2012.09.30 - 10Q

Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
As of November 5, 2012 there were 93,506,829 outstanding Common Shares, $0.175 par value per share, of the registrant.
 



Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


Table of Contents

PART I. FINANCIAL INFORMATION 
ITEM 1. FINANCIAL STATEMENTS

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2012 (unaudited) and December 31, 2011
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2012—$4,803,217; 2011—$4,859,705)
$
4,887,622

 
$
4,894,145

Short-term investments, at fair value (amortized cost: 2012—$275,099; 2011—$280,299)
275,324

 
280,191

Other investments, at fair value (amortized cost: 2012—$511,310; 2011—$15,002)
525,441

 
16,787

Cash and cash equivalents
1,005,829

 
832,844

Total investments and cash
6,694,216

 
6,023,967

Investments in affiliates
99,312

 
53,031

Premiums receivable
781,991

 
646,354

Deferred acquisition costs
155,456

 
121,505

Prepaid reinsurance premiums
144,788

 
91,381

Securities lending collateral
10,383

 
7,736

Loss reserves recoverable
317,252

 
372,485

Paid losses recoverable
36,209

 
90,495

Income taxes recoverable
5,019

 

Intangible assets
111,611

 
114,731

Goodwill
20,393

 
20,393

Accrued investment income
19,945

 
25,906

Other assets
67,245

 
50,487

Total assets
$
8,463,820

 
$
7,618,471

 
 
 
 
Liabilities
 

 
 

Reserve for losses and loss expenses
$
2,562,604

 
$
2,631,143

Unearned premiums
1,034,605

 
772,382

Reinsurance balances payable
87,955

 
119,899

Securities lending payable
10,849

 
8,462

Deferred income taxes
22,848

 
16,720

Net payable for investments purchased
26,629

 
1,256

Accounts payable and accrued expenses
86,128

 
83,402

Senior notes payable
247,063

 
246,982

Debentures payable
289,800

 
289,800

Total liabilities
$
4,368,481

 
$
4,170,046

 
 
 
 
Commitments and contingent liabilities


 


 
 
 
 
Shareholders’ equity
 

 
 

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2012—136,632,448; 2011—134,503,065; Outstanding: 2012—93,494,391; 2011—99,471,080)
$
23,911

 
$
23,538

Treasury shares (2012—43,138,057; 2011—35,031,985)
(7,549
)
 
(6,131
)
Additional paid-in-capital
1,657,767

 
1,893,890

Accumulated other comprehensive (loss)
(4,565
)
 
(6,601
)
Retained earnings
1,964,289

 
1,543,729

Total shareholders’ equity available to Validus
3,633,853

 
3,448,425

Noncontrolling interest
461,486

 

Total shareholders’ equity
$
4,095,339

 
$
3,448,425

 
 
 
 
Total liabilities and shareholders’ equity
$
8,463,820

 
$
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 and Nine Months Ended September 30, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information) 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
390,215

 
$
391,129

 
$
1,854,593

 
$
1,846,412

Reinsurance premiums ceded
(45,743
)
 
(30,586
)
 
(271,847
)
 
(272,752
)
Net premiums written
344,472

 
360,543

 
1,582,746

 
1,573,660

Change in unearned premiums
130,632

 
98,081

 
(208,816
)
 
(259,863
)
Net premiums earned
475,104

 
458,624

 
1,373,930

 
1,313,797

Net investment income
25,489

 
27,747

 
79,134

 
84,216

Net realized gains on investments
9,063

 
5,246

 
22,749

 
23,177

Net unrealized gains (losses) on investments
86,345

 
(27,848
)
 
53,442

 
(22,150
)
(Loss) from investment affiliate
(160
)
 

 
(558
)
 

Other income
7,324

 

 
22,209

 
2,201

Foreign exchange gains (losses)
1,103

 
(19,932
)
 
3,617

 
(22,390
)
Total revenues
604,268

 
443,837

 
1,554,523

 
1,378,851

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
155,455

 
226,067

 
541,136

 
909,572

Policy acquisition costs
98,623

 
77,405

 
252,884

 
232,931

General and administrative expenses
70,547

 
35,926

 
198,557

 
145,244

Share compensation expenses
7,345

 
7,382

 
19,583

 
27,059

Finance expenses
9,362

 
10,935

 
39,347

 
41,297

Transaction expenses
3,784

 
13,583

 
3,784

 
13,583

Total expenses
345,116

 
371,298

 
1,055,291

 
1,369,686

 
 
 
 
 
 
 
 
Net income before taxes and income from operating affiliates
259,152

 
72,539

 
499,232

 
9,165

Tax (expense)
(1,343
)
 
(2,538
)
 
(1,886
)
 
(1,050
)
Income from operating affiliates
6,235

 

 
13,194

 

Net income
$
264,044

 
$
70,001

 
$
510,540

 
$
8,115

Net (income) attributable to noncontrolling interest
(56,746
)
 
(13,516
)
 
(11,386
)
 
(14,110
)
Net income (loss) available (attributable) to Validus
$
207,298

 
$
56,485

 
$
499,154

 
$
(5,995
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 
 
 
Foreign currency translation adjustments
1,400

 
(413
)
 
2,036

 
523

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
1,400

 
$
(413
)
 
$
2,036

 
$
523

 
 
 
 
 
 
 
 
Comprehensive income (loss) available (attributable) to Validus
$
208,698

 
$
56,072

 
$
501,190

 
$
(5,472
)
 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 

 
 

 
 
 
 
Basic
93,368,775

 
98,961,795

 
97,016,034

 
98,430,686

Diluted
98,236,490

 
100,823,335

 
102,333,515

 
98,430,686

 
 
 
 
 
 
 
 
Basic earnings (loss) per share available (attributable) to common shareholders
$
2.20

 
$
0.55

 
$
5.09

 
$
(0.12
)
Diluted earnings (loss) per share available (attributable) to common shareholders
$
2.11

 
$
0.54

 
$
4.88

 
$
(0.12
)
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75


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 Nine Months Ended September 30, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
 
September 30, 2012
 
September 30, 2011
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
23,538

 
$
23,247

Common shares issued, net
373

 
216

Balance - End of period
$
23,911

 
$
23,463

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(6,131
)
 
$
(6,096
)
Repurchase of common shares
(1,418
)
 
(35
)
Balance - End of period
$
(7,549
)
 
$
(6,131
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
1,893,890

 
$
1,860,960

Common shares issued, net
2,551

 
4,838

Repurchase of common shares
(258,257
)
 
(5,960
)
Share compensation expenses
19,583

 
27,059

Balance - End of period
$
1,657,767

 
$
1,886,897

 
 
 
 
Accumulated other comprehensive (loss)
 

 
 

Balance - Beginning of period
$
(6,601
)
 
$
(5,455
)
Foreign currency translation adjustments
2,036

 
523

Balance - End of period
$
(4,565
)
 
$
(4,932
)
 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
1,543,729

 
$
1,632,175

Dividends
(78,594
)
 
(81,608
)
Net income
510,540

 
8,115

Net (income) attributable to noncontrolling interest
(11,386
)
 
(14,110
)
Balance - End of period
$
1,964,289

 
$
1,544,572

 
 
 
 
Total shareholders’ equity available to Validus
$
3,633,853

 
$
3,443,869

 
 
 
 
Noncontrolling interest
$
461,486

 
$
146,223

 
 
 
 
Total shareholders’ equity
$
4,095,339

 
$
3,590,092

 
 
 
 
 
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 Nine Months Ended September 30, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2012
 
September 30,
2011
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
510,540

 
$
8,115

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

 
 

Share compensation expenses
19,583

 
27,059

Amortization of discount on senior notes
81

 
81

Loss from investment affiliate
558

 

Net realized (gains) on investments
(22,749
)
 
(23,177
)
Net unrealized (gains) losses on investments
(53,442
)
 
22,150

Amortization of intangible assets
3,120

 
3,120

Income from operating affiliates
(13,194
)
 

Foreign exchange (gains) losses included in net income
(17,064
)
 
9,602

Amortization of premium on fixed maturities
19,214

 
23,470

Change in:
 

 
 

Premiums receivable
(132,292
)
 
(239,934
)
Deferred acquisition costs
(33,951
)
 
(30,797
)
Prepaid reinsurance premiums
(53,407
)
 
(70,214
)
Loss reserves recoverable
57,574

 
(103,048
)
Paid losses recoverable
54,559

 
(52,853
)
Income taxes recoverable
(5,041
)
 
(2,164
)
Accrued investment income
6,015

 
6,620

Other assets
(16,050
)
 
7,740

Reserve for losses and loss expenses
(80,954
)
 
530,925

Unearned premiums
262,223

 
330,077

Reinsurance balances payable
(33,487
)
 
40,206

Deferred income taxes
6,241

 
(518
)
Accounts payable and accrued expenses
4,948

 
(16,557
)
Net cash provided by operating activities
483,025

 
469,903

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
2,528,442

 
3,424,462

Proceeds on maturities of investments
385,642

 
266,594

Purchases of fixed maturities
(2,832,179
)
 
(3,697,544
)
Sales (purchases) of short-term investments, net
5,123

 
(273,939
)
(Purchases) sales of other investments
(499,178
)
 
4,364

(Increase) in securities lending collateral
(2,387
)
 
(1,907
)
Purchase of investment in operating affiliates
(26,500
)
 

Purchase of investment in investment affiliate
(3,798
)
 

Net cash (used in) investing activities
(444,835
)
 
(277,970
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Issuance of common shares, net
2,924

 
5,054

Purchases of common shares under share repurchase program
(259,675
)
 
(5,995
)
Dividends paid
(81,391
)
 
(81,108
)
Increase in securities lending payable
2,387

 
1,907

Third party investment in noncontrolling interest
450,100

 
132,113

Net cash provided by financing activities
114,345

 
51,971

 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
20,450

 
(8,662
)
 
 
 
 
Net increase in cash
172,985

 
235,242

 
 
 
 
Cash and cash equivalents - beginning of period
$
832,844

 
$
620,740

 
 
 
 
Cash and cash equivalents - end of period
$
1,005,829

 
$
855,982

 
 
 
 
Taxes paid (recovered) during the period
$
3,640

 
$
(3,676
)
 
 
 
 
Interest paid during the period
$
37,122

 
$
39,336

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

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Table of Contents


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 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 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 significant 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").

On April 2, 2012, the Company joined with other investors in capitalizing PaCRe, Ltd. (“PaCRe”) a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. Validus Reinsurance, Ltd. (“Validus Re”) has an equity interest in PaCRe and as Validus Re holds a majority of PaCRe's outstanding voting rights, the financial statements of PaCRe are included in the consolidated financial statements of the Company. The portion of PaCRe's earnings attributable to third party investors for the three and nine months ended September 30, 2012 is recorded in the consolidated Statements of Comprehensive Income (loss) as net income attributable to noncontrolling interest. Refer to Note 5 "Noncontrolling interest" for further information.

On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012, Ltd. (“AlphaCat Re 2012”) a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. Validus Re has an equity interest and voting interest in AlphaCat Re 2012 which is below 50%, therefore the investment in AlphaCat Re 2012 is included as an equity method investment in the consolidated financial statements of the Company. Refer to Note 4 “Investments in affiliates” for further information.

2. Recent accounting pronouncements
 
(a) Adoption of New Accounting Standards

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".

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Table of Contents

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.
Technical Amendments and Corrections to SEC Sections
In July 2012, the FASB issued Accounting Standards Update No. 2012-3, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22  (SEC Update)” (“ASU 2012-3”). ASU 2012-3 is effective upon issuance. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

(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. 

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). The objective of ASU 2012-02 is to simplify how entities test intangibles for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment described in ASC Topic 350 "Intangibles - Goodwill and Other - General Intangibles Other than Goodwill." The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued. The Company has evaluated the impact of this guidance and has concluded that it will not have a material impact on the Company's consolidated financial statements.

In October 2012, the FASB issued Accounting Standards Update No. 2012-04, “Technical Corrections and Improvements” (“ASU - 2012-04”). The objective of ASU 2012-04 is to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments will make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments that will not have transition guidance will be effective upon issuance. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The Company is currently evaluating the impact of this guidance; however it is not expected to have a material impact on the Company's consolidated financial statements.

3. Investments
 
The Company’s investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The 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.

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Table of Contents

 
(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 (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. Investments in U.S. and Non-U.S. government/agency securities, corporate bonds, mortgage backed securities, bank loans, municipal bonds and asset-backed securities are classified as Level 2 in the fair value hierarchy.  The fair value of these securities is derived from index providers, pricing vendors and broker quotations based on inputs that are observable for the asset such as reported trades, bids, offers, benchmark yields and broker-dealer quotes.  Catastrophe bonds are classified as Level 2 in the fair value hierarchy as determined by reference to direct dealer quotations.  Those indications are based on current market conditions, including liquidity and transactional history, recent issue price of similar catastrophe bonds and seasonality of the underlying risks.

Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. An investment in four Paulson & Co. Inc. managed hedge funds and an investment in a fund of hedge funds are the only financial instruments in this category as at September 30, 2012. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).

Other investments consist of an investment in four Paulson & Co. Inc. managed hedge funds (the "hedge funds"), a fund of hedge funds and a deferred compensation trust held in mutual funds. The hedge funds were valued at $512,138 at September 30, 2012. The funds' administrator provides monthly reported NAVs with a one-month delay in its valuation. As a result, the funds' administrator's August 31, 2012 NAV was used as a partial basis for fair value measurement in the Company's September 30, 2012 balance sheet. The fund manager provides an estimate of the NAV at September 30, 2012 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Immaterial variances are recorded in the following reporting period. These managed hedge funds are subject to quarterly liquidity.

The fund of hedge funds includes a side pocket valued at $4,521 at September 30, 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 a monthly reported NAV with a one-month delay in its valuation. As a result, the fund administrator’s August 31, 2012 NAV was used as a basis for fair value measurement in the Company’s September 30, 2012 balance sheet. The fund manager provides an estimate of the fund NAV at September 30, 2012 based on the estimated performance provided from the underlying third-party funds. To determine the reasonableness of the NAV, the Company compares the one-month delayed fund administrator's NAV to the fund manager’s

8


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estimated NAV that incorporates relevant valuation sources on a timely basis. Immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.
 
At September 30, 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
$

 
$
1,229,273


$

 
$
1,229,273

Non-U.S. Government and Government Agency

 
307,760



 
307,760

States, municipalities, political subdivision

 
42,538



 
42,538

Agency residential mortgage-backed securities

 
421,975



 
421,975

Non-Agency residential mortgage-backed securities

 
23,832



 
23,832

U.S. corporate

 
1,242,888



 
1,242,888

Non-U.S. corporate

 
598,253



 
598,253

Bank loans

 
602,856

 

 
602,856

Catastrophe bonds

 
38,466



 
38,466

Asset-backed securities

 
379,781



 
379,781

Commercial mortgage-backed securities

 



 

Total fixed maturities

 
4,887,622

 

 
4,887,622

Short-term investments
241,972

 
33,352

 

 
275,324

Fund of hedge funds

 

 
5,117

 
5,117

Hedge funds (a)

 

 
512,138

 
512,138

Mutual funds

 
8,186

 

 
8,186

Total
$
241,972

 
$
4,929,160

 
$
517,255

 
$
5,688,387

Noncontrolling interest (a)

 

 
(460,924
)
 
(460,924
)
Total investments excluding noncontrolling interest
$
241,972

 
$
4,929,160

 
$
56,331

 
$
5,227,463


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

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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

 

 
5,627

 
5,627

Private equity investment

 

 
3,253

 
3,253

Mutual funds

 
7,907

 

 
7,907

Total
$
257,854

 
$
4,924,389

 
$
8,880

 
$
5,191,123

 
At September 30, 2012, Level 3 investments excluding the noncontrolling interest totaled $56,331, representing 1.1% of total investments, excluding noncontrolling interest, 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 and nine month periods ending September 30, 2012 and 2011:
 
 
Three Months Ended September 30, 2012
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
454,793

 
$
454,793

Purchases

 

 

Sales

 
(218
)
 
(218
)
Issuances

 

 

Settlements

 

 

Realized gains

 
13

 
13

Unrealized gains

 
61,746

 
61,746

Amortization

 

 

Transfers

 
921

 
921

Level 3 investments - End of period
$

 
$
517,255

 
$
517,255

Noncontrolling interest (a)

 
(460,924
)
 
(460,924
)
Level 3 investments excluding noncontrolling interest
$

 
$
56,331

 
$
56,331


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Three Months Ended September 30, 2011
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
9,776

 
$
9,776

Purchases

 

 

Sales

 
(556
)
 
(556
)
Issuances

 

 

Settlements

 

 

Realized gains

 
73

 
73

Unrealized (losses)

 
(526
)
 
(526
)
Amortization

 

 

Transfers

 

 

Level 3 investments - End of period
$

 
$
8,767

 
$
8,767

 
 
Nine Months Ended September 30, 2012
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
8,880

 
$
8,880

Purchases

 
500,000

 
500,000

Sales

 
(1,115
)
 
(1,115
)
Issuances

 

 

Settlements

 

 

Realized gains

 
61

 
61

Unrealized gains

 
11,762

 
11,762

Amortization

 

 

Transfers

 
(2,333
)
 
(2,333
)
Level 3 investments - End of period
$

 
$
517,255

 
$
517,255

Noncontrolling interest (a)

 
(460,924
)
 
(460,924
)
Level 3 investments excluding noncontrolling interest
$

 
$
56,331

 
$
56,331


 
Nine Months Ended September 30, 2011
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
12,892

 
$
12,892

Purchases

 

 

Sales

 
(4,365
)
 
(4,365
)
Issuances

 

 

Settlements

 

 

Realized gains

 
508

 
508

Unrealized (losses)

 
(268
)
 
(268
)
Amortization

 

 

Transfers

 

 

Level 3 investments - End of period
$

 
$
8,767

 
$
8,767


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


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Table of Contents

There have not been any transfers between Levels 1 and 2 during the three or nine months ended September 30, 2012. During the three months ended September 30, 2012, there was a transfer of an investment into Level 3 of the fair value hierarchy. This transfer was due to the conversion of a bank loan to an other investment. During the three months ended June 30, 2012, there was a transfer of the private equity investment out of Level 3 “Other investments” to “Investments in affiliates.” Refer to Note 4 “Investments in affiliates.

(b) Net investment income
 
Net investment income was derived from the following sources: 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012

September 30, 2011
 
September 30, 2012
 
September 30, 2011
Fixed maturities and short-term investments
$
25,703

 
$
27,773

 
$
79,450

 
$
84,243

Cash and cash equivalents
1,770

 
1,864

 
5,536

 
5,132

Securities lending income
3

 
7

 
9

 
31

Total gross investment income
27,476

 
29,644

 
84,995

 
89,406

Investment expenses
(1,987
)
 
(1,897
)
 
(5,861
)
 
(5,190
)
Net investment income
$
25,489

 
$
27,747

 
$
79,134

 
$
84,216

 
(c)
Fixed maturity, short-term investments, other investments and cash equivalents
 
The following represents an analysis of net realized gains and the change in net unrealized gains (losses) on investments:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Fixed maturities, short-term and other investments and cash equivalents
 

 
 

 
 
 
 
Gross realized gains
$
10,187

 
$
8,794

 
$
29,610

 
$
37,591

Gross realized (losses)
(1,124
)
 
(3,548
)
 
(6,861
)
 
(14,414
)
Net realized gains on investments
9,063

 
5,246

 
22,749

 
23,177

Net unrealized gains (losses) on securities lending
223

 
(26
)
 
260

 
15

Change in net unrealized gains (losses) on investments
86,122

 
(27,822
)
 
53,182

 
(22,165
)
Total net realized gains and change in net unrealized gains (losses) on investments
$
95,408

 
$
(22,602
)
 
$
76,191

 
$
1,027

Noncontrolling interest (a)
(55,806
)
 

 
(10,924
)
 

Total net realized gains and change in net unrealized gains (losses) on investments excluding noncontrolling interest
$
39,602

 
$
(22,602
)
 
$
65,267

 
$
1,027


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

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Table of Contents

 
The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at September 30, 2012 were as follows:
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. Government and Government Agency
$
1,219,610

 
$
9,676

 
$
(13
)
 
$
1,229,273

Non-U.S. Government and Government Agency
300,227

 
7,836

 
(303
)
 
307,760

States, municipalities, political subdivision
41,690

 
859

 
(11
)
 
42,538

Agency residential mortgage-backed securities
405,317

 
16,757

 
(99
)
 
421,975

Non-Agency residential mortgage-backed securities
25,013

 
564

 
(1,745
)
 
23,832

U.S. corporate
1,214,986

 
28,176

 
(274
)
 
1,242,888

Non-U.S. corporate
585,454

 
12,940

 
(141
)
 
598,253

Bank loans
596,316

 
7,177

 
(637
)
 
602,856

Catastrophe bonds
37,750

 
716

 

 
38,466

Asset-backed securities
376,854

 
3,070

 
(143
)
 
379,781

Commercial mortgage-backed securities

 

 

 

Total fixed maturities
4,803,217

 
87,771

 
(3,366
)
 
4,887,622

 
 
 
 
 
 
 
 
Total short-term investments
275,099

 
229

 
(4
)
 
275,324

 
 
 
 
 
 
 
 
Fund of hedge funds
5,111

 
331

 
(325
)
 
5,117

Hedge funds (a)
500,000

 
12,138

 

 
512,138

Mutual funds
6,199

 
1,987

 
 
 
8,186

Total other investments
511,310

 
14,456

 
(325
)
 
525,441

Total
$
5,589,626

 
$
102,456

 
$
(3,695
)
 
$
5,688,387

Noncontrolling interest (a)
(450,000
)
 
(10,924
)
 
$

 
$
(460,924
)
Total investments excluding noncontrolling interest
$
5,139,626

 
$
91,532

 
$
(3,695
)
 
$
5,227,463

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

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Table of Contents


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

 
 
 
 
 
 
 
 
Fund of hedge funds
5,244

 
383

 

 
5,627

Private equity investment
3,253

 

 

 
3,253

Mutual funds
6,505

 
1,402

 

 
7,907

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 September 30, 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.
 

14


Table of Contents

 
September 30, 2012
 
December 31, 2011
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
762,664

 
15.6
%
 
$
882,912

 
18.0
%
AA
2,068,034

 
42.3
%
 
2,077,981

 
42.5
%
A
1,059,408

 
21.7
%
 
1,078,793

 
22.0
%
BBB
358,781

 
7.3
%
 
345,091

 
7.1
%
Investment grade
4,248,887

 
86.9
%
 
4,384,777

 
89.6
%
 
 
 
 
 
 
 
 
BB
352,150

 
7.2
%
 
254,409

 
5.2
%
B
263,625

 
5.4
%
 
231,420

 
4.7
%
CCC
5,578

 
0.1
%
 
12,578

 
0.3
%
CC
3,075

 
0.1
%
 
4,605

 
0.1
%
D/NR
14,307

 
0.3
%
 
6,356

 
0.1
%
Non-Investment grade
638,735

 
13.1
%
 
509,368

 
10.4
%
Total Fixed Maturities
$
4,887,622

 
100.0
%
 
$
4,894,145

 
100.0
%
 
The amortized cost and estimated fair value amounts for fixed maturity securities held at September 30, 2012 and December 31, 2011 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.
 
 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
535,216

 
$
538,572

 
$
520,631

 
$
523,107

Due after one year through five years
3,047,712

 
3,104,660

 
3,160,647

 
3,186,711

Due after five years through ten years
409,467

 
414,702

 
350,459

 
346,654

Due after ten years
3,638

 
4,100

 
8,184

 
8,211

 
3,996,033

 
4,062,034

 
4,039,921

 
4,064,683

Asset-backed and mortgage-backed securities
807,184

 
825,588

 
819,784

 
829,462

Total
$
4,803,217

 
$
4,887,622

 
$
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 Facility”). At September 30, 2012, approximately $318,506 (December 31, 2011: $nil) of letters of credit were issued and outstanding under this facility for which $396,691 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 September 30, 2012, $25,000 (December 31, 2011: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $43,836 of investments were pledged as collateral (December 31, 2011: $44,623). In addition, $2,187,135 of investments were held in trust at September 30, 2012 (December 31, 2011: $2,129,570). Of those, $1,842,391 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 September 30, 2012 approximately $88,191 (December 31, 2011: $nil) letters of credit were issued and outstanding under this facility for which $110,964 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”).  The facilites consisted of 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 September 30, 2012, the IPC Bi-Lateral Facility had $51,009 (December 31, 2011: $57,146) letters of credit issued and outstanding for which $98,476

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Table of Contents

(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 September 30, 2012, the Company had $10,576 (December 31, 2011: $8,286) in securities on loan. During the three months ended September 30, 2012, the Company recorded a $223 unrealized gain on this collateral on its Statements of Comprehensive Income (Loss) (September 30, 2011: unrealized loss $26). During the nine months ended September 30, 2012, the Company recorded a $260 unrealized gain on this collateral on its Statements of Comprehensive Income (Loss) (September 30, 2011: unrealized gain $15).
 
Securities lending collateral reinvested includes overnight repos with an average reset period of 3.0 days (December 31, 2011: 3.9 days). As at September 30, 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
Cash and cash equivalents
10,383

 

 

 
10,383

Total
$
10,383

 
$

 
$

 
$
10,383

 
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 September 30, 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.
 
 
September 30, 2012
 
December 31, 2011
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
NR
10,383

 
100.0
%
 
255

 
3.3
%
 
10,383

 
100.0
%
 
255

 
3.3
%
NR- Short-term investments (a)

 
%
 
7,481

 
96.7
%
Total
$
10,383

 
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 September 30, 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.
 

16


Table of Contents

 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
10,849

 
$
10,383

 
$
7,462

 
$
7,481

Due after one year through five years

 

 
1,000

 
255

Total
$
10,849

 
$
10,383

 
$
8,462

 
$
7,736

 
4. Investments in affiliates

(a) Operating affiliates

AlphaCat Re 2011, Ltd.
 
On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. At the time of formation, Validus Re had a majority voting equity interest in AlphaCat Re 2011 and as a result the financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company.

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

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 has been treated as an equity method investment as at September 30, 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 (loss) as net income attributable to noncontrolling interest.

AlphaCat Re 2012, Ltd.

On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012, a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. The Company holds an equity interest of 37.9% and a voting interest of 49.0% in AlphaCat Re 2012, therefore the investment has been treated as an equity method investment as at September 30, 2012.

The following table presents a reconciliation of the beginning and ending investment in operating affiliate balances for the three and nine months ended September 30, 2012
 
Three Months Ended September 30, 2012
 
 
Investment in operating affiliate (AlphaCat Re 2011)
 
Investment in operating affiliate (AlphaCat Re 2012)
 
Total
As at June 30, 2012
 
$
59,238

 
$
27,252

 
$
86,490

Purchase of shares
 

 

 

Income from operating affiliates
 
4,079

 
2,156

 
6,235

As at September 30, 2012
 
$
63,317

 
$
29,408

 
$
92,725


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Nine Months Ended September 30, 2012
 
Investment in operating affiliate (AlphaCat Re 2011)
 
Investment in operating affiliate (AlphaCat Re 2012)
 
Total
As at December 31, 2011
$
53,031

 
$

 
$
53,031

Purchase of shares

 
26,500

 
26,500

Income from operating affiliates
10,286

 
2,908

 
13,194

As at September 30, 2012
$
63,317

 
$
29,408

 
$
92,725


The following table presents the Company's investments in AlphaCat Re 2011 and AlphaCat Re 2012, as at September 30, 2012:
 
Investment in non-consolidated affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
AlphaCat Re 2011
$
41,389

 
43.7
%
 
22.3
%
 
$
63,317

AlphaCat Re 2012
$
26,500

 
49.0
%
 
37.9
%
 
$
29,408


(b) Investment affiliate

Aquiline Financial Services Fund II L.P.

On December 20, 2011, Validus Re entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which Validus Re has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Partnership") representing a total capital commitment of $50,000 (the "Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of July 2, 2010 (the "Limited Partnership Agreement"). Pursuant to the terms of the Limited Partnership Agreement, the Commitment will expire on July 2, 2015.

The private equity limited partnership provides quarterly capital account statements with a three-month delay in its valuation. As a result, the limited partnership's June 30, 2012 capital account statement was used as a basis for calculation of the Company's share of partnership income for the period.

The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliate balances for the three and nine months ended September 30, 2012:
 
Three Months Ended September 30, 2012
 
Investment in limited partnership (Aquiline Financial Services Fund II L.P)
As at June 30, 2012
$
6,317

Capital contributions
430

(Loss) from investment affiliate
(160
)
As at September 30, 2012
$
6,587


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Nine Months Ended September 30, 2012
 
Investment in limited partnership (Aquiline Financial Services Fund II L.P) (a)
As at December 31, 2011
$
3,253

Capital contributions
5,328

Net unrealized loss on investments (a)
(1,436
)
(Loss) from investment affiliate
(558
)
As at September 30, 2012
$
6,587


(a) As at December 31, 2011 and March 31, 2012, this investment was included in "Other investments" as a level 3 investment in the fair value hierarchy, hence the change in fair value was included in net unrealized (losses) gains on investments.

The following table presents the Company's investment in Aquiline as at September 30, 2012:
 
Investment in non-consolidated affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P
$
8,581

 
%
 
6.8
%
 
$
6,587


5. Noncontrolling interest
     On April 2, 2012, the Company joined with other investors in capitalizing PaCRe a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. Validus Re has a majority voting equity interest in PaCRe and as a result, the financial statements of PaCRe are included in the consolidated financial statements of the Company. The portion of PaCRe's earnings attributable to third party investors for the three and nine months ended September 30, 2012 is recorded in the consolidated Statements of Comprehensive Income (loss) as net income attributable to noncontrolling interest.

The following table presents a reconciliation of the beginning and ending balances of noncontrolling interest for the three and nine months ended September 30, 2012:
 
Three Months Ended September 30, 2012
 
Noncontrolling interest
Balance - June 30, 2012
$
404,740

   Purchase of shares by noncontrolling interest

Net Income:
 
   Net income attributable to noncontrolling interest
56,746

 
 
Balance - September 30, 2012
$
461,486

 
Nine Months Ended September 30, 2012
 
 Noncontrolling interest
Balance - April 2, 2012
$

   Purchase of shares by noncontrolling interest
450,100

Net Income:
 
   Net income attributable to noncontrolling interest
11,386

 
 
Balance - September 30, 2012
$
461,486




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6. Derivative instruments used in hedging activities
 
The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures and interest rate exposures. As at September 30, 2012 the Company held a foreign currency forward contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Chilean Pesos (CLP) as well as foreign currency forward contracts to mitigate the risk of fluctuations in the Euro to U.S. dollar exchange rates. As at September 30, 2012, the Company held two interest rate swap contracts to mitigate the risk of interest rate exposure on the payment of interest on the Company's junior subordinated debentures.

The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at September 30, 2012:
 
 
 
 
 
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