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, 2017

Commission file number 001-33606
__________________________________________________
valirgbcroppeda05.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of July 31, 2017 there were 79,465,860 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

Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2
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Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2017 (unaudited) and December 31, 2016
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,424,562; 2016—$5,584,599)
$
5,418,643

 
$
5,543,030

Short-term investments trading, at fair value (amortized cost: 2017—$2,871,126; 2016—$2,796,358)
2,871,353

 
2,796,170

Other investments, at fair value (cost: 2017—$416,996; 2016—$380,130)
448,618

 
405,712

Investments in investment affiliates, equity method (cost: 2017—$72,532; 2016—$84,840)
103,377

 
100,431

Cash and cash equivalents
800,405

 
419,976

Restricted cash
195,039

 
70,956

Total investments and cash
9,837,435

 
9,336,275

Premiums receivable
1,940,637

 
725,390

Deferred acquisition costs
302,857

 
209,227

Prepaid reinsurance premiums
335,837

 
77,996

Securities lending collateral
2,514

 
9,779

Loss reserves recoverable
600,207

 
430,421

Paid losses recoverable
35,675

 
35,247

Income taxes recoverable
4,763

 
4,870

Deferred tax asset
52,655

 
43,529

Receivable for investments sold
20,519

 
3,901

Intangible assets
175,518

 
115,592

Goodwill
227,701

 
196,758

Accrued investment income
26,968

 
26,488

Other assets
387,860

 
134,282

Total assets
$
13,951,146

 
$
11,349,755

Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,305,191

 
$
2,995,195

Unearned premiums
1,970,896

 
1,076,049

Reinsurance balances payable
461,261

 
54,781

Securities lending payable
2,980

 
10,245

Deferred tax liability
4,012

 
3,331

Payable for investments purchased
92,077

 
29,447

Accounts payable and accrued expenses
385,958

 
587,648

Notes payable to AlphaCat investors
1,066,159

 
278,202

Senior notes payable
245,463

 
245,362

Debentures payable
538,400

 
537,226

Total liabilities
8,072,397

 
5,817,486

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,251,660

 
1,528,001

Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000)
400,000

 
150,000

Common shares (Issued: 2017—161,934,355; 2016—161,279,976; Outstanding: 2017—79,518,581; 2016—79,132,252)
28,339

 
28,224

Treasury shares (2017—82,415,774; 2016—82,147,724)
(14,423
)
 
(14,376
)
Additional paid-in capital
807,321

 
821,023

Accumulated other comprehensive loss
(19,924
)
 
(23,216
)
Retained earnings
3,010,118

 
2,876,636

Total shareholders’ equity available to Validus
4,211,431

 
3,838,291

Noncontrolling interests
415,658

 
165,977

Total shareholders’ equity
4,627,089

 
4,004,268

Total liabilities, noncontrolling interests and shareholders’ equity
$
13,951,146

 
$
11,349,755

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Validus Holdings, Ltd.
Consolidated Statements of Income and Comprehensive Income
For the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
792,902

 
$
764,042

 
$
1,983,759

 
$
1,936,833

Reinsurance premiums ceded
(56,222
)
 
(36,229
)
 
(256,328
)
 
(204,064
)
Net premiums written
736,680

 
727,813

 
1,727,431

 
1,732,769

Change in unearned premiums
(105,653
)
 
(154,090
)
 
(521,028
)
 
(587,778
)
Net premiums earned
631,027

 
573,723

 
1,206,403

 
1,144,991

Net investment income
44,241

 
39,257

 
84,455

 
68,718

Net realized gains on investments
2,274

 
2,724

 
1,110

 
2,140

Change in net unrealized gains on investments
16,321

 
31,428

 
29,669

 
78,872

Income (loss) from investment affiliates
9,466

 
(589
)
 
14,654

 
(4,702
)
Other insurance related income and other income
1,339

 
824

 
2,669

 
2,237

Foreign exchange (losses) gains
(7,329
)
 
6,286

 
(5,760
)
 
12,531

Total revenues
697,339

 
653,653

 
1,333,200

 
1,304,787

Expenses
 

 
 

 
 
 
 
Losses and loss expenses
296,149

 
307,130

 
565,734

 
531,577

Policy acquisition costs
117,268

 
107,966

 
228,896

 
215,159

General and administrative expenses
96,349

 
89,688

 
184,273

 
175,896

Share compensation expenses
11,146

 
10,727

 
20,637

 
21,964

Finance expenses
14,209

 
14,166

 
28,152

 
29,369

Transaction expenses
4,427

 
—

 
4,427

 
—

Total expenses
539,548

 
529,677

 
1,032,119

 
973,965

Income before taxes, loss from operating affiliate and (income) attributable to AlphaCat investors
157,791

 
123,976

 
301,081

 
330,822

Tax benefit (expense)
987

 
(1,706
)
 
4,536

 
412

Loss from operating affiliate
—

 
—

 
—

 
(23
)
(Income) attributable to AlphaCat investors
(11,830
)
 
(6,114
)
 
(19,333
)
 
(10,714
)
Net income
$
146,948

 
$
116,156

 
$
286,284

 
$
320,497

Net (income) attributable to noncontrolling interests
(43,650
)
 
(21,193
)
 
(86,222
)
 
(58,724
)
Net income available to Validus
103,298

 
94,963

 
200,062

 
261,773

Dividends on preferred shares
(2,203
)
 
—

 
(4,406
)
 
—

Net income available to Validus common shareholders
$
101,095

 
$
94,963

 
$
195,656

 
$
261,773

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
146,948

 
$
116,156

 
$
286,284

 
$
320,497

Other comprehensive income (loss)
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
1,489

 
(3,287
)
 
2,086

 
(5,315
)
Change in minimum pension liability, net of tax
1,184

 
479

 
1,252

 
396

Change in fair value of cash flow hedge
(144
)
 
64

 
(46
)
 
(694
)
Other comprehensive income (loss), net of tax
2,529

 
(2,744
)
 
3,292

 
(5,613
)
Comprehensive (income) attributable to noncontrolling interests
(43,650
)
 
(21,193
)
 
(86,222
)
 
(58,724
)
Comprehensive income available to Validus
$
105,827

 
$
92,219

 
$
203,354

 
$
256,160

 
 
 
 
 
 
 
 
Earnings per common share
 

 
 

 
 
 
 
Basic earnings per share available to Validus common shareholders
$
1.28

 
$
1.16

 
$
2.47

 
$
3.18

Earnings per diluted share available to Validus common shareholders
$
1.25

 
$
1.14

 
$
2.42

 
$
3.12

Cash dividends declared per common share
$
0.38

 
$
0.35

 
$
0.76

 
$
0.70

 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 

 
 
 
 
Basic
79,270,561

 
81,950,833

 
79,202,116

 
82,386,047

Diluted
80,872,451

 
83,373,003

 
80,861,998

 
83,785,659

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2017
 
2016
 
(unaudited)
Preferred shares
 
 
 
Balance, beginning of period
$
150,000

 
$
—

Preferred shares issued
250,000

 
150,000

Balance, end of period
$
400,000

 
$
150,000

 
 
 
 
Common shares
 

 
 

Balance, beginning of period
$
28,224

 
$
28,100

Common shares issued, net
115

 
119

Balance, end of period
$
28,339

 
$
28,219

 
 
 
 
Treasury shares
 

 
 

Balance, beginning of period
$
(14,376
)
 
$
(13,592
)
Repurchase of common shares
(47
)
 
(492
)
Balance, end of period
$
(14,423
)
 
$
(14,084
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance, beginning of period
$
821,023

 
$
1,002,980

Offering expenses on preferred shares
(8,314
)
 
(5,148
)
Common shares redeemed, net
(12,076
)
 
(7,504
)
Repurchase of common shares
(13,949
)
 
(128,591
)
Share compensation expenses
20,637

 
21,964

Balance, end of period
$
807,321

 
$
883,701

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance, beginning of period
$
(23,216
)
 
$
(12,569
)
Other comprehensive income (loss)
3,292

 
(5,613
)
Balance, end of period
$
(19,924
)
 
$
(18,182
)
 
 
 
 
Retained earnings
 

 
 

Balance, beginning of period
$
2,876,636

 
$
2,634,056

Net income
286,284

 
320,497

Net (income) attributable to noncontrolling interests
(86,222
)
 
(58,724
)
Dividends on preferred shares
(4,406
)
 
—

Dividends on common shares
(62,174
)
 
(59,227
)
Balance, end of period
$
3,010,118

 
$
2,836,602

 
 
 
 
Total shareholders’ equity available to Validus
$
4,211,431

 
$
3,866,256

Noncontrolling interests
$
415,658

 
$
212,154

Total shareholders’ equity
$
4,627,089

 
$
4,078,410

The accompanying notes are an integral part of these unaudited consolidated financial statements.


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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2017
 
2016
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
286,284

 
$
320,497

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

 
 

Share compensation expenses
20,637

 
21,964

Loss on deconsolidation of AlphaCat ILS fund
402

 
—

Amortization of discount on senior notes
54

 
54

(Income) loss from investment affiliates
(14,654
)
 
4,702

Net realized and change in net unrealized gains on investments
(30,779
)
 
(81,012
)
Amortization of intangible assets
3,995

 
2,832

Loss from operating affiliate
—

 
23

Foreign exchange gains included in net income
(9,686
)
 
(6,289
)
Amortization of premium on fixed maturity investments
7,012

 
8,710

Change in:
 

 
 

Premiums receivable
(648,195
)
 
(719,070
)
Deferred acquisition costs
(97,746
)
 
(102,211
)
Prepaid reinsurance premiums
(30,684
)
 
(67,575
)
Loss reserves recoverable
(113,508
)
 
(95,429
)
Paid losses recoverable
17,500

 
(4,571
)
Reserve for losses and loss expenses
199,985

 
147,305

Unearned premiums
488,198

 
655,353

Reinsurance balances payable
111,488

 
18,610

Other operational balance sheet items, net
(137,618
)
 
(34,450
)
Net cash provided by operating activities
52,685

 
69,443

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of fixed maturity investments
1,632,371

 
1,376,077

Proceeds on maturities of fixed maturity investments
247,394

 
184,413

Purchases of fixed maturity investments
(1,682,609
)
 
(1,537,606
)
Purchases of short-term investments, net
(88,623
)
 
(428,040
)
Purchases of other investments, net
(33,870
)
 
(19,796
)
Decrease (increase) in securities lending collateral
7,265

 
(5,361
)
Redemption from operating affiliates
—

 
369

Distributions from (investments in) investment affiliates, net
11,708

 
(16,307
)
Increase in restricted cash
(124,083
)
 
(22,752
)
Purchase of subsidiary, net of cash acquired
(183,923
)
 
—

Net cash used in investing activities
(214,370
)
 
(469,003
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of notes payable to AlphaCat investors
269,645

 
294,748

Net proceeds on issuance of preferred shares
241,686

 
144,852

Redemption of common shares, net
(11,961
)
 
(7,385
)
Purchases of common shares under share repurchase program
(13,996
)
 
(129,083
)
Dividends paid on preferred shares
(4,406
)
 
—

Dividends paid on common shares
(63,286
)
 
(59,961
)
(Decrease) increase in securities lending payable
(7,265
)
 
5,361

Third party investment in redeemable noncontrolling interests
210,200

 
381,250

Third party redemption of redeemable noncontrolling interests
(79,334
)
 
(10,800
)
Third party investment in noncontrolling interests
258,300

 
171,674

Third party distributions of noncontrolling interests
(96,125
)
 
(127,103
)
Third party subscriptions deployed in AlphaCat Funds and Sidecars
(171,952
)
 
(411,336
)
Net cash provided by financing activities
531,506

 
252,217

Effect of foreign currency rate changes on cash and cash equivalents
10,608

 
(6,968
)
Net increase (decrease) in cash and cash equivalents
380,429

 
(154,311
)
Cash and cash equivalents - beginning of period
419,976

 
723,109

Cash and cash equivalents - end of period
$
800,405

 
$
568,798

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the period
$
568

 
$
3,837

Interest paid during the period
$
27,186

 
$
27,552

The accompanying notes are an integral part of these unaudited consolidated financial statements.


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Validus Holdings, Ltd.
Notes to the 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 Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2016, 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.
In the opinion of management, these unaudited 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 United States Financial Accounting Standards Board (the “FASB”).
2. Recent accounting pronouncements
Recently issued accounting standards not yet adopted
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718).” This ASU is directed at reducing diversity in practice when applying the accounting guidance to a change in the terms or conditions of a share-based payment award. The ASU is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company’s Consolidated Financial Statements. The Company plans to adopt this guidance on January 1, 2018.






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


3. Business combination
On May 1, 2017, Western World Insurance Group, Inc. (“Western World”), a wholly owned subsidiary of the Company acquired all of the outstanding capital stock of Crop Risk Services (“CRS”) for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford Insurance Company (“Stratford”), a wholly–owned subsidiary of Western World, was granted the required license to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to complement the Company’s existing agricultural business and expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Western World segment in the Consolidated Financial Statements from the date of acquisition.
On closing, the Company recorded intangible assets totaling $63,921 for Distribution Channels, Brand Name and Technology. Distribution Channels and Brand Name were estimated to have finite useful economic lives of ten years on acquisition and are being amortized on a straight line basis over such period. Technology was estimated to have a finite useful economic life of two years on acquisition and is being amortized on a straight line basis over such a period.
The purchase price was allocated to the acquired assets and liabilities of CRS based on estimated fair values on May 1, 2017, the date the transaction closed, as detailed below. The Company recognized goodwill of $30,943 primarily attributable to CRS’s assembled workforce and synergies expected to result upon the integration of CRS and its related book of business into the Company’s operations. The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses. The Company estimated the fair values of intangible assets acquired based on variations of the income and cost approaches. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.
The purchase of CRS was a taxable transaction and as such, goodwill and intangibles recorded at closing will be deductible for income tax purposes. The Company has recognized and recorded a deferred tax asset of $6,443 which results from the excess of tax-deductible goodwill over book goodwill as recognized in the purchase price allocation.


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


The fair value of net assets acquired, including GAAP adjustments, are summarized as follows:
Total purchase price
 
$
185,576

Assets acquired
 
 
Cash and cash equivalents
$
1,653

 
Premiums receivable
564,453

 
Prepaid reinsurance premiums
227,157

 
Other assets
157,146

 
Assets acquired

950,409

 
 
 
Liabilities acquired
 
 
Reinsurance balances payable
$
294,201

 
Unearned premiums
406,649

 
Net loss reserves
42,575

 
Other liabilities
122,715

 
Liabilities acquired
 
866,140

Excess purchase price
 
$
101,307

 
 
 
Goodwill and other intangible assets acquired
 
 
Intangible asset - Distribution channels
$
52,898

 
Intangible asset - Brand name
9,568

 
Intangible asset - Technology
1,455

 
Total intangible assets
63,921


Goodwill
30,943

 
Deferred tax arising on Goodwill
6,443

 
Total goodwill and intangible assets
 
$
101,307

The Company also incurred transaction expenses related to the CRS acquisition of $4,427. Transaction expenses included legal, financial advisory and audit related services.

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


The following tables reconcile the carrying amount of goodwill and intangible assets from December 31, 2016 to June 30, 2017:
 
 
Goodwill
 
 
Six Months Ended June 30, 2017
 
 
Talbot
 
Western World
 
Total
Balance at December 31, 2016
 
20,393

 
176,365

 
196,758

Additions
 
—

 
30,943

 
30,943

Balance at June 30, 2017
 
20,393

 
207,308

 
227,701

 
 
 
 
 
 
 
 
 
Intangible assets
 
 
Six Months Ended June 30, 2017
 
 
Talbot
 
Western World
 
Total
Balance at December 31, 2016
 
93,924

 
21,668

 
115,592

Additions
 
—

 
63,921

 
63,921

Amortization
 
(2,081
)
 
(1,914
)
 
(3,995
)
Balance at June 30, 2017
 
91,843

 
83,675

 
175,518

 
 
Intangible assets
 
 
Six Months Ended June 30, 2017
 
 
With a Finite Life
 
With an Indefinite Life
 
Total
Balance at December 31, 2016
 
11,424

 
104,168

 
115,592

Additions
 
63,921

 
—

 
63,921

Amortization
 
(3,995
)
 
—

 
(3,995
)
Balance at June 30, 2017
 
71,350

 
104,168

 
175,518

Operating results of CRS have been included in the Consolidated Financial Statements from the May 1, 2017 acquisition date.
The following selected unaudited information has been provided to present a summary of the results of CRS that have been included in the Consolidated Financial Statements for the three and six months ended June 30, 2017.
 
From Acquisition Date to
 
June 30, 2017
Net premiums written
6,988

Net premiums earned
50,044

Total underwriting deductions
44,780

Underwriting income, before general and administrative expenses
5,264


10
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


4. 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 6, “Variable interest entities,” for further details.

The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with ASC Topic 825 “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) and fair value of the Company’s investments as at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
 
Amortized 
Cost or Cost
 

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
649,214

 
$
646,436

 
$
809,392

 
$
804,126

Non-U.S. government and government agency
293,002

 
292,504

 
245,651

 
240,791

U.S. states, municipalities and political subdivisions
227,047

 
227,949

 
271,742

 
271,830

Agency residential mortgage-backed securities
786,784

 
783,006

 
684,490

 
679,595

Non-agency residential mortgage-backed securities
26,745

 
26,683

 
15,858

 
15,477

U.S. corporate
1,378,884

 
1,386,484

 
1,540,036

 
1,534,508

Non-U.S. corporate
380,317

 
379,480

 
418,520

 
410,227

Bank loans
560,446

 
552,901

 
579,121

 
570,399

Asset-backed securities
500,679

 
502,056

 
528,563

 
526,814

Commercial mortgage-backed securities
317,732

 
316,190

 
333,740

 
330,932

Total fixed maturities
5,120,850

 
5,113,689

 
5,427,113

 
5,384,699

Short-term investments
255,289

 
255,516

 
228,574

 
228,386

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,457

 
955

Hedge funds
11,292

 
18,303

 
11,292

 
17,381

Private equity investments
79,871

 
100,391

 
66,383

 
82,627

Fixed income investment funds
266,041

 
268,110

 
247,967

 
249,275

Overseas deposits
57,874

 
57,874

 
50,106

 
50,106

Mutual funds
1,918

 
3,940

 
2,925

 
5,368

Total other investments
416,996

 
448,618

 
380,130

 
405,712

Investments in investment affiliates (a)
72,532

 
103,377

 
84,840

 
100,431

Total managed investments
$
5,865,667

 
$
5,921,200

 
$
6,120,657

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
303,712

 
$
304,954

 
$
157,486

 
$
158,331

Short-term investments
2,615,837

 
2,615,837

 
2,567,784

 
2,567,784

Total non-managed investments
2,919,549

 
2,920,791

 
2,725,270

 
2,726,115

Total investments
$
8,785,216

 
$
8,841,991

 
$
8,845,927

 
$
8,845,343

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in
income as “Income (loss) from investment affiliates.”


11
Table of Contents
Validus Holdings, Ltd.
Notes to the 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, 2017 and December 31, 2016.
 
June 30, 2017
 
December 31, 2016
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,318,254

 
42.8
%
 
$
2,405,597

 
43.4
%
AA
463,060

 
8.5
%
 
538,289

 
9.7
%
A
1,009,366

 
18.6
%
 
1,081,949

 
19.5
%
BBB
703,563

 
13.0
%
 
740,861

 
13.4
%
Total investment grade managed fixed maturities
4,494,243

 
82.9
%
 
4,766,696

 
86.0
%
 
 
 
 
 
 
 
 
BB
229,023

 
4.2
%
 
213,568

 
3.9
%
B
176,743

 
3.3
%
 
177,737

 
3.2
%
CCC
11,114

 
0.2
%
 
13,371

 
0.2
%
NR
202,566

 
3.8
%
 
213,327

 
3.8
%
Total non-investment grade fixed maturities
619,446

 
11.5
%
 
618,003

 
11.1
%
Total managed fixed maturities
$
5,113,689

 
94.4
%
 
$
5,384,699

 
97.1
%
 
 
 
 
 
 
 
 
Non-managed fixed maturities
 
 
 
 
 
 
 
BB
28,177

 
0.4
%
 
29,731

 
0.6
%
B
2,781

 
0.1
%
 
4,524

 
0.1
%
NR
273,996

 
5.1
%
 
124,076

 
2.2
%
Total non-managed fixed maturities
304,954

 
5.6
%
 
158,331

 
2.9
%
Total fixed maturities
$
5,418,643

 
100.0
%
 
$
5,543,030

 
100.0
%

12
Table of Contents
Validus Holdings, Ltd.
Notes to the 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, 2017 and December 31, 2016 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, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
497,473

 
$
492,256

 
$
350,733

 
$
346,161

Due after one year through five years
2,464,093

 
2,461,870

 
2,954,856

 
2,933,146

Due after five years through ten years
456,793

 
459,311

 
430,365

 
426,647

Due after ten years
70,551

 
72,317

 
128,508

 
125,927

 
3,488,910

 
3,485,754

 
3,864,462

 
3,831,881

Asset-backed and mortgage-backed securities
1,631,940

 
1,627,935

 
1,562,651

 
1,552,818

Total managed fixed maturities
$
5,120,850

 
$
5,113,689

 
$
5,427,113

 
$
5,384,699

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
33,662

 
$
32,441

 
$
43,664

 
$
45,418

Due after one year through five years
263,300

 
265,735

 
112,572

 
111,656

Due after five years through ten years
6,750

 
6,778

 
1,250

 
1,257

Due after ten years
—

 
—

 
—

 
—

Total non-managed fixed maturities
303,712

 
304,954

 
157,486

 
158,331

Total fixed maturities
$
5,424,562

 
$
5,418,643

 
$
5,584,599

 
$
5,543,030


13
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
18,303

 
18,303

 
—

 
 
 
 
Private equity investments
 
100,391

 
100,391

 
—

 
 
 
 
Fixed income investment funds
 
268,110

 
237,986

 
30,124

 
Daily
 
Daily to 2 days
Overseas deposits
 
57,874

 
57,874

 
—

 
 
 
 
Mutual funds
 
3,940

 
—

 
3,940

 
Daily
 
Daily
Total other investments
 
$
448,618

 
$
414,554

 
$
34,064

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
955

 
$
955

 
$
—

 
 
 
 
Hedge funds
 
17,381

 
17,381

 
—

 
 
 
 
Private equity investments
 
82,627

 
82,627

 
—

 
 
 
 
Fixed income investment funds
 
249,275

 
218,333

 
30,942

 
Daily
 
2 days
Overseas deposits
 
50,106

 
50,106

 
—

 
 
 
 
Mutual funds
 
5,368

 
—

 
5,368

 
Daily
 
Daily
Total other investments
 
$
405,712

 
$
369,402

 
$
36,310

 
 
 
 
(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 $192,437 (December 31, 2016: $184,749), has a lock-up period of approximately two years as at June 30, 2017 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. 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, 2017, the Company does not have any plans to sell any of the other investments listed above.

14
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(c)    Investments in investment affiliates
Included in the Company’s managed investment portfolio as at June 30, 2017 were investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”) and Aquiline Technology Growth Fund L.P. (“Aquiline Tech”).

Aquiline II and III

For further information regarding Aquiline II and III please refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. As at June 30, 2017, the Company’s total unfunded investment commitment to Aquiline II and III was $3,229 and $62,031, respectively (December 31, 2016: $2,040 and $62,031).

Aquiline Tech

On March 20, 2017, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Aquiline Technology Growth GP Ltd, (the “General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests in Aquiline Tech, a Cayman Islands exempted limited partnership, with a capital commitment in an amount equal to $20,000. The limited partnership interests are governed by the terms of an amended and restated exempted limited partnership agreement. As at June 30, 2017, the unfunded investment commitment to Aquiline Tech was $18,786.

The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Investments in investment affiliates, beginning of period
$
94,697

 
$
84,135

 
$
100,431

 
$
87,673

Net capital (distributions) contributions
(786
)
 
15,732

 
(11,708
)
 
16,307

Income (loss) from investment affiliates
9,466

 
(589
)
 
14,654

 
(4,702
)
Investments in investment affiliates, end of period
$
103,377

 
$
99,278

 
$
103,377

 
$
99,278

The following table presents the Company’s investments in investment affiliates as at June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,349

 
—
%
 
8.1
%
 
$
52,010

Aquiline III
37,969

 
—
%
 
9.0
%
 
50,153

Aquiline Tech
1,214

 
—
%
 
16.4
%
 
1,214

Total investments in investment affiliates
$
72,532

 
 
 
 
 
$
103,377

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
46,871

 
—
%
 
8.1
%
 
$
61,999

Aquiline III
37,969

 
—
%
 
9.0
%
 
38,432

Total investments in investment affiliates
$
84,840

 
 
 
 
 
$
100,431


15
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(d)    Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
31,312

 
$
30,621

 
$
62,983

 
$
58,638

Other investments
7,571

 
8,026

 
14,441

 
8,898

Cash and cash equivalents and restricted cash
616

 
380

 
1,226

 
1,245

Securities lending income
7

 
12

 
20

 
17

Total gross investment income
39,506

 
39,039

 
78,670

 
68,798

Investment expenses
(1,443
)
 
(2,190
)
 
(4,415
)
 
(4,026
)
Total managed net investment income
$
38,063

 
$
36,849

 
$
74,255

 
$
64,772

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
4,500

 
$
1,977

 
$
7,560

 
$
3,272

Restricted cash, cash and cash equivalents
1,678

 
431

 
2,640

 
674

Total non-managed net investment income
6,178

 
2,408

 
10,200

 
3,946

Total net investment income
$
44,241

 
$
39,257

 
$
84,455

 
$
68,718

Net investment income from other investments includes distributed and undistributed net income from hedge funds, overseas deposits and certain fixed income investment funds.
(e)    Net realized and change in net unrealized gains on investments
The following table sets forth an analysis of net realized gains and the change in net unrealized gains on investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
5,175

 
$
3,306

 
$
7,865

 
$
6,523

Gross realized (losses)
(2,906
)
 
(786
)
 
(8,488
)
 
(5,089
)
Net realized gains (losses) on investments
2,269

 
2,520

 
(623
)
 
1,434

Change in net unrealized gains on investments
15,942

 
30,052

 
30,291

 
77,130

Total net realized and change in net unrealized gains on managed investments
$
18,211

 
$
32,572

 
$
29,668

 
$
78,564

Non-managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
5

 
$
204

 
$
1,733

 
$
715

Gross realized (losses)
—

 
—

 
—

 
(9
)
Net realized gains on investments
5

 
204

 
1,733

 
706

Change in net unrealized gains (losses) on investments
379

 
1,376

 
(622
)
 
1,742

Total net realized and change in net unrealized gains on non-managed investments
384

 
1,580

 
1,111

 
2,448

Total net realized and change in net unrealized gains on total investments
$
18,595

 
$
34,152

 
$
30,779

 
$
81,012


16
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(f)    Pledged cash and investments
As at June 30, 2017, the Company had $5,221,174 (December 31, 2016: $5,173,966) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $5,156,173 were held in trust (December 31, 2016: $5,068,092). 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.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the total amount of $404,516 (December 31, 2016: $442,184). For further details on the credit facilities, please refer to Note 13, “Debt and financing arrangements.”
5. 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.
 

17
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At June 30, 2017, 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 (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
646,436

 
$
—

 
$
—

 
$
646,436

Non-U.S. government and government agency
—

 
292,504

 
—

 
—

 
292,504

U.S. states, municipalities and political subdivisions
—

 
227,949

 
—

 
—

 
227,949

Agency residential mortgage-backed securities
—

 
783,006

 
—

 
—

 
783,006

Non-agency residential mortgage-backed securities
—

 
26,683

 
—

 
—

 
26,683

U.S. corporate
—

 
1,386,484

 
—

 
—

 
1,386,484

Non-U.S. corporate
—

 
379,480

 
—

 
—

 
379,480

Bank loans
—

 
328,729

 
224,172

 
—

 
552,901

Asset-backed securities
—

 
466,135

 
35,921

 
—

 
502,056

Commercial mortgage-backed securities
—

 
316,190

 
—

 
—

 
316,190

Total fixed maturities
—

 
4,853,596

 
260,093

 
—

 
5,113,689

Short-term investments
248,439

 
7,077

 
—

 
—

 
255,516

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds
—

 
—

 
—

 
18,303

 
18,303

Private equity investments
—

 
—

 
—

 
100,391

 
100,391

Fixed income investment funds
—

 
30,137

 
16,400

 
221,573

 
268,110

Overseas deposits
—

 
—

 
—

 
57,874

 
57,874

Mutual funds
—

 
3,940

 
—

 
—

 
3,940

Total other investments
—

 
34,077

 
16,400

 
398,141

 
448,618

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
103,377

Total managed investments
$
248,439

 
$
4,894,750

 
$
276,493

 
$
398,141

 
$
5,921,200

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
236,929

 
$
68,025

 
$
—

 
$
304,954

Short-term investments
2,615,837

 
—

 
—

 
—

 
2,615,837

Total non-managed investments
2,615,837

 
236,929

 
68,025

 
—

 
2,920,791

Total investments
$
2,864,276

 
$
5,131,679

 
$
344,518

 
$
398,141

 
$
8,841,991

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.

18
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At December 31, 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 (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
804,126

 
$
—

 
$
—

 
$
804,126

Non-U.S. government and government agency
—

 
240,791

 
—

 
—

 
240,791

U.S. states, municipalities and political subdivisions
—

 
271,830

 
—

 
—

 
271,830

Agency residential mortgage-backed securities
—

 
679,595

 
—

 
—

 
679,595

Non-agency residential mortgage-backed securities
—

 
15,477

 
—

 
—

 
15,477

U.S. corporate
—

 
1,534,508

 
—

 
—

 
1,534,508

Non-U.S. corporate
—

 
410,227

 
—

 
—

 
410,227

Bank loans
—

 
323,903

 
246,496

 
—

 
570,399

Asset-backed securities
—

 
502,883

 
23,931

 
—

 
526,814

Commercial mortgage-backed securities
—

 
330,932

 
—

 
—

 
330,932

Total fixed maturities
—

 
5,114,272

 
270,427

 
—

 
5,384,699

Short-term investments
209,651

 
18,735

 
—

 
—

 
228,386

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
—

 
955

 
955

Hedge funds
—

 
—

 
—

 
17,381

 
17,381

Private equity investments
—

 
—

 
—

 
82,627

 
82,627

Fixed income investment funds
—

 
30,941

 
12,168

 
206,166

 
249,275

Overseas deposits
—

 
—

 
—

 
50,106

 
50,106

Mutual funds
—

 
5,368

 
—

 
—

 
5,368

Total other investments
—

 
36,309

 
12,168

 
357,235

 
405,712

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
100,431

Total managed investments
$
209,651

 
$
5,169,316

 
$
282,595

 
$
357,235

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
109,956

 
$
48,375

 
$
—

 
$
158,331

Short-term investments
2,567,784

 
—

 
—

 
—

 
2,567,784

Total non-managed investments
2,567,784

 
109,956

 
48,375

 
—

 
2,726,115

Total investments
$
2,777,435

 
$
5,279,272

 
$
330,970

 
$
357,235

 
$
8,845,343

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At June 30, 2017, managed Level 3 investments totaled $276,493 (December 31, 2016: $282,595), representing 4.7% (December 31, 2016: 4.6%) 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.

19
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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.
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

20
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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.
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.

21
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. 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
During the three months ended June 30, 2017, the Company’s investment in a fund of hedge funds was liquidated. Prior to liquidation, the fund’s administrator provided a monthly reported NAV with a three month delay in its valuation. The fund manager provided an estimate of the fund NAV at year end based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compared the fund administrator’s NAV to the fund manager’s estimated NAV that incorporates relevant valuation sources. Prior to liquidation, the fair value of these investments were measured using the NAV practical expedient and therefore were not categorized within the fair value hierarchy.
Hedge funds
The hedge fund investment was assumed by the Company 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.
Fixed income investment funds
The Company’s investment funds classified as Level 2 consist of a pooled investment 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 and is traded on a daily basis.
Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure.  Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.

22
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
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 an investment fund which invests in various quoted investments. The fair value of units in the mutual fund is based on the NAV of the fund as reported by the fund manager. The mutual fund has daily liquidity which allows us to redeem our holdings at the applicable NAV in the near term. As such, the Company has classified this investment 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, 2017 and 2016:
 
Three Months Ended June 30, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
236,694

 
$
72,676

 
$
12,560

 
$
23,882

 
$
345,812

Purchases
16,757

 
5,000

 
3,432

 
11,053

 
36,242

Sales
—

 
—

 
—

 
(53
)
 
(53
)
Settlements
(28,893
)
 
(10,216
)
 
408

 
—

 
(38,701
)
Net realized gains
—

 
216

 
—

 
—

 
216

Change in net unrealized (losses) gains
(386
)
 
349

 
—

 
49

 
12

Amortization
—

 
—

 
—

 
990

 
990

Level 3 investments, end of period
$
224,172

 
$
68,025

 
$
16,400

 
$
35,921

 
$
344,518

 
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
)
Level 3 investments, end of period
$
243,148

 
$
37,518

 
$
12,383

 
$
293,049


23
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Six Months Ended June 30, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments—beginning of period
$
246,496

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

Purchases
39,933

 
66,091

 
3,432

 
11,053

 
120,509

Sales
—

 
—

 
—

 
(53
)
 
(53
)
Settlements
(62,003
)
 
(48,996
)
 
800

 
—

 
(110,199
)
Net realized gains
—

 
3,350

 
—

 
—

 
3,350

Change in net unrealized (losses)
(254
)
 
(795
)
 
—

 
—

 
(1,049
)
Amortization
—

 
—

 
—

 
990

 
990

Level 3 investments—end of period
$
224,172

 
$
68,025

 
$
16,400

 
$
35,921

 
$
344,518

 
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
)
Level 3 investments—end of period
$
243,148

 
$
37,518

 
$
12,383

 
$
293,049

There have not been any transfers into or out of Level 3 during the three and six months ended June 30, 2017 or 2016.
(d)
Financial instruments not carried at fair value
ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of cash and cash equivalents, restricted cash, accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at June 30, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
6. 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 are primarily entities in 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.

AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and 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

24
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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”). All of the AlphaCat ILS funds are VIEs and were consolidated by the Company as the primary beneficiary through May 31, 2017. However, on June 1, 2017, the Company redeemed its investment in one of the lower risk AlphaCat ILS funds. As a result, the Company was no longer deemed to be the primary beneficiary and therefore this fund was deconsolidated effective June 1, 2017. The deconsolidation resulted in a loss of $402 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the three and six months ended June 30, 2017. 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.

Any notes issued by the master funds to the consolidated feeder funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re to direct third party investors and non-consolidated feeder funds remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of Income and Comprehensive Income as (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

During 2017 and 2016, one of the AlphaCat ILS funds (the “Fund”) 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 of the Fund and earn an interest rate of 7% (2016: 8%) per annum, payable on a cumulative basis in arrears.

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 Income and Comprehensive Income as (income) 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.

25
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables present a reconciliation of the beginning and ending notes payable to AlphaCat investors for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
343,256

 
$
103,320

 
$
446,576

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
423,269

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
267,867

 
68,880

 
336,747

Redemption of notes payable to AlphaCat investors
(140,150
)
 
—

 
(140,150
)
Foreign exchange gains
(283
)
 
—

 
(283
)
Notes payable to AlphaCat investors, end of period
$
893,959

 
$
172,200

 
$
1,066,159

 
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, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
278,202

 
$
—

 
$
278,202

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
423,269

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
541,877

 
172,200

 
714,077

Redemption of notes payable to AlphaCat investors
(349,106
)
 
—

 
(349,106
)
Foreign exchange gains
(283
)
 
—

 
(283
)
Notes payable to AlphaCat investors, end of period
$
893,959

 
$
172,200

 
$
1,066,159

 
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

As at December 31, 2016, $1,000 of the structured notes redeemed during the year were payable to AlphaCat investors and included in accounts payable and accrued expenses.
The income attributable to AlphaCat investors for the three and six months ended June 30, 2017 was $11,830 and $19,333 (2016: $6,114 and $10,714), with $63,352 included in accounts payable and accrued expenses as at June 30, 2017 (December 31, 2016: $17,068).

26
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 and issued under Rule 144A of the Securities Act of 1933, as amended, following a passive buy-and-hold investment strategy. Two of the funds are VIEs, one of which is consolidated by the Company as the primary beneficiary. The remaining fund is a VOE and is 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, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
29,330

 
$
3,455

 
$
40,041

 
$
3,206

AlphaCat ILS funds - Lower Risk (a)
951,428

951,428

13,371

 
1,498,276

 
42,457

AlphaCat ILS funds - Higher Risk (a)
1,037,568

 
207,300

 
972,633

 
381,332

AlphaCat Re and AlphaCat Master Fund
2,828,096

 
2,827,926

 
2,510,415

 
2,510,245

BetaCat ILS funds
146,098

 
278

 
82,471

 
30,663

(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.
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 4, “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.
7. Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, 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 interests. 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 interests.

27
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the three and six months ended June 30, 2017 and 2016:
 
Redeemable noncontrolling interests
 
Noncontrolling interests
 
Total
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
1,657,630

 
$
1,409,037

 
$
330,597

 
$
157,223

 
$
1,988,227

 
$
1,566,260

Issuance of shares
106,501

 
112,500

 
103,320

 
59,349

 
209,821

 
171,849

Adjustment to noncontrolling interests as a result of deconsolidation
(459,021
)
 
—

 
—

 
—

 
(459,021
)
 
—

Income attributable to noncontrolling interests
28,555

 
17,230

 
15,095

 
3,963

 
43,650

 
21,193

Redemption of shares / distributions
(82,005
)
 
(6,484
)
 
(33,354
)
 
(8,381
)
 
(115,359
)
 
(14,865
)
Balance, end of period
$
1,251,660

 
$
1,532,283

 
$
415,658

 
$
212,154

 
$
1,667,318

 
$
1,744,437

 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
Noncontrolling interests
 
Total
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
1,528,001

 
$
1,111,714

 
$
165,977

 
$
154,662

 
$
1,693,978

 
$
1,266,376

Issuance of shares
210,200

 
381,250

 
258,300

 
171,674

 
468,500

 
552,924

Adjustment to noncontrolling interests as a result of deconsolidation
(459,021
)
 
—

 
—

 
—

 
(459,021
)
 
—

Income attributable to noncontrolling interests
54,485

 
45,803

 
31,737

 
12,921

 
86,222

 
58,724

Redemption of shares / distributions
(82,005
)
 
(6,484
)
 
(40,356
)
 
(127,103
)
 
(122,361
)
 
(133,587
)
Balance, end of period
$
1,251,660

 
$
1,532,283

 
$
415,658

 
$
212,154

 
$
1,667,318

 
$
1,744,437

As at June 30, 2017, redemptions of $74,200 and distributions of $nil (December 31, 2016: $71,530 and $16,144) were payable to redeemable noncontrolling interests and noncontrolling interests, respectively. These amounts are classified within accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets.

28
Table of Contents
Validus Holdings, Ltd.
Notes to the 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, interest rate exposures and to shorten the duration of the Company’s fixed maturities portfolio.
(a)
Derivatives not designated as hedging instruments
The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments for accounting purposes within the Company’s Consolidated Balance Sheets as at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
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
 
$
223,018

 
$
1,972

 
$
6,325

 
$
181,375

 
$
2,351

 
$
3,421

Interest rate swap contracts
 
$
150,000

 
$
330

 
$
648

 
$
—

 
$
—

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.
The following table summarizes information on the classification and net impact on earnings, recognized in the Company’s Consolidated Statements of Income and Comprehensive Income relating to the foreign currency forward and interest rate swap contracts that were not designated as hedging instruments for accounting purposes during the three and six months ended June 30, 2017 and 2016:
Derivatives not designated as hedging instruments
Classification of (losses) gains recognized in earnings
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts
Foreign exchange (losses) gains
 
$
(6,525
)
 
$
896

 
$
(6,072
)
 
$
(1,117
)
Foreign currency forward contracts
Other (loss) income
 
$
(874
)
 
$
84

 
$
(979
)
 
$
120

Interest rate swap contracts
Change in unrealized losses on investments
 
$
(319
)
 
$
—

 
$
(319
)
 
$
—

(b)
Derivatives designated as hedging instruments
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, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
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

 
$
1,409

 
$
552,263

 
$
20

 
$
1,479

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.
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.

29
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 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, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Interest rate swap contracts
 
2017
 
2016
 
2017
 
2016
Amount of effective portion recognized in other comprehensive income
 
$
2,217

 
$
2,694

 
$
4,376

 
$
6,350

Amount of effective portion subsequently reclassified to earnings
 
$
(2,073
)
 
$
(2,758
)
 
$
(4,330
)
 
$
(5,656
)
Amount of ineffective portion excluded from effectiveness testing
 
$
(144
)
 
$
64

 
$
(46
)
 
$
(694
)
The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Income and Comprehensive Income.
(c)
Classification within the fair value hierarchy
As described in Note 5, “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.
(d)
Balance sheet offsetting
There was no balance sheet offsetting activity as at June 30, 2017 or December 31, 2016.
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.
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 (“IBNR”) can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed and adjusted regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed this estimate.
The following table summarizes the total reserve for losses and loss expenses as at June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
Case reserves
$
1,236,799

 
$
1,237,772

IBNR
2,068,392

 
1,757,423

Total reserve for losses and loss expenses
$
3,305,191

 
$
2,995,195


30
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Reserve for losses and loss expenses, beginning of period
$
3,052,745

 
$
2,980,300

 
$
2,995,195

 
$
2,996,567

Loss reserves recoverable
(451,856
)
 
(370,689
)
 
(430,421
)
 
(350,586
)
Net reserves for losses and loss expenses, beginning of period
2,600,889

 
2,609,611

 
2,564,774

 
2,645,981

Net reserves acquired (a)
23,753

 
—

 
23,753

 
—

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
339,439

 
369,911

 
670,255

 
648,097

Prior years
(43,290
)
 
(62,781
)
 
(104,521
)
 
(116,520
)
Total net incurred losses and loss expenses
296,149

 
307,130

 
565,734

 
531,577

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
(42,758
)
 
(45,882
)
 
(50,456
)
 
(61,655
)
Prior years
(193,265
)
 
(176,775
)
 
(431,354
)
 
(430,079
)
Total net paid losses
(236,023
)
 
(222,657
)
 
(481,810
)
 
(491,734
)
Foreign exchange losses (gains)
20,216

 
(14,354
)
 
32,533

 
(6,094
)
Net reserve for losses and loss expenses, end of period
2,704,984

 
2,679,730

 
2,704,984

 
2,679,730

Loss reserves recoverable
600,207

 
442,987

 
600,207

 
442,987

Reserve for losses and loss expenses, end of period
$
3,305,191

 
$
3,122,717

 
$
3,305,191

 
$
3,122,717

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
Incurred losses and loss expenses comprise:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Gross losses and loss expenses
$
415,013

 
$
397,863

 
$
761,808

 
$
667,716

Reinsurance recoverable
(118,864
)
 
(90,733
)
 
(196,074
)
 
(136,139
)
Net incurred losses and loss expenses
$
296,149

 
$
307,130

 
$
565,734

 
$
531,577

The net favorable development on prior years by segment and line of business for the three and six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended June 30, 2017
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(671
)
 
$
(16,313
)
 
$
(6,115
)
 
$
—

 
$
(23,099
)
Talbot
(4,894
)
 
(17,056
)
 
6,074

 
—

 
(15,876
)
Western World
(479
)
 
—

 
—

 
16

 
(463
)
AlphaCat
(3,097
)
 
—

 
(755
)
 
—

 
(3,852
)
Net (favorable) adverse development
$
(9,141
)
 
$
(33,369
)
 
$
(796
)
 
$
16

 
$
(43,290
)
The net favorable loss reserve development on prior accident years of $43.3 million during the three months ended June 30, 2017 was primarily due to favorable development on attritional losses.


31
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
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 loss reserve development on prior accident years of $62.8 million during the three months ended June 30, 2016 was primarily due to favorable development on attritional losses.
 
Six Months Ended June 30, 2017
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(4,242
)
 
$
(31,742
)
 
$
(15,895
)
 
$
—

 
$
(51,879
)
Talbot
(11,228
)
 
(33,052
)
 
(410
)
 
—

 
(44,690
)
Western World
(3,302
)
 
—

 
—

 
2,620

 
(682
)
AlphaCat
(7,492
)
 
—

 
222

 
—

 
(7,270
)
Net (favorable) adverse development
$
(26,264
)
 
$
(64,794
)
 
$
(16,083
)
 
$
2,620

 
$
(104,521
)

The net favorable loss reserve development on prior accident years of $104.5 million during the six months ended June 30, 2017 was primarily due to 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 due to favorable development on attritional losses.
10. Reinsurance
The Company’s reinsurance balances recoverable at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
Loss reserves recoverable on unpaid:
 
 
 
Case reserves
$
176,416

 
$
165,328

IBNR
423,791

 
265,093

Total loss reserves recoverable
600,207

 
430,421

Paid losses recoverable
35,675

 
35,247

Total reinsurance balances recoverable
$
635,882

 
$
465,668

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.

32
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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. As at June 30, 2017, $630,821 or 99.2% (December 31, 2016: $461,369 or 99.1%) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.
Reinsurance balances recoverable by reinsurer as at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
521,027

 
81.9
%
 
$
395,308

 
84.9
%
Other reinsurers’ balances > $1 million
106,432

 
16.8
%
 
66,944

 
14.4
%
Other reinsurers’ balances < $1 million
8,423

 
1.3
%
 
3,416

 
0.7
%
Total
$
635,882

 
100.0
%
 
$
465,668

 
100.0
%

The following tables show the reinsurance balances recoverable due from, and the ratings associated with, the Company’s top ten reinsurers as at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Munich Re
 
AA-
 
$
96,997

 
15.2
%
Lloyd's Syndicates
 
A+
 
84,742

 
13.2
%
Fully collateralized reinsurers
 
NR
 
80,558

 
12.7
%
Swiss Re
 
AA-
 
77,928

 
12.3
%
Everest Re
 
A+
 
54,565

 
8.6
%
Hannover Re
 
AA-
 
48,037

 
7.6
%
Federal Crop Insurance Corporation
 
(a)
 
29,009

 
4.6
%
Transatlantic Re
 
A+
 
23,066

 
3.6
%
XL Catlin
 
A+
 
16,062

 
2.5
%
Helvetia Group
 
A
 
10,063

 
1.6
%
Total
 
 
 
$
521,027

 
81.9
%
(a)
The Company participates in a crop reinsurance program sponsored by the U.S. federal government. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the agriculture line of business.


33
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
December 31, 2016
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Lloyd's Syndicates
 
A+
 
$
84,419

 
18.2
%
Swiss Re
 
AA-
 
84,044

 
18.1
%
Fully collateralized reinsurers
 
NR
 
83,088

 
17.8
%
Hannover Re
 
AA-
 
50,603

 
10.9
%
Everest Re
 
A+
 
36,912

 
7.9
%
Munich Re
 
AA-
 
18,214

 
3.9
%
Transatlantic Re
 
A+
 
10,593

 
2.3
%
Hamilton Re
 
A-
 
10,343

 
2.2
%
Toa Re
 
A+
 
9,510

 
2.0
%
National Indemnity Company
 
AA+
 
7,582

 
1.6
%
Total
 
 
 
$
395,308

 
84.9
%
At June 30, 2017 and December 31, 2016, the provision for uncollectible reinsurance relating to reinsurance balances recoverable was $6,741 and $5,153, respectively. To estimate this provision for uncollectible reinsurance, reinsurance balances recoverable are 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.
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 12, 2017, the Company issued 10,000 shares of its 5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”) (equivalent to 10,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series B Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series B 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 $241,686 which was used for general corporate purposes.
The Depositary Shares, representing the Series B Preferred Shares, are traded on the New York Stock Exchange (“NYSE”) under the symbol “VRPRB.” The Series B Preferred Shares have no stated maturity date and are redeemable, in whole or in part, at the Company’s option on and after June 21, 2022, at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25 per Depository Share), plus declared and unpaid dividends. The Company may also redeem all, but not less than all, of the Series B Preferred Shares before the redemption date at a redemption price of $26,000 per share (equivalent to $26 per Depository Share), plus declared and unpaid dividends, if the Company is required to submit a proposal to the holders of the Series B Preferred Shares concerning an amalgamation, consolidation, merger or other similar corporate transaction or change in Bermuda law. The Series B Preferred Shares may also be redeemed before the redemption date at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25.00 per Depository Share), plus declared and unpaid dividends, in whole, if there is a certain change in tax law, or in whole or in part, in the case of a capital disqualification event. However, no redemption may occur prior to June 21, 2027 unless the Company has sufficient funds in order to meet the Bermuda Monetary Authority’s (“the BMA”) Enhanced Capital Requirements (“ECR”) and the BMA approves of the redemption, or the Company replaces the capital represented by the Series B Preferred Shares with capital having equal or better capital treatment as the Series B Preferred Shares under the ECR.
Dividends on the Series B 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 5.800%. The Company will be restricted from paying dividends on and repurchasing its common shares, unless certain dividend payments are made on the Series B Preferred Shares.

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


Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Series B 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 B 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 B 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 B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
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). 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 share activity during the six months ended June 30, 2017 and 2016:
 
Six Months Ended June 30,
 
2017
 
2016
Preferred shares issued and outstanding, beginning of period
6,000

 
—

Preferred shares issued
10,000

 
6,000

Preferred shares issued and outstanding, end of period
16,000

 
6,000

The Company had 6,000 Series A Preferred Shares and 10,000 Series B Preferred Shares issued and outstanding as at June 30, 2017 and 6,000 Series A Preferred Shares issued and outstanding as at December 31, 2016.
(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 common share repurchase authorization to $750,000. This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company has repurchased 80,776,802 common shares for an aggregate purchase price of $2,718,402 from the inception of its share repurchase program to June 30, 2017. The Company had $305,999 remaining under its authorized share repurchase program as of June 30, 2017.
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 share activity during the six months ended June 30, 2017 and 2016:

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


 
Six Months Ended June 30,
 
2017
 
2016
Common shares issued, beginning of period
161,279,976

 
160,570,772

Restricted share awards vested, net of shares withheld
597,021

 
601,890

Restricted share units vested, net of shares withheld
14,948

 
18,486

Options exercised
—

 
13,635

Performance share awards vested, net of shares withheld
42,410

 
48,088

Common shares issued, end of period
161,934,355

 
161,252,871

Treasury shares, end of period
(82,415,774
)
 
(80,480,633
)
Common shares outstanding, end of period
79,518,581

 
80,772,238

(c)
Dividends
On May 10, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and a quarterly cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on June 30, 2017 to holders of record on June 15, 2017. The preferred share dividend was paid on June 15, 2017 to holders of record on June 1, 2017.
On February 9, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and a quarterly cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on March 31, 2017 to holders of record on March 15, 2017. The preferred share dividend was paid on March 15, 2017 to holders of record on March 1, 2017.
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 714,817 shares remain available for issuance at June 30, 2017. 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, 2017 and 2016 was as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, beginning of period
26,136

 
$
6.78

 
$
23.48

 
65,401

 
$
7.74

 
$
20.17

Options exercised
—

 
—

 
—

 
(14,044
)
 
7.69

 
17.02

Options outstanding, end of period
26,136

 
$
6.78

 
$
23.48

 
51,357

 
$
7.75

 
$
21.03


36
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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, 2017 of $9,745 (2016: $9,517) and $18,789 (2016: $18,646), 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 awards for the six months ended June 30, 2017 and 2016 was as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, beginning of period
2,469,982

 
$
40.89

 
2,739,446

 
$
38.25

Restricted share awards granted
481,619

 
53.42

 
534,905

 
48.69

Restricted share awards vested
(803,764
)
 
41.31

 
(783,523
)
 
37.32

Restricted share awards forfeited
(39,617
)
 
41.98

 
(8,317
)
 
37.94

Restricted share awards outstanding, end of period
2,108,220

 
$
43.58

 
2,482,511

 
$
40.79

At June 30, 2017, there were $63,931 (December 31, 2016: $58,804) 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, 2016: 2.3 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, 2017 of $327 (2016: $377) and $642 (2016: $688), 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, 2017 and 2016 was as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, beginning of period
112,808

 
$
40.95

 
114,337

 
$
38.47

Restricted share units granted
12,236

 
53.40

 
20,129

 
48.69

Restricted share units vested
(18,241
)
 
41.66

 
(23,982
)
 
38.18

Restricted share units issued in lieu of cash dividends
1,468

 
40.98

 
1,629

 
38.47

Restricted share units outstanding, end of period
108,271

 
$
42.24

 
112,113

 
$
40.37

At June 30, 2017, there were $2,558 (December 31, 2016: $2,542) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.6 years (December 31, 2016: 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 DBVPS 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

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


of each performance period which will reflect any adjustments in the Consolidated Statements of Income and 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, 2017 of $1,074 (2016: $833) and $1,206 (2016: $2,630), respectively.
Activity with respect to unvested performance share awards for the six months ended June 30, 2017 and 2016 was as follows:
 
Six Months Ended June 30,
 
2017
 
2016
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, beginning of period
285,820

 
$
44.53

 
172,594

 
$
40.70

Performance share awards granted
107,209

 
53.40

 
121,844

 
48.69

Performance share awards vested
(52,639
)
 
37.33

 
(57,581
)
 
36.11

Performance share awards conversion adjustment
(26,322
)
 
36.82

 
45,517

 
36.82

Performance share awards outstanding, end of period
314,068

 
$
49.37

 
282,374

 
$
44.46

At June 30, 2017, there were $10,250 (December 31, 2016: $6,902) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.3 years (December 31, 2016: 2.1 years).
(b)
Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Restricted share awards
 
$
9,745

 
$
9,517

 
$
18,789

 
$
18,646

Restricted share units
 
327

 
377

 
642

 
688

Performance share awards
 
1,074

 
833

 
1,206

 
2,630

Total
 
$
11,146

 
$
10,727

 
$
20,637

 
$
21,964

 
13. Debt and financing arrangements
The Company’s financing structure is comprised of debentures and senior notes payable along with credit and other facilities.
The Company’s outstanding debentures and senior notes payable as at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
Deferrable debentures
 
 
 
2006 Junior Subordinated
$
150,000

 
$
150,000

2007 Junior Subordinated
139,800

 
139,800

Flagstone 2006 Junior Subordinated
134,850

 
133,676

Flagstone 2007 Junior Subordinated
113,750

 
113,750

Total debentures payable
538,400

 
537,226

2010 Senior notes payable
250,000

 
250,000

Less: Unamortized debt issuance costs
(4,537
)
 
(4,638
)
Total senior notes payable
245,463

 
245,362

Total debentures and senior notes payable
$
783,863

 
$
782,588


38
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The Company’s outstanding credit and other facilities as at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
 
Commitment
 
Drawn and outstanding
 
Commitment
 
Drawn and outstanding
Credit and other facilities
 
 
 
 
 
 
 
$85,000 syndicated unsecured letter of credit facility
$
85,000

 
$
—

 
$
85,000

 
$
—

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

 
87,718

 
300,000

 
90,252

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

 
5,648

 
24,000

 
4,553

$20,000 AlphaCat Re secured letter of credit facility (a)
—

 
—

 
20,000

 
20,000

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

 
5,535

 
25,000

 
5,842

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

 
102,190

 
236,000

 
144,392

Total credit and other facilities
$
670,000

 
$
201,091

 
$
690,000

 
$
265,039

(a)
The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.
(a)
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
 
Issued
 
Maturity date
 
Interest Rate as at
 
Interest payments due
 
Issuance Date
 
June 30, 2017
 
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
 
$
134,850

 
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
 
$
100,000

 
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.
Future payments of principal of $250,000 and $538,400 on the 2010 Senior Notes and the debentures, respectively, are expected to be made after 2022.

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


(b)
Credit facilities
The Company has pledged cash and investments as collateral under the Company’s credit facilities in the total amount of $404,516 (December 31, 2016: $442,184) as detailed in the table below:
 
 
Cash and investments pledged as collateral
 
 
June 30, 2017
 
December 31, 2016
$300,000 syndicated secured letter of credit facility
 
$
147,048

 
$
157,597

$24,000 secured bi-lateral letter of credit facility
 
33,353

 
48,097

AlphaCat Re secured letter of credit facility (a)
 
—

 
20,032

$236,000 Flagstone bi-lateral facility
 
224,115

 
216,458

Total cash and investments pledged as collateral
 
$
404,516

 
$
442,184

(a)
The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.
As of June 30, 2017 and December 31, 2016, the Company was in compliance with all covenants and restrictions under its credit facilities.
(c)
Finance expenses
Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facility fees, bank charges, Talbot Funds at Lloyds (“FAL”) facility, AlphaCat financing fees and other charges as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
2006 Junior Subordinated Deferrable Debentures
$
2,211

 
$
2,211

 
$
4,398

 
$
4,422

2007 Junior Subordinated Deferrable Debentures
1,831

 
1,830

 
3,641

 
3,661

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,248

 
2,244

 
4,469

 
4,489

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,751

 
1,766

 
3,474

 
3,533

2010 Senior Notes due 2040
5,598

 
5,597

 
11,195

 
11,194

Credit facilities
403

 
235

 
621

 
896

Bank and other charges
131

 
206

 
282

 
213

AlphaCat fees (a)
36

 
77

 
72

 
961

Total finance expenses
$
14,209

 
$
14,166

 
$
28,152

 
$
29,369

(a)
Includes finance expenses incurred by AlphaCat Managers Ltd. in relation to fund raising for the AlphaCat sidecars, the AlphaCat ILS funds and AlphaCat direct.

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


14. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three and six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended June 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(21,677
)
 
$
(82
)
 
$
(694
)
 
$
(22,453
)
Other comprehensive income (loss), net of tax
1,489

 
1,184

 
(144
)
 
2,529

Balance, net of tax, end of period
$
(20,188
)
 
$
1,102

 
$
(838
)
 
$
(19,924
)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(13,862
)
 
$
251

 
$
(1,827
)
 
$
(15,438
)
Other comprehensive (loss) income, net of tax
(3,287
)
 
479

 
64

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

 
$
(1,763
)
 
$
(18,182
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(22,274
)
 
$
(150
)
 
$
(792
)
 
$
(23,216
)
Other comprehensive income (loss), net of tax
2,086

 
1,252

 
(46
)
 
3,292

Balance, net of tax, end of period
$
(20,188
)
 
$
1,102

 
$
(838
)
 
$
(19,924
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(11,834
)
 
$
334

 
$
(1,069
)
 
$
(12,569
)
Other comprehensive (loss) income, net of tax
(5,315
)
 
396

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

 
$
(1,763
)
 
$
(18,182
)




41
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 $583,600 for the 2017 underwriting year (2016 underwriting year: $617,000).
The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.
(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 2017 underwriting capacity at Lloyd’s of £600,000, at the June 30, 2017 exchange rate of £1 equals $1.30 and assuming the maximum 3% assessment, the Company would be assessed approximately $23,400.
(c)
Marketing Services Agreement (“MSA”)
On May 1, 2017, the Company entered into a MSA with Archer Daniels Midland (“ADM”). Under this agreement, ADM agrees to provide marketing services via its own distribution channels for an annual fee of $2,000 for a period of seven years, with an option for the Company to extend for an additional three years. For the three and six months ended June 30, 2017, the Company had incurred fees of $333 in relation to the MSA.
(d)    Unfunded investment commitments
As at June 30, 2017 and December 31, 2016, the Company had total unfunded investment commitments related to the following:
 
 
Unfunded investment commitments
 
 
June 30, 2017
 
December 31, 2016
Fixed maturity investments (a)
 
$
25,238

 
$
28,499

Other investments (b)
 
119,495

 
156,134

Investments in investment affiliates (c)
 
84,046

 
64,071

AlphaCat ILS Fund
 
—

 
10,000

Total unfunded investment commitments
 
$
228,779

 
$
258,704

(a)
The Company has an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator.
(b)
The Company’s total capital commitments related to other investments as at June 30, 2017 was $313,000 (December 31, 2016: $308,000).
(c)
Refer to Note 4(c), “Investments in Investment Affiliates.”



42
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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.
(a)
Aquiline Capital Partners LLC (“Aquiline Capital”)
Group Ark Insurance
Subsequent to July 2016, Aquiline Capital ceased to be shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, continues to serve 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 and $1,971, respectively. The Company also recognized reinsurance premiums ceded during the three and six months ended June 30, 2016 of $(17) and $nil, respectively. Earned premium adjustments were recorded during the three and six months ended June 30, 2016 of $473 and $999, respectively. As at December 31, 2016 the Company had recorded premiums receivable and loss reserves recoverable of $292 and $798, respectively.
Wellington
Pursuant to reinsurance agreements with a subsidiary of Wellington Insurance Company (“Wellington”), during the three and six months ended June 30, 2017 the Company recognized gross premiums written of $1,144 and $4,118 (2016: $nil and $nil), respectively, and earned premium adjustments of $1,676 and $2,537 (2016: $nil and $nil), respectively. As at June 30, 2017 and December 31, 2016 the Company had recorded premiums receivable of $3,531 and $666, respectively. Aquiline Capital are shareholders of Wellington and Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, serves as a director of Wellington.
Aquiline II, Aquiline III and Aquiline Tech
The Company had, as of June 30, 2017 and December 31, 2016, investments in Aquiline II, III and Tech with a total value of $103,377 and $100,431 and outstanding unfunded commitments of $84,046 and $64,071, respectively. For the three and six months ended June 30, 2017, the Company incurred $130 and $486 (2016: $440 and $440), respectively, in partnership fees associated with these investments. Additional information related to Aquiline II, III and Tech is disclosed in Note 4(c), “Investments in Investment Affiliates.”
(b)
Other
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.

43
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


17. Earnings per common share
The following table sets forth the computation of basic earnings per common share and earnings per diluted common share for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Basic earnings per common share
 
 
 
 
 
 
 
Net income available to Validus common shareholders
$
101,095

 
$
94,963

 
$
195,656

 
$
261,773

Weighted average number of common shares outstanding
79,270,561

 
81,950,833

 
79,202,116

 
82,386,047

Basic earnings per share available to Validus common shareholders
$
1.28

 
$
1.16

 
$
2.47

 
$
3.18

 
 
 
 
 
 
 
 
Earnings per diluted common share
 
 
 
 
 
 
 
Net income available to Validus common shareholders
$
101,095

 
$
94,963

 
$
195,656

 
$
261,773

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
79,270,561

 
81,950,833

 
79,202,116

 
82,386,047

Share equivalents:
 
 
 
 
 
 
 
Stock options
14,739

 
33,796

 
15,059

 
34,837

Unvested restricted shares
1,587,151

 
1,388,374

 
1,644,823

 
1,364,775

Weighted average number of diluted common shares outstanding
80,872,451

 
83,373,003

 
80,861,998

 
83,785,659

Earnings per diluted share available to Validus common shareholders
$
1.25

 
$
1.14

 
$
2.42

 
$
3.12

Share equivalents that would result in the issuance of common shares of 412,603 (2016: 507,262) and 207,054 (2016: 253,631) were outstanding for the three and six months ended June 30, 2017, respectively, but were not included in the computation of earnings per diluted common share because the effect would be antidilutive.

44
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 ASC Topic 280 “Segment Reporting” to be Validus Re, Talbot, Western World and AlphaCat. For segmental reporting purposes, the results of CRS have been included in the results of the Western World segment as of May 1, 2017, the date of acquisition. 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 undertakes different strategies.
A description of each of the Company’s operating segments and its Corporate and Investments function is as follows:
Validus Re Segment
The Validus Re segment is focused primarily 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, homeowners, commercial package and agriculture 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 Investments
The Company has a corporate and investments function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Transaction expenses are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it 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.
A reconciliation of segmental income to net income available to Validus is included in the tables below.




45
Table of Contents
Validus Holdings, Ltd.
Notes to the 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
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
296,997

 
$
285,810

 
$
917,519

 
$
977,478

Reinsurance premiums ceded
 
(11,387
)
 
(3,196
)
 
(120,200
)
 
(95,691
)
Net premiums written
 
285,610

 
282,614

 
797,319

 
881,787

Change in unearned premiums
 
(45,003
)
 
(35,492
)
 
(338,300
)
 
(390,834
)
Net premiums earned
 
240,607

 
247,122

 
459,019

 
490,953

Other insurance related income (loss)
 
58

 
150

 
136

 
(165
)
Total underwriting revenues
 
240,665

 
247,272

 
459,155

 
490,788

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
104,685

 
132,139

 
190,839

 
215,007

Policy acquisition costs
 
47,158

 
42,564

 
88,414

 
84,823

General and administrative expenses
 
19,274

 
17,872

 
36,106

 
35,051

Share compensation expenses
 
2,663

 
2,775

 
5,140

 
5,676

Total underwriting deductions
 
173,780

 
195,350

 
320,499

 
340,557

Underwriting income
 
$
66,885

 
$
51,922

 
$
138,656

 
$
150,231

 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
96.2
%
 
98.9
%
 
86.9
%
 
90.2
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
43.5
%
 
53.5
%
 
41.6
%
 
43.8
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
19.6
%
 
17.2
%
 
19.3
%
 
17.3
%
General and administrative expense ratio (a)
 
9.1
%
 
8.4
%
 
8.9
%
 
8.3
%
Expense ratio
 
28.7
%
 
25.6
%
 
28.2
%
 
25.6
%
Combined ratio
 
72.2
%
 
79.1
%
 
69.8
%
 
69.4
%
(a)
The general and administrative expense ratio includes share compensation expenses.

46
Table of Contents
Validus Holdings, Ltd.
Notes to the 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
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
262,477

 
$
296,067

 
$
509,652

 
$
562,384

Reinsurance premiums ceded
 
(24,977
)
 
(27,161
)
 
(117,801
)
 
(114,619
)
Net premiums written
 
237,500

 
268,906

 
391,851

 
447,765

Change in unearned premiums
 
(45,626
)
 
(67,357
)
 
(4,912
)
 
(39,424
)
Net premiums earned
 
191,874

 
201,549

 
386,939

 
408,341

Other insurance related income
 
65

 
279

 
820

 
290

Total underwriting revenues
 
191,939

 
201,828

 
387,759

 
408,631

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
93,389

 
109,310

 
199,801

 
209,411

Policy acquisition costs
 
44,305

 
43,613

 
87,581

 
87,956

General and administrative expenses
 
35,582

 
39,061

 
74,025

 
77,596

Share compensation expenses
 
3,155

 
3,270

 
5,982

 
6,792

Total underwriting deductions
 
176,431

 
195,254

 
367,389

 
381,755

Underwriting income
 
$
15,508

 
$
6,574

 
$
20,370

 
$
26,876

 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
90.5
%
 
90.8
%
 
76.9
%
 
79.6
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
48.7
%
 
54.2
%
 
51.6
%
 
51.3
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
23.1
%
 
21.6
%
 
22.6
%
 
21.5
%
General and administrative expense ratio (a)
 
20.2
%
 
21.1
%
 
20.7
%
 
20.7
%
Expense ratio
 
43.3
%
 
42.7
%
 
43.3
%
 
42.2
%
Combined ratio
 
92.0
%
 
96.9
%
 
94.9
%
 
93.5
%
(a)
The general and administrative expense ratio includes share compensation expenses.

47
Table of Contents
Validus Holdings, Ltd.
Notes to the 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
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
131,068

 
$
86,971

 
$
303,111

 
$
150,930

Reinsurance premiums ceded
 
(23,180
)
 
(5,006
)
 
(28,798
)
 
(9,145
)
Net premiums written
 
107,888

 
81,965

 
274,313

 
141,785

Change in unearned premiums
 
22,806

 
(16,309
)
 
(46,347
)
 
(14,630
)
Net premiums earned
 
130,694

 
65,656

 
227,966

 
127,155

Other insurance related income
 
663

 
189

 
904

 
477

Total underwriting revenues
 
131,357

 
65,845

 
228,870

 
127,632

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
97,008

 
44,229

 
171,933

 
83,875

Policy acquisition costs
 
19,230

 
15,410

 
39,466

 
29,610

General and administrative expenses
 
18,316

 
11,458

 
29,070

 
23,533

Share compensation expenses
 
609

 
542

 
1,301

 
1,123

Total underwriting deductions
 
135,163

 
71,639

 
241,770

 
138,141

Underwriting loss
 
$
(3,806
)
 
$
(5,794
)
 
$
(12,900
)
 
$
(10,509
)
 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
82.3
%
 
94.2
%
 
90.5
%
 
93.9
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
74.2
%
 
67.4
%
 
75.4
%
 
66.0
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
14.7
%
 
23.5
%
 
17.3
%
 
23.3
%
General and administrative expense ratio (a)
 
14.5
%
 
18.2
%
 
13.4
%
 
19.3
%
Expense ratio
 
29.2
%
 
41.7
%
 
30.7
%
 
42.6
%
Combined ratio
 
103.4
%
 
109.1
%
 
106.1
%
 
108.6
%
(a)
The general and administrative expense ratio includes share compensation expenses.

48
Table of Contents
Validus Holdings, Ltd.
Notes to the 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
 
2017
 
2016
 
2017
 
2016
Fee revenues
 
 
 
 
 
 
 
 
Third party
 
$
5,549

 
$
3,091

 
$
10,193

 
$
7,818

Related party
 
644

 
328

 
1,275

 
1,219

Total fee revenues
 
6,193

 
3,419

 
11,468

 
9,037

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
3,549

 
2,751

 
7,393

 
4,233

Share compensation expenses
 
83

 
133

 
165

 
274

Finance expenses
 
44

 
75

 
75

 
883

Tax expense
 
135

 
—

 
134

 
—

Foreign exchange losses
 
1

 
4

 
—

 
12

Total expenses
 
3,812

 
2,963

 
7,767

 
5,402

Income before investments from AlphaCat Funds and Sidecars
 
2,381

 
456

 
3,701

 
3,635

 
 
 
 
 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (a)
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
(21
)
 
541

 
(133
)
 
665

AlphaCat ILS Funds - Lower Risk (b)
 
1,301

 
2,075

 
3,490

 
4,582

AlphaCat ILS Funds - Higher Risk (b)
 
2,600

 
692

 
4,967

 
3,128

BetaCat ILS Funds
 
263

 
1,113

 
631

 
1,676

PaCRe
 
—

 
—

 
—

 
(23
)
Validus’ share of investment income from AlphaCat Funds and Sidecars
 
4,143

 
4,421

 
8,955

 
10,028

Validus’ share of AlphaCat segment income
 
$
6,524

 
$
4,877

 
$
12,656

 
$
13,663

 
 
 
 
 
 
 
 
 
Supplemental information
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
$
—

 
$
(14
)
 
$
66

 
$
(66
)
AlphaCat ILS Funds - Lower Risk (b)
 
53,632

 
50,234

 
106,540

 
110,192

AlphaCat ILS Funds - Higher Risk (b)
 
43,672

 
42,010

 
137,208

 
138,330

AlphaCat Direct (c)
 
8,378

 
6,675

 
26,794

 
17,797

Total gross premiums written
 
$
105,682

 
$
98,905

 
$
270,608

 
$
266,253

(a)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(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.

49
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 Investments
 
2017
 
2016
 
2017
 
2016
Investment income
 
 
 
 
 
 
 
 
Managed net investment income (a)
 
$
38,063

 
$
36,849

 
$
74,255

 
$
64,772

 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
18,847

 
17,872

 
36,024

 
34,055

Share compensation expenses
 
4,636

 
4,007

 
8,049

 
8,099

Finance expenses (b)
 
14,149

 
13,979

 
28,013

 
28,320

Dividends on preferred shares
 
2,203

 
—

 
4,406

 
—

Tax (benefit) expense
 
(1,122
)
 
1,706

 
(4,670
)
 
(412
)
Total Corporate expenses
 
38,713

 
37,564

 
71,822

 
70,062

 
 
 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
 
 
Net realized gains (losses) on managed investments (b)
 
2,269

 
2,520

 
(623
)
 
1,434

Change in net unrealized gains on managed investments (b)
 
15,942

 
30,052

 
30,291

 
77,130

Income (loss) from investment affiliate
 
9,466

 
(589
)
 
14,654

 
(4,702
)
Foreign exchange (losses) gains (b)
 
(7,323
)
 
6,621

 
(6,220
)
 
12,695

Other income
 
174

 
79

 
268

 
756

Transaction expenses
 
(4,427
)
 
—

 
(4,427
)
 
—

Total other items
 
16,101

 
38,683

 
33,943

 
87,313

Total Corporate and Investments
 
$
15,451

 
$
37,968

 
$
36,376

 
$
82,023

(a)
Managed net investment income excludes the components which are included in the Company’s share of AlphaCat, net realized and change in unrealized gains on managed investments and income (loss) from investment affiliates.
(b)
These items exclude the components which are included in Validus’ share of AlphaCat and amounts which are consolidated from VIEs.

50
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 along with our corporate and investments function to the Consolidated results of the Company for the periods indicated:
 
Three Months Ended June 30, 2017
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
296,997

 
$
262,477

 
$
131,068

 
$
105,682

 
$
—

 
$
(3,322
)
 
$
792,902

Reinsurance premiums ceded
(11,387
)
 
(24,977
)
 
(23,180
)
 
—

 
—

 
3,322

 
(56,222
)
Net premiums written
285,610

 
237,500

 
107,888

 
105,682

 
—

 
—

 
736,680

Change in unearned premiums
(45,003
)
 
(45,626
)
 
22,806

 
(37,830
)
 
—

 
—

 
(105,653
)
Net premiums earned
240,607

 
191,874

 
130,694

 
67,852

 
—

 
—

 
631,027

Other insurance related income
58

 
65

 
663

 
5,874

 
—

 
(5,495
)
 
1,165

Total underwriting revenues
240,665

 
191,939

 
131,357

 
73,726

 
—

 
(5,495
)
 
632,192

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
104,685

 
93,389

 
97,008

 
1,067

 
—

 
—

 
296,149

Policy acquisition costs
47,158

 
44,305

 
19,230

 
7,165

 
—

 
(590
)
 
117,268

General and administrative expenses
19,274

 
35,582

 
18,316

 
9,768

 
18,847

 
(5,438
)
 
96,349

Share compensation expenses
2,663

 
3,155

 
609

 
83

 
4,636

 
—

 
11,146

Total underwriting deductions
173,780

 
176,431

 
135,163

 
18,083

 
23,483

 
(6,028
)
 
520,912

Underwriting income (loss)
$
66,885

 
$
15,508

 
$
(3,806
)
 
$
55,643

 
$
(23,483
)
 
$
533

 
$
111,280

Other items (a)
—

 
—

 
—

 
183

 
7,501

 
—

 
7,684

Dividends on preferred shares
—

 
—

 
—

 
—

 
(2,203
)
 
—

 
(2,203
)
Net investment income
—

 
—

 
—

 
6,178

 
38,063

 
—

 
44,241

Transaction expenses
—

 
—

 
—

 
—

 
(4,427
)
 
—

 
(4,427
)
(Income) attributable to AlphaCat investors
—

 
—

 
—

 
(11,830
)
 
—

 
—

 
(11,830
)
Net (income) attributable to noncontrolling interest
—

 
—

 
—

 
(43,650
)
 
—

 
—

 
(43,650
)
Segmental income (loss)
$
66,885

 
$
15,508

 
$
(3,806
)
 
$
6,524

 
$
15,451

 
$
533

 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
101,095

(a)
Other items includes finance expenses, tax benefit (expense), 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).

51
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Three Months Ended June 30, 2016
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and 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
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).


52
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Six Months Ended June 30, 2017
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
917,519

 
$
509,652

 
$
303,111

 
$
270,608

 
$
—

 
$
(17,131
)
 
$
1,983,759

Reinsurance premiums ceded
(120,200
)
 
(117,801
)
 
(28,798
)
 
(6,660
)
 
—

 
17,131

 
(256,328
)
Net premiums written
797,319

 
391,851

 
274,313

 
263,948

 
—

 
—

 
1,727,431

Change in unearned premiums
(338,300
)
 
(4,912
)
 
(46,347
)
 
(131,469
)
 
—

 
—

 
(521,028
)
Net premiums earned
459,019

 
386,939

 
227,966

 
132,479

 
—

 
—

 
1,206,403

Other insurance related income
136

 
820

 
904

 
11,035

 
—

 
(10,494
)
 
2,401

Total underwriting revenues
459,155

 
387,759

 
228,870

 
143,514

 
—

 
(10,494
)
 
1,208,804

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
190,839

 
199,801

 
171,933

 
3,161

 
—

 
—

 
565,734

Policy acquisition costs
88,414

 
87,581

 
39,466

 
14,066

 
—

 
(631
)
 
228,896

General and administrative expenses
36,106

 
74,025

 
29,070

 
19,409

 
36,024

 
(10,361
)
 
184,273

Share compensation expenses
5,140

 
5,982

 
1,301

 
165

 
8,049

 
—

 
20,637

Total underwriting deductions
320,499

 
367,389

 
241,770

 
36,801

 
44,073

 
(10,992
)
 
999,540

Underwriting income (loss)
$
138,656

 
$
20,370

 
$
(12,900
)
 
$
106,713

 
$
(44,073
)
 
$
498

 
$
209,264

Other items (a)
—

 
—

 
—

 
1,298

 
15,027

 
—

 
16,325

Dividends on preferred shares
—

 
—

 
—

 
—

 
(4,406
)
 
—

 
(4,406
)
Net investment income
—

 
—

 
—

 
10,200

 
74,255

 
—

 
84,455

Transaction expenses
—

 
—

 
—

 
—

 
(4,427
)
 
—

 
(4,427
)
(Income) attributable to AlphaCat investors
—

 
—

 
—

 
(19,333
)
 
—

 
—

 
(19,333
)
Net (income) attributable to noncontrolling interest
—

 
—

 
—

 
(86,222
)
 
—

 
—

 
(86,222
)
Segmental income (loss)
$
138,656

 
$
20,370

 
$
(12,900
)
 
$
12,656

 
$
36,376

 
$
498

 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
195,656

(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).


53
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 Segment and Consolidated VIEs
 
Corporate and 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).


54
Table of Contents
Validus Holdings, Ltd.
Notes to the 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 by operating segment allocated to the territory of coverage exposure for the periods indicated:
 
Gross Premiums Written
 
Three Months Ended June 30, 2017
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
100,312

 
$
34,470

 
$
131,068

 
$
70,048

 
$
(3,443
)
 
$
332,455

 
41.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
4,537

 
32,627

 
—

 
870

 
114

 
38,148

 
4.7
%
Australia and New Zealand
3,264

 
1,848

 
—

 
2,003

 
40

 
7,155

 
0.9
%
Europe
748

 
5,857

 
—

 
(15
)
 
275

 
6,865

 
0.9
%
Latin America and Caribbean
11,874

 
24,800

 
—

 
46

 
(1,411
)
 
35,309

 
4.5
%
Japan
39,305

 
3,381

 
—

 
2,662

 
(6
)
 
45,342

 
5.7
%
Canada
3,155

 
1,111

 
—

 
130

 
(4
)
 
4,392

 
0.6
%
Rest of the world (b)
4,877

 
23,168

 
—

 
—

 
105

 
28,150

 
3.6
%
Sub-total, non United States
67,760

 
92,792

 
—

 
5,696

 
(887
)
 
165,361

 
20.9
%
Worldwide including United States (a)
53,524

 
30,735

 
—

 
29,937

 
1,006

 
115,202

 
14.5
%
Other locations non-specific (c)
75,401

 
104,480

 
—

 
1

 
2

 
179,884

 
22.7
%
Total
$
296,997

 
$
262,477

 
$
131,068

 
$
105,682

 
$
(3,322
)
 
$
792,902

 
100.0
%
 
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
%



55
Table of Contents
Validus Holdings, Ltd.
Notes to the 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, 2017
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
314,180

 
$
63,555

 
$
303,111

 
$
98,251

 
$
(4,323
)
 
$
774,774

 
39.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
38,605

 
66,958

 
—

 
7,905

 
(539
)
 
112,929

 
5.7
%
Australia and New Zealand
4,195

 
5,030

 
—

 
2,003

 
(110
)
 
11,118

 
0.6
%
Europe
30,364

 
17,572

 
—

 
451

 
(430
)
 
47,957

 
2.3
%
Latin America and Caribbean
21,216

 
48,977

 
—

 
46

 
(4,283
)
 
65,956

 
3.3
%
Japan
40,466

 
5,206

 
—

 
3,855

 
(36
)
 
49,491

 
2.5
%
Canada
4,870

 
2,248

 
—

 
130

 
(49
)
 
7,199

 
0.4
%
Rest of the world (b)
18,782

 
46,440

 
—

 
—

 
(1,577
)
 
63,645

 
3.2
%
Sub-total, non United States
158,498

 
192,431

 
—

 
14,390

 
(7,024
)
 
358,295

 
18.0
%
Worldwide including United States (a)
155,945

 
58,092

 
—

 
153,246

 
(5,784
)
 
361,499

 
18.2
%
Other locations non-specific (c)
288,896

 
195,574

 
—

 
4,721

 
—

 
489,191

 
24.7
%
Total
$
917,519

 
$
509,652

 
$
303,111

 
$
270,608

 
$
(17,131
)
 
$
1,983,759

 
100.0
%
 
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
%
(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.


56
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 unaudited consolidated results of operations for the three and six months ended June 30, 2017 and 2016 and the Company’s consolidated financial condition, liquidity and capital resources as at June 30, 2017 and December 31, 2016. 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, 2016, 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, 2016.
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, 2016 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.
Table of Contents
Section
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


57
Table of Contents

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. On May 1, 2017, the Company acquired all of the outstanding capital stock of CRS and its related agriculture book of business. For segmental reporting purposes, the results of CRS have been included in the results of the Western World segment as of May 1, 2017, the date of acquisition.
In addition, the Company has a corporate and investment function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment. The Company’s corporate expenses, capital servicing and debt costs and investment results are presented separately within the corporate and investments 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 a function of net earned premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events; changes in interest rates, financial markets and general economic conditions; the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
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. GAAP does 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.
During the Validus Re and AlphaCat mid year 2017 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, with terms and conditions generally unchanged. However, the rate environment in the international property market proved to be more challenging with average rate reductions ranging between 4% and 5%.
Business written by the Talbot and Western World segments is distributed more evenly throughout the year. Through June 30, 2017, the Talbot segment experienced a whole account rate decrease of approximately 4.3% driven primarily by decreases in the downstream and upstream energy classes. The Western World segment experienced a modest whole account rate increase of approximately 0.1% through June 30, 2017.


58
Table of Contents

Non-GAAP Financial Measures
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
Book value financial indicators
In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.
The following table presents reconciliations of book value per common share to book value per diluted common share plus accumulated dividends and other non-GAAP book value financial indicators:
 
June 30, 2017
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,811,431

 
79,518,581

 
$
47.93

Non-GAAP Adjustments:
 
 
 
 
 
Assumed exercise of outstanding stock options (c)(d)
614

 
26,136

 
 
Unvested restricted shares
—

 
2,530,559

 
 
Book value per diluted common share (e)
3,812,045

 
82,075,276

 
$
46.45

Goodwill
(227,701
)
 
—

 
 
Intangible assets
(175,518
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,408,826

 
82,075,276

 
$
41.53

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
46.45

Accumulated dividends
 
 
 
 
12.32

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
58.77

 
December 31, 2016
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,688,291

 
79,132,252

 
$
46.61

Non-GAAP Adjustments:
 
 
 
 
 
Assumed exercise of outstanding stock options (c)(d)
614

 
26,136

 
 
Unvested restricted shares
—

 
2,868,610

 
 
Book value per diluted common share (e)
3,688,905

 
82,026,998

 
$
44.97

Goodwill
(196,758
)
 
—

 
 
Intangible assets
(115,592
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,376,555

 
82,026,998

 
$
41.16

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
44.97

Accumulated dividends
 
 
 
 
11.56

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
56.53

(a)
Per share amounts are calculated by dividing the equity amount by the common shares.
(b)
The equity amount used in the calculation of book value per common share represents total shareholders’ equity available to Validus excluding the liquidation value of the preferred shares.
(c)
Using the “as-if-converted” method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
(d)
At June 30, 2017, the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $23.48 (December 31, 2016: $23.48).
(e)
Non-GAAP financial measure.


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Book value per common share, a GAAP financial measure, increased by $1.32, or 2.8%, from $46.61 at December 31, 2016 to $47.93 at June 30, 2017.
Book value per diluted common share plus accumulated dividends, a non-GAAP financial measure, is considered by management to be the key financial indicator of performance, as the Company believes 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 $2.24, or 4.0%, from $56.53 at December 31, 2016 to $58.77 at June 30, 2017. Cash dividends per common share are an integral part of the value created for shareholders. During the six months ended June 30, 2017, the Company paid cash dividends of $0.76 (2016: $0.70) per common share.
Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid increased by $1.48, or 3.3%, from $44.97 at December 31, 2016 to $46.45 at June 30, 2017. Growth in book value per diluted common share inclusive of dividends paid was 5.0% and 6.6% for the six months ended June 30, 2017 and 2016, respectively.
Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes 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 $0.37, or 0.9%, from $41.16 at December 31, 2016 to $41.53 at June 30, 2017.
Other financial indicators
In addition to presenting net income available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating income available to Validus common shareholders, a non-GAAP financial measure, 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.
Net operating income available to Validus common shareholders is calculated by the addition or subtraction of certain Consolidated Statement of Income and Comprehensive Income line items from net income available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Net income available to Validus common shareholders
 
$
101,095

 
$
94,963

 
$
195,656

 
$
261,773

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
Net realized gains on investments
 
(2,274
)
 
(2,724
)
 
(1,110
)
 
(2,140
)
Change in net unrealized gains on investments
 
(16,321
)
 
(31,428
)
 
(29,669
)
 
(78,872
)
(Income) loss from investment affiliates
 
(9,466
)
 
589

 
(14,654
)
 
4,702

Foreign exchange losses (gains)
 
7,329

 
(6,286
)
 
5,760

 
(12,531
)
Other income
 
(174
)
 
(79
)
 
(268
)
 
(756
)
Transaction expenses
 
4,427

 
—

 
4,427

 
—

Net income (loss) attributable to noncontrolling interests
 
2,102

 
(135
)
 
2,830

 
102

Tax expense (a)
 
1,748

 
2,980

 
2,328

 
7,107

Net operating income available to Validus common shareholders (b)
 
$
88,466

 
$
57,880

 
$
165,300

 
$
179,385

 
 
 
 
 
 
 
 
 
Average shareholders’ equity available to Validus common shareholders (c)
 
$
3,786,654

 
$
3,720,341

 
$
3,753,866

 
$
3,693,219

 
 
 
 
 
 
 
 
 
Annualized return on average equity
 
10.7
%
 
10.2
%
 
10.4
%
 
14.2
%
Annualized net operating return on average equity (b)
 
9.3
%
 
6.2
%
 
8.8
%
 
9.7
%
(a)
Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
(b)
Non-GAAP financial measure.
(c)
Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares.
Net operating income available to Validus common shareholders, a non-GAAP financial measure, measures the performance of the Company’s operations without the influence of gains or losses on investments and foreign currencies and other items as noted

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in the table above. The Company excludes these items 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 and other factors. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. 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 (re)insurance operations. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing, as well as 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.
Return on average equity, a GAAP financial measure, and net operating return on average equity, a non-GAAP financial measure, represents the returns generated on common shareholders’ equity during the year. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed.
For further discussion of the components driving the Company’s financial indicators refer to the “Results of Operations” sections.

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Table of Contents

Second Quarter 2017 Results of Operations - Consolidated
The following table presents the results of operations for the three months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
2017
 
2016
Revenues
 

 
 

Gross premiums written
$
792,902

 
$
764,042

Reinsurance premiums ceded
(56,222
)
 
(36,229
)
Net premiums written
736,680

 
727,813

Change in unearned premiums
(105,653
)
 
(154,090
)
Net premiums earned
631,027

 
573,723

Net investment income
44,241

 
39,257

Net realized gains on investments
2,274

 
2,724

Change in net unrealized gains on investments
16,321

 
31,428

Income (loss) from investment affiliates
9,466

 
(589
)
Other insurance related income and other income
1,339

 
824

Foreign exchange (losses) gains
(7,329
)
 
6,286

Total revenues
697,339

 
653,653

Expenses
 

 
 

Losses and loss expenses
296,149

 
307,130

Policy acquisition costs
117,268

 
107,966

General and administrative expenses
96,349

 
89,688

Share compensation expenses
11,146

 
10,727

Finance expenses
14,209

 
14,166

Transaction expenses
4,427

 
—

Total expenses
539,548

 
529,677

Income before taxes and (income) attributable to AlphaCat investors
157,791

 
123,976

Tax benefit (expense)
987

 
(1,706
)
(Income) attributable to AlphaCat investors
(11,830
)
 
(6,114
)
Net income
$
146,948

 
$
116,156

Net (income) attributable to noncontrolling interests
(43,650
)
 
(21,193
)
Net income available to Validus
103,298

 
94,963

Dividends on preferred shares
(2,203
)
 
—

Net income available to Validus common shareholders
$
101,095

 
$
94,963

 
 
 
 
Supplemental information:
 
 
 
Losses and loss expenses:
 
 
 
Current period excluding items below
$
331,871

 
$
284,704

Current period—notable loss events
—

 
36,915

Current period—non-notable loss events
7,568

 
48,292

Change in prior accident years
(43,290
)
 
(62,781
)
Total losses and loss expenses
$
296,149

 
$
307,130

Selected ratios:
 
 
 
Ratio of net to gross premiums written
92.9
 %
 
95.3
 %
Losses and loss expense ratio:
 
 
 
Current period excluding items below
52.6
 %
 
49.6
 %
Current period—notable loss events
—
 %
 
6.4
 %
Current period—non-notable loss events
1.2
 %
 
8.4
 %
Change in prior accident years
(6.9
)%
 
(10.9
)%
Losses and loss expense ratio
46.9
 %
 
53.5
 %
Policy acquisition cost ratio
18.6
 %
 
18.8
 %
General and administrative expense ratio (a)
17.0
 %
 
17.6
 %
Expense ratio
35.6
 %
 
36.4
 %
Combined ratio
82.5
 %
 
89.9
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended June 30, 2017 were $792.9 million compared to $764.0 million for the three months ended June 30, 2016, an increase of $28.9 million, or 3.8%. The increase was primarily driven by an increase in the Western World, Validus Re and AlphaCat segments and was partially offset by a decrease in the Talbot segment.
•
Reinsurance premiums ceded for the three months ended June 30, 2017 were $56.2 million compared to $36.2 million for the three months ended June 30, 2016, an increase of $20.0 million, or 55.2%. The increase was primarily driven by an increase in the Western World and Validus Re segments.
•
Losses and loss expenses for the three months ended June 30, 2017 were $296.1 million compared to $307.1 million for the three months ended June 30, 2016, a decrease of $11.0 million or 3.6%. The decrease was primarily driven by a decrease in notable and non-notable losses and was partially offset by lower favorable development on prior accident years.
Notable and Non-notable Loss Events
◦
The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million. The term “events” refers to aggregate notable and non-notable losses incurred.
Notable Loss Events
◦
There were no notable loss events occurring during the three months ended June 30, 2017.
◦
Losses and loss expenses from a single notable loss event occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Net losses and loss expenses
 
$
36,915

Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(6,422
)
Validus’ share of net losses and loss expenses
 
30,493

Less: Reinstatement premiums, net
 
(3,632
)
Net loss attributable to Validus
 
$
26,861

Losses and loss expenses from the Canadian Wildfires notable loss event were $36.9 million, or 6.4 percentage points of the loss ratio. Net of losses of $6.4 million attributable to AlphaCat third party investors and noncontrolling interests and reinstatement premiums of $3.6 million, the net loss attributable to the Company was $26.9 million.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended June 30, 2017. During the three months ended June 30, 2017, the Company increased its loss estimate on a first quarter 2017 energy non-notable loss event by $7.6 million, or 1.2 percentage points of the loss ratio.
◦
Losses and loss expenses from three non-notable loss events occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Net losses and loss expenses
 
$
17,760

 
$
15,318

 
$
15,214

 
$
48,292

Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(5,535
)
 
—

 
—

 
(5,535
)
Validus’ share of net losses and loss expenses
 
12,225

 
15,318

 
15,214

 
42,757

Less: Reinstatement premiums, net
 
(1,967
)
 
—

 
(7,667
)
 
(9,634
)
Net loss attributable to Validus
 
$
10,258

 
$
15,318

 
$
7,547

 
$
33,123


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Table of Contents

Losses and loss expenses from the three non-notable loss events were $48.3 million, or 8.4 percentage points of the loss ratio. Net of losses attributable to AlphaCat third party investors and noncontrolling interests of $5.5 million and reinstatement premiums of $9.6 million, the net loss attributable to the Company from these non-notable loss events was $33.1 million.
Change in prior accident years
◦
Loss reserve development for the three months ended June 30, 2017 and 2016 was as follows:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Favorable development on event losses
 
$
(5,069
)
 
$
(6,433
)
Favorable development on attritional losses
 
(38,221
)
 
(56,348
)
Change in prior accident years
 
$
(43,290
)
 
$
(62,781
)
The favorable development for the three months ended June 30, 2017 and 2016 was primarily driven by favorable development on attritional losses.
Loss Ratios
◦
The loss ratio for the three months ended June 30, 2017 and June 30, 2016 was 46.9% and 53.5%, respectively, a decrease of 6.6 percentage points.
◦
Loss ratios by line of business for the three months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
2017
 
2016
Property
35.2
%
 
53.1
%
Marine
14.1
%
 
35.1
%
Specialty
63.7
%
 
61.0
%
Liability
70.2
%
 
66.1
%
All lines
46.9
%
 
53.5
%
•
Policy acquisition cost ratio for the three months ended June 30, 2017 was 18.6% compared to 18.8% for the three months ended June 30, 2016, a decrease of 0.2 percentage points.
•
General and administrative (“G&A”) expenses for the three months ended June 30, 2017 were $96.3 million compared to $89.7 million for the three months ended June 30, 2016, an increase of $6.7 million or 7.4%. The increase was primarily driven by an increase in G&A expenses in the Western World segment, which included $6.8 million of CRS expenses, of which $1.2 million related to the amortization of intangible assets acquired.
•
Combined ratio for the three months ended June 30, 2017 and 2016 was 82.5% and 89.9%, respectively, a decrease of 7.4 percentage points.



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Table of Contents

Second Quarter 2017 Results of Operations - Validus Re Segment
The following table presents underwriting income by line of business for the three months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
174,759

 
$
14,557

 
$
107,681

 
$296,997
 
$
216,034

 
$
7,806

 
$
61,970

 
$
285,810

Reinsurance premiums ceded
 
(4,227
)
 
(38
)
 
(7,122
)
 
(11,387
)
 
(8,892
)
 
868

 
4,828

 
(3,196
)
Net premiums written
 
170,532

 
14,519

 
100,559

 
285,610

 
207,142

 
8,674

 
66,798

 
282,614

Change in unearned premiums
 
(75,148
)
 
15,275

 
14,870

 
(45,003
)
 
(101,914
)
 
22,423

 
43,999

 
(35,492
)
Net premiums earned
 
95,384

 
29,794

 
115,429

 
240,607

 
105,228

 
31,097

 
110,797

 
247,122

Other insurance related income
 
 
 
 
 
 
 
58

 
 
 
 
 
 
 
150

Total underwriting revenues
 
 
 
 
 
 
 
240,665

 
 
 
 
 
 
 
247,272

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
32,750

 
(1,732
)
 
73,667

 
104,685

 
51,856

 
6,921

 
73,362

 
132,139

Policy acquisition costs
 
17,359

 
5,246

 
24,553

 
47,158

 
18,269

 
5,281

 
19,014

 
42,564

Total underwriting deductions before G&A
 
50,109

 
3,514

 
98,220

 
151,843

 
70,125

 
12,202

 
92,376

 
174,703

Underwriting income before G&A
 
$
45,275

 
$
26,280

 
$
17,209

 
$
88,822

 
$
35,103

 
$
18,895

 
$
18,421

 
$
72,569

General and administrative expenses
 
 
 
 
 
 
 
19,274

 
 
 
 
 
 
 
17,872

Share compensation expenses
 
 
 
 
 
 
 
2,663

 
 
 
 
 
 
 
2,775

Total underwriting deductions
 
 
 
 
 
 
 
173,780

 
 
 
 
 
 
 
195,350

Underwriting income
 
 
 
 
 
 
 
$
66,885

 
 
 
 
 
 
 
$
51,922

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
28,360

 
$
14,581

 
$
77,275

 
$
120,216

 
$
21,361

 
$
16,269

 
$
75,046

 
$
112,676

Current period—notable loss events
 
—

 
—

 
—

 
—

 
17,884

 
—

 
—

 
17,884

Current period—non-notable loss events
 
5,061

 
—

 
2,507

 
7,568

 
22,079

 
670

 
9,707

 
32,456

Change in prior accident years
 
(671
)
 
(16,313
)
 
(6,115
)
 
(23,099
)
 
(9,468
)
 
(10,018
)
 
(11,391
)
 
(30,877
)
Total losses and loss expenses
 
$
32,750

 
$
(1,732
)
 
$
73,667

 
$
104,685

 
$
51,856

 
$
6,921

 
$
73,362

 
$
132,139

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
97.6
 %
 
99.7
 %
 
93.4
 %
 
96.2
 %
 
95.9
 %
 
111.1
 %
 
107.8
 %
 
98.9
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
29.7
 %
 
49.0
 %
 
66.9
 %
 
50.0
 %
 
20.3
 %
 
52.3
 %
 
67.7
 %
 
45.7
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
17.0
 %
 
—
 %
 
—
 %
 
7.2
 %
Current period—non-notable loss events
 
5.3
 %
 
—
 %
 
2.2
 %
 
3.1
 %
 
21.0
 %
 
2.2
 %
 
8.8
 %
 
13.1
 %
Change in prior accident years
 
(0.7
)%
 
(54.8
)%
 
(5.3
)%
 
(9.6
)%
 
(9.0
)%
 
(32.2
)%
 
(10.3
)%
 
(12.5
)%
Losses and loss expense ratio
 
34.3
 %
 
(5.8
)%
 
63.8
 %
 
43.5
 %
 
49.3
 %
 
22.3
 %
 
66.2
 %
 
53.5
 %
Policy acquisition cost ratio
 
18.2
 %
 
17.6
 %
 
21.3
 %
 
19.6
 %
 
17.4
 %
 
17.0
 %
 
17.2
 %
 
17.2
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
9.1
 %
 
 
 
 
 
 
 
8.4
 %
Expense ratio
 
 
 
 
 
 
 
28.7
 %
 
 
 
 
 
 
 
25.6
 %
Combined ratio
 
 
 
 
 
 
 
72.2
 %
 
 
 
 
 
 
 
79.1
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended June 30, 2017 were $297.0 million compared to $285.8 million for the three months ended June 30, 2016, an increase of $11.2 million, or 3.9%. The increase in gross premiums written was driven by:
◦
An increase in the specialty lines of $45.7 million, primarily driven by new business in the casualty, composite and financial lines; and
◦
An increase in the marine lines of $6.8 million, primarily due to adjustments to existing business; partially offset by
◦
A decrease in the property lines of $41.3 million, primarily driven by reductions in participation and the non-renewal of various catastrophe programs due to market conditions.
•
Reinsurance premiums ceded for the three months ended June 30, 2017 were $11.4 million compared to $3.2 million for the three months ended June 30, 2016, an increase of $8.2 million. The increase was primarily driven by an increase in the specialty lines of $12.0 million as a result of new non-proportional coverage purchased and adjustments to existing business and was partially offset by a decrease in the property lines of $4.7 million relating to the timing of certain reinsurance purchases.
•
Net premiums earned for the three months ended June 30, 2017 were $240.6 million compared to $247.1 million for the three months ended June 30, 2016, a decrease of $6.5 million, or 2.6%.
•
Losses and loss expenses for the three months ended June 30, 2017 were $104.7 million compared to $132.1 million for the three months ended June 30, 2016, a decrease of $27.5 million or 20.8%. The decrease was primarily driven by a decrease in notable and non-notable losses and was partially offset by lower favorable development on prior accident years.
Notable Loss Events
◦
There were no notable loss events occurring during the three months ended June 30, 2017.
◦
Losses and loss expenses from a single notable loss event occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Validus Re’s share of net losses and loss expenses
 
$
17,884

Less: Reinstatement premiums, net
 
(3,102
)
Net loss attributable to Validus Re
 
$
14,782

Losses and loss expenses from the Canadian Wildfires notable loss event were $17.9 million, or 7.2 percentage points of the loss ratio. Net of reinstatement premiums of $3.1 million, the net loss attributable to Validus Re was $14.8 million.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended June 30, 2017. During the three months ended June 30, 2017, the Company increased its loss estimate on a first quarter 2017 energy non-notable loss event by $7.6 million, or 3.1 percentage points of the loss ratio.

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Table of Contents

◦
Losses and loss expenses from three non-notable loss events occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Validus Re’s share of net losses and loss expenses
 
$
6,884

 
$
15,195

 
$
10,377

 
$
32,456

Less: Reinstatement premiums, net
 
(1,836
)
 
—

 
(6,706
)
 
(8,542
)
Net loss attributable to Validus Re
 
$
5,048

 
$
15,195

 
$
3,671

 
$
23,914

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $32.5 million, or 13.1 percentage points of the loss ratio. Net of reinstatement premiums of $8.5 million, the net loss attributable to Validus Re was $23.9 million. The losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $22.1 million; and
▪Jubilee Oil - marine and specialty lines of $0.7 million and $9.7 million, respectively.
Change in prior accident years
◦
Loss reserve development by line of business for the three months ended June 30, 2017 and 2016 was as follows:
 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(353
)
 
$
(6,115
)
 
$
6,235

 
$
(233
)
(Favorable) development on attritional losses
 
(318
)
 
(10,198
)
 
(12,350
)
 
(22,866
)
Change in prior accident years
 
$
(671
)
 
$
(16,313
)
 
$
(6,115
)
 
$
(23,099
)
The adverse development on event losses in the specialty lines was driven by additional reserves established on the second quarter 2016 non-notable loss event, Jubilee Oil, as a result of an increased industry loss estimate and was fully offset with favorable development in the marine lines relating to losses retroceded on the same event. The net favorable development across all lines was primarily driven by favorable development on attritional losses.
 
 
Three Months Ended June 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(287
)
 
$
(11
)
 
$
2

 
$
(296
)
(Favorable) development on attritional losses
 
(9,181
)
 
(10,007
)
 
(11,393
)
 
(30,581
)
Change in prior accident years
 
$
(9,468
)
 
$
(10,018
)
 
$
(11,391
)
 
$
(30,877
)
The net favorable development across all lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the three months ended June 30, 2017 and June 30, 2016 was 43.5% and 53.5%, respectively, a decrease of 10.0 percentage points.
•
Policy acquisition cost ratio for the three months ended June 30, 2017 was 19.6% compared to 17.2% for the three months ended June 30, 2016, an increase of 2.4 percentage points of the policy acquisition cost ratio. The increase was primarily driven by an increase in the specialty lines as a result of a change in business mix, notably an increase in casualty business which carries higher acquisition costs.
•
General and administration expenses for the three months ended June 30, 2017 were $19.3 million compared to $17.9 million for the three months ended June 30, 2016, an increase of $1.4 million, or 7.8%, driven by a higher allocation of costs to the Validus Re segment.


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Table of Contents

Second Quarter 2017 Results of Operations - Talbot Segment
The following table presents underwriting income by line of business for the three months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
88,525

 
$
74,308

 
$
99,644

 
$262,477
 
$
111,646

 
$
85,992

 
$
98,429

 
$
296,067

Reinsurance premiums ceded
 
(14,376
)
 
(5,119
)
 
(5,482
)
 
(24,977
)
 
(19,733
)
 
(4,729
)
 
(2,699
)
 
(27,161
)
Net premiums written
 
74,149

 
69,189

 
94,162

 
237,500

 
91,913

 
81,263

 
95,730

 
268,906

Change in unearned premiums
 
(16,408
)
 
(15,570
)
 
(13,648
)
 
(45,626
)
 
(37,054
)
 
(7,341
)
 
(22,962
)
 
(67,357
)
Net premiums earned
 
57,741

 
53,619

 
80,514

 
191,874

 
54,859

 
73,922

 
72,768

 
201,549

Other insurance related income
 
 
 
 
 
 
 
65

 
 
 
 
 
 
 
279

Total underwriting revenues
 
 
 
 
 
 
 
191,939

 
 
 
 
 
 
 
201,828

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
39,222

 
13,529

 
40,638

 
93,389

 
40,856

 
29,922

 
38,532

 
109,310

Policy acquisition costs
 
10,269

 
14,514

 
19,522

 
44,305

 
9,057

 
17,582

 
16,974

 
43,613

Total underwriting deductions before G&A
 
49,491

 
28,043

 
60,160

 
137,694

 
49,913

 
47,504

 
55,506

 
152,923

Underwriting income before G&A
 
$
8,250

 
$
25,576

 
$
20,354

 
$
54,245

 
$
4,946

 
$
26,418

 
$
17,262

 
$
48,905

General and administrative expenses
 
 
 
 
 
 
 
35,582

 
 
 
 
 
 
 
39,061

Share compensation expenses
 
 
 
 
 
 
 
3,155

 
 
 
 
 
 
 
3,270

Total underwriting deductions
 
 
 
 
 
 
 
176,431

 
 
 
 
 
 
 
195,254

Underwriting income
 
 
 
 
 
 
 
$
15,508

 
 
 
 
 
 
 
$
6,574

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
44,116

 
$
30,585

 
$
34,564

 
$
109,265

 
$
34,973

 
$
34,013

 
$
47,838

 
$
116,824

Current period—notable loss events
 
—

 
—

 
—

 
—

 
11,703

 
—

 
—

 
11,703

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
4,274

 
4,837

 
—

 
9,111

Change in prior accident years
 
(4,894
)
 
(17,056
)
 
6,074

 
(15,876
)
 
(10,094
)
 
(8,928
)
 
(9,306
)
 
(28,328
)
Total losses and loss expenses
 
$
39,222

 
$
13,529

 
$
40,638

 
$
93,389

 
$
40,856

 
$
29,922

 
$
38,532

 
$
109,310

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
83.8
 %
 
93.1
 %
 
94.5
%
 
90.5
 %
 
82.3
 %
 
94.5
 %
 
97.3
 %
 
90.8
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
76.4
 %
 
57.0
 %
 
43.0
%
 
57.0
 %
 
63.8
 %
 
46.1
 %
 
65.8
 %
 
58.0
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
%
 
—
 %
 
21.3
 %
 
—
 %
 
—
 %
 
5.8
 %
Current period—non-notable loss events
 
—
 %
 
—
 %
 
—
%
 
—
 %
 
7.8
 %
 
6.5
 %
 
—
 %
 
4.5
 %
Change in prior accident years
 
(8.5
)%
 
(31.8
)%
 
7.5
%
 
(8.3
)%
 
(18.4
)%
 
(12.1
)%
 
(12.8
)%
 
(14.1
)%
Losses and loss expense ratio
 
67.9
 %
 
25.2
 %
 
50.5
%
 
48.7
 %
 
74.5
 %
 
40.5
 %
 
53.0
 %
 
54.2
 %
Policy acquisition cost ratio
 
17.8
 %
 
27.1
 %
 
24.2
%
 
23.1
 %
 
16.5
 %
 
23.8
 %
 
23.3
 %
 
21.6
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
20.2
 %
 
 
 
 
 
 
 
21.1
 %
Expense ratio
 
 
 
 
 
 
 
43.3
 %
 
 
 
 
 
 
 
42.7
 %
Combined ratio
 
 
 
 
 
 
 
92.0
 %
 
 
 
 
 
 
 
96.9
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended June 30, 2017 were $262.5 million compared to $296.1 million for the three months ended June 30, 2016, a decrease of $33.6 million, or 11.3%. The decrease in gross premiums written was driven by:
◦
Decreases in the property and marine lines of $23.1 million and $11.7 million, respectively, driven by reductions in participation and non-renewals on various programs due to the current rate environment and adjustments to existing business; partially offset by
◦
An increase in the specialty lines of $1.2 million.
•
Reinsurance premiums ceded for the three months ended June 30, 2017 were $25.0 million compared to $27.2 million for the three months ended June 30, 2016, a decrease of $2.2 million, or 8.0%.
•
Net premiums earned for the three months ended June 30, 2017 were $191.9 million compared to $201.5 million for the three months ended June 30, 2016, a decrease of $9.7 million, or 4.8%.
•
Losses and loss expenses for the three months ended June 30, 2017 were $93.4 million compared to $109.3 million for the three months ended June 30, 2016, a decrease of $15.9 million or 14.6%. The decrease was primarily driven by a decrease in notable and non-notable losses and was partially offset by lower favorable development on prior accident years.
Notable Loss Events
◦
There were no notable loss events occurring during the three months ended June 30, 2017.
◦
Losses and loss expenses from a single notable loss event occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Talbot’s share of net losses and loss expenses
 
$
11,703

Less: Reinstatement premiums, net
 
(530
)
Net loss attributable to Talbot
 
$
11,173

Losses and loss expenses from the Canadian Wildfires notable loss event were $11.7 million, or 5.8 percentage points of the loss ratio. Net of reinstatement premiums of $0.5 million, the net loss attributable to Talbot was $11.2 million.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended June 30, 2017.
◦
Losses and loss expenses from three non-notable loss events occurring during the three months ended June 30, 2016 were as follows:
 
 
Three Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Talbot’s share of net losses and loss expenses
 
4,150

 
124

 
4,837

 
9,111

Less: Reinstatement premiums, net
 
(131
)
 
—

 
(961
)
 
(1,092
)
Net loss attributable to Talbot
 
$
4,019

 
$
124

 
$
3,876

 
$
8,019

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $9.1 million, or 4.5 percentage points of the loss ratio. Net of reinstatement premiums of $1.1 million, the net loss attributable to Talbot was $8.0 million. The losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $4.3 million; and
▪Jubilee Oil - marine lines of $4.8 million.

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Table of Contents

Change in prior accident years
◦
Loss reserve development by line of business for the three months ended June 30, 2017 and 2016 was as follows:
 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) development on event losses
 
$
(551
)
 
$
(2,405
)
 
$
(228
)
 
$
(3,184
)
(Favorable) adverse development on attritional losses
 
(4,343
)
 
(14,651
)
 
6,302

 
(12,692
)
Change in prior accident years
 
$
(4,894
)
 
$
(17,056
)
 
$
6,074

 
$
(15,876
)
The adverse development on attritional losses in the specialty lines was driven by adverse development on the second quarter 2016 Norwegian Helicopter loss which did not meet the non-notable threshold and adverse development in the accident and health and contingency classes. The net favorable development across all lines was primarily driven by favorable development on attritional losses.
 
 
Three Months Ended June 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(6,038
)
 
$
(233
)
 
$
134

 
$
(6,137
)
(Favorable) development on attritional losses
 
(4,056
)
 
(8,695
)
 
(9,440
)
 
(22,191
)
Change in prior accident years
 
$
(10,094
)
 
$
(8,928
)
 
$
(9,306
)
 
$
(28,328
)
The net favorable development across all lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the three months ended June 30, 2017 and June 30, 2016 was 48.7% and 54.2%, respectively, a decrease of 5.5 percentage points.
•
Policy acquisition cost ratio for the three months ended June 30, 2017 was 23.1% compared to 21.6% for the three months ended June 30, 2016, an increase of 1.5 percentage points of the policy acquisition cost ratio.
•
General and administration expenses for the three months ended June 30, 2017 were $35.6 million compared to $39.1 million for the three months ended June 30, 2016, a decrease of $3.5 million, or 8.9%. The decrease was primarily driven by the impact of foreign exchange as the U.S. dollar strengthened against the British Pound.

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Table of Contents

Second Quarter 2017 Results of Operations - Western World Segment
The following table presents underwriting loss by line of business for the three months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
Liability
 
Specialty
 
 Total
 
 Property
 
Liability
 
Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
38,967

 
$
68,162

 
$
23,939

 
$131,068
 
$
26,218

 
$
60,753

 
$
—

 
$
86,971

Reinsurance premiums ceded
 
(5,383
)
 
(846
)
 
(16,951
)
 
(23,180
)
 
(2,153
)
 
(2,853
)
 
—

 
(5,006
)
Net premiums written
 
33,584

 
67,316

 
6,988

 
107,888

 
24,065

 
57,900

 
—

 
81,965

Change in unearned premiums
 
(10,459
)
 
(9,791
)
 
43,056

 
22,806

 
(9,888
)
 
(6,421
)
 
—

 
(16,309
)
Net premiums earned
 
23,125

 
57,525

 
50,044

 
130,694

 
14,177

 
51,479

 
—

 
65,656

Other insurance related income
 
 
 
 
 
 
 
663

 
 
 
 
 
 
 
189

Total underwriting revenues
 
 
 
 
 
 
 
131,357

 
 
 
 
 
 
 
65,845

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
11,854

 
40,374

 
44,780

 
97,008

 
10,176

 
34,053

 
—

 
44,229

Policy acquisition costs
 
6,656

 
12,574

 
—

 
19,230

 
3,381

 
12,029

 
—

 
15,410

Total underwriting deductions before G&A
 
18,510

 
52,948

 
44,780

 
116,238

 
13,557

 
46,082

 
—

 
59,639

Underwriting income before G&A
 
$
4,615

 
$
4,577

 
$
5,264

 
$
15,119

 
$
620

 
$
5,397

 
$
—

 
$
6,206

General and administrative expenses
 
 
 
 
 
 
 
18,316

 
 
 
 
 
 
 
11,458

Share compensation expenses
 
 
 
 
 
 
 
609

 
 
 
 
 
 
 
542

Total underwriting deductions
 
 
 
 
 
 
 
135,163

 
 
 
 
 
 
 
71,639

Underwriting loss
 
 
 
 
 
 
 
$
(3,806
)
 
 
 
 
 
 
 
$
(5,794
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
12,333

 
$
40,358

 
$
44,780

 
$
97,471

 
$
11,133

 
$
35,629

 
$
—

 
$
46,762

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
625

 
—

 
—

 
625

Change in prior accident years
 
(479
)
 
16

 
—

 
(463
)
 
(1,582
)
 
(1,576
)
 
—

 
(3,158
)
Total losses and loss expenses
 
$
11,854

 
$
40,374

 
$
44,780

 
$
97,008

 
$
10,176

 
$
34,053

 
$
—

 
$
44,229

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
86.2
 %
 
98.8
%
 
29.2
%
 
82.3
 %
 
91.8
 %
 
95.3
 %
 
—
%
 
94.2
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
53.4
 %
 
70.2
%
 
89.5
%
 
74.6
 %
 
78.6
 %
 
69.2
 %
 
—
%
 
71.2
 %
Current period—notable loss events
 
—
 %
 
—
%
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
%
 
—
 %
Current period—non-notable loss events
 
—
 %
 
—
%
 
—
%
 
—
 %
 
4.4
 %
 
—
 %
 
—
%
 
1.0
 %
Change in prior accident years
 
(2.1
)%
 
—
%
 
—
%
 
(0.4
)%
 
(11.2
)%
 
(3.1
)%
 
—
%
 
(4.8
)%
Losses and loss expense ratio
 
51.3
 %
 
70.2
%
 
89.5
%
 
74.2
 %
 
71.8
 %
 
66.1
 %
 
—
%
 
67.4
 %
Policy acquisition cost ratio
 
28.8
 %
 
21.9
%
 
—
%
 
14.7
 %
 
23.8
 %
 
23.4
 %
 
—
%
 
23.5
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
14.5
 %
 
 
 
 
 
 
 
18.2
 %
Expense ratio
 
 
 
 
 
 
 
29.2
 %
 
 
 
 
 
 
 
41.7
 %
Combined ratio
 
 
 
 
 
 
 
103.4
 %
 
 
 
 
 
 
 
109.1
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

71
Table of Contents

Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended June 30, 2017 were $131.1 million compared to $87.0 million for the three months ended June 30, 2016, an increase of $44.1 million, or 50.7%. The increase in gross premiums written was driven by:
◦
An increase in gross premiums written in specialty lines of $23.9 million due to new agriculture business written through CRS; and
◦
An increase in the property and liability lines of $12.7 million and $7.4 million, respectively, primarily due to the continued build out of product offerings in the short-tail property lines. Also contributing to the increase in the liability lines was an increase in the contract and programs liability lines which was partially offset by decreases resulting from the discontinuation of other underperforming general liability lines.
•
Reinsurance premiums ceded for the three months ended June 30, 2017 were $23.2 million compared to $5.0 million for the three months ended June 30, 2016, an increase of $18.2 million. The increase was primarily driven by an increase in ceded specialty premiums relating to new agriculture business written through CRS.
•
Losses and loss expenses for the three months ended June 30, 2017 were $97.0 million compared to $44.2 million for the three months ended June 30, 2016, an increase of $52.8 million or 119.3%. The increase was primarily driven by an increase in the specialty lines due to new agriculture business written through CRS and lower favorable development on prior accident years and was partially offset by a decrease in non-notable losses.
Notable Loss Events
◦
There were no notable loss events occurring during the three months ended June 30, 2017 and 2016.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended June 30, 2017.
◦
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 during the three months ended June 30, 2016.
Loss Ratio
◦
The loss ratio for the three months ended June 30, 2017 and June 30, 2016 was 74.2% and 67.4%, respectively, an increase of 6.8 percentage points. The loss ratio for the three months ended June 30, 2017 included specialty losses of $44.8 million arising from new agriculture business written through CRS which is booked at a 89.5% loss ratio and U.S.-based weather losses of $3.0 million, or 2.3 percentage points of the loss ratio, compared to $6.3 million, or 9.6 percentage points of the loss ratio during the three months ended June 30, 2016.
•
Policy acquisition cost ratio for the three months ended June 30, 2017 was 14.7% compared to 23.5% for the three months ended June 30, 2016, a decrease of 8.8 percentage points of the policy acquisition cost ratio. The decrease was primarily driven by new agriculture business written during the three months ended June 30, 2017 which carries lower acquisition costs.
•
General and administration expenses for the three months ended June 30, 2017 were $18.3 million compared to $11.5 million for the three months ended June 30, 2016, an increase of $6.9 million, or 59.9%. General and administrative expenses for the three months ended June 30, 2017 included $6.8 million of CRS expenses, of which $1.2 million related to the amortization of intangible assets acquired.


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Table of Contents

Second Quarter 2017 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, 2017 and 2016:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Fee revenues
 
 
 
 
Third party
 
$
5,549

 
$
3,091

Related party
 
644

 
328

Total fee revenues
 
6,193

 
3,419

 
 
 
 
 
Expenses
 
 
 
 
General and administrative expenses
 
3,549

 
2,751

Share compensation expenses
 
83

 
133

Finance expenses
 
44

 
75

Tax expense
 
135

 
—

Foreign exchange losses
 
1

 
4

Total expenses
 
3,812

 
2,963

Income before investment income from AlphaCat Funds and Sidecars
 
$
2,381

 
$
456

 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (a)
 
 
 
 
AlphaCat Sidecars
 
(21
)
 
541

AlphaCat ILS Funds - Lower Risk (b)
 
1,301

 
2,075

AlphaCat ILS Funds - Higher Risk (b)
 
2,600

 
692

BetaCat ILS Funds
 
263

 
1,113

PaCRe
 
—

 
—

Validus’ share of investment income from AlphaCat Funds and Sidecars
 
4,143

 
4,421

Validus’ share of AlphaCat segment income
 
$
6,524

 
$
4,877

 
 
 
 
 
Supplemental information:
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
—

 
$
(14
)
AlphaCat ILS Funds - Lower Risk (b)
 
53,632

 
50,234

AlphaCat ILS Funds - Higher Risk (b)
 
43,672

 
42,010

AlphaCat Direct (c)
 
8,378

 
6,675

Total
 
$
105,682

 
$
98,905

(a)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(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.

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Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
Fee revenues earned for the three months ended June 30, 2017 were $6.2 million compared to $3.4 million during the three months ended June 30, 2016, an increase of $2.8 million or 81.1%. Third party fee revenues earned during the three months ended June 30, 2017 were $5.5 million compared to $3.1 million, an increase of $2.5 million or 79.5%. The increase was primarily driven by an increase in assets under management and the impact of notable and non-notable loss events during the three months ended June 30, 2016.
•
Total expenses for the three months ended June 30, 2017 were $3.8 million compared to $3.0 million during the three months ended June 30, 2016, an increase of $0.8 million, or 28.7%, primarily driven by a higher allocation of costs to the AlphaCat segment.
•
Validus’ share of investment income from AlphaCat Funds and Sidecars for the three months ended June 30, 2017 was $4.1 million compared to $4.4 million during the three months ended June 30, 2016, a decrease of $0.3 million or 6.3%.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2017
 
April 1, 2017
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
5,686

 
$
5,656

AlphaCat ILS Funds - Lower Risk
 
79,808

 
125,098

AlphaCat ILS Funds - Higher Risk
 
84,663

 
86,679

AlphaCat Direct (b)
 
—

 
—

BetaCat ILS Funds
 
25,000

 
27,062

Total
 
$
195,157

 
$
244,495

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
20,590

 
$
20,422

AlphaCat ILS Funds - Lower Risk
 
1,309,377

 
1,302,337

AlphaCat ILS Funds - Higher Risk
 
896,639

 
790,734

AlphaCat Direct (b)
 
534,555

 
457,744

BetaCat ILS Funds
 
118,493

 
87,375

Total
 
2,879,654

 
2,658,612

Total Assets Under Management
 
$
3,074,811

 
$
2,903,107

(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)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat’s assets under management were $3.1 billion as at July 1, 2017, compared to $2.9 billion as at April 1, 2017, of which third party assets under management were $2.9 billion as at July 1, 2017, compared to $2.7 billion as at April 1, 2017.
During the three months ended July 1, 2017, a total of $338.2 million of capital was raised, of which $330.2 million was raised from third parties. During the three months ended July 1, 2017, $195.4 million was returned to investors, of which $135.8 million was returned to third party investors.


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Second Quarter 2017 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Investment income
 
 
 
 
Managed net investment income (a)
 
$
38,063

 
$
36,849

 
 
 
 
 
Corporate expenses
 
 
 
 
General and administrative expenses
 
18,847

 
17,872

Share compensation expenses
 
4,636

 
4,007

Finance expenses (b)
 
14,149

 
13,979

Dividends on preferred shares
 
2,203

 
—

Tax (benefit) expense (b)
 
(1,122
)
 
1,706

Total Corporate expenses
 
38,713

 
37,564

 
 
 
 
 
Other items
 
 
 
 
Net realized gains on managed investments (b)
 
2,269

 
2,520

Change in net unrealized gains on managed investments (b)
 
15,942

 
30,052

Income (loss) from investment affiliates
 
9,466

 
(589
)
Foreign exchange (losses) gains (b)
 
(7,323
)
 
6,621

Other income
 
174

 
79

Transaction expenses
 
(4,427
)
 
—

Total other items
 
16,101

 
38,683

Total Corporate and Investments
 
$
15,451

 
$
37,968

(a)
Managed net investment income excludes the components which are included in the Company’s share of AlphaCat, net realized and change in unrealized gains on managed investments and income (loss) from investment affiliates.
(b)
These items exclude the components which are included in the Company’s share of AlphaCat and amounts which are consolidated from VIEs.
Investments
Highlights of our managed investment portfolio for the second quarter 2017 as compared to 2016 were as follows:
•
Managed net investment income from our managed investment portfolio for the three months ended June 30, 2017 was $38.1 million compared to $36.8 million for the three months ended June 30, 2016, an increase of $1.2 million, or 3.3%.
•
Annualized effective yield for the three months ended June 30, 2017 was 2.35%, compared to 2.34% for the three months ended June 30, 2016, an increase of 1 basis point.
•
Net realized gains on managed investments for the three months ended June 30, 2017 were $2.3 million compared to $2.5 million for the three months ended June 30, 2016, an unfavorable movement of $0.3 million or 10.0%.
•
The change in net unrealized gains on managed investments for the three months ended June 30, 2017 was $15.9 million compared to $30.1 million for the three months ended June 30, 2016, an unfavorable movement of $14.1 million, or 47.0%. The unfavorable movement was primarily driven by changes in interest rates having less of an impact on the Company’s managed fixed maturity investment portfolio during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016.
•
Income from investment affiliates for the three months ended June 30, 2017 was $9.5 million compared to a loss of $0.6 million for the three months ended June 30, 2016, a favorable movement of $10.1 million. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

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Table of Contents

Corporate Expenses and Other Items
Highlights for the second quarter 2017 as compared to 2016 were as follows:
•
General and administrative expenses for the three months ended June 30, 2017 were $18.8 million compared to $17.9 million for the three months ended June 30, 2016, an increase of $1.0 million or 5.5%.
•
Share compensation expenses for the three months ended June 30, 2017 were $4.6 million compared to $4.0 million for the three months ended June 30, 2016, an increase of $0.6 million or 15.7%.
•
Finance expenses, excluding the Company's share of AlphaCat finance expenses from consolidated VIEs, for the three months ended June 30, 2017 were $14.1 million compared to $14.0 million for the three months ended June 30, 2016, an increase of $0.2 million or 1.2%.
•
The Company issued $250.0 million of preferred shares during the three months ended June 30, 2017 and $150.0 million of preferred shares during the three months ended June 30, 2016. Dividends paid on preferred shares during the three months ended June 30, 2017 were $2.2 million compared to $nil during the three months ended June 30, 2016.
•
Foreign exchange losses for the three months ended June 30, 2017 were $7.3 million compared to gains of $6.6 million for the three months ended June 30, 2016, an unfavorable movement of $13.9 million. The unfavorable movement was primarily driven by the Euro strengthening against the U.S. dollar during the three months ended June 30, 2017.
•
Transaction expenses for the three months ended June 30, 2017 were $4.4 million compared to $nil for the three months ended June 30, 2016 and are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS, which was completed on May 1, 2017.




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Table of Contents

Year to Date Results of Operations - Consolidated
The following table presents the results of operations for the six months ended June 30, 2017 and 2016:
 
Six Months Ended June 30,
 
2017
 
2016
Revenues
 

 
 

Gross premiums written
$
1,983,759

 
$
1,936,833

Reinsurance premiums ceded
(256,328
)
 
(204,064
)
Net premiums written
1,727,431

 
1,732,769

Change in unearned premiums
(521,028
)
 
(587,778
)
Net premiums earned
1,206,403

 
1,144,991

Net investment income
84,455

 
68,718

Net realized gains on investments
1,110

 
2,140

Change in net unrealized gains on investments
29,669

 
78,872

Income (loss) from investment affiliates
14,654

 
(4,702
)
Other insurance related income and other income
2,669

 
2,237

Foreign exchange (losses) gains
(5,760
)
 
12,531

Total revenues
1,333,200

 
1,304,787

Expenses
 
 
 
Losses and loss expenses
565,734

 
531,577

Policy acquisition costs
228,896

 
215,159

General and administrative expenses
184,273

 
175,896

Share compensation expenses
20,637

 
21,964

Finance expenses
28,152

 
29,369

Transaction expenses
4,427

 
—

Total expenses
1,032,119

 
973,965

Income before taxes, loss from operating affiliate and (income) attributable to AlphaCat investors
301,081

 
330,822

Tax benefit
4,536

 
412

Loss from operating affiliate
—

 
(23
)
(Income) attributable to AlphaCat investors
(19,333
)
 
(10,714
)
Net income
$
286,284

 
$
320,497

Net (income) attributable to noncontrolling interests
(86,222
)
 
(58,724
)
Net income available to Validus
200,062

 
261,773

Dividends on preferred shares
(4,406
)
 
—

Net income available to Validus common shareholders
$
195,656

 
$
261,773

 
 
 
 
Supplemental information:
 
 
 
Losses and loss expenses:
 
 
 
Current period excluding items below
$
642,925

 
$
562,890

Current period—notable loss events
—

 
36,915

Current period—non-notable loss events
27,330

 
48,292

Change in prior accident years
(104,521
)
 
(116,520
)
Total losses and loss expenses
$
565,734

 
$
531,577

Selected ratios:
 
 
 
Ratio of net to gross premiums written
87.1
 %
 
89.5
 %
Losses and loss expense ratio:
 
 
 
Current period excluding items below
53.3
 %
 
49.2
 %
Current period—notable loss events
—
 %
 
3.2
 %
Current period—non-notable loss events
2.3
 %
 
4.2
 %
Change in prior accident years
(8.7
)%
 
(10.2
)%
Losses and loss expense ratio
46.9
 %
 
46.4
 %
Policy acquisition cost ratio
19.0
 %
 
18.8
 %
General and administrative expense ratio (a)
17.0
 %
 
17.3
 %
Expense ratio
36.0
 %
 
36.1
 %
Combined ratio
82.9
 %
 
82.5
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the six months ended June 30, 2017 were $1,983.8 million compared to $1,936.8 million for the six months ended June 30, 2016, an increase of $46.9 million, or 2.4%. The increase was primarily driven by an increase in the Western World segment and was offset by decreases in the Validus Re and Talbot segments.
•
Reinsurance premiums ceded for the six months ended June 30, 2017 were $256.3 million compared to $204.1 million for the six months ended June 30, 2016, an increase of $52.3 million, or 25.6%. The increase was primarily driven by an increase in the Validus Re and Western World segments.
•
Losses and loss expenses for the six months ended June 30, 2017 were $565.7 million compared to $531.6 million for the six months ended June 30, 2016, an increase of $34.2 million or 6.4%. The increase was driven by an increase in attritional losses, including $63.6 million of losses relating to new agriculture business written through CRS and lower favorable development on prior accident years and was partially offset by a reduction in losses from notable and non-notable loss events.
Notable Loss Events
◦
There were no notable loss events occurring during the six months ended June 30, 2017.
◦
Losses and loss expenses incurred from a single notable loss event during the six months ended June 30, 2016 were as follows:
 
 
Six Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Net losses and loss expenses
 
$
36,915

Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(6,422
)
Validus’ share of net losses and loss expenses
 
30,493

Less: Reinstatement premiums, net
 
(3,632
)
Net loss attributable to Validus
 
$
26,861

Losses and loss expenses from the Canadian Wildfires notable loss event were $36.9 million, or 3.2 percentage points of the loss ratio. Net of losses of $6.4 million attributable to AlphaCat third party investors and noncontrolling interests and reinstatement premiums of $3.6 million, the net loss attributable to the Company was $26.9 million.
Non-notable Loss Events
◦
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were as follows:
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Non-Notable Loss Event
Validus’ share of net losses and loss expenses
 
$
27,330

Less: Reinstatement premiums
 
(567
)
Net loss attributable to Validus
 
$
26,763

Losses and loss expenses from a single energy non-notable loss event were $27.3 million, or 2.3 percentage points of the loss ratio. Net of reinstatement premiums of $0.6 million, the net loss attributable to the Company was $26.8 million.

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Table of Contents

◦
Losses and loss expenses from three non-notable loss events occurring during the six months ended June 30, 2016 were as follows:
 
 
Six Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Net losses and loss expenses
 
$
17,760

 
$
15,318

 
$
15,214

 
$
48,292

Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(5,535
)
 
—

 
—

 
(5,535
)
Validus’ share of net losses and loss expenses
 
12,225

 
15,318

 
15,214

 
42,757

Less: Reinstatement premiums, net
 
(1,967
)
 
—

 
(7,667
)
 
(9,634
)
Net loss attributable to Validus
 
$
10,258

 
$
15,318

 
$
7,547

 
$
33,123

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $48.3 million, or 4.2 percentage points of the loss ratio. Net of losses attributable to AlphaCat third party investors and noncontrolling interests of $5.5 million and reinstatement premiums of $9.6 million, the net loss attributable to the Company from these non-notable loss events was $33.1 million.
Change in prior accident years
◦
Loss reserve development for the six months ended June 30, 2017 and 2016 was as follows:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
(Favorable) adverse development on event losses
 
$
(15,403
)
 
$
11,264

Favorable development on attritional losses
 
(89,118
)
 
(127,784
)
Change in prior accident years
 
$
(104,521
)
 
$
(116,520
)
The favorable development on event losses during the six months ended June 30, 2017 primarily related to the Pemex 2015 notable loss event. The adverse development on event losses for the six months ended June 30, 2016 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.
Loss Ratios
◦
The loss ratio for the six months ended June 30, 2017 and June 30, 2016 was 46.9% and 46.4%, respectively, an increase of 0.5 percentage points.
•
Loss ratios by line of business for the six months ended June 30, 2017 and 2016 were as follows:
 
Six Months Ended June 30,
 
2017
 
2016
Property
34.2
%
 
31.5
%
Marine
17.3
%
 
49.3
%
Specialty
65.3
%
 
58.7
%
Liability
71.7
%
 
64.1
%
All lines
46.9
%
 
46.4
%
•
Policy acquisition cost ratio for the six months ended June 30, 2017 was 19.0% compared to 18.8% for the six months ended June 30, 2016, an increase of 0.2 percentage points.
•
General and administrative expenses for the six months ended June 30, 2017 were $184.3 million compared to $175.9 million for the six months ended June 30, 2016, an increase of $8.4 million or 4.8%. The increase was primarily driven by an increase in G&A expenses in the Western World segment, which included $6.8 million of CRS expenses, of which $1.2 million related to the amortization of intangible assets acquired.
•
Combined ratio for the six months ended June 30, 2017 and 2016 was 82.9% and 82.5%, respectively, an increase of 0.4 percentage points.

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Table of Contents

Year to Date Results of Operations - Validus Re Segment
The following table presents underwriting income by line of business for the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
378,463

 
$
115,105

 
$
423,951

 
$
917,519

 
$
408,671

 
$
114,409

 
$
454,398

 
$
977,478

Reinsurance premiums ceded
 
(88,041
)
 
(14,471
)
 
(17,688
)
 
(120,200
)
 
(81,388
)
 
(6,547
)
 
(7,756
)
 
(95,691
)
Net premiums written
 
290,422

 
100,634

 
406,263

 
797,319

 
327,283

 
107,862

 
446,642

 
881,787

Change in unearned premiums
 
(97,297
)
 
(46,965
)
 
(194,038
)
 
(338,300
)
 
(119,903
)
 
(41,894
)
 
(229,037
)
 
(390,834
)
Net premiums earned
 
193,125

 
53,669

 
212,225

 
459,019

 
207,380

 
65,968

 
217,605

 
490,953

Other insurance related income (loss)
 
 
 
 
 
 
 
136

 
 
 
 
 
 
 
(165
)
Total underwriting revenues
 
 
 
 
 
 
 
459,155

 
 
 
 
 
 
 
490,788

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
57,037

 
(761
)
 
134,563

 
190,839

 
48,614

 
27,332

 
139,061

 
215,007

Policy acquisition costs
 
34,824

 
10,234

 
43,356

 
88,414

 
37,213

 
10,193

 
37,417

 
84,823

Total underwriting deductions before G&A
 
91,861

 
9,473

 
177,919

 
279,253

 
85,827

 
37,525

 
176,478

 
299,830

Underwriting income before G&A
 
$
101,264

 
$
44,196

 
$
34,306

 
$
179,902

 
$
121,553

 
$
28,443

 
$
41,127

 
$
190,958

General and administrative expenses
 
 
 
 
 
 
 
36,106

 
 
 
 
 
 
 
35,051

Share compensation expenses
 
 
 
 
 
 
 
5,140

 
 
 
 
 
 
 
5,676

Total underwriting deductions
 
 
 
 
 
 
 
320,499

 
 
 
 
 
 
 
340,557

Underwriting income
 
 
 
 
 
 
 
$
138,656

 
 
 
 
 
 
 
$
150,231

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
49,924

 
$
30,981

 
$
143,233

 
$
224,138

 
$
40,951

 
$
33,125

 
$
147,152

 
$
221,228

Current period—notable loss events
 
—

 
—

 
—

 
—

 
17,884

 
—

 
—

 
17,884

Current period—non-notable loss events
 
11,355

 
—

 
7,225

 
18,580

 
22,079

 
670

 
9,707

 
32,456

Change in prior accident years
 
(4,242
)
 
(31,742
)
 
(15,895
)
 
(51,879
)
 
(32,300
)
 
(6,463
)
 
(17,798
)
 
(56,561
)
Total losses and loss expenses
 
$
57,037

 
$
(761
)
 
$
134,563

 
$
190,839

 
$
48,614

 
$
27,332

 
$
139,061

 
$
215,007

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
76.7
 %
 
87.4
 %
 
95.8
 %
 
86.9
 %
 
80.1
 %
 
94.3
 %
 
98.3
 %
 
90.2
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
25.8
 %
 
57.7
 %
 
67.5
 %
 
48.9
 %
 
19.8
 %
 
50.2
 %
 
67.6
 %
 
45.1
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
8.6
 %
 
—
 %
 
—
 %
 
3.6
 %
Current period—non-notable loss events
 
5.9
 %
 
—
 %
 
3.4
 %
 
4.0
 %
 
10.6
 %
 
1.0
 %
 
4.5
 %
 
6.6
 %
Change in prior accident years
 
(2.2
)%
 
(59.1
)%
 
(7.5
)%
 
(11.3
)%
 
(15.6
)%
 
(9.8
)%
 
(8.2
)%
 
(11.5
)%
Losses and loss expense ratio
 
29.5
 %
 
(1.4
)%
 
63.4
 %
 
41.6
 %
 
23.4
 %
 
41.4
 %
 
63.9
 %
 
43.8
 %
Policy acquisition cost ratio
 
18.0
 %
 
19.1
 %
 
20.4
 %
 
19.3
 %
 
17.9
 %
 
15.5
 %
 
17.2
 %
 
17.3
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
8.9
 %
 
 
 
 
 
 
 
8.3
 %
Expense ratio
 
 
 
 
 
 
 
28.2
 %
 
 
 
 
 
 
 
25.6
 %
Combined ratio
 
 
 
 
 
 
 
69.8
 %
 
 
 
 
 
 
 
69.4
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the six months ended June 30, 2017 were $917.5 million compared to $977.5 million for the six months ended June 30, 2016, a decrease of $60.0 million, or 6.1%. The decrease in gross premiums written was primarily driven by:
◦
A decrease in the specialty lines of $30.4 million, primarily driven by a decline in agriculture premiums and was partially offset by an increase in casualty business written; and
◦
A decrease in the property lines of $30.2 million, primarily driven by reductions in participation and the non-renewal of various catastrophe programs due to market conditions.
•
Reinsurance premiums ceded for the six months ended June 30, 2017 were $120.2 million compared to $95.7 million for the six months ended June 30, 2016, an increase of $24.5 million, or 25.6%. The increase was driven by an increase in all lines as a result of additional reinsurance coverage purchased and adjustments to existing business.
•
Losses and loss expenses for the six months ended June 30, 2017 were $190.8 million compared to $215.0 million for the six months ended June 30, 2016, a decrease of $24.2 million or 11.2%. The decrease was primarily driven by a decrease in notable and non-notable loss events.
Notable Loss Events
◦
There were no notable loss events occurring during the six months ended June 30, 2017.
◦
Losses and loss expenses incurred from a single notable loss event during the six months ended June 30, 2016 were as follows:
 
 
Six Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Validus Re’s share of net losses and loss expenses
 
$
17,884

Less: Reinstatement premiums, net
 
(3,102
)
Net loss attributable to Validus Re
 
$
14,782

Losses and loss expenses from the Canadian Wildfires notable loss event were $17.9 million, or 3.6 percentage points of the loss ratio. Net of reinstatement premiums of $3.1 million, the net loss attributable to Validus Re was $14.8 million.
Non-notable Loss Events
◦
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were as follows:
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Non-Notable Loss Event
Validus Re’s share of net losses and loss expenses
 
$
18,580

Less: Reinstatement premiums
 
(567
)
Net loss attributable to Validus Re
 
$
18,013

Losses and loss expenses from a single energy non-notable loss event were $18.6 million, or 4.0 percentage points of the loss ratio. Net of reinstatement premiums of $0.6 million, the net loss attributable to Validus Re was $18.0 million.

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◦
Losses and loss expenses from three non-notable loss events occurring during the six months ended June 30, 2016 were as follows:
 
 
Six Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Validus Re’s share of net losses and loss expenses
 
$
6,884

 
$
15,195

 
$
10,377

 
$
32,456

Less: Reinstatement premiums, net
 
(1,836
)
 
—

 
(6,706
)
 
(8,542
)
Net loss attributable to Validus Re
 
$
5,048

 
$
15,195

 
$
3,671

 
$
23,914

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $32.5 million, or 6.6 percentage points of the loss ratio. Net of reinstatement premiums of $8.5 million, the net loss attributable to Validus Re from these events was $23.9 million. The losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $22.1 million; and
▪Jubilee Oil - marine and specialty lines of $0.7 million and $9.7 million, respectively.
Change in prior accident years
•
Loss reserve development by line of business for the six months ended June 30, 2017 and 2016 was as follows:
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
Adverse (favorable) development on event losses
 
$
2,107

 
$
(17,874
)
 
$
6,235

 
$
(9,532
)
(Favorable) development on attritional losses
 
(6,349
)
 
(13,868
)
 
(22,130
)
 
(42,347
)
Change in prior accident years
 
$
(4,242
)
 
$
(31,742
)
 
$
(15,895
)
 
$
(51,879
)
The adverse development on event losses in the specialty lines was driven by additional reserves established on the second quarter 2016 non-notable loss event, Jubilee Oil, as a result of an increased industry loss estimate and was fully offset with favorable development in the marine lines relating to losses retroceded on the same event. The favorable development on event losses in the marine lines primarily related to the second quarter 2015 Pemex notable loss event and retrocession recoveries on the second quarter 2016 Jubilee Oil non-notable loss event as noted above.
 
 
Six Months Ended June 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(10,841
)
 
$
12,080

 
$
861

 
$
2,100

(Favorable) development on attritional losses
 
(21,459
)
 
(18,543
)
 
(18,659
)
 
(58,661
)
Change in prior accident years
 
$
(32,300
)
 
$
(6,463
)
 
$
(17,798
)
 
$
(56,561
)
The adverse development on event losses in the marine lines 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.
Loss Ratio
◦
The loss ratio for the six months ended June 30, 2017 and June 30, 2016 was 41.6% and 43.8%, respectively, a decrease of 2.2 percentage points.
•
Policy acquisition cost ratio for the six months ended June 30, 2017 was 19.3% compared to 17.3% for the six months ended June 30, 2016, an increase of 2.0 percentage points. The increase was primarily driven by an increase in the specialty lines as a result of a change in business mix, notably a decrease in agriculture business which carries lower acquisition costs and an increase in casualty business which carries higher acquisition costs.
•
General and administration expenses for the six months ended June 30, 2017 were $36.1 million compared to $35.1 million for the six months ended June 30, 2016, an increase of $1.1 million, or 3.0%.


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Year to Date Results of Operations - Talbot Segment
The following table presents underwriting income by line of business for the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
161,785

 
$
151,626

 
$
196,241

 
$509,652
 
$
181,413

 
$
174,212

 
$
206,759

 
$
562,384

Reinsurance premiums ceded
 
(54,157
)
 
(20,126
)
 
(43,518
)
 
(117,801
)
 
(53,789
)
 
(26,101
)
 
(34,729
)
 
(114,619
)
Net premiums written
 
107,628

 
131,500

 
152,723

 
391,851

 
127,624

 
148,111

 
172,030

 
447,765

Change in unearned premiums
 
2,962

 
(14,066
)
 
6,192

 
(4,912
)
 
(11,769
)
 
(4,318
)
 
(23,337
)
 
(39,424
)
Net premiums earned
 
110,590

 
117,434

 
158,915

 
386,939

 
115,855

 
143,793

 
148,693

 
408,341

Other insurance related income
 
 
 
 
 
 
 
820

 
 
 
 
 
 
 
290

Total underwriting revenues
 
 
 
 
 
 
 
387,759

 
 
 
 
 
 
 
408,631

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
77,134

 
30,317

 
92,350

 
199,801

 
56,311

 
76,029

 
77,071

 
209,411

Policy acquisition costs
 
19,174

 
29,264

 
39,143

 
87,581

 
17,474

 
36,097

 
34,385

 
87,956

Total underwriting deductions before G&A
 
96,308

 
59,581

 
131,493

 
287,382

 
73,785

 
112,126

 
111,456

 
297,367

Underwriting income before G&A
 
$
14,282

 
$
57,853

 
$
27,422

 
$
100,377

 
$
42,070

 
$
31,667

 
$
37,237

 
$
111,264

General and administrative expenses
 
 
 
 
 
 
 
74,025

 
 
 
 
 
 
 
77,596

Share compensation expenses
 
 
 
 
 
 
 
5,982

 
 
 
 
 
 
 
6,792

Total underwriting deductions
 
 
 
 
 
 
 
367,389

 
 
 
 
 
 
 
381,755

Underwriting income
 
 
 
 
 
 
 
$
20,370

 
 
 
 
 
 
 
$
26,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
79,612

 
$
63,369

 
$
92,760

 
$
235,741

 
$
68,874

 
$
77,156

 
$
93,615

 
$
239,645

Current period—notable loss events
 
—

 
—

 
—

 
—

 
11,703

 
—

 
—

 
11,703

Current period—non-notable loss events
 
8,750

 
—

 
—

 
8,750

 
4,274

 
4,837

 
—

 
9,111

Change in prior accident years
 
(11,228
)
 
(33,052
)
 
(410
)
 
(44,690
)
 
(28,540
)
 
(5,964
)
 
(16,544
)
 
(51,048
)
Total losses and loss expenses
 
$
77,134

 
$
30,317

 
$
92,350

 
$
199,801

 
$
56,311

 
$
76,029

 
$
77,071

 
$
209,411

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
66.5
 %
 
86.7
 %
 
77.8
 %
 
76.9
 %
 
70.3
 %
 
85.0
 %
 
83.2
 %
 
79.6
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
72.0
 %
 
53.9
 %
 
58.4
 %
 
60.8
 %
 
59.4
 %
 
53.6
 %
 
62.9
 %
 
58.7
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
10.1
 %
 
—
 %
 
—
 %
 
2.9
 %
Current period—non-notable loss events
 
7.9
 %
 
—
 %
 
—
 %
 
2.3
 %
 
3.7
 %
 
3.4
 %
 
—
 %
 
2.2
 %
Change in prior accident years
 
(10.2
)%
 
(28.1
)%
 
(0.3
)%
 
(11.5
)%
 
(24.6
)%
 
(4.1
)%
 
(11.1
)%
 
(12.5
)%
Losses and loss expense ratio
 
69.7
 %
 
25.8
 %
 
58.1
 %
 
51.6
 %
 
48.6
 %
 
52.9
 %
 
51.8
 %
 
51.3
 %
Policy acquisition cost ratio
 
17.3
 %
 
24.9
 %
 
24.6
 %
 
22.6
 %
 
15.1
 %
 
25.1
 %
 
23.1
 %
 
21.5
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
20.7
 %
 
 
 
 
 
 
 
20.7
 %
Expense ratio
 
 
 
 
 
 
 
43.3
 %
 
 
 
 
 
 
 
42.2
 %
Combined ratio
 
 
 
 
 
 
 
94.9
 %
 
 
 
 
 
 
 
93.5
 %
(a)
The general and administrative expense ratio includes share compensation expenses.


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Table of Contents

Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the six months ended June 30, 2017 were $509.7 million compared to $562.4 million for the six months ended June 30, 2016, a decrease of $52.7 million, or 9.4%. The decrease in gross premiums written was driven by:
◦
A decrease in the marine lines of $22.6 million; driven by a decrease in the marine and other treaty account due to business now being written directly by Validus Re Swiss. Also contributing to the decrease were decreases in the upstream energy and marine hull and yachts classes as a result of the non-renewal of various programs due to continued pressure on rates from the lack of activity and lower prices in the oil and gas sector. The decreases were partially offset by an increase in new business written of $5.1 million in the upstream energy class;
◦
A decrease in the property lines of $19.6 million, driven by reductions in participation and non-renewals on various programs due to the current rate environment;
◦
A decrease in the specialty lines of $10.5 million; driven by decreases in the contingency and accident and health classes of $4.1 million and $9.1 million, respectively due to adjustments on existing business and the non-renewal of various programs. The decrease was partially offset by an increase in the financial lines of $4.4 million, primarily due to new business written.
•
Reinsurance premiums ceded for the six months ended June 30, 2017 were $117.8 million compared to $114.6 million for the six months ended June 30, 2016, an increase of $3.2 million, or 2.8%.
•
Losses and loss expenses for the six months ended June 30, 2017 were $199.8 million compared to $209.4 million for the six months ended June 30, 2016, a decrease of $9.6 million or 4.6%. The decrease was driven by a decrease in notable and non-notable loss events and was partially offset by lower favorable development on prior accident years.
Notable Loss Events
◦
There were no notable loss events occurring during the six months ended June 30, 2017.
◦
Losses and loss expenses incurred from a single notable loss event during the six months ended June 30, 2016 were as follows:
 
 
Six Months Ended June 30, 2016
 
 
Notable Loss Event
(Dollars in thousands)
 
Canadian Wildfires
Talbot’s share of net losses and loss expenses
 
$
11,703

Less: Reinstatement premiums, net
 
(530
)
Net loss attributable to Talbot
 
$
11,173

Losses and loss expenses from the Canadian Wildfires notable loss event were $11.7 million, or 2.9 percentage points of the loss ratio. Net of reinstatement premiums of $0.5 million, the net loss attributable to Talbot was $11.2 million.
Non-notable Loss Events
◦
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were as follows:
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Non-Notable Loss Event
Talbot’s share of net losses and loss expenses
 
$
8,750

Plus: Reinstatement premiums payable
 
1,627

Net loss attributable to Talbot
 
$
10,377

Losses and loss expenses from a single energy non-notable loss event were $8.8 million, or 2.3 percentage points of the loss ratio. Including reinstatement premiums payable of $1.6 million, the net loss attributable to Talbot was $10.4 million.
◦
Losses and loss expenses from three non-notable loss events occurring during the six months ended June 30, 2016 were as follows:

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Table of Contents

 
 
Six Months Ended June 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
Talbot’s share of net losses and loss expenses
 
$
4,150

 
$
124

 
$
4,837

 
$
9,111

Less: Reinstatement premiums, net
 
(131
)
 
—

 
(961
)
 
(1,092
)
Net loss attributable to Talbot
 
$
4,019

 
$
124

 
$
3,876

 
$
8,019

Losses and loss expenses the Texas Hailstorms, Kumamoto Earthquake and Jubilee Oil non-notable loss events were $9.1 million, or 2.2 percentage points of the loss ratio. Net of reinstatement premiums of $1.1 million, the net loss attributable to Talbot from these events was $8.0 million. The losses and loss expenses of the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $4.3 million; and
▪Jubilee Oil - marine lines of $4.8 million.
Change in prior accident years
•
Loss reserve development by line of business for the six months ended June 30, 2017 and 2016 was as follows:
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) development on event losses
 
$
(433
)
 
$
(2,619
)
 
$
(462
)
 
$
(3,514
)
(Favorable) adverse development on attritional losses
 
(10,795
)
 
(30,433
)
 
52

 
(41,176
)
Change in prior accident years
 
$
(11,228
)
 
$
(33,052
)
 
$
(410
)
 
$
(44,690
)
The adverse development on attritional losses in the specialty lines was driven by adverse development on the second quarter 2016 Norwegian Helicopter loss which did not meet the non-notable threshold and adverse development in the accident and health and contingency classes. The net favorable development across all lines was primarily driven by favorable development on attritional losses.
 
 
Six Months Ended June 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(8,726
)
 
$
19,123

 
$
(1,232
)
 
$
9,165

(Favorable) development on attritional losses
 
(19,814
)
 
(25,087
)
 
(15,312
)
 
(60,213
)
Change in prior accident years
 
$
(28,540
)
 
$
(5,964
)
 
$
(16,544
)
 
$
(51,048
)
The adverse development on event losses in the marine lines 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 net favorable development across all lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the six months ended June 30, 2017 and June 30, 2016 was 51.6% and 51.3%, respectively, an increase of 0.3 percentage points.
•
Policy acquisition cost ratio for the six months ended June 30, 2017 was 22.6% compared to 21.5% for the six months ended June 30, 2016, an increase of 1.1 percentage points.
•
General and administration expenses for the six months ended June 30, 2017 were $74.0 million compared to $77.6 million for the six months ended June 30, 2016, a decrease of $3.6 million, or 4.6%. The decrease was driven primarily by the impact of foreign exchange as the U.S. dollar strengthened against the British Pound.


85
Table of Contents

Year to Date Results of Operations - Western World Segment
The following table presents underwriting loss by line of business for the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended June 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
Liability
 
Specialty
 
 Total
 
 Property
 
Liability
 
Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
67,103

 
$
127,770

 
$
108,238

 
$
303,111

 
$
41,644

 
$
109,286

 
$
—

 
$
150,930

Reinsurance premiums ceded
 
(10,355
)
 
(1,492
)
 
(16,951
)
 
(28,798
)
 
(3,707
)
 
(5,438
)
 
—

 
(9,145
)
Net premiums written
 
56,748

 
126,278

 
91,287

 
274,313

 
37,937

 
103,848

 
—

 
141,785

Change in unearned premiums
 
(13,556
)
 
(12,334
)
 
(20,457
)
 
(46,347
)
 
(11,565
)
 
(3,065
)
 
—

 
(14,630
)
Net premiums earned
 
43,192

 
113,944

 
70,830

 
227,966

 
26,372

 
100,783

 
—

 
127,155

Other insurance related income
 
 
 
 
 
 
 
904

 
 
 
 
 
 
 
477

Total underwriting revenues
 
 
 
 
 
 
 
228,870

 
 
 
 
 
 
 
127,632

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
26,579

 
81,752

 
63,602

 
171,933

 
19,231

 
64,644

 
—

 
83,875

Policy acquisition costs
 
12,042

 
25,460

 
1,964

 
39,466

 
6,283

 
23,327

 
—

 
29,610

Total underwriting deductions before G&A
 
38,621

 
107,212

 
65,566

 
211,399

 
25,514

 
87,971

 
—

 
113,485

Underwriting income before G&A
 
$
4,571

 
$
6,732

 
$
5,264

 
$
17,471

 
$
858

 
$
12,812

 
$
—

 
$
14,147

General and administrative expenses
 
 
 
 
 
 
 
29,070

 
 
 
 
 
 
 
23,533

Share compensation expenses
 
 
 
 
 
 
 
1,301

 
 
 
 
 
 
 
1,123

Total underwriting deductions
 
 
 
 
 
 
 
241,770

 
 
 
 
 
 
 
138,141

Underwriting loss
 
 
 
 
 
 
 
$
(12,900
)
 
 
 
 
 
 
 
$
(10,509
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
29,881

 
$
79,132

 
$
63,602

 
$
172,615

 
$
20,629

 
$
70,205

 
$
—

 
$
90,834

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
625

 
—

 
—

 
625

Change in prior accident years
 
(3,302
)
 
2,620

 
—

 
(682
)
 
(2,023
)
 
(5,561
)
 
—

 
(7,584
)
Total losses and loss expenses
 
$
26,579

 
$
81,752

 
$
63,602

 
$
171,933

 
$
19,231

 
$
64,644

 
$
—

 
$
83,875

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
84.6
 %
 
98.8
%
 
84.3
%
 
93.9
 %
 
91.1
 %
 
95.0
 %
 
—
%
 
93.9
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
69.1
 %
 
69.4
%
 
89.8
%
 
75.7
 %
 
78.2
 %
 
69.6
 %
 
—
%
 
71.5
 %
Current period—notable loss events
 
—
 %
 
—
%
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
%
 
—
 %
Current period—non-notable loss events
 
—
 %
 
—
%
 
—
%
 
—
 %
 
2.4
 %
 
—
 %
 
—
%
 
0.5
 %
Change in prior accident years
 
(7.6
)%
 
2.3
%
 
—
%
 
(0.3
)%
 
(7.7
)%
 
(5.5
)%
 
—
%
 
(6.0
)%
Losses and loss expense ratio
 
61.5
 %
 
71.7
%
 
89.8
%
 
75.4
 %
 
72.9
 %
 
64.1
 %
 
—
%
 
66.0
 %
Policy acquisition cost ratio
 
27.9
 %
 
22.3
%
 
2.8
%
 
17.3
 %
 
23.8
 %
 
23.1
 %
 
—
%
 
23.3
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
13.4
 %
 
 
 
 
 
 
 
19.3
 %
Expense ratio
 
 
 
 
 
 
 
30.7
 %
 
 
 
 
 
 
 
42.6
 %
Combined ratio
 
 
 
 
 
 
 
106.1
 %
 
 
 
 
 
 
 
108.6
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

86
Table of Contents

Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the six months ended June 30, 2017 were $303.1 million compared to $150.9 million for the six months ended June 30, 2016, an increase of $152.2 million, or 100.8%. The increase in gross premiums written was driven by:
◦
An increase in gross premiums written in specialty lines of $108.2 million due to new agriculture business written through and in relation to CRS; and
◦
An increase in the property and liability lines of $25.5 million and $18.5 million, respectively, primarily due to the continued build out of product offerings in the short-tail property lines. Also contributing to the increase in the liability lines was an increase in the contract and programs liability lines which was partially offset by decreases resulting from the discontinuation of other underperforming general liability lines.
•
Reinsurance premiums ceded for the six months ended June 30, 2017 were $28.8 million compared to $9.1 million for the six months ended June 30, 2016, an increase of $19.7 million, or 214.9%. The increase was primarily driven by an increase in ceded specialty premiums relating to new agriculture business written through CRS.
•
Net premiums earned for the six months ended June 30, 2017 were $228.0 million compared to $127.2 million for the six months ended June 30, 2016, an increase of $100.8 million, or 79.3%. The increase was primarily driven by the increase in gross premiums written in all lines of business as noted above and was partially offset by the discontinuation of underperforming liability lines.
•
Losses and loss expenses for the six months ended June 30, 2017 were $171.9 million compared to $83.9 million for the six months ended June 30, 2016, an increase of $88.1 million or 105.0%. The increase was primarily driven by an increase in the specialty lines due to new agriculture business written through and in relation to CRS and lower favorable development on prior accident years and was partially offset by a decrease in U.S.-based weather losses.
Notable Loss Events
◦
There were no notable loss events occurring during the six months ended June 30, 2017 or 2016.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the six months ended June 30, 2017.
◦
Losses and loss expenses incurred from the Texas Hailstorms non-notable loss event were $0.6 million, or 0.5 percentage points of the loss ratio during the six months ended June 30, 2016.
Loss Ratio
◦
The loss ratio for the six months ended June 30, 2017 and June 30, 2016 was 75.4% and 66.0%, respectively, an increase of 9.4 percentage points. The loss ratio for the six months ended June 30, 2017 included specialty losses of $63.6 million primarily arising from new agriculture business written through CRS which is booked at a 89.5% loss ratio and U.S.-based weather losses of $11.1 million, or 4.9 percentage points of the loss ratio, compared to $8.5 million, or 6.7 percentage points of the loss ratio during the six months ended June 30, 2016.
•
Policy acquisition cost ratio for the six months ended June 30, 2017 was 17.3% compared to 23.3% for the six months ended June 30, 2016, a decrease of 6.0 percentage points of the policy acquisition costs ratio. The decrease was primarily driven by new agriculture business written during the six months ended June 30, 2017 which carries lower acquisition costs.
•
General and administration expenses for the six months ended June 30, 2017 were $29.1 million compared to $23.5 million for the six months ended June 30, 2016, an increase of $5.5 million, or 23.5%. General and administrative expenses for the six months ended June 30, 2017 included $6.8 million of CRS expenses, of which $1.2 million related to the amortization of intangible assets acquired.

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Year to Date 2017 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, 2017 and 2016:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Fee revenues
 
 
 
 
Third party
 
$
10,193

 
$
7,818

Related party
 
1,275

 
1,219

Total fee revenues
 
11,468

 
9,037

 
 
 
 
 
Expenses
 
 
 
 
General and administrative expenses
 
7,393

 
4,233

Share compensation expenses
 
165

 
274

Finance expenses
 
75

 
883

Tax expense
 
134

 
—

Foreign exchange losses
 
—

 
12

Total expenses
 
7,767

 
5,402

Income before investment income from AlphaCat Funds and Sidecars
 
$
3,701

 
$
3,635

 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (a)
 
 
AlphaCat Sidecars
 
(133
)
 
665

AlphaCat ILS Funds - Lower Risk (b)
 
3,490

 
4,582

AlphaCat ILS Funds - Higher Risk (b)
 
4,967

 
3,128

BetaCat ILS Funds
 
631

 
1,676

PaCRe
 
—

 
(23
)
Validus’ share of investment income from AlphaCat Funds and Sidecars
 
8,955

 
10,028

Validus’ share of AlphaCat segment income
 
$
12,656

 
$
13,663

 
 
 
 
 
Supplemental information:
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
66

 
$
(66
)
AlphaCat ILS Funds - Lower Risk (b)
 
106,540

 
110,192

AlphaCat ILS Funds - Higher Risk (b)
 
137,208

 
138,330

AlphaCat Direct (c)
 
26,794

 
17,797

Total
 
$
270,608

 
$
266,253

(a)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(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.

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Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Fee revenues earned for the six months ended June 30, 2017 were $11.5 million compared to $9.0 million during the six months ended June 30, 2016, an increase of $2.4 million or 26.9%. Third party fee revenues earned during the six months ended June 30, 2017 were $10.2 million, compared to $7.8 million, an increase of $2.4 million or 30.4%. The increase was primarily driven by an increase in assets under management and the impact of notable and non-notable loss events during the six months ended June 30, 2016
•
Total expenses for the six months ended June 30, 2017 were $7.8 million, compared to $5.4 million for the six months ended June 30, 2016, an increase of $2.4 million or 43.8%, primarily driven by a higher allocation of costs to the AlphaCat segment.
•
Validus’ share of investment income from AlphaCat Funds and Sidecars was $9.0 million for the six months ended June 30, 2017 as compared to $10.0 million for the six months ended June 30, 2016, a decrease of $1.1 million or 10.7%.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2017
 
January 1, 2017
Assets Under Management - Related Party
 
 
 
 
AlphaCat Sidecars
 
$
5,686

 
$
7,729

AlphaCat ILS Funds - Lower Risk
 
79,808

 
124,297

AlphaCat ILS Funds - Higher Risk
 
84,663

 
83,881

AlphaCat Direct (b)
 
—

 
—

BetaCat ILS Funds
 
25,000

 
26,808

Total
 
$
195,157

 
$
242,715

 
 
 
 
 
Assets Under Management - Third Party
 
 
 
 
AlphaCat Sidecars
 
$
20,590

 
$
28,829

AlphaCat ILS Funds - Lower Risk
 
1,309,377

 
1,257,287

AlphaCat ILS Funds - Higher Risk
 
896,639

 
738,813

AlphaCat Direct (b)
 
534,555

 
444,668

BetaCat ILS Funds
 
118,493

 
29,000

Total
 
2,879,654

 
2,498,597

Total Assets Under Management
 
$
3,074,811

 
$
2,741,312

(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)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat’s assets under management were $3.1 billion as at July 1, 2017, compared to $2.7 billion as at January 1, 2017. Third party assets under management were $2.9 billion as at July 1, 2017, compared to $2.5 billion as at January 1, 2017.
During the six months ended July 1, 2017, a total of $478.7 million of capital was raised, of which $468.7 million was raised from third parties. During the six months ended July 1, 2017, $208.0 million was returned to investors, of which $146.3 million was returned to third party investors.

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Year to Date Results of Operations - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Investment income
 
 
 
 
Managed net investment income (a)
 
$
74,255

 
$
64,772

 
 
 
 
 
Corporate expenses
 
 
 
 
General and administrative expenses
 
36,024

 
34,055

Share compensation expenses
 
8,049

 
8,099

Finance expenses (b)
 
28,013

 
28,320

Dividends on preferred shares
 
4,406

 
—

Tax benefit (b)
 
(4,670
)
 
(412
)
Total Corporate expenses
 
71,822

 
70,062

 
 
 
 
 
Other items
 
 
 
 
Net realized (losses) gains on investments (b)
 
(623
)
 
1,434

Change in net unrealized gains on investments (b)
 
30,291

 
77,130

Income (loss) from investment affiliates
 
14,654

 
(4,702
)
Foreign exchange (losses) gains (b)
 
(6,220
)
 
12,695

Other income
 
268

 
756

Transaction expenses
 
(4,427
)
 
—

Total other items
 
33,943

 
87,313

Total Corporate and Investments
 
$
36,376

 
$
82,023

(a)
Managed net investment income excludes the components which are included in the Company’s share of AlphaCat, net realized and change in unrealized gains on managed investments and income (loss) from investment affiliates.
(b)
These items exclude the components which are included in the Company’s share of AlphaCat and amounts which are consolidated from VIEs.
Investments
Highlights of our managed investment portfolio for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
Managed net investment income from our managed investment portfolio for the six months ended June 30, 2017 was $74.3 million compared to $64.8 million for the six months ended June 30, 2016, an increase of $9.5 million, or 14.6%. The increase was primarily driven by a strong performance from the Company’s fixed income funds.
•
Annualized effective yield for the six months ended June 30, 2017 was 2.31% compared to 2.06% for the six months ended June 30, 2016, an increase of 25 basis points.
•
Net realized losses on managed investments for the six months ended June 30, 2017 were $0.6 million compared to gains of $1.4 million for the six months ended June 30, 2016, an unfavorable movement of $2.1 million or 143.4%.
•
The change in net unrealized gains on managed investments for the six months ended June 30, 2017 was $30.3 million compared to $77.1 million for the six months ended June 30, 2016, an unfavorable movement of $46.8 million, or 60.7%. The unfavorable movement was primarily driven by changes in interest rates having less of an impact on the Company’s managed fixed maturity investment portfolio during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016.
•
Income from investment affiliates for the six months ended June 30, 2017 was $14.7 million compared to a loss of $4.7 million for the six months ended June 30, 2016, a favorable movement of $19.4 million. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

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Corporate Expenses and Other Items
Highlights for the six months ended June 30, 2017 as compared to 2016 were as follows:
•
General and administrative expenses for the six months ended June 30, 2017 were $36.0 million compared to $34.1 million for the six months ended June 30, 2016, an increase of $2.0 million or 5.8%.
•
Share compensation expenses for the six months ended June 30, 2017 were $8.0 million compared to $8.1 million for the six months ended June 30, 2016, a decrease of $0.1 million or 0.6%.
•
Finance expenses, excluding the Company’s share of AlphaCat finance expenses from consolidated VIEs, for the six months ended June 30, 2017 were $28.0 million compared to $28.3 million for the six months ended June 30, 2016, a decrease of $0.3 million or 1.1%.
•
The Company issued $250.0 million of preferred shares during the six months ended June 30, 2017 and $150.0 million of preferred shares during the six months ended June 30, 2016. Dividends paid on preferred shares during the six months ended June 30, 2017 were $4.4 million compared to $nil during the six months ended June 30, 2016.
•
Tax benefit for the six months ended June 30, 2017 was $4.7 million compared to $0.4 million for the six months ended June 30, 2016, an increase of $4.3 million.
•
Foreign exchange losses for the six months ended June 30, 2017 were $6.2 million compared to gains of $12.7 million for the six months ended June 30, 2016, an unfavorable movement of $18.9 million. The unfavorable movement was primarily driven by the Euro strengthening against the U.S. dollar during the six months ended June 30, 2017.
•
Transaction expenses for the six months ended June 30, 2017 were $4.4 million compared to $nil for the six months ended June 30, 2016 and are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS, which was completed on May 1, 2017.

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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 6, “Variable interest entities,” to the Consolidated Financial Statements in Part I, Item 1 for further details.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at June 30, 2017 and December 31, 2016 was as follows:
 
Fair Value
 
June 30, 2017
 
December 31, 2016
Managed investments, cash and cash equivalents and restricted cash
 
 
 
Fixed maturities
 
 
 
U.S. government and government agency
$
646,436

 
$
804,126

Non-U.S. government and government agency
292,504

 
240,791

U.S. states, municipalities and political subdivisions
227,949

 
271,830

Agency residential mortgage-backed securities
783,006

 
679,595

Non-agency residential mortgage-backed securities
26,683

 
15,477

U.S. corporate
1,386,484

 
1,534,508

Non-U.S. corporate
379,480

 
410,227

Bank loans
552,901

 
570,399

Asset-backed securities
502,056

 
526,814

Commercial mortgage-backed securities
316,190

 
330,932

Total fixed maturities
5,113,689

 
5,384,699

Short-term investments
255,516

 
228,386

Other investments
 
 
 
Fund of hedge funds
—

 
955

Hedge funds
18,303

 
17,381

Private equity investments
100,391

 
82,627

Fixed income investment funds
268,110

 
249,275

Overseas deposits
57,874

 
50,106

Mutual funds
3,940

 
5,368

Total other investments
448,618

 
405,712

Investment in investment affiliate
103,377

 
100,431

Cash and cash equivalents
796,476

 
415,419

Restricted cash
48,101

 
15,000

Total managed investments, cash and cash equivalents and restricted cash
$
6,765,777

 
$
6,549,647

 
 
 
 
Non-managed investments, cash and cash equivalents and restricted cash
 
 
 
Catastrophe bonds
$
304,954

 
$
158,331

Short-term investments
2,615,837

 
2,567,784

Cash and cash equivalents
3,929

 
4,557

Restricted cash
146,938

 
55,956

Total non-managed investments, cash and cash equivalents and restricted cash
3,071,658

 
2,786,628

Total investments and cash
$
9,837,435

 
$
9,336,275

As at June 30, 2017, the Company’s managed cash and investment portfolio totaled $6.8 billion (December 31, 2016: $6.5 billion). Refer to Note 4, “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

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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 3.25 years. At June 30, 2017, the average duration of the Company’s managed investment portfolio was 2.02 years (December 31, 2016: 2.26 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and 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 with 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, 2017, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- (December 31, 2016: AA-). Refer to Note 4(a) to the Consolidated Financial Statements, “Investments,” in Part I, Item 1 for further details related to the investment ratings of the Company’s fixed maturity portfolio.
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
Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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, 2017
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
74,604

 
11.1
%
Supranational
 
57,047

 
8.5
%
United Kingdom
 
29,376

 
4.4
%
Canada
 
25,419

 
3.8
%
Province of Ontario
 
25,430

 
3.8
%
France
 
11,484

 
1.7
%
Jordan
 
10,064

 
1.5
%
Other (individual jurisdictions below $10,000)
 
59,080

 
8.7
%
Total Managed Non-U.S. Government Securities
 
292,504

 
43.5
%
European Corporate Securities
 
167,740

 
25.0
%
United Kingdom Corporate Securities
 
107,376

 
16.0
%
Other Non-U.S. Corporate Securities
 
104,364

 
15.5
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
671,984

 
100.0
%

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December 31, 2016
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
66,886

 
10.3
%
Supranational
 
41,502

 
6.4
%
United Kingdom
 
36,178

 
5.6
%
Canada
 
15,836

 
2.4
%
Province of Ontario
 
12,387

 
1.9
%
Norway
 
12,085

 
1.9
%
France
 
10,360

 
1.6
%
Jordan
 
10,080

 
1.5
%
Other (individual jurisdictions below $10,000)
 
35,477

 
5.4
%
Total Managed Non-U.S. Government Securities
 
240,791

 
37.0
%
European Corporate Securities
 
173,326

 
26.6
%
United Kingdom Corporate Securities
 
96,425

 
14.8
%
Other Non-U.S. Corporate Securities
 
140,476

 
21.6
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
651,018

 
100.0
%
At June 30, 2017, the Company did not have an aggregate exposure to any single issuer of more than 0.9% (December 31, 2016: 1.0%) of total managed investments and cash, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at June 30, 2017 were as follows:
 
 
June 30, 2017
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Managed Investments and Cash
JPMorgan Chase & Co
 
$
57,817

 
 BBB+
 
0.9
%
Bank of America Corp
 
53,459

 
 BBB+
 
0.8
%
Morgan Stanley
 
51,656

 
 BBB+
 
0.8
%
Citigroup Inc
 
44,525

 
BBB+
 
0.7
%
Wells Fargo & Company
 
43,374

 
 A
 
0.6
%
Goldman Sachs Group
 
43,289

 
 BBB+
 
0.6
%
Bank of New York Mellon Corp
 
33,048

 
A
 
0.5
%
Anheuser-Busch Inbev NV
 
28,753

 
 A-
 
0.4
%
Capital One Financial Corporation
 
28,617

 
BBB+
 
0.4
%
Verizon Communications Inc.
 
28,438

 
BBB+
 
0.4
%
Total
 
$
412,976

 
 
 
6.1
%

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December 31, 2016
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Managed Investments and Cash
JPMorgan Chase & Co
 
$
66,827

 
BBB+
 
1.0
%
Citigroup Inc
 
52,737

 
BBB
 
0.8
%
Bank of America Corp
 
50,280

 
BBB+
 
0.8
%
Morgan Stanley
 
48,273

 
BBB+
 
0.7
%
Goldman Sachs Group
 
46,261

 
BBB+
 
0.7
%
Wells Fargo & Company
 
44,596

 
A
 
0.7
%
Anheuser-Busch Inbev NV
 
39,674

 
A-
 
0.6
%
Bank of New York Mellon Corp
 
34,619

 
A
 
0.5
%
HSBC Holdings plc
 
29,411

 
A
 
0.4
%
US Bancorp
 
28,175

 
AA-
 
0.4
%
Total
 
$
440,853

 
 
 
6.6
%
(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. For investments where three ratings are unavailable, the lower of the ratings shall apply. All investment ratings are presented as the Standard & Poor’s equivalent rating.
Reserve for Losses and Loss Expenses
At June 30, 2017, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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, 2017
 
December 31, 2016
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
Property
 
$
410,232

 
$
515,730

 
$
925,962

 
$
390,141

 
$
440,531

 
$
830,672

Marine
 
349,501

 
384,201

 
733,702

 
389,614

 
471,845

 
861,459

Specialty
 
280,942

 
798,795

 
1,079,737

 
259,251

 
473,656

 
732,907

Liability
 
196,124

 
369,666

 
565,790

 
198,766

 
371,391

 
570,157

Total
 
$
1,236,799

 
$
2,068,392

 
$
3,305,191

 
$
1,237,772

 
$
1,757,423

 
$
2,995,195

 
 
June 30, 2017
 
December 31, 2016
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
Property
 
$
349,685

 
$
384,321

 
$
734,006

 
$
330,213

 
$
392,886

 
$
723,099

Marine
 
291,186

 
337,390

 
628,576

 
337,550

 
369,908

 
707,458

Specialty
 
237,899

 
622,113

 
860,012

 
222,496

 
428,864

 
651,360

Liability
 
181,613

 
300,777

 
482,390

 
182,185

 
300,672

 
482,857

Total
 
$
1,060,383

 
$
1,644,601

 
$
2,704,984

 
$
1,072,444

 
$
1,492,330

 
$
2,564,774






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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the three months ended June 30, 2017.
 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,107,080

 
$
1,346,517

 
$
615,428

 
$
45,805

 
$
(62,085
)
 
$
3,052,745

Loss reserves recoverable
 
(89,645
)
 
(335,352
)
 
(88,944
)
 
—

 
62,085

 
(451,856
)
Net reserves for losses and loss expenses, beginning of period
 
1,017,435

 
1,011,165

 
526,484

 
45,805

 
—

 
2,600,889

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves acquired (a)
 
—

 
—

 
23,753

 
—

 
—

 
23,753

Current year
 
127,784

 
109,265

 
97,471

 
4,919

 
—

 
339,439

Prior years
 
(23,099
)
 
(15,876
)
 
(463
)
 
(3,852
)
 
—

 
(43,290
)
Total net incurred losses and loss expenses
 
104,685

 
93,389

 
97,008

 
1,067

 
—

 
296,149

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
 
11,848

 
7,735

 
—

 
633

 
—

 
20,216

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
(7,970
)
 
(21,423
)
 
(13,365
)
 
—

 
—

 
(42,758
)
Prior years
 
(88,523
)
 
(61,885
)
 
(41,835
)
 
(1,022
)
 
—

 
(193,265
)
Total net paid losses
 
(96,493
)
 
(83,308
)
 
(55,200
)
 
(1,022
)
 
—

 
(236,023
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net reserve for losses and loss expenses, end of period
 
1,037,475

 
1,028,981

 
592,045

 
46,483

 
—

 
2,704,984

Loss reserves recoverable
 
101,926

 
364,658

 
196,018

 
—

 
(62,395
)
 
600,207

Reserve for losses and loss expenses, end of period
 
$
1,139,401

 
$
1,393,639

 
$
788,063

 
$
46,483

 
$
(62,395
)
 
$
3,305,191

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
For the three months ended June 30, 2017, favorable loss reserve development on prior accident years was $43.3 million, of which $23.1 million related to the Validus Re segment, $15.9 million related to the Talbot segment, $0.5 million related to the Western World segment and $3.9 million related to the AlphaCat segment.


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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the six months ended June 30, 2017:

 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,116,753

 
$
1,301,517

 
$
589,500

 
$
48,534

 
$
(61,109
)
 
$
2,995,195

Loss reserves recoverable
 
(98,005
)
 
(306,038
)
 
(87,487
)
 
—

 
61,109

 
(430,421
)
Net reserves for losses and loss expenses, beginning of period
 
1,018,748

 
995,479

 
502,013

 
48,534

 
—

 
2,564,774

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves acquired (a)
 
—

 
—

 
23,753

 
—

 
—

 
23,753

Current year
 
242,718

 
244,491

 
172,615

 
10,431

 
—

 
670,255

Prior years
 
(51,879
)
 
(44,690
)
 
(682
)
 
(7,270
)
 
—

 
(104,521
)
Total net incurred losses and loss expenses
 
190,839

 
199,801

 
171,933

 
3,161

 
—

 
565,734

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
 
20,594

 
11,158

 
—

 
781

 
—

 
32,533

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
(10,226
)
 
(22,506
)
 
(17,724
)
 
—

 
—

 
(50,456
)
Prior years
 
(182,480
)
 
(154,951
)
 
(87,930
)
 
(5,993
)
 
—

 
(431,354
)
Total net paid losses
 
(192,706
)
 
(177,457
)
 
(105,654
)
 
(5,993
)
 
—

 
(481,810
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves for losses and loss expenses, end of period
 
1,037,475

 
1,028,981

 
592,045

 
46,483

 
—

 
2,704,984

Loss reserves recoverable
 
101,926

 
364,658

 
196,018

 
—

 
(62,395
)
 
600,207

Reserve for losses and loss expenses, end of period
 
$
1,139,401

 
$
1,393,639

 
$
788,063

 
$
46,483

 
$
(62,395
)
 
$
3,305,191

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
For the six months ended June 30, 2017, favorable loss reserve development on prior accident years was $104.5 million, of which $51.9 million related to the Validus Re segment, $44.7 million related to the Talbot segment, $0.7 million related to the Western World segment and $7.3 million related to the AlphaCat segment.
For further information regarding the Company’s reserves for losses and loss expenses refer to Note 9, “Reserve for losses and loss expenses,” to the Consolidated Financial Statements in Part I, Item 1. The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned.
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”) and would be included as part of the Company’s overall reserves. As at June 30, 2017 and December 31, 2016 the Company had no RDE.

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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. There were no notable loss events during the six months ended June 30, 2017.
 
 
 
 
Year Ended December 31, 2016
 
Six Months Ended June 30, 2017
2016 Notable Loss Events
 
Initial estimate (a)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Canadian Wildfires
 
$
36,915

 
$
(17,265
)
 
$
19,650

 
$
—

 
$
19,650

Hurricane Matthew
 
39,140

 
—

 
39,140

 
22

 
39,162

2016 New Zealand Earthquake
 
31,421

 
—

 
31,421

 
—

 
31,421

Total
 
$
107,476

 
$
(17,265
)
 
$
90,211

 
$
22

 
$
90,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Closing
Reserve (c)
 
Paid Loss (Recovery)
 
Closing
Reserve (c)
Canadian Wildfires
 
 
 
$
5,676

 
$
13,974

 
$
2,729

 
$
11,245

Hurricane Matthew
 
 
 
6,712

 
32,428

 
14,610

 
17,840

2016 New Zealand Earthquake
 
 
 
—

 
31,421

 
749

 
30,672

Total
 
 
 
$
12,388

 
$
77,823

 
$
18,088

 
$
59,757

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Excludes impact of movements in foreign exchange rates.
(c)
Closing Reserve for the period equals Closing Estimate for the period less cumulative paid losses (recovery).
Sources of Liquidity
Holding Company Liquidity
Validus Holdings 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, 2017
 
December 31, 2016
Validus Reinsurance, Ltd. (excluding capital supporting FAL) (a) (b)
 
$
3,828,211

 
$
3,720,595

Talbot Holdings, Ltd. (including capital supporting FAL) (b)
 
958,250

 
914,442

Other, net
 
208,833

 
(14,158
)
Redeemable noncontrolling interests in AlphaCat
 
1,251,660

 
1,528,001

Noncontrolling interests in AlphaCat
 
415,658

 
165,977

Total consolidated capitalization
 
6,662,612

 
6,314,857

Senior notes payable
 
(245,463
)
 
(245,362
)
Debentures payable
 
(538,400
)
 
(537,226
)
Redeemable noncontrolling interests in AlphaCat
 
(1,251,660
)
 
(1,528,001
)
Total shareholders’ equity
 
4,627,089

 
4,004,268

Preferred shares (c)
 
(400,000
)
 
(150,000
)
Noncontrolling interests in AlphaCat
 
(415,658
)
 
(165,977
)
Total shareholders’ equity available to Validus common shareholders (c)
 
$
3,811,431

 
$
3,688,291

(a)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $735,174 (December 31, 2016: $639,113) relating to Western World Insurance Group, Inc.
(b)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $755,323 (December 31, 2016: $723,888) 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.

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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.
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, 2017 and 2016 is provided in the following table:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2017
 
2016
Net cash provided by operating activities
 
$
52,685

 
$
69,443

Net cash used in investing activities
 
(214,370
)
 
(469,003
)
Net cash provided by financing activities
 
531,506

 
252,217

Effect of foreign currency rate changes on cash and cash equivalents
 
10,608

 
(6,968
)
Net increase (decrease) in cash and cash equivalents
 
$
380,429

 
$
(154,311
)
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, 2017 was $52.7 million compared to $69.4 million during the six months ended June 30, 2016, an unfavorable movement of $16.8 million. This unfavorable movement was primarily due to the timing of cash receipts and payments, notably with regard to premiums receivable and losses payable, respectively.
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, 2017, the Company’s portfolio was composed of fixed income, short-term and other investments and investments in investment affiliates amounting to $8.8 billion or 89.9% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 4, “Investments,” to the Consolidated Financial Statements in Part I, Item 1.
Net cash used in investing activities during the six months ended June 30, 2017 was $214.4 million compared to $469.0 million for the six months ended June 30, 2016, a decrease of $254.6 million. This decrease was primarily driven by cash used to fund the Company’s acquisition of CRS and lower purchases of short-term investments during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.
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, 2017 was $531.5 million compared to $252.2 million during the six months ended June 30, 2016, an increase of $279.3 million. The increase during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016 was primarily driven by increases in the net proceeds received on the

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issuance of preferred shares of $96.8 million, an increase in net third party investments from AlphaCat investors of $92.3 million and a decrease in share repurchases of $115.1 million.
Capital Resources
The following table details the Company’s capital position as at June 30, 2017 and December 31, 2016.
(Dollars in thousands)
June 30, 2017
 
December 31, 2016
Senior Notes (a)
$
245,463

 
$
245,362

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

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (a)
248,600

 
247,426

Total debt
$
783,863

 
$
782,588

 
 
 
 
Redeemable noncontrolling interests
$
1,251,660

 
$
1,528,001

 
 
 
 
Preferred shares, liquidation value (b)
$
400,000

 
$
150,000

Ordinary shares, capital and surplus available to Validus common shareholders
3,831,355

 
3,711,507

Accumulated other comprehensive loss
(19,924
)
 
(23,216
)
Noncontrolling interests
415,658

 
165,977

Total shareholders’ equity
$
4,627,089

 
$
4,004,268

 
 
 
 
Total capitalization (c)
$
6,662,612

 
$
6,314,857

 
 
 
 
Total capitalization available to Validus (d)
$
4,995,294

 
$
4,620,879

 
 
 
 
Debt to total capitalization
11.8
%
 
12.4
%
Debt (excluding JSDs) to total capitalization
3.7
%
 
3.9
%
Debt and preferred shares to total capitalization
17.8
%
 
14.8
%
 
 
 
 
Debt to total capitalization available to Validus
15.7
%
 
16.9
%
Debt (excluding JSDs) to total capitalization available to Validus
4.9
%
 
5.3
%
Debt and preferred shares to total capitalization available to Validus
23.7
%
 
20.2
%
(a)
Refer to Part I, Item 1, Note 13 to the Consolidated Financial Statements, “Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.
(b)
Refer to Part I, Item 1, Note 11 to the Consolidated Financial Statements, “Share capital,” for further details and discussion on the Company’s preferred shares.
(c)
Total capitalization equals total shareholders’ equity plus redeemable noncontrolling interests and total debt.
(d)
Total capitalization available to Validus equals total capitalization as per (c) less redeemable noncontrolling interests and noncontrolling interests.
Shareholders’ Equity
Shareholders’ equity available to Validus common shareholders at June 30, 2017 was $3.8 billion, compared to $3.7 billion at December 31, 2016. Including $400.0 million of preferred shares at June 30, 2017 (December 31, 2016: $150.0 million), shareholders’ equity available to Validus at June 30, 2017 was $4.2 billion, compared to $3.8 billion at December 31, 2016.
On May 10, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and a quarterly cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on June 30, 2017 to holders of record on June 15, 2017. The preferred share dividend was paid on June 15, 2017 to holders of record on June 1, 2017.
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. The Company has repurchased 80,829,523 common shares for an aggregate purchase price of $2.7 billion from the inception of the share repurchase program to July 31, 2017. The Company had $303.3 million remaining under its authorized share repurchase program as of July 31, 2017.

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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
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 to the Consolidated Financial Statements, “Debt and financing arrangements” and Part I, Item 1, Note 20 to the Consolidated Financial Statements, “Debt and financing arrangements,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, 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 interests. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability. As at June 30, 2017 and December 31, 2016, the amount of the Company’s total capitalization owed to third parties as redeemable noncontrolling interests was $1.3 billion and $1.5 billion, respectively.
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 interests. As at June 30, 2017 and December 31, 2016, the amount of the Company’s total capitalization owed to third parties as noncontrolling interests was $415.7 million and $166.0 million, respectively. Refer to Part I, Item I, Notes 6 and 7 to the Consolidated Financial Statements, “Variable Interest Entities,” and “Noncontrolling interests,” respectively, for further details.
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 2, 2017:
 
A.M. Best
 
S&P
 
Moody’s
 
Fitch
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa1
 
A-
Senior debt
bbb
 
BBB+
 
Baa1
 
BBB+
Subordinated debt
bbb-
 
—
 
Baa2
 
BBB
Preferred stock
bb+
 
BBB-
 
Baa3
 
BBB
Outlook on ratings
Positive
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A2
 
A
Outlook on ratings
Stable
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Lloyd’s of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd’s syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Stable
 
Stable
 
—
 
Negative
 
 
 
 
 
 
 
 
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
For information relating to relevant recent accounting pronouncements, refer to Part I, Item 1, Note 2 to the Consolidated Financial Statements, “Recent accounting pronouncements,” for further details.
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 Part II, 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, 2016.
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.
The Company believes 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 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 these new businesses;
•
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;
•
termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. Farm Bill, including modifications to the Standard Reinsurance Agreement put in place by the Risk Management Agency of the U.S. Department of Agriculture; 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, 2016, 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 the Company’s 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 the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company or our business or operations. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company’s exposure to market risks has not changed materially since December 31, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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The Company acquired all of the outstanding capital stock of CRS on May 1, 2017. CRS’ total assets and net premiums earned represented approximately 8.2% and 4.1%, respectively of the Company’s total assets and net premiums earned as at and for the six months ended June 30, 2017. CRS has been excluded from the Company’s assessment scope for the effectiveness of internal control over financial reporting as at June 30, 2017 because it was acquired by the Company in a purchase business combination during 2017.
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 as defined and in 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, 2017, 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
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In addition to the risk factors identified therein, as a result of the Company’s acquisition of CRS on May 1, 2017, the Company has identified the following additional risk factors which it considers to be applicable:
The terms of the Federal Multi-Peril Crop Insurance Program may change and adversely impact us.
Stratford Insurance Company (“Stratford”), a subsidiary of Western World, currently participates in the U.S. Federal Multi-Peril Crop Insurance Program ("MPCI") sponsored by the Risk Management Agency of the U.S. Department of Agriculture (the "RMA"). The U.S. Farm Bill was signed into law February 2014, which fixes the terms of the MPCI program, is subject to change by the U. S. Congress at any time. Stratford's agriculture insurance premiums, which are primarily driven by MPCI, represent a large portion of Western World’s business, totaling $50.0 million of net premiums earned during the three months ended June 30, 2017, and representing 38.3% of the total net premiums earned in the Western World segment.
The RMA periodically reviews and proposes changes to the Standard Reinsurance Agreement (“SRA”) used in connection with the MPCI program and such changes to the SRA could adversely affect the financial results of crop insurers such as Stratford.
As an agriculture (re)insurer, we could face losses from commodity price volatility.
A significant portion of our agriculture (re)insurance business provides revenue protection to farmers for their expected crop revenues, which can be affected by changes in crop prices. We face the risk that significant losses could be incurred in the event of a decline in the applicable commodity prices prior to harvest. While this risk is partially mitigated by policyholder retentions, it is

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possible that large declines in the commodity prices of the major crops we (re)insure, including corn, soybeans, cotton and wheat, could have a material adverse effect on our results of operations or financial condition if we are unable to effectively (re)insure these risks.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company, from time to time, repurchases its shares in the open market, or in privately negotiated transactions, under its share repurchase program. 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. Share repurchases may also include repurchases by the Company of shares from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. The Company repurchases these shares at their fair market value, as determined by reference to the closing price of its common shares on the day the restricted shares vested. The Company’s share repurchase program may be modified, extended or terminated by its Board of Directors at any time.
The Company repurchased 267,953 common shares during the three months ended June 30, 2017. The Company has, from the inception of its share repurchase program to July 31, 2017, repurchased 80,829,523 common shares for an aggregate purchase price of $2.7 billion. As of July 31, 2017, the Company had $303.3 million remaining under its authorized share repurchase program.
The table below details the following repurchases that were made under the Program through to July 31, 2017:
 
 
Total shares repurchased under publicly announced repurchase program
(Dollars in thousands, except share and per share amounts)
 
Total number of shares repurchased
 
Aggregate Purchase
Price (a)
 
Average Price per Share (a)
 
Approximate dollar value of shares that may yet be purchased under the Program
Cumulative inception-to-date to December 31, 2016
 
80,508,849

 
$
2,704,406

 
$
33.59

 
$
319,995

 
 
 
 
 
 
 
 
 
Cumulative for the three months ended March 31, 2017
 
—

 
—

 
$
—

 
$
319,995

 
 
 
 
 
 
 
 
 
June 2017
 
267,953

 
13,996

 
$
52.23

 
$
305,999

Cumulative for the three months ended June 30, 2017
 
267,953

 
13,996

 
$
52.23

 
 
Cumulative inception-to-date to June 30, 2017
 
80,776,802

 
$
2,718,402

 
$
33.65

 
$
305,999

 
 
 
 
 
 
 
 
 
Repurchases made subsequent to quarter-end:
 
 
 
 
 
 
 
 
July 1 - 31, 2017
 
52,721

 
$
2,737

 
$
51.91

 
$
303,262

(a)
Share transactions are on a trade date basis through July 31, 2017 and are inclusive of commissions. Average share price is rounded to two decimal places.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.

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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 the Company’s non-U.S. subsidiaries provide global marine hull & war policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that certain of its policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Since these policies insure multiple voyages and fleets containing multiple ships, the Company is 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 the Company’s 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 in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that one of its 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, the Company is 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 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 2, 2017
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
August 2, 2017
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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