Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

Commission file number 001-33606

 


 

VALIDUS HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

 


 

BERMUDA

 

98-0501001

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

29 Richmond Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

 

(441) 278-9000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of May 1, 2012 there were 99,343,415 outstanding Common Shares, $0.175 par value per share, of the registrant.

 

 

 



Table of Contents

 

INDEX

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements:

 

 

 

Consolidated Balance Sheets as at March 31, 2012 (unaudited) and December 31, 2011

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011 (unaudited)

3

 

 

Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011 (unaudited)

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)

5

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

72

 

 

Item 4. Controls and Procedures

74

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

75

 

 

Item 1A. Risk Factors

75

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

75

 

 

Item 3. Defaults Upon Senior Securities

76

 

 

Item 4. Mine Safety Disclosure

76

 

 

Item 5. Other Information

76

 

 

Item 6. Exhibits

77

 

 

Signatures

78

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at March 31, 2012 (unaudited) and December 31, 2011

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2012 - $4,951,881; 2011 - $4,859,705)

 

$

5,015,210

 

$

4,894,145

 

Short-term investments, at fair value (amortized cost: 2012 - $304,150; 2011 - $280,299)

 

304,149

 

280,191

 

Other investments, at fair value (amortized cost: 2012 - $15,938; 2011 - $15,002)

 

16,803

 

16,787

 

Cash and cash equivalents

 

917,396

 

832,844

 

Total investments and cash

 

6,253,558

 

6,023,967

 

Investment in non-consolidated affiliate

 

56,398

 

53,031

 

Premiums receivable

 

894,698

 

646,354

 

Deferred acquisition costs

 

170,722

 

121,505

 

Prepaid reinsurance premiums

 

125,407

 

91,381

 

Securities lending collateral

 

419

 

7,736

 

Loss reserves recoverable

 

351,292

 

372,485

 

Paid losses recoverable

 

47,657

 

90,495

 

Income taxes recoverable

 

967

 

 

Intangible assets

 

113,691

 

114,731

 

Goodwill

 

20,393

 

20,393

 

Accrued investment income

 

24,387

 

25,906

 

Other assets

 

62,280

 

50,487

 

Total assets

 

$

8,121,869

 

$

7,618,471

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss expenses

 

$

2,649,610

 

$

2,631,143

 

Unearned premiums

 

1,085,446

 

772,382

 

Reinsurance balances payable

 

152,724

 

119,899

 

Securities lending payable

 

1,108

 

8,462

 

Deferred income taxes

 

17,556

 

16,720

 

Net payable for investments purchased

 

63,427

 

1,256

 

Accounts payable and accrued expenses

 

75,678

 

83,402

 

Senior notes payable

 

247,009

 

246,982

 

Debentures payable

 

289,800

 

289,800

 

Total liabilities

 

$

4,582,358

 

$

4,170,046

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2012 - 134,745,003; 2011 - 134,503,065; Outstanding: 2012 - 99,340,458; 2011 - 99,471,080)

 

$

23,580

 

$

23,538

 

Treasury shares (2012 - 35,404,545; 2011 - 35,031,985)

 

(6,196

)

(6,131

)

Additional paid-in-capital

 

1,886,776

 

1,893,890

 

Accumulated other comprehensive (loss)

 

(5,208

)

(6,601

)

Retained earnings

 

1,640,559

 

1,543,729

 

Total shareholders’ equity

 

$

3,539,511

 

$

3,448,425

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

8,121,869

 

$

7,618,471

 

 

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

 

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Table of Contents

 

Validus Holdings, Ltd.

Consolidated Statements of Comprehensive Income (Loss)

For the Three Months Ended March 31, 2012 and 2011 (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

 

 

 

 

Gross premiums written

 

$

837,289

 

$

849,896

 

Reinsurance premiums ceded

 

(107,052

)

(109,820

)

Net premiums written

 

730,237

 

740,076

 

Change in unearned premiums

 

(279,038

)

(310,543

)

Net premiums earned

 

451,199

 

429,533

 

Net investment income

 

27,760

 

29,975

 

Net realized gains on investments

 

7,532

 

6,379

 

Net unrealized gains (losses) on investments

 

20,671

 

(12,828

)

Other income

 

8,891

 

1,606

 

Foreign exchange gains (losses)

 

3,166

 

(467

)

Total revenues

 

519,219

 

454,198

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Losses and loss expenses

 

231,989

 

476,198

 

Policy acquisition costs

 

78,132

 

77,296

 

General and administrative expenses

 

66,375

 

48,477

 

Share compensation expenses

 

5,438

 

12,049

 

Finance expenses

 

16,279

 

14,001

 

Total expenses

 

398,213

 

628,021

 

 

 

 

 

 

 

Net income (loss) before taxes

 

121,006

 

(173,823

)

Tax (expense) benefit

 

(139

)

1,459

 

Equity earnings in non-consolidated affiliate

 

3,367

 

 

Net income (loss)

 

$

124,234

 

$

(172,364

)

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

Foreign currency translation adjustments

 

1,393

 

957

 

 

 

 

 

 

 

Other comprehensive income

 

1,393

 

957

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

125,627

 

$

(171,407

)

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Weighted average number of common shares and common share equivalents outstanding

 

 

 

 

 

Basic

 

99,425,140

 

97,944,340

 

Diluted

 

105,096,090

 

97,944,340

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

1.23

 

$

(1.78

)

Diluted earnings (loss) per share

 

$

1.18

 

$

(1.78

)

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.25

 

$

0.25

 

 

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

 

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Table of Contents

 

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2012 and 2011 (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

(unaudited)

 

(unaudited)

 

Common shares

 

 

 

 

 

Balance - Beginning of period

 

$

23,538

 

$

23,247

 

Common shares issued, net

 

42

 

84

 

Balance - End of period

 

$

23,580

 

$

23,331

 

 

 

 

 

 

 

Treasury shares

 

 

 

 

 

Balance - Beginning of period

 

$

(6,131

)

$

(6,096

)

Repurchase of common shares

 

(65

)

(35

)

Balance - End of period

 

$

(6,196

)

$

(6,131

)

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

Balance - Beginning of period

 

$

1,893,890

 

$

1,860,960

 

Common shares (redeemed) issued, net

 

(1,309

)

3,055

 

Repurchase of common shares

 

(11,243

)

(5,960

)

Share compensation expenses

 

5,438

 

12,049

 

Balance - End of period

 

$

1,886,776

 

$

1,870,104

 

 

 

 

 

 

 

Accumulated other comprehensive (loss)

 

 

 

 

 

Balance - Beginning of period

 

$

(6,601

)

$

(5,455

)

Foreign currency translation adjustments

 

1,393

 

957

 

Balance - End of period

 

$

(5,208

)

$

(4,498

)

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance - Beginning of period

 

$

1,543,729

 

$

1,632,175

 

Dividends

 

(27,404

)

(27,296

)

Net income (loss)

 

124,234

 

(172,364

)

Balance - End of period

 

$

1,640,559

 

$

1,432,515

 

 

 

 

 

 

 

Total shareholders’ equity

 

$

3,539,511

 

$

3,315,321

 

 

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

 

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Table of Contents

 

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011 (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

Cash flows provided by (used in) operating activities

 

 

 

 

 

Net income (loss)

 

$

124,234

 

$

(172,364

)

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

 

 

 

 

 

Share compensation expenses

 

5,438

 

12,049

 

Amortization of discount on senior notes

 

27

 

27

 

Net realized (gains) on investments

 

(7,532

)

(6,379

)

Net unrealized (gains) losses on investments

 

(20,671

)

12,828

 

Amortization of intangible assets

 

1,040

 

1,040

 

Equity earnings in investment in non-consolidated affiliate

 

(3,367

)

 

Foreign exchange (gains) included in net income

 

(13,070

)

(4,694

)

Amortization of premium on fixed maturities

 

7,517

 

8,542

 

Change in:

 

 

 

 

 

Premiums receivable

 

(246,039

)

(345,025

)

Deferred acquisition costs

 

(49,217

)

(50,464

)

Prepaid reinsurance premiums

 

(34,026

)

(44,105

)

Loss reserves recoverable

 

22,916

 

(168,836

)

Paid losses recoverable

 

42,903

 

1,546

 

Income taxes recoverable

 

(1,004

)

306

 

Accrued investment income

 

1,565

 

444

 

Other assets

 

(10,880

)

5,409

 

Reserve for losses and loss expenses

 

8,702

 

489,356

 

Unearned premiums

 

313,064

 

354,648

 

Reinsurance balances payable

 

31,701

 

92,655

 

Deferred income taxes

 

1,029

 

(3,891

)

Accounts payable and accrued expenses

 

(9,425

)

(14,535

)

Net cash provided by operating activities

 

164,905

 

168,557

 

 

 

 

 

 

 

Cash flows provided by (used in) investing activities

 

 

 

 

 

Proceeds on sales of investments

 

939,646

 

1,581,206

 

Proceeds on maturities of investments

 

108,360

 

108,629

 

Purchases of fixed maturities

 

(1,080,442

)

(1,449,698

)

Purchases of short-term investments, net

 

(23,943

)

(292,131

)

Purchases of other investments

 

(947

)

 

Decrease (increase) in securities lending collateral

 

7,354

 

(10,785

)

Net cash (used in) investing activities

 

(49,972

)

(62,779

)

 

 

 

 

 

 

Cash flows provided by (used in) financing activities

 

 

 

 

 

(Redemption) issuance of common shares, net

 

(1,267

)

3,139

 

Purchases of common shares under share repurchase program

 

(11,308

)

(5,995

)

Dividends paid

 

(26,997

)

(27,196

)

(Decrease) increase in securities lending payable

 

(7,354

)

10,785

 

Net cash (used in) financing activities

 

(46,926

)

(19,267

)

 

 

 

 

 

 

Effect of foreign currency rate changes on cash and cash equivalents

 

16,545

 

10,193

 

 

 

 

 

 

 

Net increase in cash

 

84,552

 

96,704

 

 

 

 

 

 

 

Cash and cash equivalents - beginning of period

 

$

832,844

 

$

620,740

 

 

 

 

 

 

 

Cash and cash equivalents - end of period

 

$

917,396

 

$

717,444

 

 

 

 

 

 

 

Taxes paid during the period

 

$

3,194

 

$

26

 

 

 

 

 

 

 

Interest paid during the period

 

$

15,611

 

$

17,458

 

 

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

 

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Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

1.  Basis of preparation and consolidation

 

These unaudited consolidated financial statements include Validus Holdings, Ltd. and its subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles 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 should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of 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. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the 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 unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year.  The term “ASC” used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board (“FASB”).

 

2.  Recent accounting pronouncements

 

(a) Adoption of New Accounting Standards

 

Presentation of Comprehensive Income

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. ASU 2011-12 indefinitely defers certain reclassification adjustment provisions of ASU 2011-05. ASU 2011-12 is also effective for interim and annual periods beginning after December 15, 2011. Effective January 1, 2012, the Company retrospectively adopted this guidance.  The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

 

Fair Value Measurement and Disclosures

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The objective of ASU 2011-04 is to provide common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the amendments do not result in a change in the application of the requirements in ASC Topic 820 “Fair Value Measurements”. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  Effective January 1, 2012, the Company prospectively adopted this amended guidance.  The adoption of this guidance did not impact our results of operations, financial condition or liquidity.  The adoption of this guidance did not have a significant impact on the current disclosures included in Note 3 — Investments.

 

(b) Recently Issued Accounting Standards Not Yet Adopted

 

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have a material impact on the Company’s consolidated financial statements.

 

3.  Investments

 

The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

 

(a) Classification within the fair value hierarchy

 

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 quoted prices

 

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Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

(unadjusted) 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.

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.

 

Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds, U.S. agency and non-agency mortgage and asset-backed securities and bank loans. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. A fund of hedge funds and a private equity investment are the only financial instruments in this category as at March 31, 2012.

 

Other investments consist of an investment in a fund of hedge funds, a private equity investment and a deferred compensation trust held in mutual funds. The fund of hedge funds is a side pocket valued at $4,978 at March 31, 2012. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund’s administrator provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the funds administrator’s February 29, 2012 NAV was used as a partial basis for fair value measurement in the Company’s March 31, 2012 balance sheet. The fund manager provides an estimate of the performance of the fund for the following month based on the estimated performance provided from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund administrator’s NAV. Immaterial variances are recorded in the following reporting period. The private equity investment is also valued using both observable and significant unobservable inputs.

 

At March 31, 2012, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. Government and Government Agency

 

$

 

$

1,216,891

 

$

 

$

1,216,891

 

Non-U.S. Government and Government Agency

 

 

406,754

 

 

406,754

 

States, municipalities, political subdivision

 

 

25,784

 

 

25,784

 

Agency residential mortgage-backed securities

 

 

470,868

 

 

470,868

 

Non-Agency residential mortgage-backed securities

 

 

33,449

 

 

33,449

 

U.S. corporate

 

 

1,354,566

 

 

1,354,566

 

Non-U.S. corporate

 

 

631,522

 

 

631,522

 

Bank loans

 

 

490,147

 

 

490,147

 

Catastrophe bonds

 

 

29,355

 

 

29,355

 

Asset-backed securities

 

 

355,874

 

 

355,874

 

Commercial mortgage-backed securities

 

 

 

 

 

Total fixed maturities

 

 

5,015,210

 

 

5,015,210

 

Short-term investments

 

297,303

 

6,846

 

 

304,149

 

Fund of hedge funds / Private equity investment

 

 

 

8,325

 

8,325

 

Mutual funds

 

 

8,478

 

 

8,478

 

Total

 

$

297,303

 

$

5,030,534

 

$

8,325

 

$

5,336,162

 

 

7



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

At December 31, 2011, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. Government and Government Agency

 

$

 

$

1,182,393

 

$

 

$

1,182,393

 

Non-U.S. Government and Government Agency

 

 

449,358

 

 

449,358

 

States, municipalities, political subdivision

 

 

26,291

 

 

26,291

 

Agency residential mortgage-backed securities

 

 

468,054

 

 

468,054

 

Non-Agency residential mortgage-backed securities

 

 

32,706

 

 

32,706

 

U.S. corporate

 

 

1,329,758

 

 

1,329,758

 

Non-U.S. corporate

 

 

579,675

 

 

579,675

 

Bank loans

 

 

467,256

 

 

467,256

 

Catastrophe bonds

 

 

29,952

 

 

29,952

 

Asset-backed securities

 

 

328,299

 

 

328,299

 

Commercial mortgage-backed securities

 

 

403

 

 

403

 

Total fixed maturities

 

 

4,894,145

 

 

4,894,145

 

Short-term investments

 

257,854

 

22,337

 

 

280,191

 

Fund of hedge funds / Private equity investment

 

 

 

8,880

 

8,880

 

Mutual funds

 

 

7,907

 

 

7,907

 

Total

 

$

257,854

 

$

4,924,389

 

$

8,880

 

$

5,191,123

 

 

At March 31, 2012, Level 3 investments totaled $8,325, representing 0.2% of total investments measured at fair value on a recurring basis. At December 31, 2011, Level 3 investments totaled $8,880 representing 0.2% of total investments measured at fair value on a recurring basis.

 

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ending March 31, 2012 and 2011:

 

 

 

Three Months Ended March 31, 2012

 

 

 

Fixed Maturity
Investments

 

Other Investments

 

Total Fair Market Value

 

Level 3 investments - Beginning of period

 

$

 

$

8,880

 

$

8,880

 

Purchases

 

 

1,529

 

1,529

 

Sales

 

 

(620

)

(620

)

Issuances

 

 

 

 

Settlements

 

 

 

 

Realized gains

 

 

28

 

28

 

Unrealized (losses)

 

 

(1,492

)

(1,492

)

Amortization

 

 

 

 

Transfers

 

 

 

 

Level 3 investments - End of period

 

$

 

$

8,325

 

$

8,325

 

 

8



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

Three Months Ended March 31, 2011

 

 

 

Fixed Maturity
Investments

 

Other Investments

 

Total Fair Market Value

 

Level 3 investments - Beginning of period

 

$

 

$

12,892

 

$

12,892

 

Purchases

 

 

 

 

Sales

 

 

(2,562

)

(2,562

)

Issuances

 

 

 

 

Settlements

 

 

 

 

Realized gains

 

 

260

 

260

 

Unrealized (losses)

 

 

123

 

123

 

Amortization

 

 

 

 

Transfers

 

 

 

 

Level 3 investments - End of period

 

$

 

$

10,713

 

$

10,713

 

 

(b) Net investment income

 

Net investment income was derived from the following sources:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

Fixed maturities and short-term investments

 

$

27,276

 

$

28,935

 

Cash and cash equivalents

 

2,317

 

2,581

 

Securities lending income

 

5

 

16

 

Total gross investment income

 

29,598

 

31,532

 

Investment expenses

 

(1,838

)

(1,557

)

Net investment income

 

$

27,760

 

$

29,975

 

 

(c) Fixed maturity and short-term investments

 

The following represents an analysis of net realized gains and the change in net unrealized gains (losses) on investments:

 

9



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

Fixed maturities, short-term and other investments and cash equivalents

 

 

 

 

 

Gross realized gains

 

$

10,008

 

$

15,765

 

Gross realized (losses)

 

(2,476

)

(9,386

)

Net realized gains on investments

 

7,532

 

6,379

 

Net unrealized gains on securities lending

 

37

 

30

 

Change in net unrealized gains (losses) on investments

 

20,634

 

(12,858

)

Total net realized gains and change in net unrealized gains (losses) on investments

 

$

28,203

 

$

(6,449

)

 

The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at March 31, 2012 were as follows:

 

 

 

Amortized Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

U.S. Government and Government Agency

 

$

1,211,508

 

$

6,900

 

$

(1,517

)

$

1,216,891

 

Non-U.S. Government and Government Agency

 

398,550

 

9,100

 

(896

)

406,754

 

States, municipalities, political subdivision

 

25,101

 

683

 

 

25,784

 

Agency residential mortgage-backed securities

 

454,249

 

16,837

 

(218

)

470,868

 

Non-Agency residential mortgage-backed securities

 

37,711

 

259

 

(4,521

)

33,449

 

U.S. corporate

 

1,327,830

 

28,697

 

(1,961

)

1,354,566

 

Non-U.S. corporate

 

623,577

 

8,905

 

(960

)

631,522

 

Bank loans

 

489,058

 

4,331

 

(3,242

)

490,147

 

Catastrophe bonds

 

29,250

 

166

 

(61

)

29,355

 

Asset-backed securities

 

355,047

 

1,586

 

(759

)

355,874

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

4,951,881

 

77,464

 

(14,135

)

5,015,210

 

Total short-term investments

 

304,150

 

3

 

(4

)

304,149

 

Total other investments

 

15,938

 

2,301

 

(1,436

)

16,803

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,271,969

 

$

79,768

 

$

(15,575

)

$

5,336,162

 

 

The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2011 were as follows:

 

10



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

Amortized Cost

 

Gross Unrealized 
Gains

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

U.S. Government and Government Agency

 

$

1,170,810

 

$

11,630

 

$

(47

)

$

1,182,393

 

Non-U.S. Government and Government Agency

 

446,258

 

9,173

 

(6,073

)

449,358

 

States, municipalities, political subdivision

 

25,715

 

586

 

(10

)

26,291

 

Agency residential mortgage-backed securities

 

451,751

 

16,622

 

(319

)

468,054

 

Non-Agency residential mortgage-backed securities

 

39,134

 

143

 

(6,571

)

32,706

 

U.S. corporate

 

1,314,375

 

24,932

 

(9,549

)

1,329,758

 

Non-U.S. corporate

 

577,743

 

6,320

 

(4,388

)

579,675

 

Bank loans

 

475,770

 

2,435

 

(10,949

)

467,256

 

Catastrophe bonds

 

29,250

 

702

 

 

29,952

 

Asset-backed securities

 

328,497

 

900

 

(1,098

)

328,299

 

Commercial mortgage-backed securities

 

402

 

1

 

 

403

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

4,859,705

 

73,444

 

(39,004

)

4,894,145

 

Total short-term investments

 

280,299

 

1

 

(109

)

280,191

 

Total other investments

 

15,002

 

1,785

 

 

16,787

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,155,006

 

$

75,230

 

$

(39,113

)

$

5,191,123

 

 

The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at March 31, 2012 and December 31, 2011. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Estimated Fair
Value

 

% of Total

 

Estimated Fair
Value

 

% of Total

 

AAA

 

$

852,954

 

17.0

%

$

882,912

 

18.0

%

AA

 

2,114,001

 

42.2

%

2,077,981

 

42.5

%

A

 

1,192,091

 

23.8

%

1,078,793

 

22.0

%

BBB

 

323,226

 

6.4

%

345,091

 

7.1

%

Investment grade

 

4,482,272

 

89.4

%

4,384,777

 

89.6

%

 

 

 

 

 

 

 

 

 

 

BB

 

285,476

 

5.7

%

254,409

 

5.2

%

B

 

223,175

 

4.4

%

231,420

 

4.7

%

CCC

 

12,760

 

0.3

%

12,578

 

0.3

%

CC

 

4,944

 

0.1

%

4,605

 

0.1

%

D/NR

 

6,583

 

0.1

%

6,356

 

0.1

%

Non-Investment grade

 

532,938

 

10.6

%

509,368

 

10.4

%

 

 

 

 

 

 

 

 

 

 

Total Fixed Maturities

 

$

5,015,210

 

100.0

%

$

4,894,145

 

100.0

%

 

The amortized cost and estimated fair value amounts for fixed maturity securities held at March 31, 2012 and December 31, 2011 are shown 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.

 

11



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amortized Cost

 

Estimated Fair
Value

 

Amortized Cost

 

Estimated Fair
Value

 

Due in one year or less

 

$

498,365

 

$

503,282

 

$

520,631

 

$

523,107

 

Due after one year through five years

 

3,208,987

 

3,251,358

 

3,160,647

 

3,186,711

 

Due after five years through ten years

 

383,404

 

386,216

 

350,459

 

346,654

 

Due after ten years

 

14,118

 

14,163

 

8,184

 

8,211

 

 

 

4,104,874

 

4,155,019

 

4,039,921

 

4,064,683

 

Asset-backed and mortgage-backed securities

 

847,007

 

860,191

 

819,784

 

829,462

 

Total

 

$

4,951,881

 

$

5,015,210

 

$

4,859,705

 

$

4,894,145

 

 

The Company has a four year, $525,000 secured letter of credit facility provided by a syndicate of commercial banks (the “Four Year Secured Facility”). At March 31, 2012, approximately $327,829 (December 31, 2011: $nil) of letters of credit were issued and outstanding under this facility for which $458,980 of investments were pledged as collateral (December 31, 2011: $nil). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”).  On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At March 31, 2012, $25,000 (December 31, 2011: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $44,384 of investments were pledged as collateral (December 31, 2011: $44,623). In addition, $2,064,780 of investments were held in trust at March 31, 2012 (December 31, 2011: $2,129,570). Of those, $1,730,946 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2011: $1,686,586). In 2009, the Company entered into a $500,000 secured letter of credit facility provided by Citibank Europe plc (the “Secured Bi-Lateral Letter of Credit Facility”).  At March 31, 2012 approximately $116 (December 31, 2011: $nil) of letters of credit were issued and outstanding under this facility for which $1,010 of investments were pledged as collateral (December 31, 2011: $nil).

 

The Company assumed two letters of credit facilities as part of the acquisition of IPC Holdings, Ltd. (the “IPC Acquisition”).  A Credit Facility between IPC, IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At March 31, 2010, the IPC Syndicated Facility was closed.  At March 31, 2012, the IPC Bi-Lateral Facility had $51,583 (December 31, 2011: $57,146) letters of credit issued and outstanding for which $107,674 (December 31, 2011: $105,428) of investments were held in an associated collateral account.

 

(d)         Securities lending

 

The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at March 31, 2012, the Company had $1,083 (December 31, 2011: $8,286) in securities on loan. During the three months ended March 31, 2012, the Company recorded a $37 unrealized gain on this collateral on its Statements of Comprehensive Income (Loss) (March 31, 2011: unrealized gain $30).

 

Securities lending collateral reinvested includes corporate floating rate securities and overnight repos with an average reset period of 1.0 days (December 31, 2011: 3.9 days). As at March 31, 2012, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Corporate

 

$

 

$

292

 

$

 

$

292

 

Short-term investments

 

127

 

 

 

127

 

Total

 

$

127

 

$

292

 

$

 

$

419

 

 

12



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

As at December 31, 2011, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Corporate

 

$

 

$

255

 

$

 

$

255

 

Cash and cash equivalents

 

7,481

 

 

 

7,481

 

Total

 

$

7,481

 

$

255

 

$

 

$

7,736

 

 

The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at March 31, 2012 and December 31, 2011. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Estimated Fair
Value

 

% of Total

 

Estimated Fair
Value

 

% of Total

 

NR

 

292

 

69.7

%

255

 

3.3

%

 

 

292

 

69.7

%

255

 

3.3

%

NR- Short-term investments (a)

 

127

 

30.3

%

7,481

 

96.7

%

Total

 

$

419

 

100.0

%

$

7,736

 

100.0

%

 


(a) This amount relates to certain short-term investments with short original maturities which are generally not rated.

 

The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at March 31, 2012 and December 31, 2011 are shown by contractual maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amortized Cost

 

Estimated Fair
Value

 

Amortized Cost

 

Estimated Fair
Value

 

Due in one year or less

 

$

108

 

$

127

 

$

7,462

 

$

7,481

 

Due after one year through five years

 

1,000

 

292

 

1,000

 

255

 

Total

 

$

1,108

 

$

419

 

$

8,462

 

$

7,736

 

 

4. Investment in AlphaCat Re 2011, Ltd.

 

On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, Ltd. (“AlphaCat Re 2011”), a special purpose “sidecar” reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance.  At the time of formation, Validus Re had an equity interest in AlphaCat Re 2011 and as Validus Re held a majority of AlphaCat Re 2011’s outstanding voting rights, the financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company.

 

On December 23, 2011, the Company completed a secondary offering of common shares of AlphaCat Re 2011 to third party investors, along with a partial sale of Validus Re’s common shares to one of the third party investors.

 

13



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

As a result of these transactions, Validus Re maintained an equity interest in AlphaCat Re 2011; however its share of AlphaCat Re 2011’s outstanding voting rights decreased to 43.7%.  As a result of the Company’s voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and the remaining investment in AlphaCat Re 2011 is treated as an equity method investment as at March 31, 2012. The portion of AlphaCat Re 2011’s earnings attributable to third party investors for the year ended December 31, 2011 was recorded in the Consolidated Statements of Comprehensive Income as net income attributable to noncontrolling interest.

 

The following table presents a reconciliation of the beginning and ending investment in non-consolidated affiliate balances for the three months ended March 31, 2012:

 

 

 

Three Months Ended March
31, 2012

 

 

 

Investment in non-
consolidated affiliate

 

As at December 31, 2011

 

$

53,031

 

Equity earnings in non-consolidated affiliate

 

3,367

 

As at March 31, 2012

 

$

56,398

 

 

The following table presents the Company’s equity investment in AlphaCat Re 2011 at March 31, 2012:

 

 

 

Investment in non-consolidated affiliate

 

 

 

Investment at
cost

 

Voting
ownership %

 

Equity
ownership %

 

Carrying value

 

AlphaCat Re 2011

 

$

41,389

 

43.7

%

22.3

%

$

56,398

 

 

5.  Derivative instruments used in hedging activities

 

The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures. During the year ended December 31, 2010, the Company entered into a foreign currency forward contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Chilean Pesos (CLP). The CLP foreign currency forward contract was renewed during the three months ended March 31, 2012.  During the three months ended March 31, 2011, the Company entered into three foreign currency forward exchange contracts to mitigate the risk of fluctuations in the Euro and Australian dollar to U.S. dollar rates. One of the contracts was renewed during the three months ended March 31, 2012. During the three months ended June 30, 2011, the Company entered into a foreign currency forward exchange contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Japanese Yen. The Yen foreign currency forward contract was renewed during the three months ended March 31, 2012.  During the three months ended December 31, 2011, the Company entered into an additional foreign currency forward contract to mitigate the risk of fluctuations in the Euro to U.S. dollar rates. This contract was renewed during the three months ended March 31, 2012.  During the three months ended March 31, 2012, the Company entered into an additional foreign currency forward contract to mitigate the risk of fluctuations in the Euro to U.S. dollar rates.  The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at March 31, 2012:

 

14



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

 

 

Asset derivatives

 

Liability derivatives

 

Derivatives designated as hedging
instruments:

 

Notional
amount

 

Balance Sheet
location

 

Fair value

 

Balance Sheet
location

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

104,300

 

Other assets

 

$

 

Accounts payable and accrued expenses

 

$

676

 

 

The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at December 31, 2011:

 

 

 

 

 

Asset derivatives

 

Liability derivatives

 

Derivatives designated as hedging
instruments:

 

Notional
amount

 

Balance Sheet
location

 

Fair value

 

Balance Sheet
location

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contract

 

$

75,323

 

Other assets

 

$

476

 

Accounts payable and accrued expenses

 

$

 

 

(a) Classification within the fair value hierarchy

 

As described in Note 3 “Investments” 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 are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.

 

(b) Derivative instruments designated as a fair value hedge

 

The Company designates its derivative instruments as fair value hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the hedging derivatives to specific assets and liabilities.  The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items.

 

The following table provides the total impact on earnings relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

Three Months Ended March 31, 2012

 

Derivatives designated as
fair value hedges and
related hedged item:

 

Location of gain
(loss) recognized in
income

 

Amount of gain
(loss) recognized in
income on
derivative

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange

 

Foreign exchange (losses) gains

 

$

(3,319

)

$

3,319

 

$

 

 

15



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

 

 

Three Months Ended March 31, 2011

 

Derivatives designated as
fair value hedges and
related hedged item:

 

Location of gain
(loss) recognized in
income

 

Amount of gain
(loss) recognized in
income on
derivative

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange

 

Foreign exchange (losses) gains

 

$

(3,822

)

$

3,822

 

$

 

 

6.    Reserve for losses and loss expenses

 

Reserves for losses and loss expenses are based in part upon the estimation of case losses reported from brokers, insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and 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, case 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 the total reserves.

 

The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Reserve for losses and loss expenses, beginning of period

 

$

2,631,143

 

$

2,035,973

 

Losses and loss expenses recoverable

 

(372,485

)

(283,134

)

Net reserves for losses and loss expenses, beginning of period

 

2,258,658

 

1,752,839

 

Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:

 

 

 

 

 

Current year

 

262,413

 

502,714

 

Prior years

 

(30,424

)

(26,516

)

Total incurred losses and loss expenses

 

231,989

 

476,198

 

Total net paid losses

 

(204,223

)

(163,257

)

Foreign exchange

 

11,894

 

14,934

 

Net reserve for losses and loss expenses, end of period

 

2,298,318

 

2,080,714

 

Losses and loss expenses recoverable

 

351,292

 

453,701

 

Reserve for losses and loss expenses, end of period

 

$

2,649,610

 

$

2,534,415

 

 

16



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

7.  Reinsurance

 

The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits and increase its aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocession agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.

 

(a)         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 rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At March 31, 2012, 99.7% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $97,048 of IBNR recoverable (December 31, 2011: $125,298). Reinsurance recoverables by reinsurer are as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Reinsurance
Recoverable

 

% of Total

 

Reinsurance
Recoverable

 

% of Total

 

Top 10 reinsurers

 

$

313,589

 

78.6

%

$

323,315

 

69.8

%

Other reinsurers’ balances > $1 million

 

78,870

 

19.8

%

132,417

 

28.6

%

Other reinsurers’ balances < $1 million

 

6,490

 

1.6

%

7,248

 

1.6

%

Total

 

$

398,949

 

100.0

%

$

462,980

 

100.0

%

 

 

 

March 31, 2012

 

Top 10 Reinsurers

 

Rating

 

Reinsurance
Recoverable

 

% of Total

 

Lloyd’s Syndicates

 

A+

 

$

82,289

 

26.4

%

Allianz

 

AA-

 

45,000

 

14.3

%

Everest Re

 

A+

 

44,304

 

14.1

%

Hannover Re

 

AA-

 

40,219

 

12.8

%

Transatlantic Re

 

A+

 

21,297

 

6.8

%

Amlin AG

 

A

 

18,307

 

5.8

%

Odyssey Reinsurance Company

 

A-

 

16,269

 

5.2

%

Swiss Re

 

AA-

 

15,809

 

5.0

%

Hiscox Insurance Company (Bermuda) Ltd.

 

A

 

15,801

 

5.0

%

Fully Collateralized

 

NR

 

14,294

 

4.6

%

Total

 

 

 

$

313,589

 

100.0

%

 

17



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

December 31, 2011

 

Top 10 Reinsurers

 

Rating

 

Reinsurance
Recoverable

 

% of Total

 

Lloyd’s Syndicates

 

A+

 

$

77,419

 

24.0

%

Allianz

 

AA-

 

59,764

 

18.5

%

Hannover Re

 

AA-

 

39,762

 

12.3

%

Everest Re

 

A+

 

38,618

 

11.9

%

Transatlantic Re

 

A+

 

21,344

 

6.6

%

Tokio Millenium Re Ltd

 

AA-

 

20,432

 

6.3

%

Fully Collateralized

 

NR

 

18,140

 

5.6

%

Odyssey Reinsurance Company

 

A-

 

16,737

 

5.2

%

Platinum Underwriters

 

A

 

15,833

 

4.9

%

Munich Re

 

AA-

 

15,266

 

4.7

%

Total

 

 

 

$

323,315

 

100.0

%

 

At March 31, 2012 and December 31, 2011, the provision for uncollectible reinsurance relating to losses recoverable was $6,286 and $6,821, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable is first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $398,949 reinsurance recoverable at March 31, 2012 (December 31, 2011: $462,980), $14,294 was fully collateralized (December 31, 2011: $18,140).

 

The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

 

8.  Share capital

 

(a)         Authorized and issued

 

The Company’s authorized share capital is 571,428,571 voting and non-voting shares with a par value of $0.175 per share. The holders of common voting 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. The Company has repurchased 35,404,545 common shares for an aggregate purchase price of $958,478 from the inception of its share repurchase program to May 1, 2012. The Company has $370,695 remaining under its authorized share repurchase program.

 

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

 

The following table is a summary of the common shares issued and outstanding:

 

18



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

 

 

Common Shares

 

Common shares issued, December 31, 2011

 

134,503,065

 

Restricted share awards vested, net of shares withheld

 

229,688

 

Restricted share units vested, net of shares withheld

 

5,101

 

Employee seller shares vested

 

 

Options exercised

 

7,149

 

Warrants exercised

 

 

Direct issuance of common stock

 

 

Common shares issued, March 31, 2012

 

134,745,003

 

Shares repurchased

 

(35,404,545

)

Common shares outstanding, March 31, 2012

 

99,340,458

 

 

 

 

Common Shares

 

Common shares issued, December 31, 2010

 

132,838,111

 

Restricted share awards vested, net of shares withheld

 

274,966

 

Restricted share units vested, net of shares withheld

 

5,376

 

Employee seller shares vested

 

 

Options exercised

 

201,709

 

Warrants exercised

 

 

Common shares issued, March 31, 2011

 

133,320,162

 

Shares repurchased

 

(35,031,985

)

Common shares outstanding, March 31, 2011

 

98,288,177

 

 

(b)         Warrants

 

During the three months ended March 31, 2012 and 2011, no warrants were exercised.

 

(c)          Deferred share units

 

Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash.  The number of deferred share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units.  The total outstanding deferred share units at March 31, 2012 were 4,888 (December 31, 2011: 4,850).

 

(d)         Dividends

 

On February 9, 2012, the Company announced a quarterly cash dividend of $0.25 (2011: $0.25) per common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on March 30, 2012 to holders of record on March 15, 2012.

 

9.  Stock plans

 

(a)         Long Term Incentive Plan and Short Term Incentive Plan

 

The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Plan

 

19



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

(“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares of which 4,104,307 shares are remaining. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs have been granted to date. Grant prices are established at the fair market value of the Company’s common shares at the date of grant.

 

i.                       Options

 

Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either ratably 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. The following weighted average assumptions were used for all grants to date:

 

 

Year

 

Weighted average risk free
interest rate

 

Weighted average
dividend yield

 

Expected life (years)

 

Expected volatility

 

2009

 

3.9

%

3.7

%

2

 

34.6

%

2010 (a)

 

n/a

 

n/a

 

n/a

 

n/a

 

2011 (a)

 

n/a

 

n/a

 

n/a

 

n/a

 

 


(a) The Company has not granted any stock option awards since September 4, 2009.

 

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.

 

Share compensation expenses of $135 were recorded for the three months ended March 31, 2012 (2011: $1,247). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

 

Activity with respect to options for the three months ended March 31, 2012 was as follows:

 

 

 

 

 

Weighted Average

 

Weighted Average

 

 

 

 

 

Grant Date

 

Grant Date

 

 

 

Options

 

Fair Value

 

Exercise Price

 

Options outstanding, December 31, 2011

 

2,263,012

 

$

6.69

 

$

20.12

 

Options granted

 

 

 

 

Options exercised

 

(7,149

)

6.90

 

24.69

 

Options forfeited

 

 

 

 

Options outstanding, March 31, 2012

 

2,255,863

 

$

6.69

 

$

20.10

 

Options exercisable at March 31, 2012

 

2,227,043

 

$

6.64

 

$

20.08

 

 

Activity with respect to options for the three months ended March 31, 2011 was as follows:

 

 

 

 

 

Weighted Average

 

Weighted Average

 

 

 

 

 

Grant Date

 

Grant Date

 

 

 

Options

 

Fair Value

 

Exercise Price

 

Options outstanding, December 31, 2010

 

2,723,684

 

$

6.74

 

$

20.19

 

Options granted

 

 

 

 

Options exercised

 

(201,709

)

4.48

 

21.94

 

Options forfeited

 

 

 

 

Options outstanding, March 31, 2011

 

2,521,975

 

$

6.92

 

$

20.05

 

Options exercisable at March 31, 2011

 

2,399,880

 

$

6.81

 

$

19.94

 

 

20



Table of Contents

 

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

 

At March 31, 2012, there were $7 (December 31, 2011: $141) of total unrecognized share compensation expenses in respect of options that are expected to be recognized over a weighted-average period of 0.1 year (December 31, 2011: 0.2 years).

 

ii.                  Restricted share awards

 

Restricted shares granted under the LTIP and STIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $5,940 were recorded for the three months ended March 31, 2012 (2011: $9,156). 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 three months ended March 31, 2012 was as follows:

 

 

 

Restricted

 

Weighted Average

 

 

 

Share

 

Grant Date

 

 

 

Awards

 

Fair Value

 

Restricted share awards outstanding, December 31, 2011

 

3,003,5