3.2
%
CCC
8,331

 
0.2
%
 
5,706

 
0.1
%
CC
113

 
0.0
%
 
1,015

 
0.0
%
NR
231,828

 
4.2
%
 
242,546

 
4.4
%
Total non-investment grade managed fixed maturities
650,835

 
11.7
%
 
664,060

 
12.0
%
Total managed fixed maturities
$
5,393,525

 
97.2
%
 
$
5,323,952

 
96.6
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
BBB
$
—

 
0.0
%
 
$
1,911

 
0.0
%
Total investment grade non-managed catastrophe bonds
—

 
0.0
%
 
1,911

 
0.0
%
 
 
 
 
 
 
 
 
BB
41,412

 
0.7
%
 
70,962

 
1.3
%
B
6,161

 
0.1
%
 
30,698

 
0.6
%
NR
110,488

 
2.0
%
 
82,808

 
1.5
%
Total non-investment grade non-managed catastrophe bonds
158,061

 
2.8
%
 
184,468

 
3.4
%
Total non-managed fixed maturities
158,061

 
2.8
%
 
186,379

 
3.4
%
Total fixed maturities
$
5,551,586

 
100.0
%
 
$
5,510,331

 
100.0
%

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)


The amortized cost and fair value amounts for the Company's fixed maturity investments held at June 30, 2016 and December 31, 2015 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.
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
Due in one year or less
$
349,115

 
$
348,137

 
$
367,132

 
$
366,019

Due after one year through five years
2,990,421

 
2,996,295

 
2,965,920

 
2,936,053

Due after five years through ten years
485,899

 
492,101

 
548,183

 
539,083

Due after ten years
116,065

 
113,447

 
150,444

 
148,036

 
3,941,500

 
3,949,980

 
4,031,679

 
3,989,191

Asset-backed and mortgage-backed securities
1,424,928

 
1,443,545

 
1,337,374

 
1,334,761

Total managed fixed maturities
$
5,366,428

 
$
5,393,525

 
$
5,369,053

 
$
5,323,952

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
28,445

 
$
29,328

 
$
7,504

 
$
7,544

Due after one year through five years
128,614

 
128,185

 
165,093

 
163,575

Due after five years through ten years
540

 
548

 
15,250

 
15,260

Due after ten years
—

 
—

 
—

 
—

Total non-managed fixed maturities
157,599

 
158,061

 
187,847

 
186,379

Total fixed maturities
$
5,524,027

 
$
5,551,586

 
$
5,556,900

 
$
5,510,331

(b)
Other investments
The following tables set forth certain information regarding the Company's other investment portfolio as at June 30, 2016 and December 31, 2015:
Other investments
 
Fair Value as at June 30, 2016
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
959

 
$
959

 
$
—

 

 

Hedge funds
 
18,625

 
18,625

 
—

 

 

Private equity investments
 
73,306

 
73,306

 
—

 

 

Investment funds
 
203,871

 
181,536

 
22,335

 
Daily
 
2 days
Overseas deposits
 
55,301

 
55,301

 
—

 

 

Mutual funds
 
7,464

 
—

 
7,464

 
Daily
 
Daily
Total other investments
 
$
359,526

 
$
329,727

 
$
29,799

 
 
 
 
(a)
The redemption frequency and notice periods only apply to investments without redemption restrictions.

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)


Other investments
 
Fair value as at December 31, 2015
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
1,417

 
$
1,417

 
$
—

 

 

Hedge funds
 
20,980

 
20,980

 
—

 

 

Private equity investments
 
63,771

 
63,771

 
—

 

 

Investment funds
 
188,721

 
167,910

 
20,811

 
Daily
 
2 days
Overseas deposits
 
54,484

 
54,484

 
—

 

 

Mutual funds
 
7,483

 
—

 
7,483

 
Daily
 
Daily
Total other investments
 
$
336,856

 
$
308,562

 
$
28,294

 
 
 
 
(a)
The redemption frequency and notice periods only apply to investments without redemption restrictions.
Other investments include alternative investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities.
Certain securities included in other investments are subject to redemption restrictions and are unable to be redeemed from the funds. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments would liquidate over five to ten years from inception of the funds. In addition, one of the investment funds with a fair value of $171,187 (December 31, 2015: $167,910), has a lock-up period of three years as at June 30, 2016 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company's ability to withdraw from the overseas deposit funds is restricted by an annual and quarterly funding and release process for Lloyd's market participants.
The Company's maximum exposure to any of these alternative investments is limited to the amount invested and any remaining capital commitments. Refer to Note 15, "Commitments and contingencies," for further details. As at June 30, 2016, the Company does not have any plans to sell any of the other investments listed above.
(c)Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
30,621

 
$
29,433

 
$
58,638

 
$
57,106

Other investments
8,026

 
4,014

 
8,898

 
7,202

Restricted cash, cash and cash equivalents
380

 
427

 
1,245

 
843

Securities lending income
12

 
6

 
17

 
9

Total gross investment income
39,039

 
33,880

 
68,798

 
65,160

Investment expenses
(2,190
)
 
(2,026
)
 
(4,026
)
 
(3,870
)
Total managed net investment income
$
36,849

 
$
31,854

 
$
64,772

 
$
61,290

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
1,977

 
$
1,733

 
$
3,272

 
$
3,307

Restricted cash, cash and cash equivalents
431

 
24

 
674

 
43

Total non-managed net investment income
2,408

 
1,757

 
3,946

 
3,350

Total net investment income
$
39,257

 
$
33,611

 
$
68,718

 
$
64,640


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)


Managed net investment income from other investments includes distributed and undistributed net income from certain investment funds.
(d)
Net realized gains and change in net unrealized gains (losses) on investments
The following represents an analysis of net realized gains and the change in net unrealized gains (losses) on investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
3,306

 
$
6,140

 
$
6,523

 
$
12,449

Gross realized (losses)
(786
)
 
(4,036
)
 
(5,089
)
 
(6,165
)
Net realized gains on investments
2,520

 
2,104

 
1,434

 
6,284

Change in net unrealized gains (losses) on investments
30,052

 
(33,926
)
 
77,130

 
743

Total net realized and change in net unrealized gains (losses) on managed investments
$
32,572

 
$
(31,822
)
 
$
78,564

 
$
7,027

Non-managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
204

 
$
140

 
$
715

 
$
140

Gross realized (losses)
—

 
—

 
(9
)
 
(11
)
Net realized gains on investments
204

 
140

 
706

 
129

Change in net unrealized (losses) on investments
1,376

 
(750
)
 
1,742

 
(2,192
)
Total net realized and change in net unrealized (losses) on non-managed investments
1,580

 
(610
)
 
2,448

 
(2,063
)
Total net realized and change in net unrealized gains (losses) on total investments
$
34,152

 
$
(32,432
)
 
$
81,012

 
$
4,964

(e)
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 13, “Debt and financing arrangements.”
 
 
June 30, 2016
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

$300,000 syndicated secured letter of credit facility
 
300,000

 
105,575

 
151,166

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
11,805

 
48,380

AlphaCat Re secured letter of credit facility
 
20,000

 
20,000

 
30,191

IPC bi-lateral facility
 
25,000

 
5,666

 
—

$236,000 Flagstone bi-lateral facility
 
236,000

 
195,622

 
322,520

Total
 
$
690,000

 
$
338,668

 
$
552,257


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)



 
 
December 31, 2015
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

$300,000 syndicated secured letter of credit facility
 
300,000

 
235,540

 
370,909

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
10,543

 
47,607

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,153

IPC bi-lateral facility
 
25,000

 
9,241

 
—

$236,000 Flagstone bi-lateral facility
 
236,000

 
193,764

 
377,866

Total
 
$
700,000

 
$
479,088

 
$
826,535

In addition, $4,687,599 of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments were pledged during the normal course of business as at June 30, 2016 (December 31, 2015: $4,056,788). Of those, $4,564,394 were held in trust (December 31, 2015: $4,007,215). 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 Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd. ("Validus Re Swiss") and Talbot as an alien insurer/reinsurer by certain regulators.
During December 2014, Validus Reinsurance, Ltd. established a Multi-Beneficiary Reinsurance Trust ("MBRT") to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As a result, cedants domiciled in that state will receive automatic credit in their regulatory filings for the reinsurance provided prospectively by the Company. As of June 30, 2016, Validus Reinsurance, Ltd. was approved as a trusteed reinsurer in 48 states as well as Puerto Rico and the District of Columbia. In addition, Validus Re Swiss established a MBRT in December 2015 and was approved as a trusteed reinsurer in 9 states as at June 30, 2016.
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.

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)


At June 30, 2016, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
931,803

 
$
—

 
$
—

 
$
931,803

Non-U.S. government and government agency
—

 
215,250

 
—

 
—

 
215,250

U.S. states, municipalities and political subdivisions
—

 
285,412

 
—

 
—

 
285,412

Agency residential mortgage-backed securities
—

 
676,783

 
—

 
—

 
676,783

Non-agency residential mortgage-backed securities
—

 
23,389

 
—

 
—

 
23,389

U.S. corporate
—

 
1,556,047

 
—

 
—

 
1,556,047

Non-U.S. corporate
—

 
364,406

 
—

 
—

 
364,406

Bank loans
—

 
353,914

 
243,148

 
—

 
597,062

Asset-backed securities
—

 
416,957

 
12,383

 
—

 
429,340

Commercial mortgage-backed securities
—

 
314,033

 
—

 
—

 
314,033

Total fixed maturities
—

 
5,137,994

 
255,531

 
—

 
5,393,525

Short-term investments
186,276

 
3,352

 
—

 
—

 
189,628

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
—

 
959

 
959

Hedge funds
—

 
—

 
—

 
18,625

 
18,625

Private equity investments
—

 
—

 
—

 
73,306

 
73,306

Investment funds
—

 
22,335

 
—

 
181,536

 
203,871

Overseas deposits
—

 
—

 
—

 
55,301

 
55,301

Mutual funds
—

 
7,464

 
—

 
—

 
7,464

Total other investments
—

 
29,799

 
—

 
329,727

 
359,526

Total managed investments
$
186,276

 
$
5,171,145

 
$
255,531

 
$
329,727

 
$
5,942,679

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
120,543

 
$
37,518

 
$
—

 
$
158,061

Short-term investments
2,180,026

 
—

 
—

 
—

 
2,180,026

Total non-managed investments
2,180,026

 
120,543

 
37,518

 
—

 
2,338,087

Total investments
$
2,366,302

 
$
5,291,688

 
$
293,049

 
$
329,727

 
$
8,280,766


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)


At December 31, 2015, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
937,202

 
$
—

 
$
—

 
$
937,202

Non-U.S. government and government agency
—

 
237,968

 
—

 
—

 
237,968

U.S. states, municipalities and political subdivisions
—

 
301,289

 
—

 
—

 
301,289

Agency residential mortgage-backed securities
—

 
610,582

 
—

 
—

 
610,582

Non-agency residential mortgage-backed securities
—

 
26,920

 
—

 
—

 
26,920

U.S. corporate
—

 
1,489,951

 
—

 
—

 
1,489,951

Non-U.S. corporate
—

 
446,570

 
—

 
—

 
446,570

Bank loans
—

 
343,874

 
232,337

 
—

 
576,211

Asset-backed securities
—

 
437,124

 
—

 
—

 
437,124

Commercial mortgage-backed securities
—

 
260,135

 
—

 
—

 
260,135

Total fixed maturities
—

 
5,091,615

 
232,337

 
—

 
5,323,952

Short-term investments
222,678

 
14,691

 
—

 
—

 
237,369

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
—

 
1,417

 
1,417

Hedge funds
—

 
—

 
—

 
20,980

 
20,980

Private equity investments
—

 
—

 
—

 
63,771

 
63,771

Investment funds
—

 
20,811

 
—

 
167,910

 
188,721

Overseas deposits
—

 
—

 
—

 
54,484

 
54,484

Mutual funds
—

 
7,483

 
—

 
—

 
7,483

Total other investments
—

 
28,294

 
—

 
308,562

 
336,856

Total managed investments
$
222,678

 
$
5,134,600

 
$
232,337

 
$
308,562

 
$
5,898,177

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
172,879

 
$
13,500

 
$
—

 
$
186,379

Short-term investments
1,704,266

 
—

 
—

 
—

 
1,704,266

Total non-managed investments
1,704,266

 
172,879

 
13,500

 
—

 
1,890,645

Total investments
$
1,926,944

 
$
5,307,479

 
$
245,837

 
$
308,562

 
$
7,788,822

At June 30, 2016, managed Level 3 investments totaled $255,531 (December 31, 2015: $232,337), representing 4.3% (December 31, 2015: 3.9%) of total managed investments.
(b)
Valuation techniques
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.
Fixed maturity investments
In general, valuation of the Company's fixed maturity investment portfolio 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.

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)


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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

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)


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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. 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. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair value of these investments are classified as Level 3.
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. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.
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

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)


cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Catastrophe bonds
Catastrophe bonds are priced based on broker or underwriter bid indications. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. To the extent that these indications are based on significant unobservable inputs, the fair value of the relevant bonds will be classified as a Level 3.
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 portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair value of these investments are classified as Level 2.
Other investments
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 three month delay in its valuation. The fund manager has provided an estimate of the fund NAV at each period end based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compares the 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. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Hedge funds
The hedge funds consist of one investment assumed in the acquisition of Flagstone Reinsurance Holdings, S.A. ("Flagstone") (the "Flagstone hedge fund"). The Flagstone hedge fund's administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.
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. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Investment funds
Investment funds consist of one pooled investment, two structured securities funds and a mezzanine debt fund. The pooled investment is invested in fixed income securities with high credit ratings and is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund as reported by Lloyd’s Treasury & Investment Management. As the fund NAV is published, the fair value of this investment is classified as Level 2.
The structured securities funds invest across asset backed, residential mortgage backed and commercial mortgage backed securities, whereas the mezzanine debt fund invests in a portfolio of mezzanine securities which generally take the form of private debt securities with equity participation in connection with buyouts, recapitalizations and refinancings. The fair value of units in each fund is based on the NAV of the respective fund as reported by the independent fund administrator. The NAV for each fund is reported on a one or three month delay by the fund's administrator. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.


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)


Overseas deposits
The Company's share of a portfolio of Lloyd's overseas 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. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
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 are based on the NAV of the funds as reported by the fund manager. As the NAVs for each fund are published, the fair value of these investments are classified as Level 2.
(c)
Level 3 investments
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 and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30, 2016
 
Bank Loans
 
Catastrophe Bonds
 
Asset Backed Securities
 
Total
Level 3 investments—beginning of period
$
255,011

 
$
37,105

 
$
—

 
$
292,116

Purchases
8,885

 
—

 
12,383

 
21,268

Settlements
(17,784
)
 
—

 
—

 
(17,784
)
Change in net unrealized (losses) gains
(2,964
)
 
413

 
—

 
(2,551
)
Transfers into Level 3 during the period
—

 
—

 
—

 
—

Transfers out of Level 3 during the period
—

 
—

 
—

 
—

Level 3 investments—end of period
$
243,148

 
$
37,518

 
$
12,383

 
$
293,049

 
Three Months Ended June 30, 2015
 
Bank Loans
 
Catastrophe Bonds
 
Total
Level 3 investments—beginning of period
$
86,533

 
$
15,500

 
$
102,033

Purchases
43,791

 
—

 
43,791

Sales
(929
)
 
(2,000
)
 
(2,929
)
Settlements
(4,203
)
 
—

 
(4,203
)
Change in net unrealized losses
(210
)
 
—

 
(210
)
Transfers into Level 3 during the period
—

 
—

 
—

Transfers out of Level 3 during the period
—

 
—

 
—

Level 3 investments—end of period
$
124,982

 
$
13,500

 
$
138,482



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)


 
Six Months Ended June 30, 2016
 
Bank Loans
 
Catastrophe Bonds
 
Asset Backed Securities
 
Total
Level 3 investments—beginning of period
$
232,337

 
$
13,500

 
$
—

 
$
245,837

Purchases
50,988

 
23,272

 
12,383

 
86,643

Sales
(2,389
)
 
—

 
—

 
(2,389
)
Settlements
(34,033
)
 
(125
)
 
—

 
(34,158
)
Change in net unrealized (losses) gains
(3,755
)
 
871

 
—

 
(2,884
)
Transfers into Level 3 during the period
—

 
—

 
—

 
—

Transfers out of Level 3 during the period
—

 
—

 
—

 
—

Level 3 investments—end of period
$
243,148

 
$
37,518

 
$
12,383

 
$
293,049

 
Six Months Ended June 30, 2015
 
Bank Loans
 
Catastrophe Bonds
 
Total
Level 3 investments—beginning of period
$
32,748

 
$
17,500

 
$
50,248

Purchases
101,966

 
—

 
101,966

Sales
(929
)
 
(3,989
)
 
(4,918
)
Settlements
(8,198
)
 
—

 
(8,198
)
Net realized losses
—

 
(11
)
 
(11
)
Change in net unrealized losses
(605
)
 
—

 
(605
)
Transfers into Level 3 during the period
—

 
—

 
—

Transfers out of Level 3 during the period
—

 
—

 
—

Level 3 investments—end of period
$
124,982

 
$
13,500

 
$
138,482

There have not been any transfers into or out of Level 3 during the three and six months ended June 30, 2016 or 2015, respectively.

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)


5. Variable interest entities
The Company consolidates all VOEs in which it has a controlling financial interest and all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs primarily include entities related to the AlphaCat segment.
(a)
Consolidated VIEs
AlphaCat sidecars
Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of sidecars for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities return capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company as the primary beneficiary. The Company's maximum exposure to any of the sidecars is the amount of capital invested at any given time and any remaining capital commitments.
AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and other investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and insurance linked securities (“ILS”) contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the expected loss of the fund. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7%, whereas higher risk ILS funds have a maximum permitted portfolio expected loss of greater than 7%. The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). The AlphaCat ILS funds are VIEs and are consolidated by the Company as the primary beneficiary. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time and any remaining capital commitments. Refer to Note 15, "Commitments and contingencies," for further details.
AlphaCat Re and AlphaCat Master Fund
The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “master funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the AlphaCat segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “feeder funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated to the feeder funds and direct third party investors using variable funding notes. The master funds are VIEs and are consolidated by the Company as the primary beneficiary.
Notes Payable to AlphaCat Investors
The master funds issue variable funding notes to the feeder funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the feeder funds, together with investments made by third parties in the feeder funds and on a direct basis, are provided as consideration for the notes to the master funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months; however, the variable funding notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are subsequently redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the feeder funds and direct third party investors via the variable funding notes.
As both the master and feeder funds are consolidated by the Company, any notes issued by the master funds to the feeder funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re to direct third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of Comprehensive Income as (income) loss attributable to AlphaCat investors. To the extent that the (income) loss has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
During the six months ended June 30, 2016, one of the AlphaCat ILS funds issued both common shares and structured notes to the Company and other third party investors in order to capitalize the fund. The fund deploys its capital through AlphaCat Re; therefore, the structured notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares and earn an interest rate of 8.0% per annum, payable on a cumulative basis in arrears.

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)


As the fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with any related interest included in the Consolidated Statements of Comprehensive Income as (income) loss attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
The following table presents a reconciliation of the beginning and ending notes payable to AlphaCat investors for the three and six months ended June 30, 2016:
 
Three Months Ended June 30, 2016
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
261,793

 
$
61,717

 
$
323,510

Issuance of notes payable to AlphaCat investors
102,817

 
32,609

 
135,426

Redemption of notes payable to AlphaCat investors
(88,079
)
 
—

 
(88,079
)
Foreign exchange losses
125

 
—

 
125

Notes payable to AlphaCat investors, end of period
$
276,656

 
$
94,326

 
$
370,982

 
Six Months Ended June 30, 2016
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
75,493

 
$
—

 
$
75,493

Issuance of notes payable to AlphaCat investors
298,105

 
94,326

 
392,431

Redemption of notes payable to AlphaCat investors
(97,684
)
 
—

 
(97,684
)
Foreign exchange losses
742

 
—

 
742

Notes payable to AlphaCat investors, end of period
$
276,656

 
$
94,326

 
$
370,982

The income attributable to AlphaCat investors was $6,114 and $10,714 for the three and six months ended June 30, 2016, respectively, with $13,126 included in accounts payable and accrued expenses as at June 30, 2016 (December 31, 2015: $2,412).
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, as amended, following a passive buy-and-hold investment strategy. One of the funds is a VIE and is consolidated by the Company as it is the primary beneficiary. The remaining funds are VOEs and are consolidated by the Company as it owns all of the voting equity interests. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.
The following table presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
47,693

 
$
10,468

 
$
206,581

 
$
14,804

AlphaCat ILS funds - Lower Risk (a)
1,544,346

 
129,842

 
1,268,070

 
143,371

AlphaCat ILS funds - Higher Risk (a)
701,348

 
147,466

 
522,867

 
300,122

AlphaCat Re and AlphaCat Master Fund
2,431,907

 
2,431,737

 
1,615,779

 
1,615,609

BetaCat ILS funds
63,947

 
493

 
64,221

 
2,472

(a)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.

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)


Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 3, "Investments," as non-managed investments.
(b)
Non-Consolidated VIEs
The Company invests in private equity and other investment vehicles as part of the Company's investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company's involvement in these entities is passive in nature. The Company's maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs.
6. Investments in affiliates
The following table presents the Company's investments in affiliates as at June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
Investment affiliate
$
99,278

 
$
87,673

Operating affiliate
—

 
392

Investments in affiliates
$
99,278

 
$
88,065

(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 ("Aquiline Capital") 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 Aquiline Capital'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 Aquiline II Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company's investment in the Aquiline II Partnership has been treated as an equity method investment. The Aquiline II 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 the Aquiline II Partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline II Partnership or to withdraw any part of its capital account without prior consent from the Aquiline II General Partner. The Company's maximum exposure to the Aquiline II Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 15, "Commitments and contingencies," for further details.
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 committed and agreed 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 "Aquiline 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”).

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 Aquiline III Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company's investment in the Aquiline III Partnership has been treated as an equity method investment. The Aquiline III 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 Aquiline III Partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline III Partnership or to withdraw any part of its capital account without prior consent from the Aquiline III General Partner. The Company's maximum exposure to the Aquiline III Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 15, "Commitments and contingencies," for further details.
The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliate balance for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Investment affiliate, beginning of period
$
84,135

 
$
85,982

 
$
87,673

 
$
63,506

Capital contributions
15,732

 
3,415

 
16,307

 
23,115

(Loss) income from investment affiliate
(589
)
 
284

 
(4,702
)
 
3,060

Investment affiliate, end of period
$
99,278

 
$
89,681

 
$
99,278

 
$
89,681

The following table presents the Company’s investment in the partnerships as at June 30, 2016:
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline Financial Services Fund II L.P.
$
56,479

 
—
%
 
8.0
%
 
$
71,178

Aquiline Financial Services Fund III L.P.
$
29,622

 
—
%
 
10.5
%
 
$
28,100

Total
$
86,101

 
 
 
 
 
$
99,278

The following table presents the Company’s investment in the partnerships as at December 31, 2015:
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline Financial Services Fund II L.P.
$
55,904

 
—
%
 
8.1
%
 
$
73,880

Aquiline Financial Services Fund III L.P.
13,890

 
—
%
 
13.7
%
 
13,793

Total
$
69,794

 
 
 
 
 
$
87,673

(b)
Operating affiliate
PaCRe, Ltd.
On April 2, 2012, the Company joined with other investors in capitalizing PaCRe, a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. However, during the fourth quarter of 2015, PaCRe's Class 4 license was surrendered and the company was considered off-risk effective January 1, 2016. The Company's investment in PaCRe has been treated as an equity method investment. The Company's maximum exposure to the fund is the amount of capital invested at any given time.
The following table presents a reconciliation of the beginning and ending investment in the Company's operating affiliate balance for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating affiliate, beginning of period
$
369

 
$
54,928

 
$
392

 
$
50,944

Return of investment
(369
)
 
—

 
(369
)
 
—

(Loss) income from operating affiliate
—

 
1,738

 
(23
)
 
5,722

Operating affiliate, end of period
$
—

 
$
56,666

 
$
—

 
$
56,666


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)


The following table presents the Company’s investment in PaCRe as at June 30, 2016:
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Investment in PaCRe
$
—

 
100.0
%
 
10.0
%
 
$
—

The following table presents the Company’s investment in PaCRe as at December 31, 2015:
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Investment in PaCRe
$
392

 
100.0
%
 
10.0
%
 
$
392


7. Noncontrolling interest
Investors in certain of 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 AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company's Consolidated Balance Sheets as noncontrolling interest.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interest and noncontrolling interest for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30, 2016
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
Balance, beginning of period
$
1,409,037

 
$
157,223

 
$
1,566,260

Issuance of shares
112,500

 
59,349

 
171,849

Income attributable to noncontrolling interest
17,230

 
3,963

 
21,193

Redemptions payable
(6,484
)
 
—

 
(6,484
)
Distributions
—

 
(8,381
)
 
(8,381
)
Balance, end of period
$
1,532,283

 
$
212,154

 
$
1,744,437

 
Three Months Ended June 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
Balance, beginning of period
$
834,644

 
$
151,583

 
$
986,227

Issuance of shares
249,300

 
9,600

 
258,900

Income attributable to noncontrolling interest
17,462

 
5,099

 
22,561

Redemption of shares
(59,395
)
 
—

 
(59,395
)
Redemptions payable
(6,500
)
 
—

 
(6,500
)
Distributions
—

 
(12,759
)
 
(12,759
)
Balance, end of period
$
1,035,511

 
$
153,523

 
$
1,189,034


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)


 
Six Months Ended June 30, 2016
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
Balance, beginning of period
$
1,111,714

 
$
154,662

 
$
1,266,376

Issuance of shares
381,250

 
171,674

 
552,924

Income attributable to noncontrolling interest
45,803

 
12,921

 
58,724

Redemptions payable
(6,484
)
 
—

 
(6,484
)
Distributions
—

 
(127,103
)
 
(127,103
)
Balance, end of period
$
1,532,283

 
$
212,154

 
$
1,744,437

 
Six Months Ended June 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
Balance, beginning of period
$
617,791

 
$
292,274

 
$
910,065

Issuance of shares
452,700

 
9,600

 
462,300

Income attributable to noncontrolling interest
30,915

 
9,824

 
40,739

Redemption of shares
(59,395
)
 
—

 
(59,395
)
Redemptions payable
(6,500
)
 
—

 
(6,500
)
Distributions
—

 
(158,175
)
 
(158,175
)
Balance, end of period
$
1,035,511

 
$
153,523

 
$
1,189,034


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)


8. 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 June 30, 2016 and December 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. In addition, 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 June 30, 2016 and December 31, 2015, none of the Company's foreign currency forward contracts were designated as hedging instruments for accounting purposes.
The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments for accounting purposes on the Consolidated Balance Sheets as at June 30, 2016 and December 31, 2015:
 
 
June 30, 2016
 
December 31, 2015
Derivatives not designated as hedging instruments:
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
297,275

 
$
4,230

 
$
4,746

 
$
255,840

 
$
2,601

 
$
3,211

(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, recognized in income within foreign exchange gains (losses) relating to the foreign currency forward contracts that were not designated as hedging instruments during the three and six months ended June 30, 2016 was $896 and ($1,117), respectively (2015: $nil and $nil, respectively). The net impact on earnings, recognized in income within other income (loss) relating to the foreign currency forward contracts that were not designated as hedging instruments during the three and six months ended June 30, 2016 were $84 and $120, respectively (2015: ($128) and ($127), respectively).
The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments for accounting purposes on the Consolidated Balance Sheets as at June 30, 2016 and December 31, 2015:
 
 
June 30, 2016
 
December 31, 2015
Derivatives designated as hedging instruments:
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Interest rate swap contracts
 
$
552,263

 
$
20

 
$
2,529

 
$
552,263

 
$
21

 
$
1,942

(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 certain foreign currency derivative instruments as fair value hedges for accounting purposes 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 these 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.

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)


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 for accounting purposes along with the impact of the related hedged items for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Foreign currency forward contracts
 
2016
 
2015
 
2016
 
2015
Amount of loss recognized in income on derivative
 
$
—

 
$
(8,954
)
 
$
—

 
$
(15,156
)
Amount of gain on hedged item recognized in income attributable to risk being hedged
 
$
—

 
$
8,954

 
$
—

 
$
15,156

Amount of gain recognized in income on derivative (ineffective portion)
 
$
—

 
$
—

 
$
—

 
$
—

(c)
Derivative instruments designated as a cash flow hedge
The Company designates its interest rate derivative instruments as cash flow hedges for accounting purposes 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 and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Interest rate swap contracts
 
2016
 
2015
 
2016
 
2015
Amount of effective portion recognized in other comprehensive income
 
$
2,694

 
$
2,846

 
$
6,350

 
$
6,886

Amount of effective portion subsequently reclassified to earnings
 
$
(2,758
)
 
$
(3,236
)
 
$
(5,656
)
 
$
(6,475
)
Amount of ineffective portion excluded from effectiveness testing
 
$
64

 
$
390

 
$
(694
)
 
$
(411
)
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 June 30, 2016 or December 31, 2015.
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.


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)


9. 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 ("IBNR") 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 and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Reserve for losses and loss expenses, beginning of period
$
2,980,300

 
$
3,207,885

 
$
2,996,567

 
$
3,243,147

Loss reserves recoverable
(370,689
)
 
(375,882
)
 
(350,586
)
 
(377,466
)
Net reserves for losses and loss expenses, beginning of period
2,609,611

 
2,832,003

 
2,645,981

 
2,865,681

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
369,911

 
336,864

 
648,097

 
661,352

Prior years (a)
(62,781
)
 
(70,718
)
 
(116,520
)
 
(154,277
)
Total incurred losses and loss expenses (a)
307,130

 
266,146

 
531,577

 
507,075

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
(45,882
)
 
(28,965
)
 
(61,655
)
 
(42,065
)
Prior years
(176,775
)
 
(260,027
)
 
(430,079
)
 
(496,260
)
Total net paid losses
(222,657
)
 
(288,992
)
 
(491,734
)
 
(538,325
)
Foreign exchange (gain) loss
(14,354
)
 
6,841

 
(6,094
)
 
(18,433
)
Net reserve for losses and loss expenses, end of period
2,679,730

 
2,815,998

 
2,679,730

 
2,815,998

Loss reserves recoverable
442,987

 
376,665

 
442,987

 
376,665

Reserve for losses and loss expenses, end of period
$
3,122,717

 
$
3,192,663

 
$
3,122,717

 
$
3,192,663

Incurred losses and loss expenses comprise:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Gross losses and loss expenses (a)
$
397,863

 
$
303,771

 
$
667,716

 
$
568,567

Reinsurance recoverable
(90,733
)
 
(37,625
)
 
(136,139
)
 
(61,492
)
Net incurred losses and loss expenses (a)
$
307,130

 
$
266,146

 
$
531,577

 
$
507,075

(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,892 and $6,115, respectively, during the three and six months ended June 30, 2015, benefiting the loss ratio by 4.4 and 4.6 percentage points, respectively. The remaining fair value adjustment of $4,864 was fully amortized during 2015.

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)


The June 30, 2016 gross reserves for losses and loss expenses comprise reserves for reported claims of $1,267,625 (December 31, 2015: $1,278,697) and IBNR of $1,855,092 (December 31, 2015: $1,717,870). The net favorable development on prior years by segment and line of business for the three and six months ended June 30, 2016 and 2015 was as follows:
 
Three Months Ended June 30, 2016
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(9,468
)
 
$
(10,018
)
 
$
(11,391
)
 
$
—

 
$
(30,877
)
Talbot
(10,094
)
 
(8,928
)
 
(9,306
)
 
—

 
(28,328
)
Western World
(1,582
)
 
—

 
—

 
(1,576
)
 
(3,158
)
AlphaCat
(296
)
 
—

 
(122
)
 
—

 
(418
)
Net favorable development
$
(21,440
)
 
$
(18,946
)
 
$
(20,819
)
 
$
(1,576
)
 
$
(62,781
)
The net favorable development of $62.8 million for the three months ended June 30, 2016 was primarily due to favorable development on attritional losses and prior year event and non-event reserves. The Validus Re and Western World segments experienced favorable development on prior years primarily due to favorable development on attritional losses; whereas, the Talbot segment experienced favorable development on prior years primarily due to favorable development on event and non-event reserves.
 
Three Months Ended June 30, 2015
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(15,928
)
 
$
(11,099
)
 
$
(3,852
)
 
$
—

 
$
(30,879
)
Talbot
(16,683
)
 
(13,810
)
 
(5,093
)
 
—

 
(35,586
)
Western World (a)
(866
)
 
—

 
—

 
(3,387
)
 
(4,253
)
Net favorable development (a)
$
(33,477
)
 
$
(24,909
)
 
$
(8,945
)
 
$
(3,387
)
 
$
(70,718
)
(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,892 during the three months ended June 30, 2015, benefiting the loss ratio by 4.4 percentage points. The remaining fair value adjustment of $4,864 was fully amortized during 2015.
The Validus Re segment experienced favorable development on prior years primarily due to favorable development on attritional losses; whereas, the Talbot segment experienced favorable development on prior years primarily due to favorable development on attritional losses and certain events, including the Thailand floods. The Western World segment experienced favorable development on prior years primarily due to the amortization of the fair value adjustment made at the acquisition date as well as favorable development on attritional losses.
 
Six Months Ended June 30, 2016
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(32,300
)
 
$
(6,463
)
 
$
(17,798
)
 
$
—

 
$
(56,561
)
Talbot
(28,540
)
 
(5,964
)
 
(16,544
)
 
—

 
(51,048
)
Western World
(2,023
)
 
—

 
—

 
(5,561
)
 
(7,584
)
AlphaCat
(477
)
 
—

 
(850
)
 
—

 
(1,327
)
Net favorable development
$
(63,340
)
 
$
(12,427
)
 
$
(35,192
)
 
$
(5,561
)
 
$
(116,520
)
The net favorable development of $116.5 million for the six months ended June 30, 2016 was primarily attributable to net favorable development in the Validus Re, Talbot and Western World segments. The Validus Re net favorable development was primarily attributable to favorable development on attritional losses or non-event reserves; whereas Talbot's favorable development was due to favorable development on attritional losses along with favorable development on prior year event reserves. Western World's net favorable development was attributable to favorable development on attritional losses.



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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)


 
Six Months Ended June 30, 2015
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(30,824
)
 
$
(15,669
)
 
$
(9,082
)
 
$
—

 
$
(55,575
)
Talbot
(37,435
)
 
(36,324
)
 
(13,514
)
 
—

 
(87,273
)
Western World (a)
(3,594
)
 
—

 
—

 
(6,991
)
 
(10,585
)
AlphaCat
(844
)
 
—

 
—

 
—

 
(844
)
Net favorable development (a)
$
(72,697
)
 
$
(51,993
)
 
$
(22,596
)
 
$
(6,991
)
 
$
(154,277
)
(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $6,115 during the six months ended June 30, 2015, benefiting the loss ratio by 4.6 percentage points. The remaining fair value adjustment of $4,864 was fully amortized during 2015.
The Validus Re segment experienced favorable development on prior years primarily due to favorable development on attritional losses; whereas, the Talbot segment experienced favorable development on prior years primarily due to favorable development on attritional losses and certain events, including the Thailand floods. The Western World segment experienced favorable development on prior years primarily due to the amortization of the fair value adjustment made at the acquisition date as well as favorable development on attritional losses.
10. 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 June 30, 2016, 98.7% (December 31, 2015: 98.7%) of reinsurance recoverable (which includes loss reserves recoverable and recoverables on paid losses), inclusive of $291,536 of total IBNR recoverable (December 31, 2015: $214,863), were fully collateralized or from reinsurers rated A- or better.
Reinsurance recoverable by reinsurer as at June 30, 2016 and December 31, 2015 were as follows:
 
June 30, 2016
 
December 31, 2015
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
391,076

 
83.1
%
 
$
303,108

 
81.1
%
Other reinsurers’ balances > $1 million
70,763

 
15.0
%
 
61,222

 
16.4
%
Other reinsurers’ balances < $1 million
8,796

 
1.9
%
 
9,327

 
2.5
%
Total
$
470,635

 
100.0
%
 
$
373,657

 
100.0
%

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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)


 
 
June 30, 2016
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Fully collateralized reinsurers
 
NR
 
$
80,829

 
17.2
%
Swiss Re
 
AA-
 
80,604

 
17.1
%
Lloyd's Syndicates
 
A+
 
79,508

 
16.9
%
Hannover Re
 
AA-
 
47,686

 
10.1
%
Everest Re
 
A+
 
42,506

 
9.0
%
Munich Re
 
AA-
 
18,161

 
3.9
%
Transatlantic Re
 
A+
 
11,719

 
2.5
%
Hamilton Re
 
A-
 
11,623

 
2.5
%
National Indemnity Company
 
AA+
 
9,565

 
2.0
%
Toa Re
 
A+
 
8,875

 
1.9
%
Total
 
 
 
$
391,076

 
83.1
%
 
 
December 31, 2015
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
83,048

 
22.2
%
Lloyd's Syndicates
 
A+
 
66,356

 
17.8
%
Hannover Re
 
AA-
 
43,765

 
11.7
%
Everest Re
 
A+
 
43,060

 
11.5
%
Munich Re
 
AA-
 
18,707

 
5.0
%
Transatlantic Re
 
A+
 
11,923

 
3.2
%
Hamilton Re
 
A-
 
10,898

 
2.9
%
National Indemnity Company
 
AA+
 
10,293

 
2.8
%
XL Re
 
A+
 
8,728

 
2.3
%
Toa Re
 
A+
 
6,330

 
1.7
%
Total
 
 
 
$
303,108

 
81.1
%
At June 30, 2016 and December 31, 2015, the provision for uncollectible reinsurance relating to reinsurance recoverable was $5,025 and $4,997, respectively. To estimate this 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.

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)


11. Share capital
The Company is authorized to issue up to an aggregate of 571,428,571 common and preferred shares with a par value of $0.175 per share.
(a)
Preferred shares
On June 13, 2016, the Company issued 6,000 shares of its 5.875% Non-Cumulative Preferred Shares, Series A (the "Series A Preferred Shares") (equivalent to 6,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series A Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series A Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $144,852 which will be used for general corporate purposes.
The Depositary Shares, representing the Series A Preferred Shares, are traded on the New York Stock Exchange under the symbol “VRPRA.” The Series A Preferred Shares have no stated maturity date and are redeemable, in whole or in part, at the Company’s option on and after June 15, 2021, at a redemption price of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share), plus declared and unpaid dividends. The Company may also redeem all, but not less than all, of the Series A Preferred Shares before the redemption date at a redemption price of $26,000 per share (equivalent to $26 per Depositary Share), plus declared and unpaid dividends, if the Company is required to submit a proposal to the holders of the Series A Preferred Shares concerning an amalgamation, consolidation, merger or other similar corporate transaction or change in Bermuda law. The Series A Preferred Shares may also be redeemed before the redemption date at a redemption price of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share), plus declared and unpaid dividends, in whole, if there is a change in tax law, or in whole or in part, in the case of a capital disqualification event.
Dividends on the Series A Preferred Shares, when, as and if declared by the Company’s Board of Directors or a duly authorized committee thereof, will accrue and be payable on the liquidation preference amount from the original issue date, on a non-cumulative basis, quarterly in arrears on each dividend payment date at an annual rate of 5.875%. The Company will be restricted from paying dividends on and repurchasing its common shares, unless certain dividend payments are made on the Series A Preferred Shares.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Shares and any parity shares are entitled to receive out of our assets available for distribution to shareholders, before any distribution is made to holders of common shares or other junior shares, a liquidating distribution in the amount of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share) plus declared and unpaid dividends. Distributions will be made pro rata in accordance with the respective aggregate liquidation preferences of the Series A Preferred Shares and any parity shares and only to the extent of our assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
The following table is a summary of the Preferred shares issued and outstanding:
 
Preferred Shares
Preferred shares issued and outstanding, December 31, 2015
—

Preferred shares issued
6,000

Preferred shares issued and outstanding, June 30, 2016
6,000

(b)
Common Shares
The holders of common shares are entitled to receive dividends and 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

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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)


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 78,841,758 common shares for an aggregate purchase price of $2,620,814 from the inception of its share repurchase program to June 30, 2016. The Company had $403,587 remaining under its authorized share repurchase program as of June 30, 2016.
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.
The following table is a summary of the common shares issued and outstanding:
 
Common Shares
Common shares issued, December 31, 2015
160,570,772

Restricted share awards vested, net of shares withheld
601,890

Restricted share units vested, net of shares withheld
18,486

Options exercised
13,635

Performance share awards vested, net of shares withheld
48,088

Common shares issued, June 30, 2016
161,252,871

Treasury shares, June 30, 2016
(80,480,633
)
Common shares outstanding, June 30, 2016
80,772,238

 
Common Shares
Common shares issued, December 31, 2014
155,554,224

Restricted share awards vested, net of shares withheld
609,654

Restricted share units vested, net of shares withheld
13,260

Options exercised
728,489

Warrants exercised
1,461,715

Direct issuance of common stock
639

Performance share awards vested, net of shares withheld
11,524

Common shares issued, June 30, 2015
158,379,505

Treasury shares, June 30, 2015
(75,083,710
)
Common shares outstanding, June 30, 2015
83,295,795

(c)
Dividends
On May 5, 2016, the Company announced a quarterly cash dividend of $0.35 (2015: $0.32) per common share. This dividend was paid on June 30, 2016 to holders of record on June 15, 2016.
On February 2, 2016 the Company announced a quarterly cash dividend of $0.35 (2015: $0.32) per common share. This dividend was paid on March 31, 2016 to holders of record on March 15, 2016.

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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)


12. Stock plans
(a)
Long 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. The total number of shares reserved for issuance under the LTIP are 2,753,292 shares of which 1,256,215 shares remain available for issuance at June 30, 2016. The LTIP is 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. Outstanding options have a life of 10 years and vest either pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.
Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.
The Company has not granted any stock option awards since September 4, 2009. These stock option awards were fully amortized during the year ended December 31, 2012.
Activity with respect to options for the six months ended June 30, 2016 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2015
65,401

 
$
7.74

 
$
20.17

Options exercised
(14,044
)
 
7.69

 
17.02

Options outstanding, June 30, 2016
51,357

 
$
7.75

 
$
21.03

Activity with respect to options for the six months ended June 30, 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
(1,040,680
)
 
7.26

 
16.86

Options outstanding, June 30, 2015
119,377

 
$
5.94

 
$
25.46

ii.
Restricted share awards
Restricted shares granted under the LTIP 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. The Company recognized share compensation expenses during the three and six months ended June 30, 2016 of $9,517 (2015: $8,653) and $18,646 (2015:$17,132), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

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)


Activity with respect to unvested restricted share awards for the six months ended June 30, 2016 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2015
2,739,446

 
$
38.25

Restricted share awards granted
534,905

 
48.69

Restricted share awards vested
(783,523
)
 
37.32

Restricted share awards forfeited
(8,317
)
 
37.94

Restricted share awards outstanding, June 30, 2016
2,482,511

 
$
40.79

Activity with respect to unvested restricted share awards for the six months ended June 30, 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 granted
670,432

 
43.55

Restricted share awards vested
(781,704
)
 
34.42

Restricted share awards forfeited
(51,818
)
 
38.04

Restricted share awards outstanding, June 30, 2015
2,695,621

 
$
38.09

At June 30, 2016, there were $76,049 (December 31, 2015: $69,143) 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, 2015: 2.4 years).
iii.
Restricted share units
Restricted share units under the LTIP 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. The Company recognized share compensation expenses during the three and six months ended June 30, 2016 of $377 (2015: $279) and $688 (2015: $541), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share units for the six months ended June 30, 2016 was as follows:
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2015
114,337

 
$
38.47

Restricted share units granted
20,129

 
48.69

Restricted share units vested
(23,982
)
 
38.18

Restricted share units issued in lieu of cash dividends
1,629

 
38.47

Restricted share units outstanding, June 30, 2016
112,113

 
$
40.37


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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)


Activity with respect to unvested restricted share units for the six months ended June 30, 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 granted
28,057

 
42.91

Restricted share units vested
(19,455
)
 
34.58

Restricted share units issued in lieu of cash dividends
1,517

 
36.53

Restricted share units forfeited
(892
)
 
35.42

Restricted share units outstanding, June 30, 2015
112,711

 
$
38.47

At June 30, 2016, there were $3,079 (December 31, 2015: $2,790) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.7 years (December 31, 2015: 2.6 years).
iv.
Performance share awards
The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted 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.
The Company recognized share compensation expenses during the three and six months ended June 30, 2016 of $833 (2015: $310) and $2,630 (2015: $623), respectively.
Activity with respect to unvested performance share awards for the six months ended June 30, 2016 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2015
172,594

 
$
40.70

Performance share awards granted
121,844

 
48.69

Performance share awards vested
(57,581
)
 
36.11

Performance share awards conversion adjustment
45,517

 
36.82

Performance share awards outstanding, June 30, 2016
282,374

 
$
44.46

Activity with respect to unvested performance share awards for the six months ended June 30, 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 granted
81,569

 
45.03

Performance share awards vested
(15,344
)
 
31.38

Performance share awards outstanding, June 30, 2015
172,594

 
$
40.70

At June 30, 2016, there were $8,719 (December 31, 2015: $4,011) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.5 years (December 31, 2015: 2.1 years).

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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)


(b)
 Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Restricted share awards
$
9,517

 
$
8,653

 
$
18,646

 
$
17,132

Restricted share units
377

 
279

 
688

 
541

Performance share awards
833

 
310

 
2,630

 
623

Total
$
10,727

 
$
9,242

 
$
21,964

 
$
18,296

 
13. Debt and financing arrangements
(a)
Financing structure
The financing structure at June 30, 2016 was as follows:
 
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
134,437

 
134,437

 
134,437

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
598,187

 
537,987

 
537,987

2010 Senior Notes due 2040
250,000

 
250,000

 
245,261

Total debentures and senior notes payable
848,187

 
787,987

 
783,248

$85,000 syndicated unsecured letter of credit facility
85,000

 
—

 
—

$300,000 syndicated secured letter of credit facility
300,000

 
105,575

 
—

$24,000 secured bi-lateral letter of credit facility
24,000

 
11,805

 
—

$20,000 AlphaCat Re secured letter of credit facility
20,000

 
20,000

 
—

$25,000 IPC bi-lateral facility
25,000

 
5,666

 
—

$236,000 Flagstone bi-lateral facility
236,000

 
195,622

 
—

Total credit and other facilities
690,000

 
338,668

 
—

Total debt and financing arrangements
$
1,538,187

 
$
1,126,655

 
$
783,248


40
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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 financing structure at December 31, 2015 was as follows:
 
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
134,118

 
134,118

 
134,118

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
597,868

 
537,668

 
537,668

2010 Senior Notes due 2040
250,000

 
250,000

 
245,161

Total debentures and senior notes payable
847,868

 
787,668

 
782,829

$85,000 syndicated unsecured letter of credit facility
85,000

 
—

 
—

$300,000 syndicated secured letter of credit facility
300,000

 
235,540

 
—

$24,000 secured bi-lateral letter of credit facility
24,000

 
10,543

 
—

$20,000 AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

$25,000 IPC bi-lateral facility
25,000

 
9,241

 
—

$236,000 Flagstone bi-lateral facility
236,000

 
193,764

 
—

Total credit and other facilities
700,000

 
479,088

 
—

Total debt and financing arrangements
$
1,547,868

 
$
1,266,756

 
$
782,829

(a)
Indicates utilization of commitment amount, not necessarily drawn borrowings.
(b)
Senior notes and junior subordinated deferrable debentures
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures:
Description
 
Issuance date
 
Commitment
 
Maturity date
 
Interest Rate as at
 
Interest payments due
 
Issuance Date
 
June 30, 2016
 
2006 Junior Subordinated Deferrable Debentures
 
June 15, 2006
 
$
150,000

 
June 15, 2036
 
9.069
%
(a)
 
5.831
%
(e)
 
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
 
August 23, 2006
 
$
134,437

 
September 15, 2036
 
3.540
%
(b)
 
6.463
%
(e)
 
Quarterly
2007 Junior Subordinated Deferrable Debentures
 
June 21, 2007
 
$
200,000

 
June 15, 2037
 
8.480
%
(c)
 
5.180
%
(e)
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
June 8, 2007
 
$
88,750

 
July 30, 2037
 
3.000
%
(b)
 
5.900
%
(e)
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
September 20, 2007
 
$
25,000

 
September 15, 2037
 
3.100
%
(b)
 
5.983
%
(e)
 
Quarterly
2010 Senior Notes due 2040
 
January 26, 2010
 
$
250,000

 
January 26, 2040
 
8.875
%
(d)
 
8.875
%
(d)
 
Semi-annually in arrears
(a)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 3.550% thereafter, reset quarterly.
(b)
Floating interest rate of three-month LIBOR plus amount stated, reset quarterly.
(c)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 2.950% thereafter, reset quarterly.
(d)
Fixed interest rate.
(e)
Fixed interest rate as a result of interest rate swap contracts entered into by the Company.

41
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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)


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 are amortized to income over the life of the 2010 Senior Notes and are presented on a net basis within the senior notes payable balance in the Company's Consolidated Balance Sheets. There were no redemptions made during the three and six months ended June 30, 2016 and 2015.
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 2021.
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 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 and six months ended June 30, 2016 and 2015.
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 and six months ended June 30, 2016 and 2015.
Future payments of principal of $537,987 on the debentures discussed above are all expected to be after 2021.
(c)
Credit facilities
i.
$85,000 syndicated unsecured letter of credit facility and $300,000 syndicated secured letter of credit facility
On December 9, 2015, the Company entered into a $85,000 five-year unsecured credit facility with various counterparties as co-documentation agents and the lenders party thereto, which provides for letter of credit and revolving credit availability for the Company (the “Five Year Unsecured Facility”) (the full $85,000 of which is available for letters of credit and/or revolving loans). The Five Year Unsecured Facility was provided by a syndicate of commercial banks. Letters of credit under the Five Year Unsecured Facility are available to support obligations in connection with the reinsurance business of the Company and its subsidiaries. Loans under the Five 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 Five 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 Five Year Unsecured Facility do not exceed $150,000.
Also on December 9, 2015, the Company entered into a $300,000 five-year secured credit facility, with the same parties, which provides for letter of credit availability for the Company (the “Five Year Secured Facility” and together with the Five Year Unsecured Facility, the “Credit Facilities”). The Five Year Secured Facility was also provided by a syndicate of commercial banks. Letters of credit under the Five Year Secured Facility will be available to support obligations in connection with the reinsurance business of the Company and its subsidiaries. The Company may request that existing lenders under the Five 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 Five Year Secured Facility do not exceed $400,000. The obligations of the Company under the Five 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.

42
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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)


As of June 30, 2016, there was $nil outstanding under the Five Year Unsecured Facility and $105,575 in outstanding letters of credit under the Five Year Secured 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 June 30, 2015, to be increased quarterly by an amount equal to 25.0% 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 June 30, 2016, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
ii.
$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 June 30, 2016, there were $5,666 outstanding letters of credit issued under the IPC bi-lateral facility (December 31, 2015: $9,241). As of June 30, 2016, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.
iii.
$24,000 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 June 30, 2016, $11,805 (December 31, 2015: $10,543) 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 June 30, 2016, and throughout the reporting periods presented, the Company is in compliance with all covenants and restrictions under the Secured bi-lateral letter of credit facility.
iv.$20,000 AlphaCat Re secured letter of credit facility
During 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. During the three months ended June 30, 2016 the available amount under the facility was reduced to $20,000 from $30,000. As of June 30, 2016, $20,000 (December 31, 2015: $30,000) of letters of credit were outstanding under this facility. As of June 30, 2016, and throughout the reporting periods presented, AlphaCat Re was in compliance with all covenants and restrictions under the AlphaCat Re secured letter of credit facility.
v.
$236,000 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”). As of June 30, 2016, the Flagstone Bi-Lateral Facility had $195,622 (December 31, 2015: $193,764) letters of credit issued and outstanding. As of June 30, 2016, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility.

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)


(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, Talbot FAL facility and other charges and AlphaCat financing fees as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
2006 Junior Subordinated Deferrable Debentures
$
2,211

 
$
2,211

 
$
4,422

 
$
4,398

2007 Junior Subordinated Deferrable Debentures
1,830

 
1,835

 
3,661

 
3,644

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,244

 
2,243

 
4,489

 
4,461

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,766

 
1,770

 
3,533

 
3,528

2010 Senior Notes due 2040
5,597

 
5,597

 
11,194

 
11,194

Credit facilities
235

 
1,193

 
896

 
2,900

Bank charges, Talbot FAL facility and other charges (a)
206

 
1,252

 
213

 
2,459

AlphaCat fees (b)
77

 
2,581

 
961

 
7,065

Total finance expenses
$
14,166

 
$
18,682

 
$
29,369

 
$
39,649

(a)
On November 30, 2015, the Company terminated its Funds-at-Lloyd’s Standby Letter of Credit Facility (the “Talbot FAL Facility”) provided and arranged by Lloyds Bank plc and ING Bank N.V., London Branch.
(b)
Includes finance expenses incurred by AlphaCat Managers Ltd. in relation to fund raising for the AlphaCat sidecars, the AlphaCat ILS funds and AlphaCat direct.
14. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three and six months ended June 30, 2016 and 2015 was as follows:
Three Months Ended June 30, 2016
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(13,862
)
 
$
251

 
$
(1,827
)
 
$
(15,438
)
Net current period other comprehensive loss, net of tax
(3,287
)
 
479

 
64

 
(2,744
)
Balance end of period, net of tax
$
(17,149
)
 
$
730

 
$
(1,763
)
 
$
(18,182
)
Three Months Ended June 30, 2015
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(11,137
)
 
$
(475
)
 
$
(1,029
)
 
$
(12,641
)
Net current period other comprehensive loss, net of tax
2,763

 
422

 
390

 
3,575

Balance end of period, net of tax
$
(8,374
)
 
$
(53
)
 
$
(639
)
 
$
(9,066
)
Six Months Ended June 30, 2016
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(11,834
)
 
$
334

 
$
(1,069
)
 
$
(12,569
)
Net current period other comprehensive loss, net of tax
(5,315
)
 
396

 
(694
)
 
(5,613
)
Balance end of period, net of tax
$
(17,149
)
 
$
730

 
$
(1,763
)
 
$
(18,182
)

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)


Six Months Ended June 30, 2015
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(8,118
)
 
$
(210
)
 
$
(228
)
 
$
(8,556
)
Net current period other comprehensive loss, net of tax
(256
)
 
157

 
(411
)
 
(510
)
Balance end of period, net of tax
$
(8,374
)
 
$
(53
)
 
$
(639
)
 
$
(9,066
)
15. Commitments and contingencies
(a)
Funds at Lloyd's
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 and investments. The Company provided FAL in the amount of $617,000 for the 2016 underwriting year (2015 underwriting year: $595,100).
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(e) for investments pledged as collateral.
(b)
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 2016 underwriting capacity at Lloyd's of £600,000, at the June 30, 2016 exchange rate of £1 equals $1.33 and assuming the maximum 3% assessment, the Company would be assessed approximately $23,940.
(c)
Investment affiliate commitments
As discussed in Note 6, "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 in respect of the Aquiline II Partnership. The Company’s remaining commitment at June 30, 2016 was $2,934 (December 31, 2015: $3,413).
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. The Company's remaining capital commitment at June 30, 2016 was $587 (December 31, 2015: $683).
On November 7, 2014, the Company entered into a Subscription Agreement with the Aquiline III General Partner, pursuant to which it assumed total capital commitments of $100,000 in respect of the Aquiline III Partnership. The Company’s remaining commitment at June 30, 2016 was $70,379 (December 31, 2015: $86,110).
(d)
AlphaCat commitments
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. On December 29, 2015, the Company assumed an additional capital commitment of $20,000. The Company’s remaining commitment at June 30, 2016 was $nil (December 31, 2015: $10,000).
On December 30, 2015, the Company entered into an agreement with another AlphaCat ILS fund pursuant to which it assumed total capital commitments of $25,000. The Company’s remaining commitment at June 30, 2016 was $nil (December 31, 2015: $9,536).

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)


(e)
Fixed maturity commitments
At June 30, 2016, the Company had an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator. The undrawn amount under the revolver facility participations as at June 30, 2016 was $29,726 (December 31, 2015: $34,888).
During 2016, the Company entered into a loan commitment of $25,000 of which the remaining unfunded commitment as at June 30, 2016 was $4,588.
(f)
Other investment commitments
At June 30, 2016, the Company had capital commitments in certain other investments of $308,000 (December 31, 2015: $263,000). The Company's remaining commitment to these investments at June 30, 2016 was $198,265 (December 31, 2015: $185,548).
16. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counterparty are members of the Company's board of directors.
Aquiline Capital Partners, LLC and its related companies ("Aquiline"), which own 828,458 shares in the Company, 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 and six months ended June 30, 2016 of $65 (2015: $526) and $1,971 (2015: $2,396), respectively with $1,041 included in premiums receivable at June 30, 2016 (December 31, 2015: $82). The Company also recognized reinsurance premiums ceded during the three and six months ended June 30, 2016 of $(17) (2015: $(28)) and $nil (2015: $1), respectively and had reinsurance balances payable of $4 at June 30, 2016 (December 31, 2015: $4). The Company recorded $748 of loss reserves recoverable at June 30, 2016 (December 31, 2015: $790). Earned premium adjustments were recorded during the three and six months ended June 30, 2016 of $473 (2015: $534) and $999 (2015: $1,317), respectively.
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. During the three months ended September 30, 2015, Aquiline disposed of its investment in Conning. Therefore, effective September 30, 2015, Conning was no longer a related party. Investment management fees earned by Conning for the three and six months ended June 30, 2015 were $120 and $405, respectively.
On December 20, 2011, the Company entered into an Agreement with Aquiline Capital and Aquiline II General Partner pursuant to which the Company has assumed 100% of Aquiline Capital's interest in 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. For both the three and six months ended June 30, 2016, the Company incurred $440 in partnership fees (2015:$489 and $937, respectively) and made capital contributions of $nil and $575 (2015: $3,415 and $8,977), respectively.
On November 7, 2014, the Company entered into a Subscription Agreement (the "Subscription Agreement") with 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 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. For both the three and six months ended June 30, 2016, the Company incurred $575 in partnership fees (2015: $369 and $1,239, respectively) and made capital contributions of $15,732 (2015: $nil and $14,138, respectively).
On November 24, 2015, Western World, a subsidiary of the Company, entered into a Stock Purchase Agreement (the “Agreement”) with WRM America Indemnity Holding Company, LLC (the “Seller”), a company owned in part by Aquiline Financial Services Fund LP and Aquiline Financial Services Fund (Offshore) LP (collectively, “Aquiline”), pursuant to which Western World will purchase all of the issued and outstanding shares of capital stock of WRM America Indemnity Company, Inc. ("WRMAI"), a

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)


New York stock property and casualty insurance company. Under the terms of the Agreement, Western World has agreed to pay an amount equal to the sum of: (i) the amount of policyholder surplus of WRMAI as of the Closing Date, as shown on the Closing Balance Sheet, and (ii) $3,750. The Agreement includes customary indemnities and conditions to closing including the approval by The New York Department of Financial Services of the acquisition of control of WRMAI by Western World.
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.
17. Earnings per share
The following table sets forth the computation of basic and earnings per diluted share for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Basic earnings per share
 
 
 
 
 

 
 

Net income available to Validus common shareholders
94,963

 
65,790

 
261,773

 
239,201

Less: Dividends on outstanding warrants
—

 
(1,081
)
 
—

 
(2,486
)
Net income allocated to Validus common shareholders
$
94,963

 
$
64,709

 
$
261,773

 
$
236,715

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
81,950,833

 
84,003,549

 
82,386,047

 
83,627,396

 
 
 
 
 
 
 
 
Basic earnings per share available to Validus common shareholders
$
1.16

 
$
0.77

 
$
3.18

 
$
2.83

 
 
 
 
 
 
 
 
Earnings per diluted share
 
 
 
 
 

 
 

Net income available to Validus common shareholders
94,963

 
65,790

 
261,773

 
239,201

Less: Dividends on outstanding warrants
—

 
—

 
—

 
—

Net income allocated to Validus common shareholders
$
94,963

 
$
65,790

 
$
261,773

 
$
239,201

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
81,950,833

 
84,003,549

 
82,386,047

 
83,627,396

Share equivalents:
 
 
 
 
 
 
 
Warrants
—

 
2,073,231

 
—

 
2,409,149

Stock options
33,796

 
50,160

 
34,837

 
261,792

Unvested restricted shares
1,388,374

 
1,186,214

 
1,364,775

 
1,149,805

Weighted average number of diluted common shares outstanding
83,373,003

 
87,313,154

 
83,785,659

 
87,448,142

 
 
 
 
 
 
 
 
Earnings per diluted share available to Validus common shareholders
$
1.14

 
$
0.75

 
$
3.12

 
$
2.74

Share equivalents that would result in the issuance of common shares of 507,262 (2015: 630,174) and 253,631 (2015: 315,410) were outstanding for the three and six months ended June 30, 2016, respectively, but were not included in the computation of earnings per diluted share because the effect would be antidilutive.

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)


18. 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, Talbot, Western World and AlphaCat. 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.
During the fourth quarter of 2015, the Company made certain changes in its presentation of segment information. The changes were made to present the results of Validus Re, Talbot and Western World on an underwriting income basis and the results of AlphaCat on an asset manager basis. Investment results, foreign exchange, other income (loss), finance expenses and income taxes are now presented on a consolidated basis, reflecting how the Company operationally manages these areas. The Company's assets primarily comprise cash and investments which are managed on a consolidated basis; accordingly, the Company's assets have not been presented on a segmental basis. The presentation changes have not had an effect on the reportable income or loss to any of the operating segments and all prior period disclosures have been revised to conform to current period presentation.
Underwriting income and the AlphaCat asset manager view are non-GAAP financial measures. A reconciliation of segmental income to net income available to Validus is included in the tables below.
Validus Re Segment
The Validus Re segment is focused on treaty 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, technical lines, composite, trade credit and casualty.
Talbot Segment
The Talbot segment is focused on a wide range of marine and energy, political lines, 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.
AlphaCat Segment
The AlphaCat segment leverages the Company’s underwriting and analytical expertise and earns management and performance fees from the Company and other third party investors primarily through the AlphaCat ILS funds and sidecars.
Corporate and Investment information
The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance 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 certain inter segment revenues and expenses and other items that are not allocated to the operating segments.

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)


The following tables summarize the results of our operating segments and "Corporate and Investments":
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Validus Re Segment Information
 
2016
 
2015
 
2016
 
2015
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
285,810

 
$
297,420

 
$
977,478

 
$
1,009,113

Reinsurance premiums ceded
 
(3,196
)
 
(19,378
)
 
(95,691
)
 
(133,155
)
Net premiums written
 
282,614

 
278,042

 
881,787

 
875,958

Change in unearned premiums
 
(35,492
)
 
(13,492
)
 
(390,834
)
 
(358,320
)
Net premiums earned
 
247,122

 
264,550

 
490,953

 
517,638

Other insurance related income (loss)
 
150

 
434

 
(165
)
 
749

Total underwriting revenues
 
247,272

 
264,984

 
490,788

 
518,387

 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
132,139

 
123,405

 
215,007

 
236,533

Policy acquisition costs
 
42,564

 
43,826

 
84,823

 
85,920

General and administrative expenses
 
17,872

 
18,781

 
35,051

 
38,290

Share compensation expenses
 
2,775

 
2,396

 
5,676

 
4,974

Total underwriting deductions
 
195,350

 
188,408

 
340,557

 
365,717

 
 
 
 
 
 
 
 
 
Underwriting income
 
$
51,922

 
$
76,576

 
$
150,231

 
$
152,670

 
 
 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
98.9
%
 
93.5
%
 
90.2
%
 
86.8
%
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
53.5
%
 
46.6
%
 
43.8
%
 
45.7
%
 
 
 
 
 
 
 
 
 
Policy acquisition costs
 
17.2
%
 
16.6
%
 
17.3
%
 
16.6
%
General and administrative expenses (a)
 
8.4
%
 
8.0
%
 
8.3
%
 
8.4
%
Expense ratio
 
25.6
%
 
24.6
%
 
25.6
%
 
25.0
%
Combined ratio
 
79.1
%
 
71.2
%
 
69.4
%
 
70.7
%
(a)
The general and administrative expense ratio includes share compensation expenses.

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)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Talbot Segment Information
 
2016
 
2015
 
2016
 
2015
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
296,067

 
$
293,046

 
$
562,384

 
$
563,123

Reinsurance premiums ceded
 
(27,161
)
 
(37,246
)
 
(114,619
)
 
(128,321
)
Net premiums written
 
268,906

 
255,800

 
447,765

 
434,802

Change in unearned premiums
 
(67,357
)
 
(50,362
)
 
(39,424
)
 
(6,775
)
Net premiums earned
 
201,549

 
205,438

 
408,341

 
428,027

Other insurance related income
 
279

 
40

 
290

 
94

Total underwriting revenues
 
201,828

 
205,478

 
408,631

 
428,121

 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
109,310

 
95,970

 
209,411

 
174,098

Policy acquisition costs
 
43,613

 
47,659

 
87,956

 
96,763

General and administrative expenses
 
39,061

 
35,555

 
77,596

 
72,049

Share compensation expenses
 
3,270

 
3,024

 
6,792

 
5,981

Total underwriting deductions
 
195,254

 
182,208

 
381,755

 
348,891

 
 
 
 
 
 
 
 
 
Underwriting income
 
$
6,574

 
$
23,270

 
$
26,876

 
$
79,230

 
 
 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
90.8
%
 
87.3
%
 
79.6
%
 
77.2
%
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
54.2
%
 
46.7
%
 
51.3
%
 
40.7
%
 
 
 
 
 
 
 
 
 
Policy acquisition costs
 
21.6
%
 
23.2
%
 
21.5
%
 
22.6
%
General and administrative expenses (a)
 
21.1
%
 
18.8
%
 
20.7
%
 
18.2
%
Expense ratio
 
42.7
%
 
42.0
%
 
42.2
%
 
40.8
%
Combined ratio
 
96.9
%
 
88.7
%
 
93.5
%
 
81.5
%
(a)
The general and administrative expense ratio includes share compensation expenses.

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)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Western World Segment Information
 
2016
 
2015
 
2016
 
2015
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
86,971

 
$
79,554

 
$
150,930

 
$
136,501

Reinsurance premiums ceded
 
(5,006
)
 
(5,441
)
 
(9,145
)
 
(8,674
)
Net premiums written
 
81,965

 
74,113

 
141,785

 
127,827

Change in unearned premiums
 
(16,309
)
 
(8,995
)
 
(14,630
)
 
5,173

Net premiums earned
 
65,656

 
65,118

 
127,155

 
133,000

Other insurance related income
 
189

 
276

 
477

 
539

Total underwriting revenues
 
65,845

 
65,394

 
127,632

 
133,539

 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
44,229

 
46,771

 
83,875

 
97,288

Policy acquisition costs
 
15,410

 
9,617

 
29,610

 
13,896

General and administrative expenses
 
11,458

 
8,923

 
23,533

 
19,550

Share compensation expenses
 
542

 
494

 
1,123

 
971

Total underwriting deductions
 
71,639

 
65,805

 
138,141

 
131,705

 
 
 
 
 
 
 
 
 
Underwriting (loss) income
 
$
(5,794
)
 
$
(411
)
 
$
(10,509
)
 
$
1,834

 
 
 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
94.2
%
 
93.2
%
 
93.9
%
 
93.6
%
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
67.4
%
 
71.8
%
 
66.0
%
 
73.1
%
 
 
 
 
 
 
 
 
 
Policy acquisition costs
 
23.5
%
 
14.8
%
 
23.3
%
 
10.5
%
General and administrative expenses (a)
 
18.2
%
 
14.5
%
 
19.3
%
 
15.4
%
Expense ratio
 
41.7
%
 
29.3
%
 
42.6
%
 
25.9
%
Combined ratio
 
109.1
%
 
101.1
%
 
108.6
%
 
99.0
%
(a)
The general and administrative expense ratio includes share compensation expenses.

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)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
AlphaCat Segment Information (a)
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Third party
 
$
3,091

 
$
4,323

 
$
7,818

 
$
8,860

Related party
 
328

 
1,134

 
1,219

 
2,320

Total revenues
 
3,419

 
5,457

 
9,037

 
11,180

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
2,751

 
2,330

 
4,233

 
4,759

Share compensation expenses
 
133

 
150

 
274

 
299

Finance expenses
 
75

 
2,534

 
883

 
6,962

Foreign exchange losses
 
4

 
15

 
12

 
2

Total expenses
 
2,963

 
5,029

 
5,402

 
12,022

 
 
 
 
 
 
 
 
 
Income (loss) before investments from AlphaCat Funds and Sidecars
 
456

 
428

 
3,635

 
(842
)
 
 
 
 
 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (b)
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
541

 
1,273

 
665

 
2,441

AlphaCat ILS Funds - Lower Risk (c)
 
2,075

 
1,894

 
4,582

 
3,180

AlphaCat ILS Funds - Higher Risk (c)
 
692

 
2,376

 
3,128

 
4,801

BetaCat ILS Funds
 
1,113

 
60

 
1,676

 
234

PaCRe
 
—

 
1,738

 
(23
)
 
5,722

Total investment income from AlphaCat Funds and Sidecars
 
4,421

 
7,341

 
10,028

 
16,378

 
 
 
 
 
 
 
 
 
Validus' share of AlphaCat income
 
$
4,877

 
$
7,769

 
$
13,663

 
$
15,536

 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
$
(14
)
 
$
3,241

 
$
(66
)
 
$
43,347

AlphaCat ILS Funds - Lower Risk (c)
 
50,234

 
45,687

 
110,192

 
88,435

AlphaCat ILS Funds - Higher Risk (c)
 
42,010

 
13,867

 
138,330

 
32,818

AlphaCat Direct (d)
 
6,675

 
—

 
17,797

 
—

Total gross premiums written
 
$
98,905

 
$
62,795

 
$
266,253

 
$
164,600

(a)
The results of AlphaCat are presented on an asset manager basis, which is non-GAAP. A reconciliation of segmental income to net income available to Validus is included in the tables below.
(b)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(c)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(d)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

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)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Corporate and Investment Information
 
2016
 
2015
 
2016
 
2015
Investment income
 
 
 
 
 
 
 
 
Net investment income (a)
 
$
36,849

 
$
31,854

 
$
64,772

 
$
61,290

 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
17,872

 
17,092

 
34,055

 
32,698

Share compensation expenses
 
4,007

 
3,178

 
8,099

 
6,071

Finance expenses (a)
 
13,979

 
15,144

 
28,320

 
30,480

Dividends on preferred shares
 
—

 
—

 
—

 
—

Tax expense (benefit)
 
1,706

 
2,549

 
(412
)
 
5,114

Total operating expenses
 
37,564

 
37,963

 
70,062

 
74,363

 
 
 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
 
 
Net realized gains on investments (a)
 
2,520

 
2,104

 
1,434

 
6,284

Change in net unrealized gains (losses) on investments (a)
 
30,052

 
(33,926
)
 
77,130

 
743

(Loss) income from investment affiliate
 
(589
)
 
284

 
(4,702
)
 
3,060

Foreign exchange gains (losses) (a)
 
6,621

 
(3,237
)
 
12,695

 
(6,693
)
Other income (loss)
 
79

 
(608
)
 
756

 
(608
)
Total other items
 
38,683

 
(35,383
)
 
87,313

 
2,786

 
 
 
 
 
 
 
 
 
Total Corporate and Investment Information
 
$
37,968

 
$
(41,492
)
 
$
82,023

 
$
(10,287
)
(a)
These items exclude the components which are included in Validus' share of AlphaCat and amounts which are consolidated from VIEs.

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)


The following tables reconcile the results of our operating segments and "Corporate & Investments" to the Consolidated results of the Company for the periods indicated:
 
Three Months Ended June 30, 2016
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat & Consolidated Variable Interest Entities
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
285,810

 
$
296,067

 
$
86,971

 
$
98,905

 
 
 
$
(3,711
)
 
$
764,042

Reinsurance premiums ceded
(3,196
)
 
(27,161
)
 
(5,006
)
 
(4,577
)
 
 
 
3,711

 
(36,229
)
Net premiums written
282,614

 
268,906

 
81,965

 
94,328

 
 
 
—

 
727,813

Change in unearned premiums
(35,492
)
 
(67,357
)
 
(16,309
)
 
(34,932
)
 
 
 
—

 
(154,090
)
Net premiums earned
247,122

 
201,549

 
65,656

 
59,396

 
 
 
—

 
573,723

Other insurance related income (loss)
150

 
279

 
189

 
3,401

 
 
 
(3,274
)
 
745

Total underwriting revenues
247,272

 
201,828

 
65,845

 
62,797

 
 
 
(3,274
)
 
574,468

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
132,139

 
109,310

 
44,229

 
21,452

 
 
 
—

 
307,130

Policy acquisition costs
42,564

 
43,613

 
15,410

 
6,530

 
 
 
(151
)
 
107,966

General and administrative expenses
17,872

 
39,061

 
11,458

 
6,561

 
17,872

 
(3,136
)
 
89,688

Share compensation expenses
2,775

 
3,270

 
542

 
133

 
4,007

 
—

 
10,727

Total underwriting deductions
195,350

 
195,254

 
71,639

 
34,676

 
21,879

 
(3,287
)
 
515,511

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
51,922

 
$
6,574

 
$
(5,794
)
 
$
28,121

 
$
(21,879
)
 
$
13

 
$
58,957

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other items (a)
 
 
 
 
 
 
1,058

 
22,998

 
 
 
24,056

Dividends on preferred shares
 
 
 
 
 
 
 
 
—

 
 
 
—

Net investment income
 
 
 
 
 
 
3,005

 
36,849

 
(597
)
 
39,257

(Income) attributable to AlphaCat investors
 
 
 
 
 
 
(6,114
)
 
—

 
 
 
(6,114
)
Net (income) attributable to noncontrolling interest
 
 
 
 
 
 
(21,193
)
 
—

 
 
 
(21,193
)
Segmental income (loss)
$
51,922

 
$
6,574

 
$
(5,794
)
 
$
4,877

 
$
37,968

 
$
(584
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
94,963

(a)
Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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)


 
Three Months Ended June 30, 2015
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat & Consolidated Variable Interest Entities
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
297,420

 
$
293,046

 
$
79,554

 
$
62,795

 
 
 
$
(6,647
)
 
$
726,168

Reinsurance premiums ceded
(19,378
)
 
(37,246
)
 
(5,441
)
 
—

 
 
 
6,647

 
(55,418
)
Net premiums written
278,042

 
255,800

 
74,113

 
62,795

 
 
 
—

 
670,750

Change in unearned premiums
(13,492
)
 
(50,362
)
 
(8,995
)
 
(25,213
)
 
 
 
—

 
(98,062
)
Net premiums earned
264,550

 
205,438

 
65,118

 
37,582

 
 
 
—

 
572,688

Other insurance related income (loss)
434

 
40

 
276

 
5,532

 
 
 
(5,574
)
 
708

Total underwriting revenues
264,984

 
205,478

 
65,394

 
43,114

 
 
 
(5,574
)
 
573,396

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
123,405

 
95,970

 
46,771

 
—

 
 
 
—

 
266,146

Policy acquisition costs
43,826

 
47,659

 
9,617

 
3,742

 
 
 
(521
)
 
104,323

General and administrative expenses
18,781

 
35,555

 
8,923

 
8,805

 
17,092

 
(5,131
)
 
84,025

Share compensation expenses
2,396

 
3,024

 
494

 
150

 
3,178

 
—

 
9,242

Total underwriting deductions
188,408

 
182,208

 
65,805

 
12,697

 
20,270

 
(5,652
)
 
463,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
76,576

 
$
23,270

 
$
(411
)
 
$
30,417

 
$
(20,270
)
 
$
78

 
$
109,660

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other items (a)
 
 
 
 
 
 
(1,844
)
 
(53,076
)
 
 
 
(54,920
)
Dividends on preferred shares
 
 
 
 
 
 
 
 
—

 
 
 
—

Net investment income
 
 
 
 
 
 
1,757

 
31,854

 
 
 
33,611

(Income) attributable to AlphaCat investors
 
 
 
 
 
 
—

 
—

 
 
 
—

Net (income) attributable to noncontrolling interest
 
 
 
 
 
 
(22,561
)
 
—

 
 
 
(22,561
)
Segmental income (loss)
$
76,576

 
$
23,270

 
$
(411
)
 
$
7,769

 
$
(41,492
)
 
$
78

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
65,790

(a)
Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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)


 
Six Months Ended June 30, 2016
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat & Consolidated Variable Interest Entities
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
977,478

 
$
562,384

 
$
150,930

 
$
266,253

 
 
 
$
(20,212
)
 
$
1,936,833

Reinsurance premiums ceded
(95,691
)
 
(114,619
)
 
(9,145
)
 
(4,821
)
 
 
 
20,212

 
(204,064
)
Net premiums written
881,787

 
447,765

 
141,785

 
261,432

 
 
 
—

 
1,732,769

Change in unearned premiums
(390,834
)
 
(39,424
)
 
(14,630
)
 
(142,890
)
 
 
 
—

 
(587,778
)
Net premiums earned
490,953

 
408,341

 
127,155

 
118,542

 
 
 
—

 
1,144,991

Other insurance related (loss)
income
(165
)
 
290

 
477

 
9,066

 
 
 
(8,187
)
 
1,481

Total underwriting revenues
490,788

 
408,631

 
127,632

 
127,608

 
 
 
(8,187
)
 
1,146,472

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
215,007

 
209,411

 
83,875

 
23,284

 
 
 
—

 
531,577

Policy acquisition costs
84,823

 
87,956

 
29,610

 
12,687

 
 
 
83

 
215,159

General and administrative expenses
35,051

 
77,596

 
23,533

 
14,017

 
34,055

 
(8,356
)
 
175,896

Share compensation expenses
5,676

 
6,792

 
1,123

 
274

 
8,099

 
—

 
21,964

Total underwriting deductions
340,557

 
381,755

 
138,141

 
50,262

 
42,154

 
(8,273
)
 
944,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
150,231

 
$
26,876

 
$
(10,509
)
 
$
77,346

 
$
(42,154
)
 
$
86

 
$
201,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other items (a)
 
 
 
 
 
 
1,212

 
59,405

 
 
 
60,617

Dividends on preferred shares
 
 
 
 
 
 
 
 
—

 
 
 
—

Net investment income
 
 
 
 
 
 
4,543

 
64,772

 
(597
)
 
68,718

(Income) attributable to AlphaCat investors
 
 
 
 
 
 
(10,714
)
 
—

 
 
 
(10,714
)
Net (income) attributable to noncontrolling interest
 
 
 
 
 
 
(58,724
)
 
—

 
 
 
(58,724
)
Segmental income (loss)
$
150,231

 
$
26,876

 
$
(10,509
)
 
$
13,663

 
$
82,023

 
$
(511
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
261,773


(a)
Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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)


 
Six Months Ended June 30, 2015
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat & Consolidated Variable Interest Entities
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,009,113

 
$
563,123

 
$
136,501

 
$
164,600

 
 
 
$
(27,945
)
 
$
1,845,392

Reinsurance premiums ceded
(133,155
)
 
(128,321
)
 
(8,674
)
 
(4,538
)
 
 
 
27,945

 
(246,743
)
Net premiums written
875,958

 
434,802

 
127,827

 
160,062

 
 
 
—

 
1,598,649

Change in unearned premiums
(358,320
)
 
(6,775
)
 
5,173

 
(90,149
)
 
 
 
—

 
(450,071
)
Net premiums earned
517,638

 
428,027

 
133,000

 
69,913

 
 
 
—

 
1,148,578

Other insurance related income (loss)
749

 
94

 
539

 
11,456

 
 
 
(11,190
)
 
1,648

Total underwriting revenues
518,387

 
428,121

 
133,539

 
81,369

 
 
 
(11,190
)
 
1,150,226

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
236,533

 
174,098

 
97,288

 
(844
)
 
 
 
—

 
507,075

Policy acquisition costs
85,920

 
96,763

 
13,896

 
7,177

 
 
 
(1,022
)
 
202,734

General and administrative expenses
38,290

 
72,049

 
19,550

 
16,059

 
32,698

 
(10,386
)
 
168,260

Share compensation expenses
4,974

 
5,981

 
971

 
299

 
6,071

 
—

 
18,296

Total underwriting deductions
365,717

 
348,891

 
131,705

 
22,691

 
38,769

 
(11,408
)
 
896,365

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
152,670

 
$
79,230

 
$
1,834

 
$
58,678

 
$
(38,769
)
 
$
218

 
$
253,861

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other items (a)
 
 
 
 
 
 
(5,753
)
 
(32,808
)
 
 
 
(38,561
)
Dividends on preferred shares
 
 
 
 
 
 
 
 
—

 
 
 
—

Net investment income
 
 
 
 
 
 
3,350

 
61,290

 
 
 
64,640

(Income) attributable to AlphaCat investors
 
 
 
 
 
 
—

 
—

 
 
 
—

Net (income) attributable to noncontrolling interest
 
 
 
 
 
 
(40,739
)
 
—

 
 
 
(40,739
)
Segmental income (loss)
$
152,670

 
$
79,230

 
$
1,834

 
$
15,536

 
$
(10,287
)
 
$
218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Validus
 
 
 
 
 
 
 
 
 
 
 
 
$
239,201

(a)
Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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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 Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
 
Gross Premiums Written
 
Three Months Ended June 30, 2016
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
129,087

 
$
39,135

 
$
86,971

 
$
37,338

 
$
(417
)
 
$
292,114

 
38.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
16,975

 
30,028

 
—

 
6,496

 
(136
)
 
53,363

 
7.0
%
Australia and New Zealand
1,926

 
2,063

 
—

 
867

 
21

 
4,877

 
0.6
%
Europe
3,267

 
6,855

 
—

 
(145
)
 
216

 
10,193

 
1.3
%
Latin America and Caribbean
5,992

 
27,597

 
—

 
—

 
(2,511
)
 
31,078

 
4.1
%
Japan
39,053

 
3,965

 
—

 
1,721

 
(7
)
 
44,732

 
5.9
%
Canada
1,821

 
2,470

 
—

 
223

 
(36
)
 
4,478

 
0.6
%
Rest of the world (b)
3,259

 
29,806

 
—

 
—

 
(457
)
 
32,608

 
4.3
%
Sub-total, non United States
72,293

 
102,784

 
—

 
9,162

 
(2,910
)
 
181,329

 
23.8
%
Worldwide including United States (a)
35,561

 
34,198

 
—

 
52,394

 
(380
)
 
121,773

 
15.9
%
Other locations non-specific (c)
48,869

 
119,950

 
—

 
11

 
(4
)
 
168,826

 
22.1
%
Total
$
285,810

 
$
296,067

 
$
86,971

 
$
98,905

 
$
(3,711
)
 
$
764,042

 
100.0
%
 
Gross Premiums Written
 
Three Months Ended June 30, 2015
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
171,006

 
$
40,036

 
$
79,554

 
$
23,800

 
$
(428
)
 
$
313,968

 
43.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
12,322

 
30,231

 
—

 
2,173

 
69

 
44,795

 
6.2
%
Australia and New Zealand
1,643

 
1,173

 
—

 
624

 
25

 
3,465

 
0.5
%
Europe
16,282

 
10,584

 
—

 
1,073

 
(84
)
 
27,855

 
3.8
%
Latin America and Caribbean
7,684

 
28,693

 
—

 
—

 
(3,919
)
 
32,458

 
4.5
%
Japan
37,800

 
2,843

 
—

 
1,671

 
(45
)
 
42,269

 
5.8
%
Canada
597

 
2,299

 
—

 
294

 
(48
)
 
3,142

 
0.4
%
Rest of the world (b)
3,026

 
24,982

 
—

 
—

 
(294
)
 
27,714

 
3.8
%
Sub-total, non United States
79,354

 
100,805

 
—

 
5,835

 
(4,296
)
 
181,698

 
25.0
%
Worldwide including United States (a)
37,967

 
32,704

 
—

 
32,410

 
(2,021
)
 
101,060

 
13.9
%
Other locations non-specific (c)
9,093

 
119,501

 
—

 
750

 
98

 
129,442

 
17.8
%
Total
$
297,420

 
$
293,046

 
$
79,554

 
$
62,795

 
$
(6,647
)
 
$
726,168

 
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 since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.


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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)


 
Gross Premiums Written
 
Six Months Ended June 30, 2016
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
424,481

 
$
65,245

 
$
150,930

 
$
62,729

 
$
(1,555
)
 
$
701,830

 
36.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
47,239

 
65,532

 
—

 
22,507

 
(611
)
 
134,667

 
7.0
%
Australia and New Zealand
6,849

 
4,375

 
—

 
4,949

 
(113
)
 
16,060

 
0.8
%
Europe
25,734

 
20,716

 
—

 
3,306

 
(708
)
 
49,048

 
2.5
%
Latin America and Caribbean
19,574

 
51,404

 
—

 
—

 
(5,537
)
 
65,441

 
3.4
%
Japan
39,925

 
4,582

 
—

 
3,221

 
(31
)
 
47,697

 
2.5
%
Canada
3,497

 
3,562

 
—

 
223

 
(87
)
 
7,195

 
0.4
%
Rest of the world (b)
19,947

 
57,290

 
—

 
—

 
(2,342
)
 
74,895

 
3.9
%
Sub-total, non United States
162,765

 
207,461

 
—

 
34,206

 
(9,429
)
 
395,003

 
20.5
%
Worldwide including United States (a)
147,338

 
62,652

 
—

 
167,767

 
(9,214
)
 
368,543

 
19.0
%
Other locations non-specific (c)
242,894

 
227,026

 
—

 
1,551

 
(14
)
 
471,457

 
24.3
%
Total
$
977,478

 
$
562,384

 
$
150,930

 
$
266,253

 
$
(20,212
)
 
$
1,936,833

 
100.0
%
 
Gross Premiums Written
 
Six Months Ended June 30, 2015
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
510,020

 
$
68,094

 
$
136,501

 
$
36,945

 
$
(1,882
)
 
$
749,678

 
40.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
47,288

 
65,173

 
—

 
8,006

 
(933
)
 
119,534

 
6.5
%
Australia and New Zealand
11,507

 
3,049

 
—

 
624

 
(126
)
 
15,054

 
0.8
%
Europe
41,017

 
23,798

 
—

 
2,512

 
(904
)
 
66,423

 
3.6
%
Latin America and Caribbean
16,932

 
51,385

 
—

 
—

 
(7,813
)
 
60,504

 
3.3
%
Japan
39,184

 
3,597

 
—

 
1,671

 
(58
)
 
44,394

 
2.4
%
Canada
2,782

 
3,997

 
—

 
488

 
(124
)
 
7,143

 
0.4
%
Rest of the world (b)
21,680

 
47,988

 
—

 
—

 
(2,542
)
 
67,126

 
3.6
%
Sub-total, non United States
180,390

 
198,987

 
—

 
13,301

 
(12,500
)
 
380,178

 
20.6
%
Worldwide including United States (a)
122,811

 
54,498

 
—

 
110,304

 
(13,659
)
 
273,954

 
14.8
%
Other locations non-specific (c)
195,892

 
241,544

 
—

 
4,050

 
96

 
441,582

 
23.9
%
Total
$
1,009,113

 
$
563,123

 
$
136,501

 
$
164,600

 
$
(27,945
)
 
$
1,845,392

 
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 since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.

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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 August 3, 2016, the Company announced a quarterly cash dividend of $0.35 per each common share, payable on September 30, 2016 to holders of record on September 15, 2016 and a cash dividend of $0.3753472 per depositary share on the outstanding Series A Preferred Shares, payable on September 15, 2016 to the holders of record on September 1, 2016.


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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 and six months ended June 30, 2016 and 2015 and the Company's consolidated financial condition, liquidity and capital resources as at June 30, 2016 and December 31, 2015. 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, 2015, 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, 2015.
For a number 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, 2015 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, Talbot, Western World, and AlphaCat. Validus Re is a Bermuda-based reinsurance segment focused on treaty reinsurance. 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. AlphaCat is a Bermuda based investment adviser managing capital for third parties and the Company in insurance linked securities and other property catastrophe and specialty reinsurance investments. The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance expenses. The Company's corporate expenses, capital servicing and debt costs and investment results are presented separately within the non-segment discussion.
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. The Company's insurance and reinsurance portfolio, as measured by gross premium written, was comprised of 31% insurance and 69% reinsurance for the six months ended June 30, 2016 (2015: 33% insurance and 67% reinsurance), compared to 46% insurance and 54% reinsurance for the year ended December 31, 2015. The change in portfolio composition was driven primarily by the seasonality of reinsurance renewals. 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.
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. 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. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy, but the Company continues to see increased competition and decreased premium rates in most classes of business. In the absence of significant catastrophes in recent years, the market supply of capital is greater than the demand and therefore we expect to see continued pressure on rates in the near term.

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Table of Contents

During the January 2016 renewal season, the Validus Re and AlphaCat segments underwrote $610.5 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), an increase of 12.9% from the prior year renewal period. This increase was primarily driven by an increase in AlphaCat AUM and new business in the casualty and specialty lines, offset by non-renewed business in the property and marine lines due to rate reductions. The U.S. property lines experienced rate declines in the low single-digits, while rate declines in the international property lines were more challenging, with rates down closer to 10%. The marine lines experienced rate declines in the mid-single digits due to the worldwide reduction in oil prices. During the mid year 2016 renewal period, the U.S. property market saw a continuation of the rate trend observed at the January 1 renewals where rate declines were in the low single-digits. However, the rate environment in the international property market proved to be more challenging as market participants actively pursued diversification of exposure, often at the expense of profit, which resulted in average rate reductions of about 10%.
Business written by the Talbot and Western World segments is distributed more evenly throughout the year. Through June 30, 2016, the Talbot segment experienced a whole account rate decrease of approximately 6.2% driven primarily by decreases in energy classes. The Western World segment experienced a whole account rate increase of approximately 1.4% through June 30, 2016.
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:
 
June 30, 2016
 
December 31, 2015
Book value per diluted common share plus accumulated dividends
$55.27
 
$52.49
Book value per diluted common share
$44.41
 
$42.33
Tangible book value per diluted common share
$40.65
 
$38.63
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 $2.78, or 5.3%, from $52.49 at December 31, 2015 to $55.27 at June 30, 2016. Cash dividends per common share are an integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.35 per common share during the six months ended June 30, 2016. On August 3, 2016, the Company announced a quarterly cash dividend of $0.35 per common share payable on September 30, 2016 to holders of record on September 15, 2016 and a cash dividend of $0.3753472 per depositary share on the outstanding Series A preferred shares, payable on September 15, 2016 to the holders of record on September 1, 2016.
Book value per diluted common share plus accumulated dividends is calculated based on total shareholders’ equity available to Validus excluding the liquidation value of the preferred shares of $150.0 million, 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, which are described 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 $2.08, or 4.9%, from $42.33 at December 31, 2015 to $44.41 at June 30, 2016. Growth in book value per diluted common share inclusive of dividends was 1.7% and 1.2% for the three months ended June 30, 2016 and 2015, respectively, and 6.6% and 6.1% for the six months ended June 30, 2016 and 2015, respectively. Book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.” All outstanding warrants expired on December 12, 2015 and no further warrants are anticipated to be issued.
Tangible book value per diluted common share is considered by management to be a measure of returns to common shareholders excluding intangible assets and goodwill, as we believe growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share increased by $2.02, or 5.2%, from $38.63 at December 31, 2015 to $40.65 at June 30, 2016. Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus excluding the liquidation value of the preferred shares of $150.0 million, less intangible assets and goodwill, 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). Tangible book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”

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Table of Contents

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Underwriting income
 
$58,957
 
$109,660
 
$201,876
 
$253,861
Net operating income available to Validus common shareholders
 
$54,900
 
$101,717
 
$172,278
 
$238,591
Annualized return on average equity
 
10.2%
 
7.2%
 
14.2%
 
13.1%
Annualized net operating return on average equity
 
5.9%
 
11.1%
 
9.3%
 
13.1%
Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income, finance expenses, tax (expense) benefit, income (loss) from operating affiliates, (income) attributable to AlphaCat investors, 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 (income) 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 was $59.0 million and $109.7 million for the three months ended June 30, 2016 and 2015, respectively, and $201.9 million and $253.9 million for the six months ended June 30, 2016 and 2015, respectively. Underwriting income is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures."
Net operating income available to Validus common shareholders is defined as net income (loss) 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, operating (income) attributable to noncontrolling interest and dividends on preferred shares. 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, non-recurring items, (income) attributable to noncontrolling interest and dividends on preferred shares. Net operating income available to Validus common shareholders was $54.9 million and $101.7 million for the three months ended June 30, 2016 and 2015, respectively, and $172.3 million and $238.6 million for the six months ended June 30, 2016 and 2015, respectively. Net operating income available to Validus common shareholders is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
Annualized return on average equity represents the return generated on common shareholders’ equity during the period. Annualized return on average equity is calculated by dividing the net income available to Validus common shareholders 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, excluding the liquidation value of the preferred shares of $150.0 million. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed. The annualized return on average equity was 10.2% and 7.2% for the three months ended June 30, 2016 and 2015, respectively, and 14.2% and 13.1% for the six months ended June 30, 2016 and 2015, respectively.
Annualized net operating return on average equity represents the operating return generated on common shareholders’ equity during the period. Annualized net operating return on average equity is calculated by dividing the net operating income available to Validus common shareholders 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, excluding the liquidation value of the preferred shares of $150.0 million. The annualized net operating return on average equity was 5.9% and 11.1% for the three months ended June 30, 2016 and 2015, respectively, and 9.3% and 13.1% for the six months ended June 30, 2016 and 2015, respectively. Annualized net operating return on average equity is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”

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Table of Contents

Second Quarter 2016 Summarized Results of Operations - Consolidated
The following table presents results of operations for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
764,042

 
$
37,874

 
$
726,168

Reinsurance premiums ceded
 
(36,229
)
 
19,189

 
(55,418
)
Net premiums written
 
727,813

 
57,063

 
670,750

Change in unearned premiums
 
(154,090
)
 
(56,028
)
 
(98,062
)
Net premiums earned
 
573,723

 
1,035

 
572,688

Other insurance related income
 
745

 
37

 
708

Total underwriting revenues
 
574,468

 
1,072

 
573,396

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
307,130

 
40,984

 
266,146

Policy acquisition costs
 
107,966

 
3,643

 
104,323

General and administrative expenses
 
89,688

 
5,663

 
84,025

Share compensation expenses
 
10,727

 
1,485

 
9,242

Total underwriting deductions
 
515,511

 
51,775

 
463,736

 
 
 
 
 
 
 
Underwriting income (a)
 
$
58,957

 
$
(50,703
)
 
$
109,660

 
 
 
 
 
 
 
Net investment income
 
39,257

 
5,646

 
33,611

Finance expenses
 
(14,166
)
 
4,516

 
(18,682
)
Dividends on preferred shares
 
—

 
—

 
—

Tax expense
 
(1,706
)
 
843

 
(2,549
)
Income from operating affiliates
 
—

 
(1,738
)
 
1,738

(Income) attributable to AlphaCat investors
 
(6,114
)
 
(6,114
)
 
—

Net (income) attributable to noncontrolling interest
 
(21,328
)
 
733

 
(22,061
)
Net operating income available to Validus common shareholders (a)
 
$
54,900

 
$
(46,817
)
 
$
101,717

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
284,704

 
$
(19,086
)
 
$
303,790

Current period—notable loss events
 
36,915

 
(11,159
)
 
48,074

Current period—non-notable loss events
 
48,292

 
63,292

 
(15,000
)
Change in prior accident years
 
(62,781
)
 
7,937

 
(70,718
)
Total losses and loss expenses
 
$
307,130

 
$
40,984

 
$
266,146

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
95.3
 %
 
2.9

 
92.4
 %
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
49.6
 %
 
(3.4
)
 
53.0
 %
Current period—notable loss events
 
6.4
 %
 
(2.0
)
 
8.4
 %
Current period—non-notable loss events
 
8.4
 %
 
11.0

 
(2.6
)%
Change in prior accident years
 
(10.9
)%
 
1.4

 
(12.3
)%
Losses and loss expenses
 
53.5
 %
 
7.0

 
46.5
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
18.8
 %
 
0.6

 
18.2
 %
General and administrative expenses (b)
 
17.6
 %
 
1.3

 
16.3
 %
Expense ratio
 
36.4
 %
 
1.9

 
34.5
 %
Combined ratio
 
89.9
 %
 
8.9

 
81.0
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Second Quarter 2016 Summarized Results of Operations - Consolidated
Highlights for the second quarter are as follows:
•
Gross premiums written for the three months ended June 30, 2016 were $764.0 million compared to $726.2 million for the three months ended June 30, 2015, an increase of $37.9 million, or 5.2%. The increase was primarily driven by an increase in the AlphaCat, Western World and Talbot segments, partially offset by a decrease in the Validus Re segment discussed further as follows:
◦
Gross premiums written in the AlphaCat segment, on behalf of the Company's variable interest entities ("VIEs"), were $98.9 million for the three months ended June 30, 2016, compared to $62.8 million for the three months ended June 30, 2015, an increase of $36.1 million or 57.5%, primarily due to an increase in the capital base of the AlphaCat ILS Funds.
◦
Gross premiums written for the three months ended June 30, 2016 in the Western World segment were $87.0 million compared to $79.6 million for the three months ended June 30, 2015, an increase of $7.4 million or 9.3%, primarily driven by an increase in the property lines as a result of continued enhancements to the underwriting platform.
◦
Gross premiums written for the three months ended June 30, 2016 in the Talbot segment were $296.1 million compared to $293.0 million for the three months ended June 30, 2015, an increase of $3.0 million or 1.0%.
◦
Gross premiums written for the three months ended June 30, 2016 in the Validus Re segment were $285.8 million compared to $297.4 million for the three months ended June 30, 2015, a decrease of $11.6 million or 3.9%. The decrease was primarily driven by a decrease in the property lines due to the timing of renewals, current market conditions and increased cessions to AlphaCat, partially offset by an increase in the specialty lines.
•
Underwriting revenues for the three months ended June 30, 2016 were $574.5 million compared to $573.4 million for the three months ended June 30, 2015, an increase of $1.1 million or 0.2%.
•
Losses and loss expenses for the three months ended June 30, 2016 were $307.1 million compared to $266.1 million for the three months ended June 30, 2015, an increase of $41.0 million or 15.4%, primarily as a result of increased non-notable loss events incurred during the three months ended June 30, 2016.
•
Gross losses and loss expenses from the Canadian Wildfires notable loss event, defined as consolidated net losses which aggregate to a threshold greater than or equal to $30.0 million, were $73.5 million for the three months ended June 30, 2016. Net of reinsurance recoveries of $36.6 million, the Company's share of net losses and loss expenses from the loss event was $36.9 million, or 6.4 percentage points of the loss ratio during the three months ended June 30, 2016. Net of losses of $6.4 million attributable to AlphaCat investors and noncontrolling interest and reinstatement premiums of $3.6 million, the net loss attributable to the Company was $26.9 million. During the three months ended June 30, 2015, the Company incurred a single notable loss event, Pemex, which resulted in an estimated net loss attributable to the Company of $48.1 million, or 8.4 percentage points of the loss ratio. Including reinstatement premiums of $0.4 million, the net loss attributable to the Company was $48.5 million.
•
Gross losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events, defined as consolidated net losses which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million, were $92.5 million for the three months ended June 30, 2016. Net of reinsurance recoveries of $44.2 million, the Company's aggregate share of net losses and loss expenses from non-notable loss events was $48.3 million, or 8.4 percentage points of the loss ratio. Net of losses of $5.5 million attributable to AlphaCat investors and noncontrolling interest and reinstatement premiums of $9.7 million, the net loss attributable to the Company was $33.1 million. Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were $(15.0) million, or (2.6) percentage points of the loss ratio which represented a reserve release on the first quarter 2015 non-notable loss event, Windstorm Niklas.


65
Table of Contents

•
Loss ratios by line of business were as follows:
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Property
53.1
%
 
41.5

 
11.6
%
Marine
35.1
%
 
(29.7
)
 
64.8
%
Specialty
60.3
%
 
(6.8
)
 
67.1
%
Liability
66.1
%
 
(4.5
)
 
70.6
%
All lines
53.5
%
 
7.0

 
46.5
%
•
The loss ratio for the three months ended June 30, 2016 was 53.5% which included $62.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.9 percentage points compared to a loss ratio for the three months ended June 30, 2015 of 46.5% which included $70.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 12.3 percentage points. The favorable development of $62.8 million for the three months ended June 30, 2016 was primarily due to favorable development on non-event reserves of $56.3 million and favorable development on prior years from events of $6.5 million. The term events refers to aggregate notable and non-notable losses incurred.
•
The combined ratio for the three months ended June 30, 2016 was 89.9% compared to 81.0% for the three months ended June 30, 2015.
•
Policy acquisition costs for the three months ended June 30, 2016 were $108.0 million compared to $104.3 million for the three months ended June 30, 2015, an increase of $3.6 million or 3.5%, primarily driven by an increase in the Western World segment due to the impact of the acquisition fair value adjustments during the three months ended June 30, 2015.
•
Underwriting income for the three months ended June 30, 2016 was $59.0 million compared to $109.7 million for the three months ended June 30, 2015, a decrease of $50.7 million or 46.2% primarily as a result of the changes in underwriting revenues and deductions described above.
•
Net operating income available to Validus common shareholders for the three months ended June 30, 2016 was $54.9 million compared to $101.7 million for the three months ended June 30, 2015, a decrease of $46.8 million, or 46.0%.
•
Net income available to Validus common shareholders for the three months ended June 30, 2016 was $95.0 million compared to $65.8 million for the three months ended June 30, 2015, an increase of $29.2 million, or 44.3%.
•
Annualized return on average equity was 10.2% and annualized net operating return on average equity was 5.9% for the three months ended June 30, 2016 compared to 7.2% and 11.1%, respectively, for the three months ended June 30, 2015.

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Table of Contents

Segment Reporting
Management has determined that the Company operates in four reportable segments Validus Re, Talbot, Western World and AlphaCat.
Second Quarter 2016 Results of Operations - Validus Re Segment
The following table presents underwriting income for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
285,810

 
$
(11,610
)
 
$
297,420

Reinsurance premiums ceded
 
(3,196
)
 
16,182

 
(19,378
)
Net premiums written
 
282,614

 
4,572

 
278,042

Change in unearned premiums
 
(35,492
)
 
(22,000
)
 
(13,492
)
Net premiums earned
 
247,122

 
(17,428
)
 
264,550

Other insurance related income
 
150

 
(284
)
 
434

Total underwriting revenues
 
247,272

 
(17,712
)
 
264,984

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
132,139

 
8,734

 
123,405

Policy acquisition costs
 
42,564

 
(1,262
)
 
43,826

General and administrative expenses
 
17,872

 
(909
)
 
18,781

Share compensation expenses
 
2,775

 
379

 
2,396

Total underwriting deductions
 
195,350

 
6,942

 
188,408

Underwriting income (a)
 
$
51,922

 
$
(24,654
)
 
$
76,576

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
112,676

 
$
(21,419
)
 
$
134,095

Current period—notable loss events
 
17,884

 
(17,305
)
 
35,189

Current period—non-notable loss events
 
32,456

 
47,456

 
(15,000
)
Change in prior accident years
 
(30,877
)
 
2

 
(30,879
)
Total losses and loss expenses
 
$
132,139

 
$
8,734

 
$
123,405

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
98.9
 %
 
5.4

 
93.5
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
45.7
 %
 
(5.0
)
 
50.7
 %
Current period—notable loss events
 
7.2
 %
 
(6.1
)
 
13.3
 %
Current period—non-notable loss events
 
13.1
 %
 
18.8

 
(5.7
)%
Change in prior accident years
 
(12.5
)%
 
(0.8
)
 
(11.7
)%
Losses and loss expenses
 
53.5
 %
 
6.9

 
46.6
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
17.2
 %
 
0.6

 
16.6
 %
General and administrative expenses (b)
 
8.4
 %
 
0.4

 
8.0
 %
Expense ratio
 
25.6
 %
 
1.0

 
24.6
 %
Combined ratio
 
79.1
 %
 
7.9

 
71.2
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.


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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
216,034

 
75.6
%
 
$
(30,591
)
 
(7.3
)
 
$
246,625

 
82.9
%
Marine
 
7,806

 
2.7
%
 
1,261

 
0.5

 
6,545

 
2.2
%
Specialty
 
61,970

 
21.7
%
 
17,720

 
6.8

 
44,250

 
14.9
%
Total
 
$
285,810

 
100.0
%
 
$
(11,610
)
 


 
$
297,420

 
100.0
%
The decrease in gross premiums written in the property lines of $30.6 million was primarily due to reductions in our participation and non-renewals on various programs due to the current rate environment, timing differences on the renewal of certain contracts and increased AlphaCat cessions and was partially offset by an increase in reinstatement premiums. The increase in gross premiums written in the specialty lines of $17.7 million was primarily as a result of new casualty business written during the three months ended June 30, 2016 of $23.0 million, partially offset by decreases in the agriculture lines of $8.2 million arising from earned premium adjustments and final contract estimate adjustments.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
8,892

 
$
(8,730
)
 
$
17,622

Marine
 
(868
)
 
(2,349
)
 
1,481

Specialty
 
(4,828
)
 
(5,103
)
 
275

Total
 
$
3,196

 
$
(16,182
)
 
$
19,378

Reinsurance premiums ceded in the property lines decreased by $8.7 million primarily due to a reduction in the Company's main proportional retrocession program. The decrease in reinsurance premiums ceded in the marine and specialty lines of $2.3 million and $5.1 million, respectively, was primarily due to adjustments on existing business.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
207,142

 
95.9
%
 
$
(21,861
)
 
3.0
 
$
229,003

 
92.9
%
Marine
 
8,674

 
111.1
%
 
3,610

 
33.7
 
5,064

 
77.4
%
Specialty
 
66,798

 
107.8
%
 
22,823

 
8.4
 
43,975

 
99.4
%
Total
 
$
282,614

 
98.9
%
 
$
4,572

 
5.4
 
$
278,042

 
93.5
%
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Table of Contents

Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
105,228

 
$
(1,965
)
 
$
107,193

Marine
 
31,097

 
(13,319
)
 
44,416

Specialty
 
110,797

 
(2,144
)
 
112,941

Total
 
$
247,122

 
$
(17,428
)
 
$
264,550

The decrease in marine lines net premiums earned of $13.3 million was primarily due to lower gross premiums written during the twelve months ended June 30, 2016 compared to the twelve months ended June 30, 2015 along with adjustments to existing business.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
All lines—current period excluding items below
45.7
 %
 
(5.0
)
 
50.7
 %
All lines—current period—notable loss events
7.2
 %
 
(6.1
)
 
13.3
 %
All lines—current period—non-notable loss events
13.1
 %
 
18.8

 
(5.7)
 %
All lines—change in prior accident years
(12.5
)%
 
(0.8
)
 
(11.7
)%
All lines—loss ratio
53.5
 %
 
6.9

 
46.6
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
112,676

 
$
(21,419
)
 
$
134,095

All lines—current period—notable loss events
 
17,884

 
(17,305
)
 
35,189

All lines—current period—non-notable loss events
 
32,456

 
47,456

 
(15,000
)
All lines—change in prior accident years
 
(30,877
)
 
2

 
(30,879
)
All lines—losses and loss expenses
 
$
132,139

 
$
8,734

 
$
123,405

Notable Loss Events
Gross losses and loss expenses from the Canadian Wildfires notable loss event were $54.2 million for the three months ended June 30, 2016. Net of reinsurance recoveries of $36.3 million, the Company's share of net losses and loss expenses was $17.9 million, which represented 7.2 percentage points of the loss ratio. Net of reinstatement premiums of $3.1 million, the effect of this event on underwriting income was a reduction of $14.8 million. Losses and loss expenses from a single notable loss event, Pemex, were $35.2 million for the three months ended June 30, 2015, which represented 13.3 percentage points of the loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on underwriting income was a reduction of $26.1 million.
Non-notable Loss Events
Gross losses and loss expenses from non-notable loss events were $76.7 million for the three months ended June 30, 2016. Net of reinsurance recoveries of $44.2 million, the Company's share of net losses and loss expenses was $32.5 million, which represented 13.1 percentage points of the loss ratio. The Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil loss events, net of reinstatement premiums of $8.5 million, resulted in an aggregate reduction of underwriting income of $24.0 million. Losses and loss expenses from non-notable loss events during the three months ended June 30, 2015 were $(15.0) million, or (5.7) percentage points of the loss ratio, representing a reserve release on the first quarter 2015 non-notable loss event, Windstorm Niklas.


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Table of Contents

Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Property—current period excluding items below
20.3
 %
 
(8.3
)
 
28.6
 %
Property—current period—notable loss events
17.0
 %
 
17.0

 
0.0
 %
Property—current period—non-notable loss events
21.0
 %
 
35.0

 
(14.0)
 %
Property—change in prior accident years
(9.0)
 %
 
5.9

 
(14.9)
 %
Property—loss ratio
49.3
 %
 
49.6

 
(0.3
)%
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
21,361

 
$
(9,251
)
 
$
30,612

Property—current period—notable loss events
 
17,884

 
17,884

 
—

Property—current period—non-notable loss events
 
22,079

 
37,079

 
(15,000
)
Property—change in prior accident years
 
(9,468
)
 
6,460

 
(15,928
)
Property—losses and loss expenses
 
$
51,856

 
$
52,172

 
$
(316
)
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 8.3 percentage points, representing a lower level of attritional losses in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, which included losses of $10.0 million from flooding in Texas that was below the non-notable loss event threshold.
During the three months ended June 30, 2016, the property lines incurred $17.9 million of losses and loss expenses from a single notable loss event, the Canadian Wildfires, which represented 17.0 percentage points of the property lines loss ratio. There were no notable loss events during the three months ended June 30, 2015. Losses and loss expenses on non-notable loss events, the Kumamoto Earthquake and the Texas Hailstorms, were $22.1 million, or 21.0 percentage points of the property lines loss ratio during the three months ended June 30, 2016. Net of reinstatement premiums of $1.8 million, the effect of these loss events on underwriting income was a reduction of $20.3 million. During the three months ended June 30, 2015, the property lines incurred $(15.0) million, or (14.0) percentage points of the property lines loss ratio of losses and loss expenses from non-notable loss events arising from a reserve release on the first quarter 2015 non-notable loss event, Windstorm Niklas. The favorable development on prior accident years for the three months ended June 30, 2016 and 2015 of $9.5 million and $15.9 million, respectively, was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Marine Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Marine—current period excluding items below
52.3
 %
 
9.6

 
42.7
 %
Marine—current period—notable loss events
0.0
 %
 
(75.5
)
 
75.5
 %
Marine—current period—non-notable loss events
2.2
 %
 
2.2

 
0.0
 %
Marine—change in prior accident years
(32.2
)%
 
(7.2
)
 
(25.0
)%
Marine—loss ratio
22.3
 %
 
(70.9
)
 
93.2
 %

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Table of Contents

 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Marine—current period excluding items below
 
$
16,269

 
$
(2,702
)
 
$
18,971

Marine—current period—notable loss events
 
—

 
(33,524
)
 
33,524

Marine—current period—non-notable loss events
 
670

 
670

 
—

Marine—change in prior accident years
 
(10,018
)
 
1,081

 
(11,099
)
Marine—losses and loss expenses
 
$
6,921

 
$
(34,475
)
 
$
41,396

The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, increased by 9.6 percentage points, primarily due to the decrease in net premiums earned in the current quarter as noted above. During the three months ended June 30, 2015, the marine lines incurred $33.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 75.5 percentage points of the marine lines loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on underwriting income was a reduction of $24.4 million. Losses and loss expenses from a single non-notable loss event, Jubilee Oil, were $0.7 million, or 2.2 percentage points of the marine lines loss ratio for the three months ended June 30, 2016. There were no non-notable loss events for the three months ended June 30, 2015. The favorable development of $10.0 million and $11.1 million on prior accident years for the three months ended June 30, 2016 and 2015, respectively, was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Specialty—current period excluding items below
67.7
 %
 
(7.1
)
 
74.8
 %
Specialty—current period—notable loss events
0.0
 %
 
(1.5
)
 
1.5
 %
Specialty—current period—non-notable loss events
8.8
 %
 
8.8

 
0.0
 %
Specialty—change in prior accident years
(10.3
)%
 
(6.9
)
 
(3.4
)%
Specialty—loss ratio
66.2
 %
 
(6.7
)
 
72.9
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Specialty—current period excluding items below
 
$
75,046

 
$
(9,466
)
 
$
84,512

Specialty—current period—notable loss events
 
—

 
(1,665
)
 
1,665

Specialty—current period—non-notable loss events
 
9,707

 
9,707

 
—

Specialty—change in prior accident years
 
(11,391
)
 
(7,539
)
 
(3,852
)
Specialty—losses and loss expenses
 
$
73,362

 
$
(8,963
)
 
$
82,325

The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 7.1 percentage points, representing a lower level of attritional losses in the current quarter. During the three months ended June 30, 2015, the specialty lines incurred $1.7 million of losses and loss expenses from a single notable loss event, Pemex, which represented 1.5 percentage points of the specialty lines loss ratio. Losses and loss expenses from a single non-notable loss event, Jubilee Oil, were $9.7 million, or 8.8 percentage points of the specialty lines loss ratio for the three months ended June 30, 2016. There were no non-notable loss events for the three months ended June 30, 2015. The favorable loss reserve development on prior accident years for the three months ended June 30, 2016 of $11.4 million was primarily due to favorable development on attritional losses and agriculture losses. The favorable development on prior accident years for the three months ended June 30, 2015 of $3.9 million was primarily due to favorable development on attritional losses.

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Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
18,269

 
17.4
%
 
$
(172
)
 
0.2

 
$
18,441

 
17.2
%
Marine
 
5,281

 
17.0
%
 
(2,497
)
 
(0.5
)
 
7,778

 
17.5
%
Specialty
 
19,014

 
17.2
%
 
1,407

 
1.6

 
17,607

 
15.6
%
Total
 
$
42,564

 
17.2
%
 
$
(1,262
)
 
0.6

 
$
43,826

 
16.6
%
The acquisition cost ratio for the marine lines decreased by 0.5 percentage points primarily due to adjustments to existing business and profit commissions. The acquisition costs ratio for the specialty lines increased by 1.6 percentage points primarily due an increase in financial, trade credit, and mortgage lines which carry higher acquisition costs.
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
35,103

 
$
(53,965
)
 
$
89,068

Marine
 
18,895

 
23,653

 
(4,758
)
Specialty
 
18,421

 
5,412

 
13,009

Other insurance related income
 
150

 
(284
)
 
434

Total
 
$
72,569

 
$
(25,184
)
 
$
97,753

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
17,872

 
7.2
%
 
$
(909
)
 
0.1
 
$
18,781

 
7.1
%
Share compensation expenses
 
2,775

 
1.2
%
 
379

 
0.3
 
2,396

 
0.9
%
Total
 
$
20,647

 
8.4
%
 
$
(530
)
 
0.4
 
$
21,177

 
8.0
%
General and administrative expenses and share compensation expenses were comparable for the three months ended June 30, 2016 and 2015.

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Table of Contents

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 expense ratio and the expense ratio. The losses and loss expense 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 expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2016 and 2015.
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Losses and loss expense ratio
53.5
%
 
6.9
 
46.6
%
Policy acquisition cost ratio
17.2
%
 
0.6
 
16.6
%
General and administrative expense ratio (a)
8.4
%
 
0.4
 
8.0
%
Expense ratio
25.6
%
 
1.0
 
24.6
%
Combined ratio
79.1
%
 
7.9
 
71.2
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2016 of 7.9 percentage points compared to the three months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.

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Second Quarter 2016 Results of Operations - Talbot Segment
The following table presents underwriting income for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
296,067

 
$
3,021

 
$
293,046

Reinsurance premiums ceded
 
(27,161
)
 
10,085

 
(37,246
)
Net premiums written
 
268,906

 
13,106

 
255,800

Change in unearned premiums
 
(67,357
)
 
(16,995
)
 
(50,362
)
Net premiums earned
 
201,549

 
(3,889
)
 
205,438

Other insurance related income
 
279

 
239

 
40

Total underwriting revenues
 
201,828

 
(3,650
)
 
205,478

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
109,310

 
13,340

 
95,970

Policy acquisition costs
 
43,613

 
(4,046
)
 
47,659

General and administrative expenses
 
39,061

 
3,506

 
35,555

Share compensation expenses
 
3,270

 
246

 
3,024

Total underwriting deductions
 
195,254

 
13,046

 
182,208

Underwriting income (a)
 
$
6,574

 
$
(16,696
)
 
$
23,270

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
116,824

 
$
(1,847
)
 
$
118,671

Current period—notable loss events
 
11,703

 
(1,182
)
 
12,885

Current period—non-notable loss events
 
9,111

 
9,111

 
—

Change in prior accident years
 
(28,328
)
 
7,258

 
(35,586
)
Total losses and loss expenses
 
$
109,310

 
$
13,340

 
$
95,970

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
90.8
 %
 
3.5

 
87.3
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
58.0
 %
 
0.3

 
57.7
 %
Current period—notable loss events
 
5.8
 %
 
(0.5
)
 
6.3
 %
Current period—non-notable loss events
 
4.5
 %
 
4.5

 
—
 %
Change in prior accident years
 
(14.1
)%
 
3.2

 
(17.3
)%
Losses and loss expenses
 
54.2
 %
 
7.5

 
46.7
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
21.6
 %
 
(1.6
)
 
23.2
 %
General and administrative expenses (b)
 
21.1
 %
 
2.3

 
18.8
 %
Expense ratio
 
42.7
 %
 
0.7

 
42.0
 %
Combined ratio
 
96.9
 %
 
8.2

 
88.7
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
111,646

 
37.8
%
 
$
2,828

 
0.7

 
$
108,818

 
37.1
%
Marine
 
85,992

 
29.0
%
 
(3,717
)
 
(1.6
)
 
89,709

 
30.6
%
Specialty
 
98,429

 
33.2
%
 
3,910

 
0.9

 
94,519

 
32.3
%
Total
 
$
296,067

 
100.0
%
 
$
3,021

 


 
$
293,046

 
100.0
%
Talbot gross premiums written for the three months ended June 30, 2016 translated at 2015 exchange rates would have been $299.6 million, an increase of $6.6 million on the prior year period.
The decrease in gross premiums written in the marine lines of $3.7 million was driven primarily by a decrease in the upstream energy class as a result of reductions in our participation and non-renewals on various programs due to the current rate environment. The increase in gross premiums written in the specialty lines of $3.9 million was primarily due to upwards premium adjustments on prior year policies.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
19,733

 
$
(2,589
)
 
$
22,322

Marine
 
4,729

 
(6,120
)
 
10,849

Specialty
 
2,699

 
(1,376
)
 
4,075

Total
 
$
27,161

 
$
(10,085
)
 
$
37,246

The decrease in reinsurance premiums ceded during the three months ended June 30, 2016 in the marine lines of $6.1 million was primarily due to a higher balance for the three months ended June 30, 2015, which included $9.5 million of reinstatement premiums from Pemex, a 2015 notable loss event.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
91,913

 
82.3
%
 
$
5,417

 
2.8
 
$
86,496

 
79.5
%
Marine
 
81,263

 
94.5
%
 
2,403

 
6.6
 
78,860

 
87.9
%
Specialty
 
95,730

 
97.3
%
 
5,286

 
1.6
 
90,444

 
95.7
%
Total
 
$
268,906

 
90.8
%
 
$
13,106

 
3.5
 
$
255,800

 
87.3
%
The changes in net premiums written and net retention ratios are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Table of Contents

Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
54,859

 
$
(1,080
)
 
$
55,939

Marine
 
73,922

 
(3,874
)
 
77,796

Specialty
 
72,768

 
1,065

 
71,703

Total
 
$
201,549

 
$
(3,889
)
 
$
205,438

The changes in net premiums earned were consistent with the pattern of net premiums written for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
All lines—current period excluding items below
58.0
 %
 
0.3

 
57.7
 %
All lines—current period—notable loss events
5.8
 %
 
(0.5
)
 
6.3
 %
All lines—current period—non-notable loss events
4.5
 %
 
4.5

 
0.0
 %
All lines—change in prior accident years
(14.1)
 %
 
3.2

 
(17.3)
 %
All lines—loss ratio
54.2
 %
 
7.5

 
46.7
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
116,824

 
$
(1,847
)
 
$
118,671

All lines—current period—notable loss events
 
11,703

 
(1,182
)
 
12,885

All lines—current period—non-notable loss events
 
9,111

 
9,111

 
—

All lines—change in prior accident years
 
(28,328
)
 
7,258

 
(35,586
)
All lines - losses and loss expenses
 
$
109,310

 
$
13,340

 
$
95,970

Notable Loss Events
Gross losses and loss expenses from the Canadian Wildfires notable loss event were $12.0 million for the three months ended June 30, 2016. Net of reinsurance recoveries of $0.3 million, the Company's share of net losses and loss expenses was $11.7 million for the three months ended June 30, 2016, which represented 5.8 percentage points of the loss ratio. Net of reinstatement premiums of $0.5 million, the effect of this event on underwriting income was a reduction of $11.2 million. Losses and loss expenses from a single notable loss event, Pemex, were $12.9 million for the three months ended June 30, 2015, which represented 6.3 percentage points of the loss ratio. Including reinstatement premiums payable, the effect of this event on underwriting income was a reduction of $22.4 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2016 were $9.1 million, which represented 4.5 percentage points of the loss ratio. The Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil loss events, net of reinstatement premiums of $1.1 million, resulted in an aggregate reduction of underwriting income of $8.0 million. There were no losses and loss expenses from non-notable loss events during the three months ended June 30, 2015.

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Table of Contents

Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Property—current period excluding items below
63.8
 %
 
5.2
 
58.6
 %
Property—current period—notable loss events
21.3
 %
 
20.5
 
0.8
 %
Property—current period—non-notable loss events
7.8
 %
 
7.8
 
0.0
 %
Property—change in prior accident years
(18.4)
 %
 
11.4
 
(29.8)
 %
Property—loss ratio
74.5
 %
 
44.9
 
29.6
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
34,973

 
$
2,165

 
$
32,808

Property—current period—notable loss events
 
11,703

 
11,277

 
426

Property—current period—non-notable loss events
 
4,274

 
4,274

 
—

Property—change in prior accident years
 
(10,094
)
 
6,589

 
(16,683
)
Property—losses and loss expenses
 
$
40,856

 
$
24,305

 
$
16,551

The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, increased by 5.2 percentage points, representing a higher level of attritional losses in the current quarter.
During the three months ended June 30, 2016, the property lines incurred $11.7 million of losses and loss expenses from a single notable loss event, the Canadian Wildfires, which represented 21.3 percentage points of the property lines loss ratio. Net of reinstatement premiums of $0.5 million, the effect of this event on underwriting income was a reduction of $11.2 million. During the three months ended June 30, 2015, the property lines incurred $0.4 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.8 percentage points of the property lines loss ratio. Net of reinstatement premiums, the effect of this event on underwriting income was a reduction of $0.3 million. Losses and loss expenses on non-notable loss events, the Kumamoto Earthquake and the Texas Hailstorms, were $4.3 million, or 7.8 percentage points of the property lines loss ratio during the three months ended June 30, 2016. Net of reinstatement premiums, the effect of this event on underwriting income was a reduction of $4.2 million. There were no non-notable loss events during the three months ended June 30, 2015.
The favorable development on prior accident years for the three months ended June 30, 2016 of $10.1 million included favorable development on event reserves of $6.0 million and non-event reserves of $4.1 million. The favorable development on prior accident years for the three months ended June 30, 2015 of $16.7 million was primarily due to favorable development on attritional losses and certain events, including the Thailand floods, which was a 2011 notable loss event.
 
Losses and Loss Expense Ratio - Marine Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Marine—current period excluding items below
46.1
 %
 
(4.2
)
 
50.3
 %
Marine—current period—notable loss events
0.0
 %
 
(16.0
)
 
16.0
 %
Marine—current period—non-notable loss events
6.5
 %
 
6.5

 
0.0
 %
Marine—change in prior accident years
(12.1
)%
 
5.7

 
(17.8
)%
Marine—loss ratio
40.5
 %
 
(8.0
)
 
48.5
 %

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Table of Contents

 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Marine—current period excluding items below
 
$
34,013

 
$
(5,097
)
 
$
39,110

Marine—current period—notable loss events
 
—

 
(12,459
)
 
12,459

Marine—current period—non-notable loss events
 
4,837

 
4,837

 
—

Marine—change in prior accident years
 
(8,928
)
 
4,882

 
(13,810
)
Marine—losses and loss expenses
 
$
29,922

 
$
(7,837
)
 
$
37,759

The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 4.2 percentage points, representing a lower level of attritional losses in the current quarter. During the three months ended June 30, 2015, the marine lines incurred $12.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 16.0 percentage points of the marine lines loss ratio. Including reinstatement premiums payable, the effect of this event on underwriting income was a reduction of $22.0 million. Losses and loss expenses from a single non-notable loss event, Jubilee Oil, were $4.8 million, or 6.5 percentage points of the marine lines loss ratio during the three months ended June 30, 2016. Net of reinstatement premiums, the effect of this event on underwriting income was a reduction of $3.8 million. There were no non-notable loss events during the three months ended June 30, 2015. The favorable development on prior accident years for the three months ended June 30, 2016 and 2015 of $8.9 million and $13.8 million, respectively, was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Specialty—current period excluding items below
65.8
 %
 
0.6

 
65.2
 %
Specialty—current period—notable loss events
0.0
 %
 
0.0

 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0

 
0.0
 %
Specialty—change in prior accident years
(12.8
)%
 
(5.7
)
 
(7.1)
 %
Specialty—loss ratio
53.0
 %
 
(5.1
)
 
58.1
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Specialty—current period excluding items below
 
$
47,838

 
$
1,085

 
$
46,753

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(9,306
)
 
(4,213
)
 
(5,093
)
Specialty—losses and loss expenses
 
$
38,532

 
$
(3,128
)
 
$
41,660

The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, increased by 0.6 percentage points, representing higher attritional losses in the current quarter. The favorable development on prior accident years for the three months ended June 30, 2016 and 2015 of $9.3 million and $5.1 million, respectively, was primarily due to favorable development on attritional losses.

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Table of Contents

Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
9,057

 
16.5
%
 
$
836

 
1.8

 
$
8,221

 
14.7
%
Marine
 
17,582

 
23.8
%
 
(4,555
)
 
(4.7
)
 
22,137

 
28.5
%
Specialty
 
16,974

 
23.3
%
 
(327
)
 
(0.8
)
 
17,301

 
24.1
%
Total
 
$
43,613

 
21.6
%
 
$
(4,046
)
 
(1.6
)
 
$
47,659

 
23.2
%
The marine acquisition cost ratio decreased by 4.7 percentage points primarily attributable to lower net earned premiums for the three months ended June 30, 2016 compared to the three months ended June 30, 2015, which included reinstatement premiums from Pemex, a 2015 notable loss event.
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
4,946

 
$
(26,221
)
 
$
31,167

Marine
 
26,418

 
8,518

 
17,900

Specialty
 
17,262

 
4,520

 
12,742

Other insurance related income
 
279

 
239

 
40

Total
 
$
48,905

 
$
(12,944
)
 
$
61,849

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
39,061

 
19.5
%
 
$
3,506

 
2.2
 
$
35,555

 
17.3
%
Share compensation expenses
 
3,270

 
1.6
%
 
246

 
0.1
 
3,024

 
1.5
%
Total
 
$
42,331

 
21.1
%
 
$
3,752

 
2.3
 
$
38,579

 
18.8
%
General and administrative expenses for the three months ended June 30, 2016 translated at 2015 exchange rates would have been $41.0 million, an increase of $5.4 million. This increase was primarily due to a greater retention of costs within the segment and an increase in Lloyd's related costs. Share compensation expenses were comparable for the three months ended June 30, 2016 and 2015.

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Table of Contents

Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2016 and 2015.
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Losses and loss expense ratio
54.2
%
 
7.5

 
46.7
%
Policy acquisition cost ratio
21.6
%
 
(1.6
)
 
23.2
%
General and administrative expense ratio (a)
21.1
%
 
2.3

 
18.8
%
Expense ratio
42.7
%
 
0.7

 
42.0
%
Combined ratio
96.9
%
 
8.2

 
88.7
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2016 of 8.2 percentage points compared to the three months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.


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Second Quarter 2016 Results of Operations - Western World Segment
The following table presents underwriting income for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
86,971

 
$
7,417

 
$
79,554

Reinsurance premiums ceded
 
(5,006
)
 
435

 
(5,441
)
Net premiums written
 
81,965

 
7,852

 
74,113

Change in unearned premiums
 
(16,309
)
 
(7,314
)
 
(8,995
)
Net premiums earned
 
65,656

 
538

 
65,118

Other insurance related income
 
189

 
(87
)
 
276

Total underwriting revenues
 
65,845

 
451

 
65,394

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
44,229

 
(2,542
)
 
46,771

Policy acquisition costs
 
15,410

 
5,793

 
9,617

General and administrative expenses
 
11,458

 
2,535

 
8,923

Share compensation expenses
 
542

 
48

 
494

Total underwriting deductions
 
71,639

 
5,834

 
65,805

Underwriting loss (a)
 
$
(5,794
)
 
$
(5,383
)
 
$
(411
)
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
46,762

 
$
(4,262
)
 
$
51,024

Current period—notable loss events
 
—

 
—

 
—

Current period—non-notable loss events
 
625

 
625

 
—

Change in prior accident years
 
(3,158
)
 
1,095

 
(4,253
)
Total losses and loss expenses
 
$
44,229

 
$
(2,542
)
 
$
46,771

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
94.2
 %
 
1.0

 
93.2
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
71.2
 %
 
(7.1
)
 
78.3
 %
Current period—notable loss events
 
—
 %
 
—

 
—
 %
Current period—non-notable loss events
 
1.0
 %
 
1.0

 
—
 %
Change in prior accident years
 
(4.8
)%
 
1.7

 
(6.5
)%
Losses and loss expenses
 
67.4
 %
 
(4.4
)
 
71.8
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
23.5
 %
 
8.7

 
14.8
 %
General and administrative expenses (b)
 
18.2
 %
 
3.7

 
14.5
 %
Expense ratio
 
41.7
 %
 
12.4

 
29.3
 %
Combined ratio
 
109.1
 %
 
8.0

 
101.1
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.




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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
Property
 
$
26,218

 
30.1
%
 
$
10,332

 
10.1

 
$
15,886

 
20.0
%
Liability
 
60,753

 
69.9
%
 
(2,915
)
 
(10.1
)
 
63,668

 
80.0
%
Total
 
$
86,971

 
100.0
%
 
$
7,417

 
 
 
$
79,554

 
100.0
%
The increase in gross premiums written in the property lines of $10.3 million was primarily due to additional business written in the commercial package property, brokerage property and program flood classes of $3.2 million, $2.9 million and $1.9 million, respectively, as a result of the continued build out of the underwriting platform in short tail lines. Gross premiums written in the liability lines consist largely of commercial package liability, program and other liability business. The decrease in gross premiums written in the liability lines of $2.9 million was driven by the discontinuation of underperforming programs and brokerage general liability lines.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
2,153

 
$
782

 
$
1,371

Liability
 
2,853

 
(1,217
)
 
4,070

Total
 
$
5,006

 
$
(435
)
 
$
5,441

Reinsurance premiums ceded were comparable for the three months ended June 30, 2016 and 2015.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
24,065

 
91.8
%
 
$
9,550

 
0.4
 
$
14,515

 
91.4
%
Liability
 
57,900

 
95.3
%
 
(1,698
)
 
1.7
 
59,598

 
93.6
%
Total
 
$
81,965

 
94.2
%
 
$
7,852

 
1.0
 
$
74,113

 
93.2
%
Net premiums written and the net retention ratios were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
14,177

 
$
3,450

 
$
10,727

Liability
 
51,479

 
(2,912
)
 
54,391

Total
 
$
65,656

 
$
538

 
$
65,118

Net premiums earned were driven by the earnings pattern of net premiums written.

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Table of Contents

Losses and Loss Expenses
 
 
Losses and Loss Expense Ratio - All Lines
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
71.2
 %
 
(7.1
)
 
78.3
 %
All lines—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
All lines—current period—non-notable loss events
 
1.0
 %
 
1.0

 
0.0
 %
All lines—change in prior accident years (a)
 
(4.8
)%
 
1.7

 
(6.5
)%
All lines—loss ratio (a)
 
67.4
 %
 
(4.4
)
 
71.8
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
46,762

 
$
(4,262
)
 
$
51,024

All lines—current period—notable loss events
 
—

 
—

 
—

All lines—current period—non-notable loss events
 
625

 
625

 
—

All lines—change in prior accident years (a)
 
(3,158
)
 
1,095

 
(4,253
)
All lines—losses and loss expenses (a)
 
$
44,229

 
$
(2,542
)
 
$
46,771

(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 $2,892 during the three months ended June 30, 2015, benefiting the loss ratio by 4.4 percentage points. The remaining fair value adjustment of $4,864 was fully amortized during the year ended December 31, 2015.
Notable Loss Events
There were no notable loss events for the three months ended June 30, 2016 or 2015.
Non-notable Loss Events
Losses and loss expenses from the Texas Hailstorms non-notable loss event were $0.6 million, or 1.0 percentage point of the loss ratio for the three months ended June 30, 2016. There were no losses and loss expenses from non-notable loss events during the three months ended June 30, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expense Ratio - Property Lines
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
Property—current period excluding items below
 
78.6
 %
 
(7.6
)
 
86.2
 %
Property—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Property—current period—non-notable loss events
 
4.4
 %
 
4.4

 
0.0
 %
Property—change in prior accident years (a)
 
(11.2
)%
 
(3.1
)
 
(8.1
)%
Property—loss ratio (a)
 
71.8
 %
 
(6.3
)
 
78.1
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
11,133

 
$
1,890

 
$
9,243

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
625

 
625

 
—

Property—change in prior accident years (a)
 
(1,582
)
 
(716
)
 
(866
)
Property—losses and loss expenses (a)
 
$
10,176

 
$
1,799

 
$
8,377

(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 $76 during the three months ended June 30, 2015, increasing the loss ratio by 0.7 percentage points. The remaining fair value adjustment of $127 was fully amortized during the year ended December 31, 2015.

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Table of Contents

The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 7.6 percentage points, representing a lower level of attritional losses in the current quarter.
During the three months ended June 30, 2016, the property lines incurred $0.6 million of losses, or 4.4 percentage points of the property lines loss ratio, resulting from the Texas Hailstorms non-notable loss event and $6.3 million of losses, or 44.4 percentage points of the property lines loss ratio, from other U.S.-based weather events including floods. There were no notable or non-notable loss events during the three months ended June 30, 2015. The favorable development on prior accident years for the three months ended June 30, 2016 and 2015 of $1.6 million and $0.9 million, respectively, primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expense Ratio - Liability Lines
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
Liability—current period excluding items below
 
69.2
 %
 
(7.6
)
 
76.8
 %
Liability—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Liability—change in prior accident years (a)
 
(3.1
)%
 
3.1

 
(6.2
)%
Liability—loss ratio (a)
 
66.1
 %
 
(4.5
)
 
70.6
 %
 
 
Losses and Loss Expenses - Liability Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Liability—current period excluding items above
 
$
35,629

 
$
(6,152
)
 
$
41,781

Liability—current period—notable loss events
 
—

 
—

 
—

Liability—current period—non-notable loss events
 
—

 
—

 
—

Liability—change in prior accident years (a)
 
(1,576
)
 
1,811

 
(3,387
)
Liability—losses and loss expenses (a)
 
$
34,053

 
$
(4,341
)
 
$
38,394

(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 $2,968 during the three months ended June 30, 2015, benefiting the loss ratio by 5.5 percentage points. The remaining fair value adjustment of $4,991 was fully amortized during the year ended December 31, 2015.
The liability lines current quarter loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 7.6 percentage points as Western World discontinued writing business in several underperforming classes during the fourth quarter of 2014. The favorable loss reserve development during the three months ended June 30, 2016 of $1.6 million was due to favorable development on attritional losses, whereas the favorable loss reserve development of $3.4 million during the three months ended June 30, 2015 was primarily due to the amortization of the fair value adjustment as noted in the table footnote above.
Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
3,381

 
23.8
%
 
$
2,656

 
17.0
 
$
725

 
6.8
%
Liability
 
12,029

 
23.4
%
 
3,137

 
7.1
 
8,892

 
16.3
%
Total (a)
 
$
15,410

 
23.5
%
 
$
5,793

 
8.7
 
$
9,617

 
14.8
%
(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 $6,584 during the three months ended June 30, 2015 benefiting the policy acquisition cost ratio by 10.1 percentage points.
The acquisition cost ratio for the property and liability lines increased by 17.0 and 7.1 percentage points, respectively, primarily due to the impact of the acquisition fair value adjustments during the three months ended June 30, 2015 as noted in footnote (a) above.

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Table of Contents

Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
620

 
$
(1,005
)
 
$
1,625

Liability
 
5,397

 
(1,708
)
 
7,105

Other insurance related income
 
189

 
(87
)
 
276

Total
 
$
6,206

 
$
(2,800
)
 
$
9,006

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
11,458

 
17.4
%
 
$
2,535

 
3.7
 
$
8,923

 
13.7
%
Share compensation expenses
 
542

 
0.8
%
 
48

 
—
 
494

 
0.8
%
Total
 
$
12,000

 
18.2
%
 
$
2,583

 
3.7
 
$
9,417

 
14.5
%
The increase in general and administrative expenses of $2.5 million for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 was primarily due to increases in staff related costs associated with the opening of new offices in Arizona, Atlanta and New York. Share compensation expenses were comparable for the three months ended June 30, 2016 and 2015.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2016 and 2015.
 
Three Months Ended June 30,
 
2016
 
Change
 
2015
Losses and loss expense ratio
67.4
%
 
(4.4
)
 
71.8
%
Policy acquisition cost ratio
23.5
%
 
8.7

 
14.8
%
General and administrative expense ratio (a)
18.2
%
 
3.7

 
14.5
%
Expense ratio
41.7
%
 
12.4

 
29.3
%
Combined ratio
109.1
%
 
8.0

 
101.1
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2016 of 8.0% percentage points compared to the three months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.


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Table of Contents

Second Quarter 2016 Results of Operations - AlphaCat Segment
The following table presents Validus' share of the AlphaCat segment income on an asset manager basis for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Revenues
 
 
 
 
 
 
Third party
 
$
3,091

 
$
(1,232
)
 
$
4,323

Related party
 
328

 
(806
)
 
1,134

Total revenues
 
3,419

 
(2,038
)
 
5,457

 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
General and administrative expenses
 
2,751

 
421

 
2,330

Share compensation expenses
 
133

 
(17
)
 
150

Finance expenses
 
75

 
(2,459
)
 
2,534

Foreign exchange gains
 
4

 
(11
)
 
15

Total expenses
 
2,963

 
(2,066
)
 
5,029

 
 
 
 
 
 
 
Income before investments from AlphaCat Funds and Sidecars
 
$
456

 
$
28

 
$
428

 
 
 
 
 
 
 
Investment income from AlphaCat Funds and Sidecars (b)
 
 
 
 
 
 
AlphaCat Sidecars
 
541

 
(732
)
 
1,273

AlphaCat ILS Funds - Lower Risk (c)
 
2,075

 
181

 
1,894

AlphaCat ILS Funds - Higher Risk (c)
 
692

 
(1,684
)
 
2,376

BetaCat ILS Funds
 
1,113

 
1,053

 
60

PaCRe
 
—

 
(1,738
)
 
1,738

Total investment income from AlphaCat Funds and Sidecars
 
4,421

 
(2,920
)
 
7,341

 
 
 
 
 
 
 
Validus' share of AlphaCat income
 
$
4,877

 
$
(2,892
)
 
$
7,769

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
AlphaCat Sidecars
 
$
(14
)
 
$
(3,255
)
 
$
3,241

AlphaCat ILS Funds - Lower Risk (c)
 
50,234

 
4,547

 
45,687

AlphaCat ILS Funds - Higher Risk (c)
 
42,010

 
28,143

 
13,867

AlphaCat Direct (d)
 
6,675

 
6,675

 
—

Total
 
$
98,905

 
$
36,110

 
$
62,795

(a)
In presenting the Company’s results, management has included and discussed the results of AlphaCat, which are presented on an asset manager basis. Validus' share of AlphaCat income is a non-GAAP measure and 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.”
(b)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(c)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(d)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.





86
Table of Contents

Revenues
Revenues earned for the three months ended June 30, 2016 were $3.4 million, of which $0.3 million was earned from related parties, compared to $5.5 million for the three months ended June 30, 2015, of which $1.1 million was earned from related parties. The decrease was primarily as a result of lower performance fees due to losses arising from notable and non-notable loss events during the three months ended June 30, 2016.
Expenses
Total expenses for the three months ended June 30, 2016 were $3.0 million, compared to $5.0 million for the three months ended June 30, 2015, a decrease of $2.1 million. The decrease was primarily due to reduced placement fees incurred in relation to raising new capital during the three months ended June 30, 2016.
Investment income from AlphaCat Funds and Sidecars
Investment income available to Validus common shareholders from the AlphaCat Funds and Sidecars decreased by $2.9 million, primarily due to the wind down of PaCRe, which was off-risk effective January 1, 2016. Excluding PaCRe, investment income available to Validus from the AlphaCat Funds and Sidecars decreased by $1.2 million during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The decrease was primarily due to Validus' share of the net losses and loss expenses of $1.5 million from notable and non-notable loss events during the three months ended June 30, 2016.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2016
 
Change
 
January 1, 2016
Assets Under Management - Related Party
 
 
 
 
 
 
AlphaCat Sidecars
 
$
8,045

 
$
(27,371
)
 
$
35,416

AlphaCat ILS Funds - Lower Risk (b)
 
175,832

 
11,818

 
164,014

AlphaCat ILS Funds - Higher Risk (b)
 
76,287

 
10,823

 
65,464

AlphaCat Direct (c)
 
—

 
—

 
—

BetaCat ILS Funds
 
63,453

 
1,704

 
61,749

Total
 
$
323,617

 
$
(3,026
)
 
$
326,643

 
 
 
 
 
 
 
Assets Under Management - Third Party
 
 
 
 
 
 
AlphaCat Sidecars
 
$
30,078

 
$
(124,308
)
 
$
154,386

AlphaCat ILS Funds - Lower Risk (b)
 
1,226,709

 
124,247

 
1,102,462

AlphaCat ILS Funds - Higher Risk (b)
 
564,513

 
129,662

 
434,851

AlphaCat Direct (c)
 
365,558

 
(2,262
)
 
367,820

BetaCat ILS Funds
 
—

 
—

 
—

Total
 
2,186,858

 
127,339

 
2,059,519

Total Assets Under Management
 
$
2,510,475

 
$
124,313

 
$
2,386,162

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat's assets under management were $2.5 billion as at July 1, 2016, compared to $2.4 billion as at January 1, 2016. Third party assets under management were $2.2 billion as at July 1, 2016, compared to $2.1 billion as at January 1, 2016. During the three months ended July 1, 2016, a total of $206.3 million of capital was raised, of which $190.2 million was raised from third parties. During the three months ended July 1, 2016, $25.8 million was returned to investors. Of this, $23.7 million was returned to third party investors.

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Table of Contents

Second Quarter 2016 Consolidated Non-Segment Results
The following table presents non-segment income and expense items on a consolidated basis for the three months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Investment income
 
 
 
 
 
 
Net investment income (a)
 
$
36,849

 
$
4,995

 
$
31,854

 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
General and administrative expenses
 
17,872

 
780

 
17,092

Share compensation expenses
 
4,007

 
829

 
3,178

Finance expenses (a)
 
13,979

 
(1,165
)
 
15,144

Tax expense
 
1,706

 
(843
)
 
2,549

Total operating expenses
 
37,564

 
(399
)
 
37,963

 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
Net realized gains on investments (a)
 
2,520

 
416

 
2,104

Change in net unrealized gains (losses) on investments (a)
 
30,052

 
63,978

 
(33,926
)
(Loss) income from investment affiliate
 
(589
)
 
(873
)
 
284

Foreign exchange gains (losses) (a)
 
6,621

 
9,858

 
(3,237
)
Other income (loss)
 
79

 
687

 
(608
)
Total other items
 
38,683

 
74,066

 
(35,383
)
 
 
 
 
 
 
 
Total corporate and investment information
 
$
37,968

 
$
79,460

 
$
(41,492
)
(a)
These items exclude the components which are included in the Company's share of AlphaCat and amounts which are consolidated from VIEs.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Managed investments
 
 
 
 
 
 
Fixed maturities and short-term investments
 
$
30,621

 
$
1,188

 
$
29,433

Other investments
 
8,026

 
4,012

 
4,014

Cash and cash equivalents
 
380

 
(47
)
 
427

Securities lending income
 
12

 
6

 
6

Total gross investment income
 
39,039

 
5,159

 
33,880

Investment expenses
 
(2,190
)
 
(164
)
 
(2,026
)
Total managed net investment income
 
$
36,849

 
$
4,995

 
$
31,854

The increase in managed net investment income for the three months ended June 30, 2016 was $5.0 million or 15.7% and was primarily due to increased yield on certain investment funds within other investments. Managed net investment income from other investments includes distributed and undistributed net income from certain investment funds.
The Company's managed yield-bearing portfolio had an annualized effective yield of 2.34% for the three months ended June 30, 2016 compared to 2.02% for the three months ended June 30, 2015, an increase of 32 basis points. Investment yield is calculated by dividing total managed net investment income by the average balance of the yield bearing assets managed by the Company's portfolio managers. Average assets for the period ended is the average of the beginning, ending and intervening quarter end asset balances.

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General and Administrative and Share Compensation Expenses
Corporate general and administrative expenses for the three months ended June 30, 2016 were $17.9 million compared to $17.1 million for the three months ended June 30, 2015, an increase of $0.8 million or 4.6%. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses for the Corporate function and other costs relating to the Company as a whole.
Corporate share compensation expenses for the three months ended June 30, 2016 were $4.0 million compared to $3.2 million for the three months ended June 30, 2015, an increase of $0.8 million or 26.1%.
Finance Expenses
Finance expenses for the three months ended June 30, 2016 were $14.0 million compared to $15.1 million for the three months ended June 30, 2015, a decrease of $1.2 million or 7.7% due to reduced credit facility expenses.
Net Realized Gains and Change in Net Unrealized Gains (Losses) on Investments
Net realized gains on managed investments for the three months ended June 30, 2016 were $2.5 million compared to $2.1 million for the three months ended June 30, 2015, a favorable movement of $0.4 million. The net realized gains primarily resulted from the sale of managed fixed maturity investments.
The change in net unrealized gains on managed investments for the three months ended June 30, 2016 was $30.1 million compared to losses of $33.9 million for the three months ended June 30, 2015, a favorable movement of $64.0 million. The favorable movement was primarily due to the impact of declining interest rates on our fixed maturity investments during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.
(Loss) Income From Investment Affiliate
The (loss) income from investment affiliate relates to the income earned from the Company's investments in the Aquiline Financial Services Fund II L.P. and Fund III L.P. For further details, refer to Note 6, "Investments in affiliates," to the Consolidated Financial Statements in Part I, Item 1.

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Foreign Exchange Gains (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 year-to-year comparisons. The Company's largest foreign currency fluctuation exposure is to the following currencies, with the movement in each currency against the U.S. dollar for the three months ended June 30, 2016 and 2015 shown in the table below:
 
 
Three Months Ended June 30,
U.S. dollar (weakened) strengthened against:
 
2016
 
2015
British Pound sterling
 
7.6
 %
 
(5.3
)%
Euro
 
2.4
 %
 
(3.2
)%
Canadian dollar
 
(0.3
)%
 
(1.3
)%
Swiss franc
 
1.5
 %
 
(3.6
)%
Australian dollar
 
3.0
 %
 
(0.9
)%
New Zealand dollar
 
(3.1
)%
 
10.3
 %
Singapore dollar
 
(0.3
)%
 
(1.6
)%
Japanese yen
 
(8.2
)%
 
2.5
 %
South African rand
 
—
 %
 
0.5
 %
Foreign exchange gains for the three months ended June 30, 2016 were $6.6 million compared to losses of $3.2 million for the three months ended June 30, 2015, a favorable movement of $9.9 million primarily due to the U.S. dollar strengthening against several currencies, notably the British Pound sterling, the Euro, and the Australian dollar.
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.

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Year to Date 2016 Summarized Consolidated Results of Operations and Financial Condition
The following table presents results of operations for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
1,936,833

 
$
91,441

 
$
1,845,392

Reinsurance premiums ceded
 
(204,064
)
 
42,679

 
(246,743
)
Net premiums written
 
1,732,769

 
134,120

 
1,598,649

Change in unearned premiums
 
(587,778
)
 
(137,707
)
 
(450,071
)
Net premiums earned
 
1,144,991

 
(3,587
)
 
1,148,578

Other insurance related income
 
1,481

 
(167
)
 
1,648

Total underwriting revenues
 
1,146,472

 
(3,754
)
 
1,150,226

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
531,577

 
24,502

 
507,075

Policy acquisition costs
 
215,159

 
12,425

 
202,734

General and administrative expenses
 
175,896

 
7,636

 
168,260

Share compensation expenses
 
21,964

 
3,668

 
18,296

Total underwriting deductions
 
944,596

 
48,231

 
896,365

 
 
 
 
 
 
 
Underwriting income (a)
 
$
201,876

 
$
(51,985
)
 
$
253,861

 
 
 
 
 
 
 
Net investment income
 
68,718

 
4,078

 
64,640

Finance expenses
 
(29,369
)
 
10,280

 
(39,649
)
Dividends on preferred shares
 
—

 
—

 
—

Tax benefit (expense)
 
412

 
5,526

 
(5,114
)
(Loss) income from operating affiliates
 
(23
)
 
(5,745
)
 
5,722

(Income) attributable to AlphaCat investors
 
(10,714
)
 
(10,714
)
 
—

Net (income) attributable to noncontrolling interest
 
(58,622
)
 
(17,753
)
 
(40,869
)
Net operating income available to Validus common shareholders (a)
 
$
172,278

 
$
(66,313
)
 
$
238,591

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
562,890

 
$
(50,388
)
 
$
613,278

Current period—notable loss events
 
36,915

 
(11,159
)
 
48,074

Current period—non-notable loss events
 
48,292

 
48,292

 
—

Change in prior accident years
 
(116,520
)
 
37,757

 
(154,277
)
Total losses and loss expenses
 
$
531,577

 
$
24,502

 
$
507,075

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
89.5
 %
 
2.9

 
86.6
 %
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
49.2
 %
 
(4.1
)
 
53.3
 %
Current period—notable loss events
 
3.2
 %
 
(1.0
)
 
4.2
 %
Current period—non-notable loss events
 
4.2
 %
 
4.2

 
—
 %
Change in prior accident years
 
(10.2
)%
 
3.2

 
(13.4
)%
Losses and loss expenses
 
46.4
 %
 
2.3

 
44.1
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
18.8
 %
 
1.1

 
17.7
 %
General and administrative expenses (b)
 
17.3
 %
 
1.1

 
16.2
 %
Expense ratio
 
36.1
 %
 
2.2

 
33.9
 %
Combined ratio
 
82.5
 %
 
4.5

 
78.0
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Year to Date 2016 Summarized Consolidated Results of Operations and Financial Condition
Highlights for the year to date include the following:
•
Gross premiums written for the six months ended June 30, 2016 were $1,936.8 million compared to $1,845.4 million for the six months ended June 30, 2015, an increase of $91.4 million, or 5.0%. The increase was primarily driven by an increase in the AlphaCat and Western World segments, partially offset by decreases in the Talbot and Validus Re segments discussed further as follows:
◦
Gross premiums written for the six months ended June 30, 2016 in the AlphaCat segment, on behalf of the Company's VIEs, were $266.3 million, compared to $164.6 million for the six months ended June 30, 2015, an increase of $101.7 million or 61.8%, primarily due to an increase in the capital base of the AlphaCat ILS Funds.
◦
Gross premiums written for the six months ended June 30, 2016 in the Western World segment were $150.9 million compared to $136.5 million for the six months ended June 30, 2015, an increase of $14.4 million or 10.6%, primarily driven by an increase in the property lines.
◦
Gross premiums written for the six months ended June 30, 2016 in the Validus Re segment were $977.5 million compared to $1,009.1 million for the six months ended June 30, 2015, a decrease of $31.6 million or 3.1%. The decrease was primarily attributable to decreases in the property and marine lines as a result of current market conditions and increased cessions to AlphaCat, partially offset by increased specialty business.
◦
Gross premiums written for the six months ended June 30, 2016 in the Talbot segment were $562.4 million compared to $563.1 million for the six months ended June 30, 2015, a decrease of $0.7 million or 0.1%.
•
Underwriting revenues for the six months ended June 30, 2016 were $1,146.5 million compared to $1,150.2 million for the six months ended June 30, 2015, a decrease of $3.8 million or 0.3%.
•
Losses and loss expenses for the six months ended June 30, 2016 were $531.6 million compared to $507.1 million for the six months ended June 30, 2015, an increase of $24.5 million or 4.8%, primarily as a result of non-notable loss events occurring during the six months ended June 30, 2016.
•
Gross losses and loss expenses from the Canadian Wildfires notable loss event were $73.5 million for the six months ended June 30, 2016. Net of reinsurance recoveries of $36.6 million, the Company's share of net losses and loss expenses from this event were $36.9 million, or 3.2 percentage points of the loss ratio during the six months ended June 30, 2016. Net of losses of $6.4 million attributable to AlphaCat investors and noncontrolling interest and reinstatement premiums of $3.6 million, the net loss attributable to the Company was $26.9 million. During the six months ended June 30, 2015, the Company incurred a single notable loss event, Pemex, which resulted in an estimated net loss attributable to the Company of $48.1 million, or 4.2 percentage points of the loss ratio. Including reinstatement premiums of $0.4 million, the net loss attributable to the Company was $48.5 million.
•
Gross losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $92.5 million for the six months ended June 30, 2016. Net of reinsurance recoveries of $44.2 million, the Company's share of net losses and loss expenses from the non-notable loss events, were $48.3 million, or 4.2 percentage points of the loss ratio. Net of losses of $5.5 million attributable to AlphaCat investors and noncontrolling interest and reinstatement premiums of $9.7 million, the net loss attributable to the Company was $33.1 million. There were no losses and loss expenses from non-notable loss events for the six months ended June 30, 2015.

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Table of Contents

•
Loss ratios by line of business were as follows:
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Property
31.5
%
 
15.8

 
15.7
%
Marine
49.3
%
 
(1.1
)
 
50.4
%
Specialty
58.4
%
 
(5.1
)
 
63.5
%
Liability
64.1
%
 
(9.9
)
 
74.0
%
All lines
46.4
%
 
2.3

 
44.1
%
•
The loss ratio for the six months ended June 30, 2016 was 46.4% which included $116.5 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.2 percentage points compared to a loss ratio for the six months ended June 30, 2015 of 44.1% which included $154.3 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 13.4 percentage points. The favorable development of $116.5 million for the six months ended June 30, 2016 was primarily due to favorable development on non-event reserves of $127.8 million, partially offset by unfavorable development on event reserves of $11.3 million. The term events refers to aggregate notable and non-notable losses incurred.
•
Combined ratio for the six months ended June 30, 2016 was 82.5% compared to 78.0% for the six months ended June 30, 2015.
•
Policy acquisition costs for the six months ended June 30, 2016 were $215.2 million compared to $202.7 million for the six months ended June 30, 2015, an increase of $12.4 million or 6.1%, primarily driven by an increase in the Western World segment due to the impact of the acquisition fair value adjustments during the six months ended June 30, 2015.
•
Underwriting income for the six months ended June 30, 2016 was $201.9 million compared to $253.9 million for the six months ended June 30, 2015, a decrease of $52.0 million or 20.5% primarily as a result of the changes in underwriting revenues and deductions as described above.
•
Net operating income available to Validus common shareholders for the six months ended June 30, 2016 was $172.3 million compared to $238.6 million for the six months ended June 30, 2015, a decrease of $66.3 million, or 27.8%.
•
Net income available to Validus common shareholders for the six months ended June 30, 2016 was $261.8 million compared to $239.2 million for the six months ended June 30, 2015, an increase of $22.6 million, or 9.4%.
•
Annualized return on average equity was 14.2% and annualized net operating return on average equity was 9.3% for the six months ended June 30, 2016 compared to 13.1% and 13.1%, respectively, for the six months ended June 30, 2015.


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Table of Contents

Year to Date 2016 Results of Operations - Validus Re Segment
The following table presents results of operations for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
977,478

 
$
(31,635
)
 
$
1,009,113

Reinsurance premiums ceded
 
(95,691
)
 
37,464

 
(133,155
)
Net premiums written
 
881,787

 
5,829

 
875,958

Change in unearned premiums
 
(390,834
)
 
(32,514
)
 
(358,320
)
Net premiums earned
 
490,953

 
(26,685
)
 
517,638

Other insurance related (loss) income
 
(165
)
 
(914
)
 
749

Total underwriting revenues
 
490,788

 
(27,599
)
 
518,387

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
215,007

 
(21,526
)
 
236,533

Policy acquisition costs
 
84,823

 
(1,097
)
 
85,920

General and administrative expenses
 
35,051

 
(3,239
)
 
38,290

Share compensation expenses
 
5,676

 
702

 
4,974

Total underwriting deductions
 
340,557

 
(25,160
)
 
365,717

Underwriting income (a)
 
$
150,231

 
$
(2,439
)
 
$
152,670

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
221,228

 
$
(35,691
)
 
$
256,919

Current period—notable loss events
 
17,884

 
(17,305
)
 
35,189

Current period—non-notable loss events
 
32,456

 
32,456

 
—

Change in prior accident years
 
(56,561
)
 
(986
)
 
(55,575
)
Total losses and loss expenses
 
$
215,007

 
$
(21,526
)
 
$
236,533

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
90.2
 %
 
3.4

 
86.8
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
45.1
 %
 
(4.5
)
 
49.6
 %
Current period—notable loss events
 
3.6
 %
 
(3.2
)
 
6.8
 %
Current period—non-notable loss events
 
6.6
 %
 
6.6

 
—
 %
Change in prior accident years
 
(11.5
)%
 
(0.8
)
 
(10.7
)%
Losses and loss expenses
 
43.8
 %
 
(1.9
)
 
45.7
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
17.3
 %
 
0.7

 
16.6
 %
General and administrative expenses (b)
 
8.3
 %
 
(0.1
)
 
8.4
 %
Expense ratio
 
25.6
 %
 
0.6

 
25.0
 %
Combined ratio
 
69.4
 %
 
(1.3
)
 
70.7
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
408,671

 
41.8
%
 
$
(57,781
)
 
(4.4
)
 
$
466,452

 
46.2
%
Marine
 
114,409

 
11.7
%
 
(25,536
)
 
(2.2
)
 
139,945

 
13.9
%
Specialty
 
454,398

 
46.5
%
 
51,682

 
6.6

 
402,716

 
39.9
%
Total
 
$
977,478

 
100.0
%
 
$
(31,635
)
 


 
$
1,009,113

 
100.0
%
The decrease in gross premiums written in the property lines of $57.8 million was primarily due to a reduction in business written in the catastrophe excess of loss lines driven by reductions in participation on various programs due to current market conditions and increased AlphaCat cessions. The decrease in gross premiums written in the marine lines of $25.5 million was due to reductions in participation on various programs as a result of current market conditions and business historically written in marine lines being renewed in specialty lines. The increase in gross premiums written in the specialty lines of $51.7 million was primarily due to new casualty lines written during the period of $46.6 million and business historically written in marine lines being renewed in specialty lines.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
81,388

 
$
(33,711
)
 
$
115,099

Marine
 
6,547

 
(218
)
 
6,765

Specialty
 
7,756

 
(3,535
)
 
11,291

Total
 
$
95,691

 
$
(37,464
)
 
$
133,155

Reinsurance premiums ceded in the property and specialty lines decreased by $33.7 million and $3.5 million, respectively, due to a reduction in the Company's main proportional retrocession program during the six months ended June 30, 2016.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
327,283

 
80.1
%
 
$
(24,070
)
 
4.8

 
$
351,353

 
75.3
%
Marine
 
107,862

 
94.3
%
 
(25,318
)
 
(0.9
)
 
133,180

 
95.2
%
Specialty
 
446,642

 
98.3
%
 
55,217

 
1.1

 
391,425

 
97.2
%
Total
 
$
881,787

 
90.2
%
 
$
5,829

 
3.4

 
$
875,958

 
86.8
%
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Table of Contents

Net Premiums Earned
 
 
Net Premiums Earned
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
207,380

 
$
(10,150
)
 
$
217,530

Marine
 
65,968

 
(16,679
)
 
82,647

Specialty
 
217,605

 
144

 
217,461

Total
 
$
490,953

 
$
(26,685
)
 
$
517,638

The decrease in property and marine lines net premiums earned of $10.2 million and $16.7 million, respectively was as a result of lower gross premiums written during the six months ended June 30, 2016, offset by the earned impact of the reduction in reinsurance premiums ceded.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
All lines—current period excluding items below
45.1
 %
 
(4.5
)
 
49.6
 %
All lines—current period—notable loss events
3.6
 %
 
(3.2
)
 
6.8
 %
All lines—current period—non-notable loss events
6.6
 %
 
6.6

 
0.0
 %
All lines—change in prior accident years
(11.5
)%
 
(0.8
)
 
(10.7
)%
All lines—loss ratio
43.8
 %
 
(1.9
)
 
45.7
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
221,228

 
$
(35,691
)
 
$
256,919

All lines—current period—notable loss events
 
17,884

 
(17,305
)
 
35,189

All lines—current period—non-notable loss events
 
32,456

 
32,456

 
—

All lines—change in prior accident years
 
(56,561
)
 
(986
)
 
(55,575
)
All lines—losses and loss expenses
 
$
215,007

 
$
(21,526
)
 
$
236,533

Notable Loss Events
Gross losses and loss expenses from the Canadian Wildfires notable loss event were $54.2 million for the six months ended June 30, 2016. Net of reinsurance recoveries of $36.3 million, the Company's share of net losses and loss expenses was $17.9 million for the six months ended June 30, 2016, which represented 3.6 percentage points of the loss ratio. Net of reinstatement premiums of $3.1 million, the effect of this event on underwriting income was a reduction of $14.8 million. Losses and loss expenses from a single notable loss event, Pemex, were $35.2 million for the six months ended June 30, 2015, which represented 6.8 percentage points of the loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on underwriting income was a reduction of $26.1 million.
Non-notable Loss Events
Gross losses and loss expenses from non-notable loss events were $76.7 million for the six months ended June 30, 2016. Net of reinsurance recoveries of $44.2 million, the Company's share of net losses and loss expenses was $32.5 million, which represented 6.6 percentage points of the loss ratio. The Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil loss events, net of reinstatement premiums of $8.5 million, resulted in an aggregate reduction of underwriting income of $24.0 million. There were no losses and loss expenses from non-notable loss events during the six months ended June 30, 2015.

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Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Property—current period excluding items below
19.8
 %
 
(3.0
)
 
22.8
 %
Property—current period—notable loss events
8.6
 %
 
8.6

 
0.0
 %
Property—current period—non-notable loss events
10.6
 %
 
10.6

 
0.0
 %
Property—change in prior accident years
(15.6
)%
 
(1.4
)
 
(14.2
)%
Property—loss ratio
23.4
 %
 
14.8

 
8.6
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
40,951

 
$
(8,577
)
 
$
49,528

Property—current period—notable loss events
 
17,884

 
17,884

 
—

Property—current period—non-notable loss events
 
22,079

 
22,079

 
—

Property—change in prior accident years
 
(32,300
)
 
(1,476
)
 
(30,824
)
Property—losses and loss expenses
 
$
48,614

 
$
29,910

 
$
18,704

The property lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 3.0 percentage points, representing a lower level of attritional losses in the current period.
During the six months ended June 30, 2016, the property lines incurred $17.9 million of losses and loss expenses from a single notable loss event, the Canadian Wildfires, which represented 8.6 percentage points of the property lines loss ratio. Losses and loss expenses on non-notable loss events, the Kumamoto Earthquake and the Texas Hailstorms, were $22.1 million, or 10.6 percentage points of the property lines loss ratio during the six months ended June 30, 2016. Net of reinstatement premiums of $1.8 million, the effect of these loss events on underwriting income was a reduction of $20.3 million. There were no notable or non-notable loss events during the six months ended June 30, 2015. The favorable development on prior accident years for the six months ended June 30, 2016 of $32.3 million included favorable development on prior years from non-event reserves of $21.5 million and event reserves of $10.8 million, including the Chilean earthquake, a third quarter 2015 notable loss event. The favorable development on prior accident years for the six months ended June 30, 2015 of $30.8 million was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Marine Lines
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Marine—current period excluding items below
50.2
 %
 
(5.8
)
 
56.0
 %
Marine—current period—notable loss events
0.0
 %
 
(40.6
)
 
40.6
 %
Marine—current period—non-notable loss events
1.0
 %
 
1.0

 
0.0
 %
Marine—change in prior accident years
(9.8
)%
 
9.2

 
(19.0
)%
Marine—loss ratio
41.4
 %
 
(36.2
)
 
77.6
 %
 
 
Losses and Loss Expenses - Marine Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Marine—current period excluding items below
 
$
33,125

 
$
(13,147
)
 
$
46,272

Marine—current period—notable loss events
 
—

 
(33,524
)
 
33,524

Marine—current period—non-notable loss events
 
670

 
670

 
—

Marine—change in prior accident years
 
(6,463
)
 
9,206

 
(15,669
)
Marine—losses and loss expenses
 
$
27,332

 
$
(36,795
)
 
$
64,127


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Table of Contents

The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 5.8 percentage points, representing a lower level of attritional losses in the current period.
During the six months ended June 30, 2015, the marine lines incurred $33.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 40.6 percentage points of the marine lines loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on underwriting income was a reduction of $24.4 million. Losses and loss expenses from a single non-notable loss event, Jubilee Oil, were $0.7 million, or 1.0 percentage point of the marine lines loss ratio for the six months ended June 30, 2016. The favorable development of $6.5 million on prior accident years for the six months ended June 30, 2016 was primarily due to favorable development on non-event reserves of $18.5 million, and was partially offset by unfavorable development on event reserves of $12.0 million, whereas the favorable development of $15.7 million on prior accident years for the six months ended June 30, 2015 was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Specialty—current period excluding items below
67.6
 %
 
(6.5
)
 
74.1
 %
Specialty—current period—notable loss events
0.0
 %
 
(0.8
)
 
0.8
 %
Specialty—current period—non-notable loss events
4.5
 %
 
4.5

 
0.0
 %
Specialty—change in prior accident years
(8.2
)%
 
(4.0
)
 
(4.2
)%
Specialty—loss ratio
63.9
 %
 
(6.8
)
 
70.7
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Specialty—current period excluding items below
 
$
147,152

 
$
(13,967
)
 
$
161,119

Specialty—current period—notable loss events
 
—

 
(1,665
)
 
1,665

Specialty—current period—non-notable loss events
 
9,707

 
9,707

 
—

Specialty—change in prior accident years
 
(17,798
)
 
(8,716
)
 
(9,082
)
Specialty—losses and loss expenses
 
$
139,061

 
$
(14,641
)
 
$
153,702

The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 6.5 percentage points, representing a lower level of attritional losses in the current period. During the six months ended June 30, 2015, the specialty lines incurred $1.7 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.8 percentage points of the specialty lines loss ratio. Losses and loss expenses from a single non-notable loss event, Jubilee Oil, were $9.7 million, or 4.5 percentage points of the specialty lines loss ratio for the six months ended June 30, 2016. The favorable loss reserve development on prior accident years for the six months ended June 30, 2016 of $17.8 million was primarily due to favorable development on attritional losses and agriculture losses. The favorable development on prior accident years for the six months ended June 30, 2015 of $9.1 million was primarily due to favorable development on attritional losses.

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Table of Contents

Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
37,213

 
17.9
%
 
$
537

 
1.0

 
$
36,676

 
16.9
%
Marine
 
10,193

 
15.5
%
 
(5,413
)
 
(3.4
)
 
15,606

 
18.9
%
Specialty
 
37,417

 
17.2
%
 
3,779

 
1.7

 
33,638

 
15.5
%
Total
 
$
84,823

 
17.3
%
 
$
(1,097
)
 
0.7

 
$
85,920

 
16.6
%
The acquisition cost ratio for the marine lines decreased by 3.4 percentage points primarily due to adjustments to existing business and the impact of reinstatement premiums. The acquisition costs ratio for the specialty lines increased by 1.7 percentage points primarily due an increase in financial, trade credit, and mortgage lines which carry higher acquisition costs.
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
121,553

 
$
(40,597
)
 
$
162,150

Marine
 
28,443

 
25,529

 
2,914

Specialty
 
41,127

 
11,006

 
30,121

Other insurance related (loss) income
 
(165
)
 
(914
)
 
749

Total
 
$
190,958

 
$
(4,976
)
 
$
195,934

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
35,051

 
7.1
%
 
$
(3,239
)

(0.3
)
 
$
38,290

 
7.4
%
Share compensation expenses
 
5,676

 
1.2
%
 
702


0.2

 
4,974

 
1.0
%
Total
 
$
40,727

 
8.3
%
 
$
(2,537
)
 
(0.1
)
 
$
43,264

 
8.4
%
General and administrative expenses decreased by $3.2 million, or 8.5%, primarily due to reductions in office related expenses and staff costs. Share compensation expenses were comparable for the six months ended June 30, 2016 and 2015.

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Table of Contents

Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2016 and 2015.
 
Select Underwriting Ratios
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Losses and loss expense ratio
43.8
%
 
(1.9
)
 
45.7
%
Policy acquisition cost ratio
17.3
%
 
0.7

 
16.6
%
General and administrative expense ratio (a)
8.3
%
 
(0.1
)
 
8.4
%
Expense ratio
25.6
%
 
0.6

 
25.0
%
Combined ratio
69.4
%
 
(1.3
)
 
70.7
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The decrease in the combined ratio for the six months ended June 30, 2016 of 1.3 percentage points compared to the six months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.

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Table of Contents

Year to Date 2016 Results of Operations - Talbot Segment
The following table presents results of operations for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
562,384

 
$
(739
)
 
$
563,123

Reinsurance premiums ceded
 
(114,619
)
 
13,702

 
(128,321
)
Net premiums written
 
447,765

 
12,963

 
434,802

Change in unearned premiums
 
(39,424
)
 
(32,649
)
 
(6,775
)
Net premiums earned
 
408,341

 
(19,686
)
 
428,027

Other insurance related income
 
290

 
196

 
94

Total underwriting revenues
 
408,631

 
(19,490
)
 
428,121

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
209,411

 
35,313

 
174,098

Policy acquisition costs
 
87,956

 
(8,807
)
 
96,763

General and administrative expenses
 
77,596

 
5,547

 
72,049

Share compensation expenses
 
6,792

 
811

 
5,981

Total underwriting deductions
 
381,755

 
32,864

 
348,891

Underwriting income (a)
 
$
26,876

 
$
(52,354
)
 
$
79,230

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
239,645

 
$
(8,841
)
 
$
248,486

Current period—notable loss events
 
11,703

 
(1,182
)
 
12,885

Current period—non-notable loss events
 
9,111

 
9,111

 
—

Change in prior accident years
 
(51,048
)
 
36,225

 
(87,273
)
Total losses and loss expenses
 
$
209,411

 
$
35,313

 
$
174,098

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
79.6
 %
 
2.4

 
77.2
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
58.7
 %
 
0.6

 
58.1
 %
Current period—notable loss events
 
2.9
 %
 
(0.1
)
 
3.0
 %
Current period—non-notable loss events
 
2.2
 %
 
2.2

 
—
 %
Change in prior accident years
 
(12.5
)%
 
7.9

 
(20.4
)%
Losses and loss expenses
 
51.3
 %
 
10.6

 
40.7
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
21.5
 %
 
(1.1
)
 
22.6
 %
General and administrative expenses (b)
 
20.7
 %
 
2.5

 
18.2
 %
Expense ratio
 
42.2
 %
 
1.4

 
40.8
 %
Combined ratio
 
93.5
 %
 
12.0

 
81.5
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
Property
 
$
181,413

 
32.2
%
 
$
934

 
0.1

 
$
180,479

 
32.1
%
Marine
 
174,212

 
31.0
%
 
(25,866
)
 
(4.5
)
 
200,078

 
35.5
%
Specialty
 
206,759

 
36.8
%
 
24,193

 
4.4

 
182,566

 
32.4
%
Total
 
$
562,384

 
100.0
%
 
$
(739
)
 
 
 
$
563,123

 
100.0
%
Talbot gross premiums written for the six months ended June 30, 2016 translated at 2015 exchange rates would have been $569.1 million, an increase of $6.0 million on the prior year period.
The decrease in gross premiums written in the marine lines of $25.9 million includes an increase in premium estimates of $9.9 million, which had no impact on earned premium. After the impact of these changes in estimates, the decrease was primarily driven by decreases in the upstream energy class as a result of reductions in our participation and non-renewals on various programs due to the current rate environment. The increase in gross premiums written in the specialty lines of $24.2 million includes an increase in premium estimates of $21.0 million, which had no impact on earned premium. After the impact of these changes in estimates, the increase was primarily driven by increases in the contingency and accident and health classes as a result of increased renewals and upwards premium adjustments, respectively.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
53,789

 
$
(8,788
)
 
$
62,577

Marine
 
26,101

 
(2,577
)
 
28,678

Specialty
 
34,729

 
(2,337
)
 
37,066

Total
 
$
114,619

 
$
(13,702
)
 
$
128,321

The decrease in reinsurance premiums ceded in the property lines of $8.8 million was due primarily to a decrease in proportional premium adjustments on prior period policies and an overall decrease in reinstatement premiums during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The decrease in reinsurance premiums ceded in the marine lines of $2.6 million was primarily due to a higher balance for the six months ended June 30, 2015, which was primarily attributable to $9.5 million of reinstatement premiums from Pemex, a 2015 notable loss event and was partially offset by reinstatement premiums on other events and favorable adjustments on prior period contracts.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net
Premiums
Written
 
% of Gross Premiums Written
 
Net
Premiums
Written
 
% of Gross Premiums Written
 
Net
Premiums
Written
 
% of Gross Premiums Written
Property
 
$
127,624

 
70.3
%
 
$
9,722

 
5.0

 
$
117,902

 
65.3
%
Marine
 
148,111

 
85.0
%
 
(23,289
)
 
(0.7
)
 
171,400

 
85.7
%
Specialty
 
172,030

 
83.2
%
 
26,530

 
3.5

 
145,500

 
79.7
%
Total
 
$
447,765

 
79.6
%
 
$
12,963

 
2.4

 
$
434,802

 
77.2
%
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Table of Contents

Net Premiums Earned
 
 
Net Premiums Earned
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
115,855

 
$
4,712

 
$
111,143

Marine
 
143,793

 
(26,260
)
 
170,053

Specialty
 
148,693

 
1,862

 
146,831

Total
 
$
408,341

 
$
(19,686
)
 
$
428,027

Excluding the impact of the changes in estimates noted above on gross premiums written, which had no impact on earned premium, the changes in the net premiums earned were consistent with the pattern of net premiums written for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Losses and Loss Expenses
 
 
Losses and Loss Expense Ratio - All Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
58.7
 %
 
0.6

 
58.1
 %
All lines—current period—notable loss events
 
2.9
 %
 
(0.1
)
 
3.0
 %
All lines—current period—non-notable loss events
 
2.2
 %
 
2.2

 
0.0
 %
All lines—change in prior accident years
 
(12.5
)%
 
7.9

 
(20.4
)%
All lines—loss ratio
 
51.3
 %
 
10.6

 
40.7
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
239,645

 
$
(8,841
)
 
$
248,486

All lines—current period—notable loss events
 
11,703

 
(1,182
)
 
12,885

All lines—current period—non-notable loss events
 
9,111

 
9,111

 
—

All lines—change in prior accident years
 
(51,048
)
 
36,225

 
(87,273
)
All lines—losses and loss expenses
 
$
209,411

 
$
35,313

 
$
174,098

Notable Loss Events
Gross losses and loss expenses from the Canadian Wildfires notable loss event were $12.0 million for the six months ended June 30, 2016. Net of reinsurance recoveries of $0.3 million, the Company's share of net losses and loss expenses was $11.7 million, which represented 2.9 percentage points of the loss ratio. Net of reinstatement premiums of $0.5 million, the effect of this event on underwriting income was a reduction of $11.2 million. Losses and loss expenses from a single notable loss event, Pemex, were $12.9 million for the six months ended June 30, 2015, which represented 3.0 percentage points of the loss ratio. Including reinstatement premiums payable, the effect of this event on underwriting income was a reduction of $22.4 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2016 were $9.1 million, which represented 2.2 percentage points of the loss ratio. The Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil loss events, net of reinstatement premiums of $1.1 million, resulted in an aggregate reduction of underwriting income of $8.0 million. There were no losses and loss expenses from non-notable loss events during the six months ended June 30, 2015.


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Table of Contents

Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expense Ratio - Property Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Property—current period excluding items below
 
59.4
 %
 
(3.7
)
 
63.1
 %
Property—current period—notable loss events
 
10.1
 %
 
9.7

 
0.4
 %
Property—current period—non-notable loss events
 
3.7
 %
 
3.7

 
0.0
 %
Property—change in prior accident years
 
(24.6
)%
 
9.1

 
(33.7
)%
Property—loss ratio
 
48.6
 %
 
18.8

 
29.8
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
68,874

 
$
(1,306
)
 
$
70,180

Property—current period—notable loss events
 
11,703

 
11,277

 
426

Property—current period—non-notable loss events
 
4,274

 
4,274

 
—

Property—change in prior accident years
 
(28,540
)
 
8,895

 
(37,435
)
Property—losses and loss expenses
 
$
56,311

 
$
23,140

 
$
33,171

The property lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 3.7 percentage points, representing a lower level of attritional losses incurred in the current period.
During the six months ended June 30, 2016, the property lines incurred $11.7 million of losses and loss expenses from a single notable loss event, the Canadian Wildfires, which represented 10.1 percentage points of the property lines loss ratio. Net of reinstatement premiums of $0.5 million, the effect of this event on underwriting income was a reduction of $11.2 million. During the six months ended June 30, 2015, the property lines incurred $0.4 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.4 percentage points of the property lines loss ratio. Net of reinstatement premiums of $0.1 million, the effect of this event on underwriting income was a reduction of $0.3 million. Losses and loss expenses on non-notable loss events, the Kumamoto Earthquake and the Texas Hailstorms, were $4.3 million, or 3.7 percentage points of the property lines loss ratio during the six months ended June 30, 2016. There were no non-notable loss events during the six months ended June 30, 2015.
The favorable development on prior accident years for the six months ended June 30, 2016 of $28.5 million included favorable development on event reserves of $8.7 million and non-event reserves of $19.8 million. The favorable development on prior accident years for the six months ended June 30, 2015 of $37.4 million was primarily due to favorable development on attritional losses and certain events, including the Thailand floods, which was a 2011 notable loss event.
 
 
Losses and Loss Expense Ratio - Marine Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Marine—current period excluding items below
 
53.6
 %
 
2.4

 
51.2
 %
Marine—current period—notable loss events
 
0.0
 %
 
(7.3
)
 
7.3
 %
Marine—current period—non-notable loss events
 
3.4
 %
 
3.4

 
0.0
 %
Marine—change in prior accident years
 
(4.1
)%
 
17.3

 
(21.4
)%
Marine—loss ratio
 
52.9
 %
 
15.8

 
37.1
 %

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Table of Contents

 
 
Losses and Loss Expenses - Marine Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Marine—current period excluding items below
 
$
77,156

 
$
(9,831
)
 
$
86,987

Marine—current period—notable loss events
 
—

 
(12,459
)
 
12,459

Marine—current period—non-notable loss events
 
4,837

 
4,837

 
—

Marine—change in prior accident years
 
(5,964
)
 
30,360

 
(36,324
)
Marine—losses and loss expenses
 
$
76,029

 
$
12,907

 
$
63,122

The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, increased by 2.4 percentage points, primarily due to the decrease in net premiums earned during the six months ended June 30, 2016 as noted above. During the six months ended June 30, 2015, the marine lines incurred $12.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 7.3 percentage points of the marine lines loss ratio. Including reinstatement premiums payable, the effect of this event on underwriting income was a reduction of $22.0 million. Losses and loss expenses on a single non-notable loss event, Jubilee Oil, were $4.8 million, or 3.4 percentage points of the marine lines loss ratio during the six months ended June 30, 2016. There were no non-notable loss events during the six months ended June 30, 2015. The favorable development on prior accident years for the six months ended June 30, 2016 of $6.0 million was comprised of favorable development on attritional losses of $25.1 million partially offset by adverse development of $19.1 million on prior years events. The adverse development was driven by reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015. The favorable development on prior accident years for the six months ended June 30, 2015 of $36.3 million was primarily due to favorable development on attritional losses.
 
 
Losses and Loss Expense Ratio - Specialty Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Specialty—current period excluding items below
 
62.9
 %
 
0.7

 
62.2
 %
Specialty—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Specialty—current period—non-notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Specialty—change in prior accident years
 
(11.1
)%
 
(1.9
)
 
(9.2
)%
Specialty—loss ratio
 
51.8
 %
 
(1.2
)
 
53.0
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Specialty—current period excluding items above
 
$
93,615

 
$
2,296

 
$
91,319

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(16,544
)
 
(3,030
)
 
(13,514
)
Specialty—losses and loss expenses
 
$
77,071

 
$
(734
)
 
$
77,805

The specialty lines current period loss ratio, excluding the impact of the change in prior accident years, increased by 0.7 percentage points, representing a higher level of attritional losses in the current period. The favorable development of $16.5 million and $13.5 million on prior accident years for the six months ended June 30, 2016 and 2015, respectively, was primarily due to favorable development on attritional losses.

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Table of Contents

Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
17,474

 
15.1
%
 
$
1,385

 
0.6

 
$
16,089

 
14.5
%
Marine
 
36,097

 
25.1
%
 
(9,392
)
 
(1.6
)
 
45,489

 
26.7
%
Specialty
 
34,385

 
23.1
%
 
(800
)
 
(0.9
)
 
35,185

 
24.0
%
Total
 
$
87,956

 
21.5
%
 
$
(8,807
)
 
(1.1
)
 
$
96,763

 
22.6
%
The marine acquisition cost ratio decreased by 1.6 percentage points primarily attributable to lower net earned premiums for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, which included reinstatement premiums from Pemex, a 2015 notable loss event.
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
42,070

 
$
(19,813
)
 
$
61,883

Marine
 
31,667

 
(29,775
)
 
61,442

Specialty
 
37,237

 
3,396

 
33,841

Other insurance related income
 
290

 
196

 
94

Total
 
$
111,264

 
$
(45,996
)
 
$
157,260

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
77,596

 
19.0
%
 
$
5,547

 
2.2
 
$
72,049

 
16.8
%
Share compensation expenses
 
6,792

 
1.7
%
 
811

 
0.3
 
5,981

 
1.4
%
Total
 
$
84,388

 
20.7
%
 
$
6,358

 
2.5
 
$
78,030

 
18.2
%
General and administrative expenses for the six months ended June 30, 2016 translated at 2015 exchange rates would have been $81.8 million, an increase of $9.8 million. This increase was primarily due to a greater retention of costs within the segment and an increase in Lloyd's related costs. Share compensation expenses were comparable for the six months ended June 30, 2016 and 2015.

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Table of Contents

Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2016 and 2015.
 
 
Select Underwriting Ratios
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Losses and loss expense ratio
 
51.3
%
 
10.6

 
40.7
%
Policy acquisition cost ratio
 
21.5
%
 
(1.1
)
 
22.6
%
General and administrative expense ratio (a)
 
20.7
%
 
2.5

 
18.2
%
Expense ratio
 
42.2
%
 
1.4

 
40.8
%
Combined ratio
 
93.5
%
 
12.0

 
81.5
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the six months ended June 30, 2016 of 12.0 percentage points compared to the six months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.


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Year to Date 2016 Results of Operations - Western World Segment
The following table presents results of operations for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
150,930

 
$
14,429

 
$
136,501

Reinsurance premiums ceded
 
(9,145
)
 
(471
)
 
(8,674
)
Net premiums written
 
141,785

 
13,958

 
127,827

Change in unearned premiums
 
(14,630
)
 
(19,803
)
 
5,173

Net premiums earned
 
127,155

 
(5,845
)
 
133,000

Other insurance related income
 
477

 
(62
)
 
539

Total underwriting revenues
 
127,632

 
(5,907
)
 
133,539

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
83,875

 
(13,413
)
 
97,288

Policy acquisition costs
 
29,610

 
15,714

 
13,896

General and administrative expenses
 
23,533

 
3,983

 
19,550

Share compensation expenses
 
1,123

 
152

 
971

Total underwriting deductions
 
138,141

 
6,436

 
131,705

Underwriting (loss) income (a)
 
$
(10,509
)
 
$
(12,343
)
 
$
1,834

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses
 
 
 
 
 
 
Current period excluding items below
 
$
90,834

 
$
(17,039
)
 
$
107,873

Current period—notable loss events
 
—

 
—

 
—

Current period—non-notable loss events
 
625

 
625

 
—

Change in prior accident years
 
(7,584
)
 
3,001

 
(10,585
)
Total losses and loss expenses
 
$
83,875

 
$
(13,413
)
 
$
97,288

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
93.9
 %
 
0.3

 
93.6
 %
 
 
 
 
 
 
 
Losses and loss expense ratio
 
 
 
 
 
 
Current period excluding items below
 
71.5
 %
 
(9.6
)
 
81.1
 %
Current period—notable loss events
 
—
 %
 
—

 
—
 %
Current period—non-notable loss events
 
0.5
 %
 
0.5

 
—
 %
Change in prior accident years
 
(6.0
)%
 
2.0

 
(8.0
)%
Losses and loss expenses
 
66.0
 %
 
(7.1
)
 
73.1
 %
 
 
 
 
 
 
 
Policy acquisition costs
 
23.3
 %
 
12.8

 
10.5
 %
General and administrative expense (b)
 
19.3
 %
 
3.9

 
15.4
 %
Expense ratio
 
42.6
 %
 
16.7

 
25.9
 %
Combined ratio
 
108.6
 %
 
9.6

 
99.0
 %
(a)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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.”
(b)
The general and administrative expense ratio includes share compensation expenses.



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Table of Contents

Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
Property
 
$
41,644

 
27.6
%
 
$
16,372

 
9.1

 
$
25,272

 
18.5
%
Liability
 
109,286

 
72.4
%
 
(1,943
)
 
(9.1
)
 
111,229

 
81.5
%
Total
 
$
150,930

 
100.0
%
 
$
14,429

 
 
 
$
136,501

 
100.0
%
The property lines consist largely of commercial package property, program and brokerage business. The increase in gross premiums written in the property lines of $16.4 million was primarily due to increases in the commercial package property, brokerage property and program flood classes of $4.3 million, $6.8 million and $2.4 million, respectively, as a result of the continued build out of the underwriting platform in short tail lines. Gross premiums written in the liability lines consist largely of commercial package liability, program and other liability business. The decrease in gross premiums written in the liability lines of $1.9 million was driven by reductions in underperforming programs and brokerage general liability lines that have been discontinued.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
3,707

 
$
1,770

 
$
1,937

Liability
 
5,438

 
(1,299
)
 
6,737

Total
 
$
9,145

 
$
471

 
$
8,674

Reinsurance premiums ceded were driven by the factors highlighted above in respect of gross premiums written for the six months ended June 30, 2016 and 2015.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
37,937

 
91.1
%
 
$
14,602

 
(1.2
)
 
$
23,335

 
92.3
%
Liability
 
103,848

 
95.0
%
 
(644
)
 
1.1

 
104,492

 
93.9
%
Total
 
$
141,785

 
93.9
%
 
$
13,958

 
0.3

 
$
127,827

 
93.6
%
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
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
26,372

 
$
4,950

 
$
21,422

Liability
 
100,783

 
(10,795
)
 
111,578

Total
 
$
127,155

 
$
(5,845
)
 
$
133,000

Net premiums earned were driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. Net premiums earned exceeded net premiums written for the six months ended June 30, 2015 as Western World discontinued writing business in several underperforming classes during the three months ended December 31, 2014, including binding authority commercial auto business, a large bar and tavern program and certain brokerage general liability habitational accounts.

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Table of Contents

Losses and Loss Expenses
 
 
Losses and Loss Expense Ratio - All Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
71.5
 %
 
(9.6
)
 
81.1
 %
All lines—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
All lines—current period—non-notable loss events
 
0.5
 %
 
0.5

 
0.0
 %
All lines—change in prior accident years (a)
 
(6.0
)%
 
2.0

 
(8.0
)%
All lines—loss ratio (a)
 
66.0
 %
 
(7.1
)
 
73.1
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
All lines—current period excluding items below
 
$
90,834

 
$
(17,039
)
 
$
107,873

All lines—current period—notable loss events
 
—

 
—

 
—

All lines—current period—non-notable loss events
 
625

 
625

 
—

All lines—change in prior accident years (a)
 
(7,584
)
 
3,001

 
(10,585
)
All lines—losses and loss expenses (a)
 
$
83,875

 
$
(13,413
)
 
$
97,288

(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 $6,115 during the six months ended June 30, 2015, benefiting the loss ratio by 4.6 percentage points. The remaining fair value adjustment of $4,864 was fully amortized during the year ended December 31, 2015.
Notable Loss Events
There were no notable loss events for the six months ended June 30, 2016 or 2015.
Non-notable Loss Events
Losses and loss expenses from the Texas Hailstorm non-notable loss event were $0.6 million, representing 0.5 percentage points of the loss ratio for the six months ended June 30, 2016. There were no losses and loss expenses from non-notable loss events during the six months ended June 30, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expense Ratio - Property Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Property—current period excluding items below
 
78.2
 %
 
(7.3
)
 
85.5
 %
Property—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Property—current period—non-notable loss events
 
2.4
 %
 
2.4

 
0.0
 %
Property—change in prior accident years (a)
 
(7.7
)%
 
9.1

 
(16.8
)%
Property—loss ratio (a)
 
72.9
 %
 
4.2

 
68.7
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property—current period excluding items below
 
$
20,629

 
$
2,316

 
$
18,313

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
625

 
625

 
—

Property—change in prior accident years (a)
 
(2,023
)
 
1,571

 
(3,594
)
Property—losses and loss expenses (a)
 
$
19,231

 
$
4,512

 
$
14,719

(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 $161 during the six months ended June 30, 2015, increasing the loss ratio by 0.8 percentage points. The remaining fair value adjustment of $127 was fully amortized during the year ended December 31, 2015.

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Table of Contents

The property lines current period loss ratio, excluding the impact of notable and non-notable loss events and the change in prior accident years, decreased by 7.3 percentage points, representing a lower level of attritional losses in the current period.
During the six months ended June 30, 2016, the property lines incurred $0.6 million of losses, or 2.4 percentage points of the property lines loss ratio, resulting from the Texas Hailstorms non-notable loss event and $8.5 million of losses, or 32.2 percentage points of the property lines loss ratio, from other U.S.-based weather events including floods. There were no non-notable loss events during the six months ended June 30, 2015. The favorable development on prior accident years for the six months ended June 30, 2016 and 2015 of $2.0 million and $3.6 million, respectively, primarily related to favorable development on attritional losses.
 
 
Losses and Loss Expense Ratio - Liability Lines
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
Liability—current period excluding items below
 
69.6
 %
 
(10.7
)
 
80.3
 %
Liability—current period—notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
 
0.0

 
0.0
 %
Liability—change in prior accident years (a)
 
(5.5
)%
 
0.8

 
(6.3
)%
Liability—loss ratio (a)
 
64.1
 %
 
(9.9
)
 
74.0
 %
 
 
Losses and Loss Expenses - Liability Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Liability—current period excluding items above
 
$
70,205

 
$
(19,355
)
 
$
89,560

Liability—current period—notable loss events
 
—

 
—

 
—

Liability—current period—non-notable loss events
 
—

 
—

 
—

Liability—change in prior accident years (a)
 
(5,561
)
 
1,430

 
(6,991
)
Liability—losses and loss expenses (a)
 
$
64,644

 
$
(17,925
)
 
$
82,569

(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 $6,276 during the six months ended June 30, 2015, benefiting the loss ratio by 5.6 percentage points. The remaining fair value adjustment of $4,991 was fully amortized during the year ended December 31, 2015.
The liability lines current period loss ratio, excluding the impact of the change in prior accident years, decreased by 10.7 percentage points as Western World discontinued writing business in several underperforming classes during the fourth quarter of 2014. The favorable loss reserve development during the six months ended June 30, 2016 of $5.6 million was due to favorable development on attritional losses, whereas the favorable loss reserve development of $7.0 million during the six months ended June 30, 2015 was primarily due to the amortization of the fair value adjustment as noted in the table footnote above.
Policy Acquisition Costs
 
 
Policy Acquisition Costs
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
6,283

 
23.8
%
 
$
4,734

 
16.6
 
$
1,549

 
7.2
%
Liability
 
23,327

 
23.1
%
 
10,980

 
12.0
 
12,347

 
11.1
%
Total (a)
 
$
29,610

 
23.3
%
 
$
15,714

 
12.8
 
$
13,896

 
10.5
%
(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 $16,992 during the six months ended June 30, 2015, benefiting the policy acquisition cost ratio by 12.8 percentage points.
The acquisition cost ratio for the property and liability lines increased by 16.6 and 12.0 percentage points, respectively, primarily due to the impact of the acquisition fair value adjustments during the six months ended June 30, 2015 as noted in footnote (a) above.

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Table of Contents

Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Underwriting Income Before General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Property
 
$
858

 
$
(4,296
)
 
$
5,154

Liability
 
12,812

 
(3,850
)
 
16,662

Other insurance related income
 
477

 
(62
)
 
539

Total
 
$
14,147

 
$
(8,208
)
 
$
22,355

The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
General and Administrative and Share Compensation Expenses
 
 
General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30,
 
 
2016
 
Change
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
23,533

 
18.4
%
 
$
3,983

 
3.7
 
$
19,550

 
14.7
%
Share compensation expenses
 
1,123

 
0.9
%
 
152

 
0.2
 
971

 
0.7
%
Total
 
$
24,656

 
19.3
%
 
$
4,135

 
3.9
 
$
20,521

 
15.4
%
The increase in general and administrative expenses of $4.0 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 was primarily due to increases in staff related costs associated with the opening of new offices in Arizona, Atlanta and New York. Share compensation expenses were comparable for the six months ended June 30, 2016 and 2015.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2016 and 2015.
 
Six Months Ended June 30,
 
2016
 
Change
 
2015
Losses and loss expense ratio
66.0
%
 
(7.1
)
 
73.1
%
Policy acquisition cost ratio
23.3
%
 
12.8

 
10.5
%
General and administrative expense ratio (a)
19.3
%
 
3.9

 
15.4
%
Expense ratio
42.6
%
 
16.7

 
25.9
%
Combined ratio
108.6
%
 
9.6

 
99.0
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the six months ended June 30, 2016 of 9.6% percentage points compared to the six months ended June 30, 2015 was due to the movement in the underlying ratios as discussed above.



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Table of Contents

Year to Date 2016 Results of Operations - AlphaCat Segment
The following table presents Validus' share of the AlphaCat segment income on an asset manager basis for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Revenues
 
 
 
 
 
 
Third party
 
$
7,818

 
$
(1,042
)
 
$
8,860

Related party
 
1,219

 
(1,101
)
 
2,320

Total revenues
 
9,037

 
(2,143
)
 
11,180

 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
General and administrative expenses
 
4,233

 
(526
)
 
4,759

Share compensation expenses
 
274

 
(25
)
 
299

Finance expenses
 
883

 
(6,079
)
 
6,962

Foreign exchange gains
 
12

 
10

 
2

Total expenses
 
5,402

 
(6,620
)
 
12,022

 
 
 
 
 
 
 
Income (loss) before investments from AlphaCat Funds and Sidecars
 
$
3,635

 
$
4,477

 
$
(842
)
 
 
 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (b)
 
 
 
 
AlphaCat Sidecars
 
665

 
(1,776
)
 
2,441

AlphaCat ILS Funds - Lower Risk (c)
 
4,582

 
1,402

 
3,180

AlphaCat ILS Funds - Higher Risk (c)
 
3,128

 
(1,673
)
 
4,801

BetaCat ILS Funds
 
1,676

 
1,442

 
234

PaCRe
 
(23
)
 
(5,745
)
 
5,722

Total investment income from AlphaCat Funds and Sidecars
 
10,028

 
(6,350
)
 
16,378

 
 
 
 
 
 
 
Validus' share of AlphaCat income
 
$
13,663

 
$
(1,873
)
 
$
15,536

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
AlphaCat Sidecars
 
$
(66
)
 
$
(43,413
)
 
$
43,347

AlphaCat ILS Funds - Lower Risk (c)
 
110,192

 
21,757

 
88,435

AlphaCat ILS Funds - Higher Risk (c)
 
138,330

 
105,512

 
32,818

AlphaCat Direct (d)
 
17,797

 
17,797

 
—

Total
 
$
266,253

 
$
101,653

 
$
164,600

(a)
In presenting the Company’s results, management has included and discussed the results of AlphaCat, which are presented on an asset manager basis. Validus' share of AlphaCat income is a non-GAAP measure and 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.”
(b)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(c)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(d)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.


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Revenues
Revenues earned for the six months ended June 30, 2016 were $9.0 million, of which $1.2 million were earned from related parties, compared to $11.2 million for the six months ended June 30, 2015, of which $2.3 million were earned from related parties. The overall decrease in revenues of $2.1 million was primarily due to lower performance fees due to losses arising from notable and non-notable loss events during the six months ended June 30, 2016.
Expenses
Total expenses for the six months ended June 30, 2016 were $5.4 million, compared to $12.0 million for the six months ended June 30, 2015, a decrease of $6.6 million. The decrease was primarily attributable to reduced placement fees incurred in relation to raising new capital during the six months ended June 30, 2016.
Investment income from AlphaCat Funds and Sidecars
Investment income available to Validus common shareholders from the AlphaCat Funds and Sidecars decreased by $6.4 million, primarily due to the wind down of PaCRe, which was off-risk effective January 1, 2016. Excluding PaCRe, investment income available to Validus from the AlphaCat Funds and Sidecars was $10.1 million for the six months ended June 30, 2016 as compared to $10.7 million for the six months ended June 30, 2015, a decrease of $0.6 million. The decrease was primarily due to Validus' share of the net losses and loss expenses of $1.5 million from notable and non-notable loss events during the six months ended June 30, 2016.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2016
 
Change
 
January 1, 2016
Assets Under Management - Related Party
 
 
 
 
 
 
AlphaCat Sidecars
 
$
8,045

 
$
(27,371
)
 
$
35,416

AlphaCat ILS Funds - Lower Risk (b)
 
175,832

 
11,818

 
164,014

AlphaCat ILS Funds - Higher Risk (b)
 
76,287

 
10,823

 
65,464

AlphaCat Direct (c)
 
—

 
—

 
—

BetaCat ILS Funds
 
63,453

 
1,704

 
61,749

Total
 
$
323,617

 
$
(3,026
)
 
$
326,643

 
 
 
 
 
 
 
Assets Under Management - Third Party
 
 
 
 
 
 
AlphaCat Sidecars
 
$
30,078

 
$
(124,308
)
 
$
154,386

AlphaCat ILS Funds - Lower Risk (b)
 
1,226,709

 
124,247

 
1,102,462

AlphaCat ILS Funds - Higher Risk (b)
 
564,513

 
129,662

 
434,851

AlphaCat Direct (c)
 
365,558

 
(2,262
)
 
367,820

BetaCat ILS Funds
 
—

 
—

 
—

Total
 
2,186,858

 
127,339

 
2,059,519

Total Assets Under Management
 
$
2,510,475

 
$
124,313

 
$
2,386,162

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat's assets under management were $2.5 billion as at July 1, 2016, compared to $2.4 billion as at January 1, 2016. Third party assets under management were $2.2 billion as at July 1, 2016, compared to $2.1 billion as at January 1, 2016. During the six months ended July 1, 2016, a total of $255.5 million of capital was raised, of which $235.9 million was raised from third parties. During the six months ended July 1, 2016, $172.3 million was returned to investors, of which $143.9 million was returned to third party investors.

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Year to Date 2016 Consolidated Non-Segment Results
The following table presents non-segment income and expense items on a consolidated basis for the six months ended June 30, 2016 and 2015:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Investment income
 
 
 
 
 
 
Net investment income (a)
 
$
64,772

 
$
3,482

 
$
61,290

 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
General and administrative expenses
 
34,055

 
1,357

 
32,698

Share compensation expenses
 
8,099

 
2,028

 
6,071

Finance expenses (a)
 
28,320

 
(2,160
)
 
30,480

Tax (benefit) expenses
 
(412
)
 
(5,526
)
 
5,114

Total operating expenses
 
70,062

 
(4,301
)
 
74,363

 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
Net realized gains on investments (a)
 
1,434

 
(4,850
)
 
6,284

Change in net unrealized gains on investments (a)
 
77,130

 
76,387

 
743

(Loss) income from investment affiliate
 
(4,702
)
 
(7,762
)
 
3,060

Foreign exchange gains (losses) (a)
 
12,695

 
19,388

 
(6,693
)
Other income (loss)
 
756

 
1,364

 
(608
)
Total other items
 
87,313

 
84,527

 
2,786

 
 
 
 
 
 
 
Total corporate and investment information
 
$
82,023

 
$
92,310

 
$
(10,287
)
(a)
These items exclude the components which are included in the Company's share of AlphaCat and amounts which are consolidated from VIEs.
Net Investment Income
 
 
Net Investment Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Managed investments
 
 
 
 
 
 
Fixed maturities and short-term investments
 
$
58,638

 
$
1,532

 
$
57,106

Other investments
 
8,898

 
1,696

 
7,202

Cash and cash equivalents
 
1,245

 
402

 
843

Securities lending income
 
17

 
8

 
9

Total gross investment income
 
68,798

 
3,638

 
65,160

Investment expenses
 
(4,026
)
 
(156
)
 
(3,870
)
Total managed net investment income
 
$
64,772

 
$
3,482

 
$
61,290

The increase in managed net investment income for the six months ended June 30, 2016 of $3.5 million, or 5.7%, was primarily due to increased yield on certain investment funds within other investments. Managed net investment income from other investments includes distributed and undistributed net income from certain investment funds.
The Company's managed yield-bearing portfolio had an annualized effective yield of 2.06% for the six months ended June 30, 2016 compared to 1.93% for the six months ended June 30, 2015, an increase of 13 basis points. Investment yield is calculated by dividing total managed net investment income by the average balance of the yield bearing assets managed by the Company's portfolio managers. Average assets for the period ended is the average of the beginning, ending and intervening quarter end asset balances.

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General and Administrative and Share Compensation Expenses
Corporate general and administrative expenses for the six months ended June 30, 2016 were $34.1 million compared to $32.7 million for the six months ended June 30, 2015, an increase of $1.4 million or 4.2%. 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 six months ended June 30, 2016 were $8.1 million compared to $6.1 million for the six months ended June 30, 2015, an increase of $2.0 million or 33.4%. The increase was primarily due to performance share award adjustments.
Finance Expenses
Finance expenses for the six months ended June 30, 2016 were $28.3 million compared to $30.5 million for the six months ended June 30, 2015, a decrease of $2.2 million or 7.1%. The decrease was primarily due to reduced credit facility expenses.
Net Realized and Change in Net Unrealized Gains on Investments
Net realized gains on managed investments for the six months ended June 30, 2016 were $1.4 million compared to $6.3 million for the six months ended June 30, 2015, a decrease of $4.9 million. The decrease in net realized gains primarily resulted from the sale of managed fixed maturities.
The change in net unrealized gains on managed investments for the six months ended June 30, 2016 was $77.1 million compared to $0.7 million for the six months ended June 30, 2015, an increase of $76.4 million. The increase was primarily due to the impact of declining interest rates on our fixed maturity investments during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
(Loss) income From Investment Affiliate
The (loss) income from investment affiliate relates to the income earned from the Company's investments in Aquiline Financial Services Fund II L.P. and Fund III L.P. For further details, refer to Note 6, "Investments in affiliates," to the Consolidated Financial Statements in Part I, Item 1.
Foreign Exchange Gains (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 year-to-year comparisons. The Company's largest foreign currency fluctuation exposure is to the following currencies, with the movement in each currency against the U.S. dollar for the six months ended June 30, 2016 and 2015 shown in the table below:
 
 
Six Months Ended June 30,
U.S. dollar (weakened) strengthened against:
 
2016
 
2015
British Pound sterling
 
10.8
 %
 
(0.8
)%
Euro
 
(2.2
)%
 
8.6
 %
Canadian dollar
 
(6.4
)%
 
7.5
 %
Swiss franc
 
(2.6
)%
 
(6.0
)%
Australian dollar
 
(1.9
)%
 
5.9
 %
New Zealand dollar
 
(4.2
)%
 
14.8
 %
Singapore dollar
 
(4.7
)%
 
1.6
 %
Japanese yen
 
(14.7
)%
 
2.4
 %
South African rand
 
(5.0
)%
 
5.3
 %
Foreign exchange gains for the six months ended June 30, 2016 were $12.7 million compared to losses of $6.7 million for the six months ended June 30, 2015, a favorable movement of $19.4 million, due primarily to the U.S. dollar strengthening against the British Pound sterling.
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.

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Non-GAAP Financial Measures
The operating results of an insurance or reinsurance company are also often measured by reference to its underwriting income and net operating income, which are non-GAAP financial measures. Underwriting income and net operating income available to Validus common shareholders, as set out in the table below, is reconciled to net income available to Validus common shareholders (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income (Loss) line items, as illustrated below.
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2016
 
2015
Underwriting income
 
$
58,957

 
$
109,660

Net investment income
 
39,257

 
33,611

Finance expenses
 
(14,166
)
 
(18,682
)
Dividends on preferred shares
 
—

 
—

Tax expense
 
(1,706
)
 
(2,549
)
Income from operating affiliates
 
—

 
1,738

(Income) attributable to AlphaCat investors
 
(6,114
)
 
—

Net operating (income) attributable to noncontrolling interest
 
(21,328
)
 
(22,061
)
Net operating income available to Validus common shareholders
 
$
54,900

 
$
101,717

Net realized gains on investments
 
2,724

 
2,244

Change in net unrealized gains (losses) on investments
 
31,428

 
(34,676
)
(Loss) income from investment affiliate
 
(589
)
 
284

Foreign exchange gains (losses)
 
6,286

 
(2,671
)
Other income (loss)
 
79

 
(608
)
Net loss (income) attributable to noncontrolling interest
 
135

 
(500
)
Net income available to Validus common shareholders
 
$
94,963

 
$
65,790

 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
2015
Underwriting income
 
$
201,876

 
$
253,861

Net investment income
 
68,718

 
64,640

Finance expenses
 
(29,369
)
 
(39,649
)
Dividends on preferred shares
 
—

 
—

Tax benefit (expense)
 
412

 
(5,114
)
(Loss) income from operating affiliates
 
(23
)
 
5,722

(Income) attributable to AlphaCat investors
 
(10,714
)
 
—

Net operating (income) attributable to noncontrolling interest
 
(58,622
)
 
(40,869
)
Net operating income available to Validus common shareholders
 
$
172,278

 
$
238,591

Net realized gains on investments
 
2,140

 
6,413

Change in net unrealized gains (losses) on investments
 
78,872

 
(1,449
)
(Loss) income from investment affiliate
 
(4,702
)
 
3,060

Foreign exchange gains (losses)
 
12,531

 
(6,936
)
Other income (loss)
 
756

 
(608
)
Net (income) loss attributable to noncontrolling interest
 
(102
)
 
130

Net income available to Validus common shareholders
 
$
261,773

 
$
239,201

The Company 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.

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Underwriting income is the primary financial measure for the Company's insurance and reinsurance operating segments: Validus Re, Talbot and Western World. The results of the AlphaCat operating segment are presented on an asset manager basis, which is also non-GAAP. Refer to Part I, Item 1, Note 18, "Segment information," for a reconciliation of segmental income to net income available to Validus.
Net operating income available to Validus common shareholders indicates the performance of the Company’s core underwriting function and includes net investment income, finance expenses, tax (expense) benefit, income (loss) from operating affiliates and (income) attributable to AlphaCat investors and excludes net operating (income) attributable to noncontrolling interest, dividends on preferred shares and certain other revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of net operating income available to Validus common shareholders 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 change in net unrealized gains and losses on investments, from its calculation of net operating income available to Validus common shareholders 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 available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing underwriting income and net operating income available to Validus common shareholders 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 in a manner similar to how management analyzes the Company’s underlying business performance.
Underwriting income and net operating income available to Validus common shareholders should not be viewed as a substitute for U.S. GAAP net income available to Validus common shareholders as there are inherent material limitations associated with the use of underwriting income and net operating income available to Validus common shareholders as compared to using net income available to Validus common shareholders, 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 underwriting income and operating income with other companies, particularly as these measures 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 available to Validus common shareholders, 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 available to Validus common shareholders and reconciliation of underwriting income and net operating income available to Validus common shareholders to net income available to Validus common shareholders.
In presenting the Company's results, management has also included and discussed certain schedules containing book value and tangible book value per diluted common share and book value per diluted common share plus accumulated dividends that are not calculated in accordance with U.S. GAAP.
Such measures described above which are referred to as non-GAAP, 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.

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The following tables present reconciliations of book value per diluted common share to book value per common share, the most comparable U.S. GAAP financial measure, as at June 30, 2016 and December 31, 2015:
 
 
June 30, 2016
(Dollars in thousands, except share and per share amounts)
 
Equity Amount
 
Shares
 
Exercise Price (a)
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
 
Total shareholders' equity available to Validus common shareholders (b)
 
$
3,716,256

 
80,772,238

 
 
 
$
46.01

 
 
 
 
 
 
 
 
 
Tangible book value per common share
 
 
 
 
 
 
 
$
42.11

 
 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
 
Total shareholders' equity available to Validus common shareholders (b)
 
3,716,256

 
80,772,238

 
 
 
 
Assumed exercise of outstanding stock options (c)
 
1,080

 
51,357

 
$
21.03

 
 
Unvested restricted shares
 
—

 
2,876,998

 
 
 
 
Book value per diluted common share
 
$
3,717,336

 
83,700,593

 
 
 
$
44.41

Adjustment for accumulated dividends
 
 
 
 
 
 
 
10.86

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
 
$
55.27

 
 
 
 
 
 
 
 
 
Tangible book value per diluted common share
 
 
 
 
 
 
 
$
40.65

 
 
December 31, 2015
(Dollars in thousands, except share and per share amounts)
 
Equity Amount
 
Shares
 
Exercise Price (a)
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
 
Total shareholders' equity available to Validus common shareholders (b)
 
$
3,638,975

 
82,900,617

 
 
 
$
43.90

 
 
 
 
 
 
 
 
 
Tangible book value per common share
 
 
 
 
 
 
 
$
40.06

 
 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
 
Total shareholders' equity available to Validus common shareholders (b)
 
3,638,975

 
82,900,617

 
 
 
 
Assumed exercise of outstanding stock options (c)
 
1,319

 
65,401

 
$
20.17

 
 
Unvested restricted shares
 
—

 
3,026,376

 
 
 
 
Book value per diluted common share
 
$
3,640,294

 
85,992,394

 
 
 
$
42.33

Adjustment for accumulated dividends
 
 
 
 
 
 
 
10.16

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
 
$
52.49

 
 
 
 
 
 
 
 
 
Tangible book value per diluted common share
 
 
 
 
 
 
 
$
38.63

(a)
Weighted average exercise price for those warrants and stock options that have an exercise price lower than book value per share.
(b)
Total shareholders' equity available to Validus common shareholders excludes the liquidation value of the preferred shares of $150,000.
(c)
Using the "as-if-converted" method, assuming all proceeds received upon exercise of warrants and stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.

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Liquidity and Capital Resources
Investments
Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 5, "Variable interest entities," to the Consolidated Financial Statements in Part I, Item 1 for further details.
As at both June 30, 2016, and December 31, 2015, the Company's managed cash and investment portfolio totaled $6.4 billion. Refer to Note 3, "Investments,” to the Consolidated Financial Statements in Part I, Item 1 for further details related to the Company's managed 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 IPS specifically requires 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 at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.00 years. At June 30, 2016, the average duration of the Company’s managed investment portfolio was 2.19 years (December 31, 2015: 2.15 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 IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities assigned ratings. Further limits on asset classes and security types 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 ERM framework. At June 30, 2016, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- (December 31, 2015: AA-).
The value of the Company’s managed 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 Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, investment funds and private equity investments. For further details on market risks, refer to
Part I, Item 3 “Quantitative And Qualitative Disclosures About Market Risk.”

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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 managed fixed maturity portfolio:
 
 
June 30, 2016
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
58,646

 
10.1
%
United Kingdom
 
36,759

 
6.3
%
Supranational
 
35,830

 
6.2
%
France
 
15,695

 
2.7
%
Norway
 
13,057

 
2.3
%
Jordan
 
10,354

 
1.8
%
Other (individual jurisdictions below $10,000)
 
44,909

 
7.7
%
Total Managed Non-U.S. Government Securities
 
215,250

 
37.1
%
European Corporate Securities
 
132,075

 
22.8
%
United Kingdom Corporate Securities
 
108,446

 
18.7
%
Other Non-U.S. Corporate Securities
 
123,885

 
21.4
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
579,656

 
100.0
%
At June 30, 2016, the Company did not have an aggregate exposure to any single issuer of more than 0.9% of managed cash and investments, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at June 30, 2016 were as follows:
 
 
June 30, 2016
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Total Managed Cash and Investments
JPMorgan Chase & Co
 
$
55,981

 
 BBB+
 
0.9
%
HSBC Holdings plc
 
51,668

 
 A
 
0.8
%
Goldman Sachs Group
 
47,396

 
 BBB+
 
0.7
%
Morgan Stanley
 
44,855

 
 BBB+
 
0.7
%
Bank of America Corp
 
41,513

 
 BBB
 
0.6
%
Citigroup Inc
 
39,510

 
 BBB
 
0.6
%
US Bancorp
 
36,612

 
 AA-
 
0.6
%
Anheuser-Busch Inbev NV
 
33,297

 
 A-
 
0.5
%
Bank of New York Mellon Corp
 
32,276

 
 A
 
0.5
%
Ford Motor Company
 
32,022

 
 BBB
 
0.5
%
Total
 
$
415,130

 
 
 
6.4
%
(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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Reserves for Losses and Loss Expenses
Notable loss events are loss events which aggregate to over $30.0 million on a consolidated basis. Non-notable loss events are loss events which aggregate to over $15.0 million but less than $30.0 million on a consolidated basis. At June 30, 2016, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section below. The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
June 30, 2016
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for Losses and Loss Expenses
Property
 
$
403,515

 
$
471,549

 
$
875,064

Marine
 
389,833

 
479,529

 
869,362

Specialty
 
273,646

 
530,728

 
804,374

Liability
 
200,631

 
373,286

 
573,917

Total
 
$
1,267,625

 
$
1,855,092

 
$
3,122,717

 
 
June 30, 2016
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for Losses and Loss Expenses
Property
 
$
354,328

 
$
405,042

 
$
759,370

Marine
 
347,628

 
375,303

 
722,931

Specialty
 
228,062

 
481,227

 
709,289

Liability
 
186,156

 
301,984

 
488,140

Total
 
$
1,116,174

 
$
1,563,556

 
$
2,679,730

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended June 30, 2016.
 
 
Three Months Ended June 30, 2016
(Dollars in thousands)
 
Validus Re Segment
 
Talbot Segment
 
Western World Segment
 
AlphaCat Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,107,747

 
$
1,333,578

 
$
593,356

 
$
12,913

 
$
(67,294
)
 
$
2,980,300

Loss reserves recoverable
 
(31,566
)
 
(321,644
)
 
(84,773
)
 
—

 
67,294

 
(370,689
)
Net reserves for losses and loss expenses, beginning of period
 
1,076,181

 
1,011,934

 
508,583

 
12,913

 
—

 
2,609,611

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
163,016

 
137,638

 
47,387

 
21,870

 
—

 
369,911

Prior years
 
(30,877
)
 
(28,328
)
 
(3,158
)
 
(418
)
 
—

 
(62,781
)
Total incurred losses and loss expenses
 
132,139

 
109,310

 
44,229

 
21,452

 
—

 
307,130

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange gain
 
(712
)
 
(13,467
)
 
—

 
(175
)
 
—

 
(14,354
)
Net paid losses
 
(78,230
)
 
(93,670
)
 
(50,678
)
 
(79
)
 
—

 
(222,657
)
Net reserve for losses and loss expenses, end of period
 
1,129,378

 
1,014,107

 
502,134

 
34,111

 
—

 
2,679,730

Loss reserves recoverable
 
111,015

 
308,686

 
86,018

 
—

 
(62,732
)
 
442,987

Reserve for losses and loss expenses, end of period
 
$
1,240,393

 
$
1,322,793

 
$
588,152

 
$
34,111

 
$
(62,732
)
 
$
3,122,717


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The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. For the three months ended June 30, 2016, favorable loss reserve development on prior accident years was $62.8 million of which $30.9 million related to the Validus Re segment, $28.3 million related to the Talbot segment, $3.2 million related to the Western World segment and $0.4 million related to the AlphaCat segment.
The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the six months ended June 30, 2016.
 
 
Six Months Ended June 30, 2016
(Dollars in thousands)
 
Validus Re Segment
 
Talbot Segment
 
Western World
 
AlphaCat Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,146,869

 
$
1,302,635

 
$
600,331

 
$
11,013

 
$
(64,281
)
 
$
2,996,567

Loss reserves recoverable
 
(36,055
)
 
(293,662
)
 
(85,150
)
 
—

 
64,281

 
(350,586
)
Net reserves for losses and loss expenses, beginning of period
 
1,110,814

 
1,008,973

 
515,181

 
11,013

 
—

 
2,645,981

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
271,568

 
260,459

 
91,459

 
24,611

 
—

 
648,097

Prior years
 
(56,561
)
 
(51,048
)
 
(7,584
)
 
(1,327
)
 
—

 
(116,520
)
Total incurred losses and loss expenses
 
215,007

 
209,411

 
83,875

 
23,284

 
—

 
531,577

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss (gain)
 
12,101

 
(18,130
)
 
—

 
(65
)
 
—

 
(6,094
)
Net paid losses
 
(208,544
)
 
(186,147
)
 
(96,922
)
 
(121
)
 
—

 
(491,734
)
Net reserves for losses and loss expenses, end of period
 
1,129,378

 
1,014,107

 
502,134

 
34,111

 
—

 
2,679,730

Loss reserves recoverable
 
111,015

 
308,686

 
86,018

 
—

 
(62,732
)
 
442,987

Reserve for losses and loss expenses, end of period
 
$
1,240,393

 
$
1,322,793

 
$
588,152

 
$
34,111

 
$
(62,732
)
 
$
3,122,717

For the six months ended June 30, 2016, favorable loss reserve development on prior accident years was $116.5 million, of which $56.6 million related to the Validus Re segment, $51.0 million related to the Talbot segment, $7.6 million related to the Western World segment and $1.3 million related to the AlphaCat segment.
Incurred losses for the three and six months ended June 30, 2016 included $36.9 million of losses from notable loss events, of which $17.9 million related to the Validus Re segment, $11.7 million related to the Talbot segment, $nil related to the Western World segment and $7.3 million related to the AlphaCat segment. Incurred losses for the three and six months ended June 30, 2016 included $48.3 million of losses from non-notable loss events, of which $32.5 million related to the Validus Re segment, $9.1 million related to the Talbot segment, $0.6 million related to the Western World segment and $6.1 million related to the AlphaCat 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 ("RDE"). Any RDE is included as part of the Company's overall reserve as defined and disclosed in the Critical Accounting Policies and Estimates section below. As at June 30, 2016, the Company had no RDE.
For disclosure purposes, only those notable loss events which have an 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, RDE may be established for a specific accident year.


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The reserves for notable loss events table below does not disclose notable loss events prior to 2014. Deepwater Horizon, a 2010 event, had closing reserves of $11.0 million as at June 30, 2016. The New Zealand earthquakes of 2010 and 2011, had total closing reserves of $91.0 million as at June 30, 2016. Superstorm Sandy, a 2012 event, had total closing reserves of $61.3 million as at June 30, 2016 and Costa Concordia, also a 2012 event, had total closing reserves of $25.8 million as at June 30, 2016.
Reserves for Notable Loss Events (Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Notable Loss Event
 
Year Ended December 31, 2014
 
Year Ended December 31, 2015
 
Six Months Ended June 30, 2016
 
 
 
 
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, 2014
 
Unfavorable (b)
 
of RDE
 
December 31, 2015
 
Unfavorable (b)
 
of RDE
 
June 30, 2016
Tripoli Airport (e)
 
$
28,134

 
$
6,810

 
—

 
$
34,944

 
$
(1,196
)
 
—

 
$
33,748

 
$
18

 
—

 
$
33,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2014
 
Year Ended December 31, 2015
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
December 31, 2014
 
 
 
 
December 31, 2015
 
 
 
 
June 30, 2016
Tripoli Airport (e)
 
 
 
 
 
$
—

 
$
34,944

 
 
 
$
22,938

 
$
10,810

 
 
 
$
62

 
$
10,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Notable Loss Events
 
 
 
Year Ended December 31, 2015
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Events
 
Estimate (a)
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
December 31, 2015
 
Unfavorable (b)
 
of RDE
 
June 30, 2016
Pemex
 
$
48,074

 
 
 
 
 
 
 
$
1,464

 
—

 
$
49,538

 
$
(426
)
 
—

 
$
49,112

Tianjin
 
47,789

 
 
 
 
 
 
 
(362
)
 
—

 
47,427

 
(1,644
)
 
—

 
45,783

Total 2015 Notable Loss Events
 
$
95,863

 
 
 
 
 
 
 
$
1,102

 
$
—

 
$
96,965

 
$
(2,070
)
 
$
—

 
$
94,895

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Events
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
June 30, 2016
Pemex
 
 
 
 
 
 
 
 
 
 
 
$
44

 
$
49,494

 
 
 
$
46

 
$
49,022

Tianjin
 
 
 
 
 
 
 
 
 
 
 
—

 
47,427

 
 
 
1,657

 
44,126

Total 2015 Notable Loss Events
 
 
 
 
 
 
 
 
 
 
 
$
44

 
$
96,921

 
 
 
$
1,703

 
$
93,148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
June 30, 2016
Canadian Wildfires
 
$
36,915

 
 
 
 
 
 
 
 
 
 
 


 
$
—

 
—

 
$
36,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
Canadian Wildfires
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
85

 
36,830

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Development other than allocation of RDE.
(c)
Excludes impact of movements in foreign exchange rates.
(d)
Closing Reserve for the period equals Closing Estimate for the period less cumulative Paid Losses (Recovery).
(e)
As at September 30, 2014, the initial estimate for Tripoli Airport was below the $30.0 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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Table of Contents

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, Talbot, Western World and AlphaCat 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 its short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:
(Dollars in thousands)
 
June 30, 2016
Validus Reinsurance, Ltd. (excluding capital supporting FAL) (a) (b)
 
$
3,686,639

Talbot Holdings, Ltd. (including capital supporting FAL) (b)
 
917,798

Other, net
 
45,067

Redeemable noncontrolling interest in AlphaCat
 
1,532,283

Noncontrolling interest in AlphaCat
 
212,154

Total consolidated capitalization
 
6,393,941

Senior notes payable
 
(245,261
)
Debentures payable
 
(537,987
)
Redeemable noncontrolling interest in AlphaCat
 
(1,532,283
)
Total shareholders’ equity
 
4,078,410

Preferred shares (c)
 
(150,000
)
Noncontrolling interest in AlphaCat
 
(212,154
)
Total shareholders' equity available to Validus common shareholders (c)
 
$
3,716,256

(a)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $661,480 relating to Western World Insurance Group, Inc.
(b)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $737,168 which supports Talbot's FAL. This capital was included in Talbot Holdings, Ltd. (including capital supporting FAL).
(c)
Total shareholders' equity available to Validus common shareholders excludes the liquidation value of the preferred shares of $150,000.
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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Table of Contents

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 six months ended June 30, 2016 and 2015 is provided in the following table:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
Change
 
2015
Net cash provided by operating activities
 
$
69,443

 
$
36,969

 
$
32,474

Net cash used in investing activities
 
(469,003
)
 
(408,188
)
 
(60,815
)
Net cash provided by (used in) financing activities
 
252,217

 
326,455

 
(74,238
)
Effect of foreign currency rate changes on cash and cash equivalents
 
(6,968
)
 
1,762

 
(8,730
)
Net decrease in cash and cash equivalents
 
$
(154,311
)
 
$
(43,002
)
 
$
(111,309
)
Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash provided by operating activities during the six months ended June 30, 2016 was $69.4 million compared to $32.5 million during the six months ended June 30, 2015, a favorable movement of $37.0 million. This favorable movement was primarily due to the timing of premium receipts.
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 June 30, 2016, the Company’s portfolio was composed of fixed income, short-term and other investments amounting to $8.3 billion or 92.6% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 3, "Investments," to the Consolidated Financial Statements in Part I, Item 1.
Net cash used in investing activities during the six months ended June 30, 2016 was $469.0 million compared to $60.8 million for the six months ended June 30, 2015, representing an increase in net cash used of $408.2 million. This increase was primarily due to increased purchases of short-term investments in the Company's non-managed portfolio on behalf of AlphaCat investors.
Financing Activities
Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, including third party investments in the AlphaCat ILS funds and sidecars, as well as the issuance of notes payable to AlphaCat investors.
Net cash provided by financing activities during the six months ended June 30, 2016 was $252.2 million compared to net cash used in financing activities of $74.2 million during the six months ended June 30, 2015, a favorable movement of $326.5 million. This favorable movement was driven primarily by an increase in the issuance of notes payable to AlphaCat investors of $294.7 million, an increase of $144.9 million resulting from the issuance of preferred shares, an increase in third party investments in noncontrolling interests of $162.1 million; partially offset by a decrease in third party investments in redeemable noncontrolling interest of $71.5 million and an increase in third party subscriptions deployed on AlphaCat funds and sidecars of $293.9 million.


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Capital Resources
The following table details the Company's capital position as at June 30, 2016 and December 31, 2015.
Capitalization (Dollars in thousands)
June 30, 2016
 
December 31, 2015
Senior Notes (a)
$
245,261

 
$
245,161

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

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (a)
248,187

 
247,868

Total debt
$
783,248

 
$
782,829

 
 
 
 
Redeemable noncontrolling interest
$
1,532,283

 
$
1,111,714

 
 
 
 
Preferred shares (b)
$
150,000

 
$
—

Ordinary shares, capital and surplus available to Validus
3,734,438

 
3,651,544

Accumulated other comprehensive loss
(18,182
)
 
(12,569
)
Noncontrolling interest
212,154

 
154,662

Total shareholders' equity
$
4,078,410

 
$
3,793,637

 
 
 
 
Total capitalization (c)
$
6,393,941

 
$
5,688,180

Total capitalization available to Validus (d)
$
4,649,504

 
$
4,421,804

 
 
 
 
Debt to total capitalization
12.2
%
 
13.8
%
Debt (excluding JSDs) to total capitalization
3.8
%
 
4.3
%
Debt and preferred shares to total capitalization
14.6
%
 
13.8
%
 
 
 
 
Debt to total capitalization available to Validus
16.8
%
 
17.7
%
Debt (excluding JSDs) to total capitalization available to Validus
5.3
%
 
5.5
%
Debt and preferred shares to total capitalization available to Validus
20.1
%
 
17.7
%
(a)
Refer to Part I, Item 1, Note 13, “Debt and financing arrangements," to the Consolidated Financial Statements for further details and discussion on the debt and financing arrangements of the Company.
(b)
Refer to Part I, Item 1, Note 11, “Share capital," to the Consolidated Financial Statements for further details and discussion on the Company's preferred shares.
(c)
Total capitalization equals shareholders' equity plus noncontrolling interests, Senior Notes and Junior Subordinated Deferrable Debentures.
(d)
Total capitalization available to Validus equals total shareholder's equity less noncontrolling interests plus Senior Notes and Junior Subordinated Deferrable Debentures.
Shareholders' Equity
Shareholders' equity available to Validus common shareholders at June 30, 2016 was $3.7 billion, compared to $3.6 billion at December 31, 2015. Including $150.0 million of preferred shares, shareholders' equity available to Validus at June 30, 2016 was $3.9 billion, compared to $3.6 billion at December 31, 2015.
On August 3, 2016, the Company announced a quarterly cash dividend of $0.35 per common share, which is payable on September 30, 2016 to shareholders of record on September 15, 2016 and a cash dividend of $0.3753472 per depositary share on the outstanding Series A preferred shares, payable on September 15, 2016 to the holders of record on September 1, 2016.
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 an increase in the Company's common share repurchase authorization to $750.0 million.

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Table of Contents

The Company has repurchased 79,282,495 common shares for an aggregate purchase price of $2.6 billion from the inception of the share repurchase program to August 3, 2016. The Company had $382.3 million remaining under its authorized share repurchase program as of August 3, 2016.
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 June 30, 2016:
(Dollars in thousands)
 
Maturity Date /
Term (a)
Commitment
 
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

Flagstone 2006 Junior Subordinated Deferrable Debentures
 
September 15, 2036
134,437

 
134,437

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

 
113,750

Total debentures payable
 
 
598,187

 
537,987

2010 Senior Notes due 2040
 
January 26, 2040
250,000

 
250,000

Total debentures and senior notes payable
 
 
848,187

 
787,987

$85,000 syndicated unsecured letter of credit facility
 
December 9, 2020
85,000

 
—

$300,000 syndicated secured letter of credit facility
 
December 9, 2020
300,000

 
105,575

$24,000 secured bi-lateral letter of credit facility
 
Evergreen
24,000

 
11,805

AlphaCat Re secured letter of credit facility
 
Evergreen
20,000

 
20,000

IPC bi-lateral facility
 
Evergreen
25,000

 
5,666

$236,000 Flagstone bi-lateral facility
 
Evergreen
236,000

 
195,622

Total credit and other facilities
 
 
690,000

 
338,668

Total debt and financing arrangements
 
 
$
1,538,187

 
$
1,126,655

(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 interest rates and debt covenants, refer to Part I, Item 1, Note 13, "Debt and financing arrangements," to the Consolidated Financial Statements 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 August 5, 2016:
 
A.M. Best
 
S&P
 
Moody’s
 
Fitch
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa2
 
A-
Senior debt
bbb
 
BBB+
 
Baa2
 
BBB+
Subordinated debt
bbb-
 
—
 
Baa3
 
BBB
Preferred stock
bb+
 
BBB-
 
Ba1
 
BBB
Outlook on ratings
Positive
 
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
Stable
 
Stable
 
—
 
Stable
 
 
 
 
 
 
 
 
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
 
—
 
—
 
—


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Recent Accounting Pronouncements
Please refer to Note 2, "Recent accounting pronouncements," 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 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 Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. Statements that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, “may”, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statement.
We believe that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the insurance and reinsurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;

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•
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, 2015, 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 managed fixed maturity investments are 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 investments fall 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 maturity investments increase 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.
The following table indicates the impact on the Company’s managed fixed maturity investments from an immediate 100 basis point increase and decrease in market interest rates (based on U.S. treasury yield):
 
 
June 30, 2016
 
December 31, 2015
(Dollars in thousands)
 
Increase (decrease) in market value
 
Increase (decrease) in market value
Immediate 100 basis point increase in market interest rates
 
$
(127,105
)
 
(2.3
)%
 
$
(126,908
)
 
(2.4
)%
Immediate 100 basis point decrease in market interest
 
$
125,452

 
2.2
 %
 
$
127,976

 
2.4
 %
As at June 30, 2016, the Company held $1.4 billion (December 31, 2015: $1.3 billion), or 26.8% (December 31, 2015: 25.1%) of the Company’s managed fixed maturity investments 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 net assets or net liabilities held in foreign currencies under insurance and reinsurance policies that are payable in foreign currencies with cash and investments that are denominated in such currencies.
The following table presents the Company’s monetary assets and liabilities held in foreign currencies and the Company's non-monetary assets and liabilities that do not require revaluation:
 
 
June 30, 2016
 
December 31, 2015
(Dollars in thousands)
 
Balance
 
% of Total
 
Balance
 
% of Total
Total monetary assets held in foreign currencies
 
$
612,970

 
5.2
%
 
$
568,153

 
5.4
%
Total monetary liabilities held in foreign currencies
 
751,370

 
12.1
%
 
732,730

 
13.1
%
Total non-monetary assets that do not require revaluation
 
17,970

 
0.2
%
 
15,937

 
0.2
%
Total non-monetary liabilities that do not require revaluation
 
92,830

 
1.5
%
 
81,718

 
1.5
%

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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 Part I, Item 1, Note 8, "Derivative instruments," in the Consolidated Financial Statements. To the extent foreign currency exposure is not hedged or otherwise matched, the Company may experience foreign exchange losses, which in turn would adversely affect the results of operations and financial condition.
Credit Risk:    The Company is exposed to credit risk from the possibility that counterparties may default on their obligations. The Company’s primary credit risks reside in investments 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 maturity investments to maintain a minimum weighted average portfolio credit rating of A+ on its rated managed fixed maturity investments. As at June 30, 2016, the Company’s rated managed fixed maturity investments had an average credit quality rating of AA- (December 31, 2015: AA-).
In addition, the Company's IPS limits the amount of “risk assets” held as part of its managed cash and investments portfolio, including investments in investment affiliates, to a maximum of 35% of shareholders' equity available to Validus. Risk assets include non-investment grade debt securities, private equity investments, private placements that are not subject to rule 144A, hedge funds and other alternative assets. The Company’s managed cash and investment portfolio, including investments in investment affiliates, had risk assets of $859.0 million or 22.2% of shareholders’ equity available to Validus as at June 30, 2016 (December 31, 2015: $837.9 million or 23.0%).
The Company also limits its aggregate exposure to any single issuer to 3.75% or less of its total managed cash and investment portfolio, excluding government and agency securities, depending on the credit rating of the issuer. The Company did not have an aggregate exposure to any single issuer of more than 0.9% of total managed cash and investments, other than with respect to government and agency securities as at June 30, 2016 (December 31, 2015: 0.9%).
Furthermore, fixed maturity investments in below investment grade securities are limited to no more than 15% of the Company's managed cash and investment portfolio. As at June 30, 2016, 10.1% (December 31, 2015: 10.3%) of the managed cash and investment portfolio was below Baa3/BBB-.
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 June 30, 2016, 98.7% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better, or from reinsurers posting full collateral (December 31, 2015: 98.7% rated A- or better).
Liquidity risk:    Certain of the Company’s investments may become illiquid. Disruption in the credit markets may materially affect the liquidity of the Company’s investments, including non-agency residential mortgage-backed securities and bank loans which represent 9.6% at June 30, 2016 (December 31, 2015: 9.4%) of managed cash and investments. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include claims on a major catastrophic event) in a period of market illiquidity, the investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under other conditions. At June 30, 2016, the Company had $777.6 million (December 31, 2015: $855.9 million) of unrestricted, liquid assets, defined as managed unpledged cash and cash equivalents, short term investments, government and government agency securities.
For details on the Company's debt and financing arrangements, refer to Part I, Item 1, Note 13, “Debt and financing arrangements,” to the Consolidated Financial Statements.
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 June 30, 2016, 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, 2015.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has repurchased 79,282,495 common shares for an aggregate purchase price of $2.6 billion from the inception of the share repurchase program to August 3, 2016.
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. The Company had $382.3 million remaining under its authorized share repurchase program as of August 3, 2016.
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.
For the three months ended June 30, 2016, the number of shares repurchased by the Company was 1,453,842. The share repurchases made during the three months ended June 30, 2016 resulted in a dilutive impact on book value per diluted common share of $0.05 for the quarter.
 
 

 
Second Quarter Share Repurchase Activity
 
 
Effect of share repurchases
(Dollars in thousands, except per share amounts)
 
As at March 31, 2016
 
 
 
 
 
 
 
Three Months Ended
 
(cumulative)
 
April
 
May
 
June
 
June 30, 2016
Aggregate purchase price (a)
 
$
2,552,098

 
$
387

 
$
32,686

 
$
35,643

 
$
68,716

Shares repurchased
 
77,387,916

 
8,718

 
686,272

 
758,852

 
1,453,842

Average price (a)
 
$
32.98

 
$
44.45

 
$
47.63

 
$
46.97

 
$
47.27

Maximum number of shares that may yet be purchased under the program (b)
 
 
 
10,619,240

 
9,092,374

 
8,393,464

 
 
 
 
 
 
Share Repurchase Activity Post Quarter End
 
 
Effect of share repurchases
(Dollars in thousands, except per share amounts)
 
As at June 30, 2016 (cumulative)
 
July
 
August
 
As at August 3, 2016
 
Cumulative to Date Effect
Aggregate purchase price (a)
 
$
2,620,814

 
$
18,438

 
$
2,877

 
$
21,315

 
$
2,642,129

Shares repurchased
 
78,841,758

 
382,648

 
58,089

 
440,737

 
79,282,495

Average price (a)
 
$
33.24

 
$
48.18

 
$
49.53

 
$
48.36

 
$
33.33

(a)
Share transactions are on a trade date basis through August 3, 2016 and are inclusive of commissions. Average share price is rounded to two decimal places.

(b)
The maximum number of shares that may yet be purchased under the program is calculated using the average execution price at month end.





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

Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.
Certain of our non-U.S. subsidiaries provide global marine hull policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions this year, including the issuance of General License H, and consistent with General License H, we have been notified that certain of our policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country. Since these policies insure multiple voyages and fleets containing multiple ships, we are unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.
Certain of our other non-U.S. subsidiaries have policies that provide excess of loss reinsurance coverage for various risks worldwide. In light of EU and U.S. modifications to Iran sanctions this year, including the issuance of General License H, and consistent with General License H, we have been notified that one of our cedants provides hull and marine, war and related coverage to a drilling contractor that operates drilling rigs located in offshore Iranian oilfields. As the reinsurance coverage provided to this cedant covers multiple global risks and multiple insureds, we are unable to attribute gross revenues and net profits from such policy to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.



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ITEM 6. EXHIBITS
Exhibit
Description
 
 
Exhibit 4.1*
Fifth Supplemental Indenture dated as of July 13, 2016 between Validus Reinsurance, Ltd. and Wilmington Trust Company, a Delaware trust company, as trustee
 
 
Exhibit 4.2*
Fourth Supplemental Indenture dated as of July 12, 2016 between Validus UPS, Ltd. and Wilmington Trust Company, a Delaware trust company, as trustee
 
 
Exhibit 4.3*
Fourth Supplemental Indenture dated as of July 13, 2016 between Validus Reinsurance Ltd. and The Bank of New York Mellon Trust Company, National Association (as successor in interest to The Bank of New York Trust Company, National Association), as trustee
 
 
Exhibit 4.4*
Fourth Supplemental Indenture dated as of July 13, 2016 between Validus Reinsurance Ltd. and The Bank of New York Mellon Trust Company, National Association (as successor in interest to JPMorgan Chase Bank, National Association), as trustee
 
 
Exhibit 4.5*
Amendment No. 3 to Note Purchase Agreement dated as of July 13, 2016 between Validus Reinsurance, Ltd. and Validus Holdings, Ltd. as Guarantor
 
 
Exhibit 4.6
Certificate of Designations of 5.875% Non-Cumulative Preference Shares, Series A, of Validus Holdings, Ltd. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 13, 2016)
 
 
Exhibit 4.7
Specimen 5.875% Non-Cumulative Preference Shares, Series A (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 13, 2016)
 
 
Exhibit 4.8
Form of depositary receipt (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on June 13, 2016)
 
 
Exhibit 10.1*
Amended and Restated Employment Agreement dated as of June 1, 2016 between Validus Holdings, Ltd. and Michael Moore
 
 
Exhibit 10.2*
Amended and Restated Employment Agreement dated as of May 18, 2016 between Validus Holdings, Ltd. Patrick Boisvert
 
 
Exhibit 10.3*
Form of Amended Restricted Share Award Agreement for Talbot Executive Officers
 
 
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:
August 5, 2016
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
August 5, 2016
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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