e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
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 þ     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 o     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 þ   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 þ
     As of August 6, 2010, there were 111,527,254 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

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EXHIBIT 31.1 CERTIFICATION
       
EXHIBIT 31.2 CERTIFICATION
       
EXHIBIT 32 CERTIFICATION
       
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2010 (unaudited) and December 31, 2009
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30,     December 31,  
    2010     2009  
    (unaudited)          
Assets
               
Fixed maturities, at fair value (amortized cost: 2010 - $4,924,447; 2009 - $4,870,395)
  $ 4,975,019     $ 4,869,378  
Short-term investments, at fair value (amortized cost: 2010 - $269,782; 2009 - $482,632)
    269,782       481,766  
Other investments, at fair value (amortized cost: 2010 - $24,948; 2009 - $35,941)
    26,068       37,615  
Cash and cash equivalents
    492,489       387,585  
 
           
Total investments and cash
    5,763,358       5,776,344  
Premiums receivable
    931,670       551,616  
Deferred acquisition costs
    165,957       112,329  
Prepaid reinsurance premiums
    185,771       73,164  
Securities lending collateral
    99,224       90,350  
Loss reserves recoverable
    193,604       181,765  
Paid losses recoverable
    24,133       14,782  
Net receivable for investments sold
    25,542        
Income taxes recoverable
    1,171       2,043  
Intangible assets
    120,975       123,055  
Goodwill
    20,393       20,393  
Accrued investment income
    38,643       38,077  
Other assets
    44,182       35,222  
 
           
Total assets
  $ 7,614,623     $ 7,019,140  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 1,978,130     $ 1,622,134  
Unearned premiums
    1,176,603       724,104  
Reinsurance balances payable
    98,740       65,414  
Securities lending payable
    100,000       90,106  
Deferred income taxes
    26,200       24,508  
Net payable for investments purchased
          44,145  
Accounts payable and accrued expenses
    95,404       127,809  
Senior notes payable
    246,820        
Debentures payable
    289,800       289,800  
 
           
Total liabilities
    4,011,697       2,988,020  
 
           
 
               
Commitments and contingent liabilities
               
 
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (including treasury shares) (2010 - 111,407,993; 2009 - 128,459,478)
    23,101       23,033  
Treasury shares (2010 - 20,598,594; 2009 - 3,156,871)
    (3,605 )     (553 )
Additional paid-in-capital
    2,247,995       2,675,680  
Accumulated other comprehensive (loss)
    (6,726 )     (4,851 )
Retained earnings
    1,342,161       1,337,811  
 
           
Total shareholders’ equity
    3,602,926       4,031,120  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 7,614,623     $ 7,019,140  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues
                               
Gross premiums written
  $ 516,861     $ 425,032     $ 1,387,795     $ 1,034,924  
Reinsurance premiums ceded
    (67,726 )     (62,291 )     (158,465 )     (134,803 )
 
                       
Net premiums written
    449,135       362,741       1,229,330       900,121  
Change in unearned premiums
    (11,191 )     (34,541 )     (333,692 )     (253,162 )
 
                       
Net premiums earned
    437,944       328,200       895,638       646,959  
Net investment income
    34,809       26,963       69,108       53,735  
Net realized gains (losses) on investments
    12,441       (2,650 )     23,839       (26,071 )
Net unrealized gains on investments
    41,640       37,249       57,053       59,402  
Other income
    2,697       1,017       3,585       1,774  
Foreign exchanges (losses) gains
    (4,099 )     8,432       (12,863 )     4,232  
 
                       
Total revenues
    525,432       399,211       1,036,360       740,031  
 
                       
 
                               
Expenses
                               
Losses and loss expenses
    194,894       124,751       673,425       256,585  
Policy acquisition costs
    74,126       64,438       150,302       125,887  
General and administrative expenses
    52,379       41,200       105,948       79,279  
Share compensation expenses
    6,846       5,632       13,422       12,986  
Finance expenses
    13,218       10,752       28,369       18,475  
Transaction expenses
          15,851             15,851  
 
                       
Total expenses
    341,463       262,624       971,466       509,063  
 
                       
 
                               
Net income before taxes
    183,969       136,587       64,894       230,968  
Tax (expense) benefit
    (4,187 )     976       (3,490 )     1,502  
 
                       
Net income
  $ 179,782     $ 137,563     $ 61,404     $ 232,470  
 
                       
 
                               
Comprehensive income
                               
Foreign currency translation adjustments
    (68 )     3,993       (1,875 )     3,797  
 
                       
Comprehensive income
  $ 179,714     $ 141,556     $ 59,529     $ 236,267  
 
                       
 
                               
Earnings per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    121,009,553       76,138,038       123,821,415       75,941,308  
Diluted
    125,152,300       78,942,065       125,661,729       79,022,355  
 
                               
Basic earnings per share
  $ 1.47     $ 1.79     $ 0.47     $ 3.02  
 
                       
Diluted earnings per share
  $ 1.44     $ 1.74     $ 0.46     $ 2.94  
 
                       
 
                               
Cash dividends declared per share
  $ 0.22     $ 0.20     $ 0.44     $ 0.40  
 
                       
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30, 2010     June 30, 2009  
    (unaudited)     (unaudited)  
Common shares
               
Balance — Beginning of period
  $ 23,033     $ 13,235  
Issue of common shares
    68       92  
 
           
Balance — End of period
  $ 23,101     $ 13,327  
 
           
 
               
Treasury shares
               
Balance — Beginning of period
  $ (553 )   $  
Repurchase of common shares
    (3,052 )      
 
           
Balance — End of period
  $ (3,605 )   $  
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 2,675,680     $ 1,412,635  
Issue of common shares, net of expenses
    (80 )     (1,243 )
Repurchase of common shares
    (441,027 )      
Share compensation expenses
    13,422       12,986  
 
           
Balance — End of period
  $ 2,247,995     $ 1,424,378  
 
           
 
               
Accumulated other comprehensive (loss)
               
Balance — Beginning of period
  $ (4,851 )   $ (7,858 )
Foreign currency translation adjustments
    (1,875 )     3,797  
 
           
Balance — End of period
  $ (6,726 )   $ (4,061 )
 
           
 
               
Retained earnings
               
Balance — Beginning of period
  $ 1,337,811     $ 520,722  
Dividends
    (57,054 )     (34,867 )
Net income
    61,404       232,470  
 
           
Balance — End of period
  $ 1,342,161     $ 718,325  
 
           
 
               
Total shareholders’ equity
  $ 3,602,926     $ 2,151,969  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30,     June 30,  
    2010     2009  
    (unaudited)     (unaudited)  
Cash flows provided by (used in) operating activities
               
Net income
  $ 61,404     $ 232,470  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expenses
    13,422       12,986  
Discount on senior notes
    27        
Net unrealized (gains) losses on investments
    (23,839 )     26,071  
Net unrealized (gains) on investments
    (57,053 )     (59,402 )
Amortization of intangible assets
    2,080       2,081  
Foreign exchange losses (gains) on cash and cash equivalents included in net income
    17,129       (9,593 )
Amortization of premium on fixed maturities
    8,410       4,123  
Change in:
               
Premiums receivable
    (383,671 )     (264,194 )
Deferred acquisition costs
    (53,628 )     (37,460 )
Prepaid reinsurance premiums
    (112,607 )     (63,532 )
Loss reserves recoverable
    (13,488 )     42,977  
Paid losses recoverable
    (9,364 )     (34,083 )
Income taxes recoverable
    860       (522 )
Accrued investment income
    (653 )     680  
Other assets
    (11,550 )     258  
Reserve for losses and loss expenses
    367,779       (18,001 )
Unearned premiums
    452,499       316,689  
Reinsurance balances payable
    35,240       66,957  
Deferred income taxes
    1,452       (2,504 )
Accounts payable and accrued expenses
    (30,867 )     (6,190 )
 
           
Net cash provided by operating activities
    263,582       209,811  
 
           
 
               
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    2,933,352       1,509,773  
Proceeds on maturities of investments
    198,637       311,221  
Purchases of fixed maturities
    (3,244,072 )     (2,122,514 )
Sales of short-term investments, net
    211,801       53,781  
Sales of other investments
    11,610        
(Increase) in securities lending collateral
    (9,894 )     (63,235 )
 
           
Net cash provided by (used in) investing activities
    101,434       (310,974 )
 
           
 
               
Cash flows provided by (used in) financing activities
               
Net proceeds on issuance of senior notes
    246,793        
Issue of common shares, net of expenses
    (12 )     (1,182 )
Purchases of common shares under share repurchase program
    (444,079 )      
Dividends paid
    (55,994 )     (33,973 )
Increase in securities lending payable
    9,894       63,235  
 
           
Net cash (used in) provided by financing activities
    (243,398 )     28,080  
 
           
 
               
Effect of foreign currency rate changes on cash and cash equivalents
    (16,714 )     13,325  
Net increase (decrease) in cash
    104,904       (59,758 )
Cash and cash equivalents — beginning of period
    387,585       449,848  
 
           
Cash and cash equivalents — end of period
  $ 492,489     $ 390,090  
 
           
Taxes paid during the period
  $ 1,335     $ 1,199  
 
           
Interest paid during the period
  $ 12,729     $ 13,344  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
1. Basis of preparation and consolidation
     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly and majority owned 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009, 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 terms “ASC” used in these notes refer to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board (“FASB”).
     The consolidated financial statements include the results of operations and cash flows of IPC Holdings Ltd. (“IPC”), since the date of acquisition, September 4, 2009 and not any prior periods (including for comparative purposes) except where indicated ‘Pro Forma’ financial information.
2. Recent accounting pronouncements
     In June 2009, the FASB issued authoritative guidance on accounting for “Transfers and Servicing” (ASC 860). This update addresses practices that have developed that are not consistent with the original intent and key requirements and concerns that derecognized financial assets and related obligations should continue to be reported in the transferors’ financial statements. This update is effective for financial asset transfers in the interim and annual periods beginning January 1, 2010. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued authoritative guidance which amends the “Consolidation” guidance that applies to Variable Interest Entities (“VIEs”) (ASC 810). This update amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. This update is effective for interim and annual periods beginning January 1, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In January 2010, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” (ASC 820). This update requires additional disclosures regarding (1) significant transfers in and out of Levels 1 and 2 and

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
the reasons that such transfers were made; (2) inputs and valuation techniques used to measure fair value for financial assets and liabilities that fall in either Level 2 or Level 3; (3) the activity within Level 3 fair value measurements, including information on a gross basis for purchases, sales, issuances, and settlements; and (4) disaggregation of financial assets and liabilities measured at fair value into classes of financial assets and liabilities. This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning January 1, 2011. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In February 2010, the FASB issued authoritative guidance which amends the “Subsequent Events” guidance (ASC 855). The guidance requires SEC filers to evaluate subsequent events through the date the financial statements are issued, and also exempts SEC filers from disclosing the date through which subsequent events have been evaluated. This update is effective immediately for financial statements that are (1) issued or available to be issued or (2) revised. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In March 2010, the FASB issued authoritative guidance which clarifies the “Embedded Derivatives” guidance (ASC 815). All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments. The amendments in this update are effective for interim periods beginning after June 15, 2010. The Company has evaluated the guidance and has concluded that it does not have a material impact on the Company’s consolidated financial statements.
     In April 2010, the FASB issued authoritative guidance which clarifies the “Stock Compensation” guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance is effective for accounting periods beginning on or after December 15, 2010, with earlier application permitted. 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 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 (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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 and U.S. agency and non-agency mortgage and asset-backed securities. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. Financial instruments in this category include certain residential mortgage-backed securities and a hedge fund.
     The Company’s external investment advisors have noted illiquidity and dislocation in the non-Agency RMBS market during 2010 and 2009. During the period ended June 30, 2010 and 2009, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, management, with assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.
     Consistent with U.S. GAAP, market approach fair value measurements for securities trading in inactive markets are not determinative. In weighing the fair value measurements resulting from market approach and income approach valuation techniques, the Company has placed less reliance on the market approach fair value measurements. The income approach valuation technique determines the fair value of each security on the basis of contractual cash flows, discounted using a risk-adjusted discount rate. As the proposed valuation technique incorporates both observable and significant unobservable inputs, these securities are included as Level 3 assets with respect to the fair value hierarchy. The foundation for the income approach is the amount and timing of future cash flows.
     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust held in mutual funds. During the fourth quarter of 2009, a majority of the fund of hedge funds was redeemed. The remaining portion is a side pocket valued at $19,130 at June 30, 2010. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s May 31, 2010 NAV was used as a partial basis for fair value measurement in the Company’s June 30, 2010 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions 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

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
the variance between the estimated NAV and the one-month delayed fund investment manager’s NAV. Immaterial variances are recorded in the following reporting period.
     At June 30, 2010, 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
  $     $ 1,751,516     $     $ 1,751,516  
Non-U.S. Government and Government Agency
          662,062             662,062  
States, municipalities, political subdivision
          27,210             27,210  
Agency residential mortgage-backed securities
          500,018             500,018  
Non-Agency residential mortgage-backed securities
          51,744       75,578       127,322  
U.S. corporate
          1,294,383             1,294,383  
Non-U.S. corporate
          432,711             432,711  
Catastrophe bonds
          63,164             63,164  
Asset-backed securities
          88,270             88,270  
Commercial mortgage-backed securities
          28,363             28,363  
 
                       
Total fixed maturities
          4,899,441       75,578       4,975,019  
Short-term investments
    269,216       566             269,782  
Hedge fund
                19,130       19,130  
Mutual funds
          6,938             6,938  
 
                       
Total
  $ 269,216     $ 4,906,945     $ 94,708     $ 5,270,869  
 
                       
     At December 31, 2009, 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
  $     $ 1,918,811     $     $ 1,918,811  
Non-U.S. Government and Government Agency
          673,680             673,680  
States, municipalities, political subdivision
          19,359             19,359  
Agency residential mortgage-backed securities
          551,610             551,610  
Non-Agency residential mortgage-backed securities
          52,233       85,336       137,569  
U.S. corporate
          1,027,225             1,027,225  
Non-U.S. corporate
          409,398             409,398  
Catastrophe bonds
          52,351             52,351  
Asset-backed securities
          36,712             36,712  
Commercial mortgage-backed securities
          42,663             42,663  
 
                       
Total fixed maturities
          4,784,042       85,336       4,869,378  
Short-term investments
    479,552       2,214             481,766  
Hedge fund
                25,670       25,670  
Mutual funds
          11,945             11,945  
 
                       
Total
  $ 479,552     $ 4,798,201     $ 111,006     $ 5,388,759  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At June 30, 2010, Level 3 investments totaled $94,708, representing 1.8% of total investments measured at fair value on a recurring basis. At December 31, 2009, Level 3 investments totaled $111,006, representing 2.1% of total investments measured at fair value on a recurring basis.
     The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs as at June 30, 2010 and December 31, 2009:
                         
    Six Months Ended June 30, 2010  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $ 85,336     $ 25,670     $ 111,006  
Payments and purchases
                 
Sales and maturities
          (7,094 )     (7,094 )
Realized gains
          344       344  
Unrealized (losses) gains
    (1,634 )     210       (1,424 )
Amortization
    (8,124 )           (8,124 )
Transfers in
                 
 
                 
 
                       
Level 3 investments — End of period
  $ 75,578     $ 19,130     $ 94,708  
 
                 
                         
    Year Ended December 31, 2009  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $ 111,318     $     $ 111,318  
Payments and purchases
          115,351       115,351  
Sales and maturities
    (822 )     (92,004 )     (92,826 )
Realized (losses) gains
    (1,284 )     1,609       325  
Unrealized (losses) gains
    (7,329 )     714       (6,615 )
Amortization
    (16,547 )           (16,547 )
Transfers in
                 
 
                 
Level 3 investments — End of period
  $ 85,336     $ 25,670     $ 111,006  
 
                 
(b) Net investment income
     Net investment income was derived from the following sources:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2010     2009     2010     2009  
Fixed maturities and short-term investments
  $ 36,346     $ 26,396     $ 72,101     $ 52,914  
Cash and cash equivalents
    311       1,120       897       1,881  
Securities lending income
    49       173       119       512  
 
                       
Total gross investment income
    36,706       27,689       73,117       55,307  
Investment expenses
    (1,897 )     (726 )     (4,009 )     (1,572 )
 
                       
Net investment income
  $ 34,809     $ 26,963     $ 69,108     $ 53,735  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized gains (losses) and the change in net unrealized gains on investments:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2010     2009     2010     2009  
Fixed maturities, short-term and other investments and cash equivalents
                               
Gross realized gains
  $ 15,120     $ 3,928     $ 27,885     $ 13,381  
Gross realized (losses)
    (2,679 )     (6,578 )     (4,046 )     (39,452 )
 
                       
Net realized gains (losses) on investments
    12,441       (2,650 )     23,839       (26,071 )
Net unrealized (losses) gains on securities lending
    (6 )     3,214       (1,020 )     4,306  
Change in net unrealized gains on investments
    41,646       34,035       58,073       55,096  
 
                       
Total net realized gains (losses) and change in net unrealized gains on investments
  $ 54,081     $ 34,599     $ 80,892     $ 33,331  
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at June 30, 2010 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair Value  
U.S. Government and Government Agency
  $ 1,718,214     $ 33,540     $ (238 )   $ 1,751,516  
Non-U.S. Government and Government Agency
    664,666       13,054       (15,658 )     662,062  
States, municipalities, political subdivision
    26,745       538       (73 )     27,210  
Agency residential mortgage-backed securities
    481,308       18,779       (69 )     500,018  
Non-Agency residential mortgage-backed securities
    164,121       116       (36,915 )     127,322  
U.S. corporate
    1,258,345       37,164       (1,126 )     1,294,383  
Non-U.S. corporate
    431,586       8,175       (7,050 )     432,711  
Catastrophe bonds
    62,924       1,366       (1,126 )     63,164  
Asset-backed securities
    88,788       442       (960 )     88,270  
Commercial mortgage-backed securities
    27,750       617       (4 )     28,363  
 
                       
Total fixed maturities
    4,924,447       113,791       (63,219 )     4,975,019  
Total short-term investments
    269,782                   269,782  
Total other investments
    24,948       1,120             26,068  
 
                       
Total
  $ 5,219,177     $ 114,911     $ (63,219 )   $ 5,270,869  
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2009 were as follows:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair Value  
U.S. Government and Government Agency
  $ 1,912,081     $ 12,308     $ (5,578 )   $ 1,918,811  
Non-U.S. Government and Government Agency
    678,555       7,552       (12,427 )     673,680  
States, municipalities, political subdivision
    19,310       105       (56 )     19,359  
Agency residential mortgage-backed securities
    537,876       14,643       (909 )     551,610  
Non-Agency residential mortgage-backed securities
    176,853       481       (39,765 )     137,569  
U.S. corporate
    1,004,464       23,895       (1,134 )     1,027,225  
Non-U.S. corporate
    411,499       4,781       (6,882 )     409,398  
Catastrophe bonds
    51,236       1,244       (129 )     52,351  
Asset-backed securities
    36,828       411       (527 )     36,712  
Commercial mortgage-backed securities
    41,693       971       (1 )     42,663  
 
                       
Total fixed maturities
    4,870,395       66,391       (67,408 )     4,869,378  
Total short-term investments
    482,632       33       (899 )     481,766  
Total other investments
    35,941       1,674             37,615  
 
                       
Total
  $ 5,388,968     $ 68,098     $ (68,307 )   $ 5,388,759  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2010 and December 31, 2009. 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.
                                 
    June 30, 2010     December 31, 2009  
    Estimated Fair                    
    Value     % of Total     Estimated Fair Value     % of Total  
AAA
  $ 3,111,753       62.5 %   $ 3,287,879       67.5 %
AA
    490,443       9.9 %     487,364       10.0 %
A
    1,158,636       23.3 %     925,532       19.0 %
BBB
    49,042       1.0 %     14,416       0.3 %
 
                       
Investment grade
    4,809,874       96.7 %     4,715,191       96.8 %
BB
    52,701       1.0 %     45,191       0.9 %
B
    35,087       0.7 %     59,116       1.2 %
CCC
    72,574       1.5 %     45,194       1.0 %
D/NR
    4,783       0.1 %     4,686       0.1 %
 
                       
Non-Investment grade
    165,145       3.3 %     154,187       3.2 %
 
                       
 
                               
Total Fixed Maturities
  $ 4,975,019       100.0 %   $ 4,869,378       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2010 and December 31, 2009 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    June 30, 2010     December 31, 2009  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 453,392     $ 453,706     $ 269,889     $ 270,688  
Due after one year through five years
    3,538,674       3,602,572       3,498,792       3,521,167  
Due after five years through ten years
    170,314       174,656       306,065       306,502  
Due after ten years
    100       112       2,399       2,467  
 
                       
 
    4,162,480       4,231,046       4,077,145       4,100,824  
 
                               
Asset-backed and mortgage-backed securities
    761,967       743,973       793,250       768,554  
 
                       
 
                               
Total
  $ 4,924,447     $ 4,975,019     $ 4,870,395     $ 4,869,378  
 
                       
     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At June 30, 2010, approximately $239,056 (December 31, 2009: $225,823) of letters of credit were issued and outstanding under this facility for which $321,018 of investments were pledged as collateral (December 31, 2009: $314,857). 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 June 30, 2010, $25,000 (December 31, 2009: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,682 of investments were pledged as collateral (December 31, 2009: $128,798). In addition, $1,575,617 of investments were held in trust at June 30, 2010 (December 31, 2009: $1,517,249). Of those, $1,421,260 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2009: $1,408,084).
     The Company assumed two letters of credit facilities as part of the acquisition of IPC. A $250,000 Credit Agreement between IPC Holdings, Ltd., IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a $350,000 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 June 30, 2010, the IPC Bi-Lateral Facility had $77,603 (December 31, 2009: $96,047) letters of credit issued and outstanding for which $103,526 (December 31, 2009: $219,004) 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 June 30, 2010, the Company had $97,550 (December 31, 2009: $88,146) in securities on loan. During the three months ended June 30, 2010, the Company recorded a $6 unrealized loss on this collateral on its Statements of Operations (June 30, 2009: unrealized gain $3,214). During the six months ended June 30, 2010, the Company recorded a $1,020 unrealized loss on this collateral on its Statements of Operations (June 30, 2009: unrealized gain $4,306).
     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities and overnight repo with an average reset period of 11.5 days (December 31, 2009: 26.1 days). As at June 30, 2010, 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:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 5,204     $     $ 5,204  
Agency
                       
Short-term investments
    61,217       32,803             94,020  
 
                       
Total
  $ 61,217     $ 38,007     $     $ 99,224  
 
                       
     As at December 31, 2009, the securities lending collateral reinvested lending by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 14,123     $     $ 14,123  
Agency
          9,363             9,363  
Asset-backed securities
          6,153             6,153  
Short-term investments
    730       59,981             60,711  
 
                       
Total
  $ 730     $ 89,620     $     $ 90,350  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at June 30, 2010 and December 31, 2009. 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.
                                 
    June 30, 2010     December 31, 2009  
    Estimated Fair Value     % of Total     Estimated Fair Value     % of Total  
AAA
  $ 14,009       14.1 %   $ 33,501       37.1 %
AA+
    13,012       13.1 %     12,011       13.3 %
AA
          0.0 %     4,998       5.5 %
AA-
    2,993       3.0 %     19,910       22.0 %
A+
          0.0 %     9,999       11.1 %
A
    7,798       7.9 %     9,006       10.0 %
NR
    195       0.2 %     195       0.2 %
 
                       
 
    38,007       38.3 %     89,620       99.2 %
NR- Short-term investments (1)
    61,217       61.7 %     730       0.8 %
 
                       
 
Total
  $ 99,224       100.0 %   $ 90,350       100.0 %
 
                       
 
(1)   This amount relates to short-term investments and is therefore not a rated security.
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at June 30, 2010 and December 31, 2009 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    June 30, 2010     December 31, 2009  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 97,000     $ 97,029     $ 68,895     $ 70,074  
Due after one year through five years
    3,000       2,195       21,211       20,276  
 
                       
Total
  $ 100,000     $ 99,224     $ 90,106     $ 90,350  
 
                       
4. 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 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 as at June 30, 2010 and December 31, 2009:
                 
    Six Months Ended     Year ended  
    June 30,     December 31,  
    2010     2009  
Reserve for losses and loss expenses, beginning of period
  $ 1,622,134     $ 1,305,303  
Losses and loss expenses recoverable
    (181,765 )     (208,796 )
 
           
Net reserves for losses and loss expenses, beginning of period
    1,440,369       1,096,507  
Net reserves acquired in purchase of IPC
          304,957  
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
               
Current year
    749,717       625,810  
Prior years
    (76,292 )     (102,053 )
 
           
Total incurred losses and loss expenses
    673,425       523,757  
Total net paid losses
    (306,084 )     (507,435 )
Foreign exchange
    (23,184 )     22,583  
 
           
Net reserve for losses and loss expenses, end of period
    1,784,526       1,440,369  
Losses and loss expenses recoverable
    193,604       181,765  
 
           
Reserve for losses and loss expenses, end of period
  $ 1,978,130     $ 1,622,134  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
5. 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 June 30, 2010, 99.2% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $84,216 of IBNR recoverable (December 31, 2009: $99,587). Reinsurance recoverables by reinsurer are as follows:
                                 
    June 30, 2010     December 31, 2009  
    Reinsurance             Reinsurance        
    Recoverable     % of Total     Recoverable     % of Total  
Top 10 reinsurers
  $ 169,005       77.6 %     170,810       86.9 %
Other reinsurers’ balances > $1 million
    38,635       17.8 %     19,818       10.1 %
Other reinsurers’ balances < $1 million
    10,097       4.6 %     5,919       3.0 %
 
                       
Total
  $ 217,737       100.0 %     196,547       100.0 %
 
                       
                     
    June 30, 2010  
        Reinsurance        
Top 10 Reinsurers   Rating   Recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 40,591       24.0 %
Lloyd’s Syndicates
  A+     37,641       22.3 %
Hannover Re
  AA-     14,973       8.9 %
Montpelier Re
  A-     15,000       8.9 %
Munich Re
  AA-     12,276       7.3 %
Tokio Millenium
  AA     10,000       5.9 %
Flagstone
  A-     9,745       5.8 %
Transatlantic Re
  A+     9,711       5.7 %
Everest Re
  A-     9,695       5.7 %
Aspen
  A     9,373       5.5 %
 
               
Total
      $ 169,005       100.0 %
 
               

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                     
    December 31, 2009  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 50,840       29.8 %
Lloyd’s Syndicates
  A+     33,103       19.4 %
Munich Re
  AA-     19,921       11.7 %
Hannover Re
  AA-     13,427       7.8 %
Aspen
  A     11,417       6.7 %
Allianz
  AA     9,645       5.6 %
Swiss Re
  A+     8,995       5.3 %
Transatlantic Re
  A+     8,804       5.1 %
Brit Insurance Limited
  A     8,159       4.8 %
Platinum Underwriters
  A     6,499       3.8 %
 
               
Total
      $ 170,810       100.0 %
 
               
     At June 30, 2010 and December 31, 2009, the provision for uncollectible reinsurance relating to losses recoverable was $5,505 and $3,477, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $217,737 reinsurance recoverable at June 30, 2010, $40,591 was fully collateralized (December 31, 2009: $50,840).
     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.
6. 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 each. 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 and Junior Subordinated Deferrable Debentures. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders. This amount is in addition to, and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010 under its previously authorized $400,000 share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased $300,000 in common shares.
     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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following table is a summary of the common shares issued and outstanding:
         
    Common Shares  
Common shares outstanding, December 31, 2009
    128,459,478  
Restricted share awards vested, net of shares withheld
    281,512  
Restricted share units vested, net of shares withheld
    57,192  
Employee seller shares vested, net of shares withheld
     
Options exercised
    51,534  
Warrants exercised
     
Shares repurchased
    (17,441,723 )
 
     
Common shares outstanding, June 30, 2010
    111,407,993  
 
     
         
    Common Shares  
Common shares outstanding, December 31, 2008
    75,624,697  
IPC acquisition issuance
    54,556,762  
Restricted share awards vested, net of shares withheld
    423,746  
Restricted share units vested, net of shares withheld
    360,383  
Employee seller shares vested, net of shares withheld
    248,085  
Options exercised
    164,834  
Warrants exercised
    237,842  
Shares repurchased
    (3,156,871 )
 
     
Common shares outstanding, December 31, 2009
    128,459,478  
 
     
b) Warrants
     During the three and six months ended June 30, 2010, no warrants were exercised. During the three and six months ended June 30, 2009, 728,010 warrants were exercised which resulted in the net share issuance of 237,842 common shares.
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 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 June 30, 2010 were 4,655 (December 31, 2009: 4,577).
d) Dividends
     On May 5, 2010, the Company announced a quarterly cash dividend of $0.22 (2009: $0.20) per common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on June 30, 2010 to holders of record on June 15, 2010.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
7. Stock plans
a) Long Term Incentive Plan and Short Term Incentive Plan
     The Company’s Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, performance units, dividend equivalents or other share-based awards. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Plan (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares of which 7,757,232 shares are remaining. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs or performance shares 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. All options granted in 2009 were as a result of the IPC Acquisition. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for all grants to date:
                 
    Weighted average risk free   Weighted average        
Year   interest rate   dividend yield   Expected life (years)   Expected volatility
2007 and prior years
  4.5%   0.0%   7   30.0%
2008
  3.5%   3.2%   7   30.0%
2009
  3.9%   3.7%   2   34.6%
     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 $1,036 were recorded for the three months ended June 30, 2010 (2009: $918). Share compensation expenses of $2,074 were recorded for the six months ended June 30, 2010 (2009: $1,975). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to the options for the six months ended June 30, 2010 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2009
    3,278,015     $ 6.83     $ 19.88  
Options granted
                 
Options exercised
    (51,534 )     5.72       22.34  
Options forfeited
    (4,317 )     10.30       20.39  
 
                 
Options outstanding, June 30, 2010
    3,222,164     $ 6.84     $ 19.84  
 
                 
Options exercisable at June 30, 2010
    2,549,805     $ 6.05     $ 20.10  
 
                 
     Activity with respect to options for the six months ended June 30, 2009 was as follows:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2008
    2,799,938     $ 7.57     $ 18.23  
Options granted
                 
Options exercised
                 
Options forfeited
    (6,536 )     10.30       20.39  
 
                 
Options outstanding, June 30, 2009
    2,793,402     $ 7.56     $ 18.22  
 
                 
Options exercisable at June 30, 2009
    1,531,092     $ 7.52     $ 17.92  
 
                 
     At June 30, 2010, there were $2,610 (December 31, 2009: $4,713) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.0 years (December 31, 2009: 1.3 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 for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $4,735 were recorded for the three months ended June 30, 2010 (2009: $4,074). Share compensation expenses of $9,061 were recorded for the six months ended June 30, 2010 (2009: $8,386). 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 shares for the six months ended June 30, 2010 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2009
    2,525,958     $ 23.43  
Restricted share awards granted
    439,114       26.17  
Restricted share awards vested
    (323,520 )     23.91  
Restricted share awards forfeited
    (22,609 )     23.07  
 
           
Restricted share awards outstanding, June 30, 2010
    2,618,943     $ 23.83  
 
           
     Activity with respect to unvested restricted share awards for the six months ended June 30, 2009 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2008
    2,307,402     $ 22.73  
Restricted share awards granted
    280,073       24.70  
Restricted share awards vested
    (291,328 )     22.00  
Restricted share awards forfeited
    (3,989 )     21.29  
 
           
Restricted share awards outstanding, June 30, 2009
    2,292,158     $ 23.06  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At June 30, 2010, there were $38,750 (December 31, 2009: $38,395) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.5 years (December 31, 2009: 2.8 years).
     iii. Restricted share units
     Restricted share units under the LTIP and STIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $61 were recorded for the three months ended June 30, 2010 (2009: $21) related to restricted share units. Share compensation expenses of $234 were recorded for the six months ended June 30, 2010 (2009: $37) related to restricted share units. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested restricted share units for the six months ended June 30, 2010 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2009
    78,591     $ 24.84  
Restricted share units granted
    7,952       26.07  
Restricted share units vested
    (59,019 )     24.76  
Restricted share units forfeited
    (1,094 )     21.49  
 
           
Restricted share units outstanding, June 30, 2010
    26,430     $ 25.51  
 
           
     Activity with respect to unvested restricted share units for the six months ended June 30, 2009 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2008
    11,853     $ 25.28  
Restricted share units granted
    4,044       25.03  
Restricted share units vested
    (1,569 )     24.84  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, June 30, 2009
    14,328     $ 25.25  
 
           
     At June 30, 2010, there were $541 (December 31, 2009: $578) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.2 years (December 31, 2009: 2.5 years). Additional restricted share units are issued in lieu of accrued dividends for each unvested restricted share unit. As at June 30, 2010, unvested restricted share units issued in lieu of dividends were $1,117 (December 31, 2009: 858).
b) Employee seller shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot Holdings, Ltd. (“Talbot”), the Company issued 1,209,741 restricted shares to Talbot employees (the “employee seller shares”). Upon consummation of the

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
acquisition, the employee seller shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s Bye-laws. However, the employee seller shares are subject to a restricted period during which they are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of employee seller shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period will end for 25% of the employee seller shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that after four years forfeiture will be completely extinguished.
     Share compensation expenses of $1,014 were recorded for the three months ended June 30, 2010 (2009: $619). Share compensation expenses of $2,053 were recorded for the six months ended June 30, 2010 (2009: $2,588). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested employee seller shares for the six months ended June 30, 2010 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2009
    410,667     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
           
Employee seller shares forfeited
    (3,551 )     (22.01 )
 
           
Employee seller shares outstanding, June 30, 2010
    407,116     $ 22.01  
 
           
     Activity with respect to unvested employee seller shares for the six months ended June 30, 2009 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2008
    663,375     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (42,349 )     22.01  
Employee seller shares forfeited
    (3,799 )     22.01  
 
           
Employee seller shares outstanding, June 30, 2009
    617,227     $ 22.01  
 
           
     At June 30, 2010, there were $4,083 (December 31, 2009: $6,135) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.0 years (December 31, 2009: 1.5 years).
c) Total share compensation expenses
     The breakdown of share compensation expenses was as follows:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
Options
  $ 1,036     $ 918     $ 2,074     $ 1,975  
Restricted share awards
    4,735       4,074       9,061       8,386  
Restricted share units
    61       21       234       37  
Employee seller shares
    1,014       619       2,053       2,588  
 
                       
Total
  $ 6,846     $ 5,632     $ 13,422     $ 12,986  
 
                       
8. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at June 30, 2010 was:
                         
    Commitment     Outstanding (1)     Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       139,800       139,800  
8.875% Senior Notes due 2040
    250,000       250,000       246,820  
$340,000 syndicated unsecured letter of credit facility
    340,000              
$60,000 bilateral unsecured letter of credit facility
    60,000              
$500,000 secured letter of credit facility
    500,000       239,056        
Talbot FAL Facility (2)
    25,000       25,000        
$350,000 IPC Bi-Lateral Facility
    350,000       77,603        
 
                 
Total
  $ 1,875,000     $ 881,459     $ 536,620  
 
                 
     The financing structure at December 31, 2009 was:
                         
    Commitment     Outstanding (1)     Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       139,800       139,800  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       225,823        
Talbot FAL Facility (2)
    25,000       25,000        
$250,000 IPC Syndicated Facility
    16,537       16,537        
$350,000 IPC Bi-Lateral Facility
    350,000       96,047        
 
                 
Total
  $ 1,441,537     $ 653,207     $ 289,800  
 
                 
 
(1)   Indicates utilization of commitment amount, not drawn borrowings.
 
(2)   Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     
    Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.
     Finance expenses consist of interest on our junior subordinated deferrable debentures, the amortization of debt offering costs, fees relating to our credit facilities and the costs of FAL as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,589     $ 3,589       7,177       7,177  
8.480% Junior Subordinated Deferrable Debentures
    3,028       3,348       6,057       6,696  
8.875% Senior Notes due 2040
    5,597             9,575        
Credit facilities
    1,109       476       2,420       840  
Talbot FAL Facility
    (89 )     42       333       105  
Talbot other interest
    (16 )           59        
Talbot third party FAL facility
          3,297       2,748       3,657  
 
                       
Total
  $ 13,218     $ 10,752     $ 28,369     $ 18,475  
 
                       
(b) $250,000 8.875% Senior Notes due 2040
     On January 21, 2010, the Company offered and sold $250,000 of Senior Notes due 2040 (the “8.875% Senior Notes”) in a registered public offering. The 8.875% Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole any time or in part from time to time at a make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 8.875% Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity or early redemption. Interest on the 8.875% Senior Notes is payable semi-annually in arrears on January 26 and July 26 of each year, commencing on July 26, 2010. The net proceeds of $243,967 from the sale of the 8.875% Senior Notes, after the deduction of commissions paid to the underwriters in the transaction and other expenses, was used by the Company for general corporate purposes, which included the repurchase of its outstanding capital stock and dividends to shareholders. Debt issuance costs of $2,808 were deferred as an asset and amortized over the life of the 8.875% Senior Notes.
     The 8.875% Senior Notes are unsecured and unsubordinated obligations and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 8.875% Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 8.875% Senior Notes will be structurally subordinated to all obligations of the Company’s subsidiaries.
     Future expected payments of interest on the 8.875% Senior Notes are as follows:
         
2010
  $ 11,094  
2011
    22,187  
2012
    22,187  
2013
    22,187  
2014 and thereafter
    587,970  
 
     
Total minimum future payments
  $ 665,625  
 
     

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     
(c) Junior subordinated deferrable debentures
     On June 15, 2006, the Company participated in a private placement of $150,000 of junior subordinated deferrable interest debentures due 2036 (the “9.069% Junior Subordinated Deferrable Debentures”). The 9.069% Junior Subordinated Deferrable Debentures mature on June 15, 2036, are redeemable at the Company’s option at par beginning June 15, 2011, and require quarterly interest payments by the Company to the holders of the 9.069% Junior Subordinated Deferrable Debentures. Interest is payable at 9.069% per annum through June 15, 2011, and thereafter at a floating rate of three-month LIBOR plus 355 basis points, reset quarterly. The proceeds of $150,000 from the sale of the 9.069% Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, were used by the Company to fund Validus Re segment operations and for general working capital purposes. Debt issuance costs of $3,750 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On June 21, 2007, the Company participated in a private placement of $200,000 of junior subordinated deferrable interest debentures due 2037 (the “8.480% Junior Subordinated Deferrable Debentures”). The 8.480% Junior Subordinated Deferrable Debentures mature on June 15, 2037, are redeemable at the Company’s option at par beginning June 15, 2012, and require quarterly interest payments by the Company to the holders of the 8.480% Junior Subordinated Deferrable Debentures. Interest will be payable at 8.480% per annum through June 15, 2012, and thereafter at a floating rate of three-month LIBOR plus 295 basis points, reset quarterly. The proceeds of $200,000 from the sale of the 8.480% Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, were used by the Company to fund the purchase of Talbot Holdings Ltd. Debt issuance costs of $2,000 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On April 29, 2008, the Company repurchased from an unaffiliated financial institution $45,700 principal amount of its 8.480% Junior Subordinated Deferrable Debentures due 2037 at an aggregate price of $36,560, plus accrued and unpaid interest of $474. The repurchase resulted in the recognition of a realized gain of $8,752 for the year ended December 31, 2008.
     On December 1, 2009, the Company repurchased from an unaffiliated financial institution $14,500 principal amount of its 8.480% Junior Subordinated Deferrable Debentures due 2037 at an aggregate price of $9,933, plus accrued and unpaid interest of $246. The repurchase resulted in the recognition of a realized gain of $4,444 for the year ended December 31, 2009.
     Future expected payments of interest and principal on the 9.069% and 8.480% Junior Subordinated Deferrable Debentures are as follows:
         
2010
  $ 12,729  
2011
    168,657  
2012
    145,727  
2013 and thereafter
     
 
     
Total minimum future payments
  $ 327,113  
 
     
(d) Credit facilities
     (i) $340,000 syndicated unsecured letter of credit facility, $60,000 bilateral unsecured letter of credit facility and $500,000 secured letter of credit facility
     On March 12, 2007, the Company entered into a $200,000 three-year unsecured facility, as subsequently amended on October 25, 2007 and September 4, 2009. The facility was refinanced at maturity on March 12, 2010 with a three-year $340,000 syndicated unsecured letter of credit facility and a $60,000 bilateral unsecured letter of credit facility which provides for letter of credit availability for Validus Re and our other subsidiaries and revolving credit

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
availability for the Company (the “Three Year Facilities”) (the full $400,000 of which is available for letters of credit and/or revolving loans).
     On March 12, 2007, the Company entered into a $500,000 five-year secured letter of credit facility, as subsequently amended on October 25, 2007, July 24, 2009, and March 12, 2010, which provides for letter of credit availability for Validus Re and our other subsidiaries (the “Five Year Facility” and, together with the Three Year Facilities, the “Credit Facilities”). The Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. On October 25, 2007, the Company entered into the First Amendment to the Credit Facilities to provide for, among other things, additional capacity to incur up to $100,000 under a new Funds at Lloyd’s Letter of Credit Facility (as described below) to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2008 and 2009 underwriting years of account. The amendment also modified certain provisions in the Credit Facilities in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default.
     On September 4, 2009, the Company announced that it had entered into Amendments to each of its $500,000  five-year secured letter of credit facility; $200,000  three-year unsecured facility and $100,000  Talbot FAL facility to amend a specific investment restriction clause to permit the completion of the IPC Acquisition. The amendment also modified and updated certain pricing and covenant terms.
     As amended, the Credit Facilities contain covenants that include, among other things, (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least 70% of consolidated net worth ($2,925,590) and, commencing with the end of the fiscal quarter ending December 31, 2009 to be increased quarterly by an amount equal to 50% of its consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). For purposes of covenant compliance (i) “net worth is calculated with investments carried at amortized cost and (ii) “consolidated total debt” does not include the Company’s junior subordinated deferrable debentures. The credit facilities also contain restrictions on our ability to pay dividends and other payments in respect of equity interests at any time that we are otherwise in default with respect to certain provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others.
     As of June 30, 2010, there was $239,056 in outstanding letters of credit under the Five Year Facility (December 31, 2009: $225,823) and $nil outstanding under the Three Year Facilities (December 31, 2009: $nil).
     As of June 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
     (ii) Talbot FAL Facility
     On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility (the “Talbot FAL Facility”) to provide Funds at Lloyd’s for the 2008 and 2009 underwriting years of account; this facility is guaranteed by the Company and is secured against the assets of Validus Re. The Talbot FAL Facility was provided by a syndicate of commercial banks arranged by Lloyds TSB Bank plc and ING Bank N.V., London Branch.
     On November 19, 2009, the Company entered into an Amendment and Restatement of the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000, and to extend the support to the 2010 and 2011 underwriting years of account.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     As amended, the Talbot FAL Facility contains affirmative covenants that include, among other things, (i) the requirement that we initially maintain a minimum level of consolidated net worth of at least 70% of consolidated net worth ($2,607,219), and commencing with the end of the fiscal quarter ending September 30, 2009 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, and (ii) the requirement that we maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00.
     The Talbot FAL Facility also contains restrictions on our ability to incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others. Other than in respect of existing and future preferred and hybrid securities, the payment of dividends and other payments in respect of equity interests are not permitted at any time that we are in default with respect to certain provisions under the Credit Facilities. As of June 30, 2010 the Company had $25,000 in outstanding letters of credit under this facility.
     As of June 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL Facility.
     (iii) IPC Syndicated Facility and IPC Bi-Lateral Facility
     IPC obtained letters of credit through the IPC Syndicated Facility and the IPC Bi-Lateral Facility (the “IPC Facilities”). In July, 2009, certain terms of these facilities were amended including suspending IPCRe’s ability to increase existing letters of credit or to issue new letters of credit. With respect to the IPC Syndicated Facility, IPCRe provides the banks security by depositing cash in the amount of 103% of the aggregate letters of credit outstanding. Effective March 31, 2010, the IPC Syndicated Facility was closed. As of June 30, 2010, $77,603 of outstanding letters of credit were issued from the IPC Bi-Lateral Facility.
     As of June 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC Facilities.
9. Commitments and contingencies
a) Concentrations of credit risk
     The Company’s investments are managed following prudent standards of diversification. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In addition, the Company limits its exposure to any single issuer to 3% or less, excluding treasury and agency securities. The minimum credit rating of any security purchased is Baa3/BBB- and where investments are downgraded, the Company permits a holding of up to 2% in aggregate market value, or 10% with written pre-authorization. At June 30, 2010, 3.1% of the investment portfolio had a split rating below Baa3/BBB- and the Company did not have an aggregate exposure to any single issuer of more than 1.5% of its investment portfolio, other than with respect to government and agency securities.
b) Funds at Lloyd’s
     The amounts provided under the Talbot FAL Facility would become a liability of the Company in the event of the syndicate declaring a loss at a level which would call on this arrangement.
     Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash,

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
investments and undrawn letters of credit provided by various banks. The amounts of cash, investments and letters of credit at June 30, 2010 amounted to $452,000 (December 31, 2009: $452,000) of which $25,000 is provided under the Talbot FAL Facility (December 31, 2009: $25,000).
c) Lloyd’s Central Fund
     Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. This levy is affected by the split of sterling and US dollar business expected to be written by the syndicate. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2010 estimated underwriting capacity at Lloyd’s of £600,000, the June 30, 2010 exchange rate of £1 equals $1.5067 and assuming the maximum 3% assessment, the Company would be assessed approximately $27,121.
10. Related party transactions
     a) On December 8, 2005, the Company entered into agreements with BlackRock Financial Management, Inc. (“BlackRock”) under which BlackRock provides investment management services for part of the Company’s investment portfolio. Merrill Lynch is a shareholder of Blackrock. Merrill Lynch entities, which are now wholly-owned subsidiaries of Bank of America Corp, own 5,714,285 non-voting shares and 658,614 voting shares in the Company, hold warrants to purchase 1,067,187 shares and during a portion of 2009 had an employee on the Company’s Board of Directors who did not receive compensation from the Company. For the three and six months ended June 30, 2010, BlackRock was no longer a related party. Investment management fees earned by Blackrock for the three and six months ended June 30, 2009 were $527 and $978.
     b) On December 8, 2005, the Company entered into agreements with Goldman Sachs Asset Management and its affiliates (“GSAM”) under which GSAM provides investment management services for a portion of the Company’s investment portfolio. Goldman Sachs entities, own 14,057,137 non-voting shares in the Company, hold warrants to purchase 1,604,410 non-voting shares, and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. Investment management fees earned by GSAM for the three and six months ended June 30, 2010 were $241 (2009: $368), and $733 (2009: $726), of which $390 was included in accounts payable and accrued expenses at June 30, 2010 (December 31, 2009: $371). Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties. Sumit Rajpal, a director of the Company, serves as Managing Director of Goldman, Sachs and Co., GSAM’s parent company.
     c) Vestar Capital entities own 8,571,427 shares in the Company, hold warrants to purchase 972,810 shares and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. During 2009, Vestar Capital entities were shareholders of PARIS RE Holdings, Limited (“Paris Re”). On July 4, 2009, PartnerRe Ltd. (“PartnerRe”) acquired the outstanding shares of Paris Re and subsequently Paris Re was not a related party of the Company during the three and six months ended June 30, 2010. However, for the three and six months ended June 30, 2009, pursuant to reinsurance agreements with Paris Re, the Company recognized gross premiums written of $28 and $6,634 and earned premium adjustments of $1,710 and $3,416. Sander M. Levy, a director of the Company, serves as Managing Director of Vestar Capital Partners.
     d) Aquiline Capital Partners, LLC and its related companies (“Aquiline”), which own 6,886,342 shares in the Company, hold warrants to purchase 3,193,865 shares, and have three employees on the Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized $601 (2009: $nil) and $1,341 (2009: $nil) of gross premiums written during the three and six months ended June 30, 2010, of which $954 was included in premiums receivable at June 30, 2010 (December 31, 2009: $nil). The Company also recognized $606 (2009: $nil) of reinsurance premiums ceded during the six months ended June 30, 2010, and $213

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(2009: $nil) and $881 (2009: $800) of earned premium adjustments during the three and six months ended June 30, 2010, of which $333 was included in reinsurance balances payable at June 30, 2010 (December 31, 2009: $nil). Christopher E. Watson, a director of the Company, also serves as a director of Group Ark.
     Aquiline is also a shareholder of Tiger Risk Partners LLC (“Tiger Risk”). Pursuant to certain reinsurance contracts, the Company recognized brokerage expenses paid to Tiger Risk of $1,432 (2009: $nil) and $1,469 (2009: $nil) during the three and six months ended June 30, 2010, of which $1,366 was included in accounts payable and accrued expenses at June 30, 2010 (December 31, 2009: $643). Christopher E. Watson, a director of the Company serves as a director of Tiger Risk.
     On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. (“Conning”) to manage a portion of the Company’s investment portfolio. Aquiline acquired Conning on June 16, 2009. John J. Hendrickson and Jeffrey W. Greenberg, directors of the Company, each serve as a director of Conning Holdings Corp., the parent company of Conning. Investment management fees earned by Conning for the three and six months ended June 30, 2010 were $100 and $186, of which $100 was included in accounts payable and accrued expenses at June 30, 2010.
11. Earnings per share
     The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009:
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
Basic earnings per share
                               
Income
  $ 179,782     $ 137,563     $ 61,404     $ 232,470  
 
                               
less: Dividends and distributions declared on outstanding warrants
    (1,749 )     (1,590 )     (3,498 )     (3,326 )
 
                       
Income available to common shareholders
  $ 178,033     $ 135,973     $ 57,906     $ 229,144  
 
                       
 
                               
Weighted average number of common shares outstanding
    121,009,553       76,138,038       123,821,415       75,941,308  
 
                       
 
                               
Basic earnings per share
  $ 1.47     $ 1.79     $ 0.47     $ 3.02  
 
                       
 
                               
Diluted earnings per share
                               
Income
  $ 179,782     $ 137,563     $ 61,404     $ 232,470  
 
                               
less: Dividends and distributions declared on outstanding warrants
                (3,498 )      
 
                       
Income available to common shareholders
  $ 179,782     $ 137,563     $ 57,906     $ 232,470  
 
                       
 
                               
Weighted average number of common shares outstanding
    121,009,553       76,138,038       123,821,415       75,941,308  
Share equivalents:
                               
Warrants
    2,339,922       1,806,372             2,056,733  
Stock options
    794,625       300,405       840,067       333,955  
Unvested restricted shares
    1,008,200       697,250       1,000,247       690,359  
 
                               
 
                       
Weighted average number of common shares outstanding
    125,152,300       78,942,065       125,661,729       79,022,355  
 
                       
 
                               
Diluted earnings per share
  $ 1.44     $ 1.74     $ 0.46     $ 2.94  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Share equivalents that would result in the issuance of common shares of 218,497 and 198,500 were outstanding for three months ended June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Share equivalents that would result in the issuance of common shares of 194,812 and 179,713 were outstanding for six months ended June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
12. Subsequent events
     On August 4, 2010, the Company announced a quarterly cash dividend of $0.22 per common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on September 30, 2010 to shareholders and warrant holders of record as of September 15, 2010.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
13. Segment information
     The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments have been determined under U.S. GAAP segment reporting. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each business requires different strategies.
Validus Re
     The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace, nuclear, terrorism, life and accident & health and workers’ compensation catastrophe.
Talbot
     The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial institutions, contingency, bloodstock & livestock, accident & health and aerospace classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Corporate and other reconciling items
     The Company has a “Corporate” function, which includes the activities of the parent company, and which carries out certain functions for the group. “Corporate” includes ‘non-core’ underwriting expenses, predominantly general and administrative and stock compensation expenses. “Corporate” also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, “Corporate” is reflected separately, however “Corporate” is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of intersegment revenues and expenses and unusual items that are not allocated to segments.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following tables summarize the underwriting results of our operating segments and corporate segment:
                                 
                    Corporate &        
Three Months Ended June 30, 2010   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 284,328     $ 253,710     $ (21,177 )   $ 516,861  
Reinsurance premiums ceded
    (41,175 )     (47,728 )     21,177       (67,726 )
 
                       
Net premiums written
    243,153       205,982             449,135  
Change in unearned premiums
    18,888       (30,079 )           (11,191 )
 
                       
Net premiums earned
    262,041       175,903             437,944  
Losses and loss expenses
    123,793       71,101             194,894  
Policy acquisition costs
    37,979       38,647       (2,500 )     74,126  
General and administrative expenses
    10,983       24,960       16,436       52,379  
Share compensation expenses
    1,749       1,468       3,629       6,846  
 
                       
 
                               
Underwriting income (loss)
  $ 87,537     $ 39,727     $ (17,565 )   $ 109,699  
 
                       
 
                               
Net investment income
    29,914       7,251       (2,356 )     34,809  
Net realized gains on investments
    10,363       2,078             12,441  
Net unrealized gains on investments
    35,697       5,943             41,640  
Foreign exchange (losses)
    (843 )     (3,243 )     (13 )     (4,099 )
Other income
    1,477       3,084       (1,864 )     2,697  
Finance expenses
    (1,107 )     105       (12,216 )     (13,218 )
 
                       
Net income (loss) before taxes
    163,038       54,945       (34,014 )     183,969  
Tax (expense) benefit
    (94 )     (4,094 )     1       (4,187 )
 
                       
Net income (loss)
  $ 162,944     $ 50,851     $ (34,011 )   $ 179,782  
 
                       
 
                               
Selected ratios (1)
                               
Losses and loss expenses
    47.2 %     40.4 %             44.5 %
Policy acquisition costs
    14.5 %     22.0 %             16.9 %
General and administrative expenses
    4.9 %     15.0 %             13.5 %
 
                         
Expense ratio
    19.4 %     37.0 %             30.4 %
 
                         
Combined ratio
    66.6 %     77.4 %             74.9 %
 
                         
 
                               
Total assets
  $ 5,057,693     $ 2,507,586     $ 49,344     $ 7,614,623  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Three months ended June 30, 2009   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 199,560     $ 235,113     $ (9,641 )   $ 425,032  
Reinsurance premiums ceded
    (43,070 )     (28,862 )     9,641       (62,291 )
 
                       
Net premiums written
    156,490       206,251             362,741  
Change in unearned premiums
    7,207       (41,748 )           (34,541 )
 
                       
Net premiums earned
    163,697       164,503             328,200  
Losses and loss expenses
    41,121       83,630             124,751  
Policy acquisition costs
    29,120       36,114       (796 )     64,438  
General and administrative expenses
    14,149       21,927       5,124       41,200  
Share compensation expenses
    1,548       2,098       1,986       5,632  
 
                       
 
                               
Underwriting income (loss)
  $ 77,759     $ 20,734     $ (6,314 )   $ 92,179  
 
                       
 
                               
Net investment income
    20,783       7,693       (1,513 )     26,963  
Net realized (losses) on investments
    (2,140 )     (510 )           (2,650 )
Net unrealized gains on investments
    35,793       1,456             37,249  
Foreign exchange gains
    1,827       6,549       56       8,432  
Other income
    902       911       (796 )     1,017  
Finance expenses
    (477 )     (3,339 )     (6,936 )     (10,752 )
Transaction expenses
                (15,851 )     (15,851 )
 
                       
Net income (loss) before taxes
    134,447       33,494       (31,354 )     136,587  
Income tax (expense) benefit
    (28 )     1,004             976  
 
                       
Net income (loss)
  $ 134,419     $ 34,498     $ (31,354 )   $ 137,563  
 
                       
 
                               
Selected ratios (1):
                               
Loss and loss expense ratio
    25.1 %     50.8 %             38.0 %
Policy acquisition cost ratio
    17.8 %     22.0 %             19.6 %
General and administrative expense ratio
    9.6 %     14.6 %             14.3 %
 
                         
Expense ratio
    27.4 %     36.6 %             33.9 %
 
                         
Combined ratio
    52.5 %     87.4 %             71.9 %
 
                         
 
                               
Total assets
  $ 3,013,433     $ 1,988,037     $ 6,980     $ 5,008,450  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following tables summarize the underwriting results of our operating segments and corporate segment:
                                 
                    Corporate &        
Six months ended June 30, 2010   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 924,623     $ 524,251     $ (61,079 )   $ 1,387,795  
Reinsurance premiums ceded
    (54,285 )     (165,259 )     61,079       (158,465 )
 
                       
Net premiums written
    870,338       358,992             1,229,330  
Change in unearned premiums
    (324,376 )     (9,316 )           (333,692 )
 
                       
Net premiums earned
    545,962       349,676             895,638  
Losses and loss expenses
    472,713       200,712             673,425  
Policy acquisition costs
    81,482       73,592       (4,772 )     150,302  
General and administrative expenses
    27,295       50,508       28,145       105,948  
Share compensation expenses
    3,378       3,027       7,017       13,422  
 
                       
 
                               
Underwriting (loss) income
  $ (38,906 )   $ 21,837     $ (30,390 )   $ (47,459 )
 
                       
 
                               
Net investment income
    59,159       14,571       (4,622 )     69,108  
Net realized gains on investments
    20,142       3,697             23,839  
Net unrealized gains on investments
    47,892       9,161             57,053  
Other income (loss)
    2,555       5,059       (4,029 )     3,585  
Finance expenses
    (2,400 )     (3,140 )     (22,829 )     (28,369 )
Foreign exchange (losses)
    (5,982 )     (6,842 )     (39 )     (12,863 )
 
                       
Net income (loss) before taxes
    82,460       44,343       (61,909 )     64,894  
Tax (expense)
    (185 )     (3,299 )     (6 )     (3,490 )
 
                       
Net income (loss)
  $ 82,275     $ 41,044     $ (61,915 )   $ 61,404  
 
                       
 
                               
Selected ratios (1)
                               
Losses and loss expenses
    86.6 %     57.4 %             75.2 %
Policy acquisition costs
    14.9 %     21.0 %             16.8 %
General and administrative expenses
    5.6 %     15.3 %             13.3 %
 
                         
Expense ratio
    20.5 %     36.3 %             30.1 %
 
                         
Combined ratio
    107.1 %     93.7 %             105.3 %
 
                         
 
                               
Total assets
  $ 5,057,693     $ 2,507,586     $ 49,344     $ 7,614,623  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Six months ended June 30, 2009   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 609,686     $ 463,033     $ (37,795 )   $ 1,034,924  
Reinsurance premiums ceded
    (56,359 )     (116,239 )     37,795       (134,803 )
 
                       
Net premiums written
    553,327       346,794             900,121  
Change in unearned premiums
    (215,183 )     (37,979 )           (253,162 )
 
                       
Net premiums earned
    338,144       308,815             646,959  
Losses and loss expenses
    96,583       160,002             256,585  
Policy acquisition costs
    57,697       69,271       (1,081 )     125,887  
General and administrative expenses
    27,941       42,141       9,197       79,279  
Share compensation expenses
    3,220       4,433       5,333       12,986  
 
                       
 
                               
Underwriting income (loss)
  $ 152,703     $ 32,968     $ (13,449 )   $ 172,222  
 
                       
 
                               
Net investment income
    41,569       15,187       (3,021 )     53,735  
Net realized (losses) on investments
    (19,679 )     (6,392 )           (26,071 )
Net unrealized gains on investments
    54,800       4,602             59,402  
Foreign exchange (losses) gains
    (1,380 )     5,556       56       4,232  
Other income (loss)
    1,187       1,668       (1,081 )     1,774  
Finance expenses
    (840 )     (3,762 )     (13,873 )     (18,475 )
Transaction expenses
                (15,851 )     (15,851 )
 
                       
Net income (loss) before taxes
    228,360       49,827       (47,219 )     230,968  
Income tax (expense) benefit
    (66 )     1,568             1,502  
 
                       
Net income (loss)
  $ 228,294     $ 51,395     $ (47,219 )   $ 232,470  
 
                       
 
                               
Selected ratios (1)
                               
Loss and loss expense ratio
    28.6 %     51.8 %             39.7 %
Policy acquisition cost ratio
    17.1 %     22.4 %             19.5 %
General and administrative expense ratio
    9.2 %     15.1 %             14.3 %
 
                         
Expense ratio
    26.3 %     37.5 %             33.8 %
 
                         
Combined ratio
    54.9 %     89.3 %             73.5 %
 
                         
 
                               
Total assets
  $ 3,013,433     $ 1,988,037     $ 6,980     $ 5,008,450  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Three Months Ended June 30, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 186,653     $ 29,691     $ (2,020 )   $ 214,324       41.5 %
Worldwide excluding United States (1)
    4,830       58,806       (2,086 )     61,550       11.9 %
Europe
    10,757       12,832       (504 )     23,085       4.4 %
Latin America and Caribbean
    15,036       29,368       (12,766 )     31,638       6.1 %
Japan
    19,250       2,901       (72 )     22,079       4.3 %
Canada
    72       3,367       (72 )     3,367       0.7 %
Rest of the world (2)
    25,168                   25,168       4.9 %
 
                             
Sub-total, non United States
    75,113       107,274       (15,500 )     166,887       32.3 %
Worldwide including United States (1)
    2,032       15,911       (504 )     17,439       3.3 %
Marine and Aerospace (3)
    20,530       100,834       (3,153 )     118,211       22.9 %
 
                             
Total
  $ 284,328     $ 253,710     $ (21,177 )   $ 516,861       100.0 %
 
                             
                                         
    Three Months Ended June 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 132,788     $ 24,480     $ (259 )   $ 157,009       36.9 %
Worldwide excluding United States (1)
    11,754       67,581       (1,593 )     77,742       18.3 %
Europe
    7,357       17,595       (551 )     24,401       5.8 %
Latin America and Caribbean
    7,560       15,646       (6,631 )     16,575       3.9 %
Japan
    14,807       3,256             18,063       4.2 %
Canada
    112       2,219       (112 )     2,219       0.5 %
Rest of the world (2)
    8,660                   8,660       2.0 %
 
                             
Sub-total, non United States
    50,250       106,297       (8,887 )     147,660       34.7 %
Worldwide including United States (1)
    6,321       16,461       (393 )     22,389       5.3 %
Marine and Aerospace (3)
    10,201       87,875       (102 )     97,974       23.1 %
 
                             
Total
  $ 199,560     $ 235,113     $ (9,641 )   $ 425,032       100.0 %
 
                             
 
(1)   Represents risks in two or more geographic zones.
 
(2)   Represents risks in one geographic zone.
 
(3)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Six Months Ended June 30, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 420,220     $ 54,974     $ (5,491 )   $ 469,703       33.8 %
Worldwide excluding United States (1)
    44,594       134,824       (5,918 )     173,500       12.5 %
Europe
    91,233       28,370       (961 )     118,642       8.5 %
Latin America and Caribbean
    43,775       46,595       (28,553 )     61,817       4.5 %
Japan
    19,900       3,609       (137 )     23,372       1.7 %
Canada
    137       7,003       (137 )     7,003       0.5 %
Rest of the world (2)
    25,168                   25,168       1.8 %
 
                             
Sub-total, non United States
    224,807       220,401       (35,706 )     409,502       29.5 %
Worldwide including United States (1)
    78,267       28,687       (2,234 )     104,720       7.6 %
Marine and Aerospace (3)
    201,329       220,189       (17,648 )     403,870       29.1 %
 
                             
Total
  $ 924,623     $ 524,251     $ (61,079 )   $ 1,387,795       100.0 %
 
                             
                                         
    Six Months Ended June 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 297,999     $ 46,893     $ (5,087 )   $ 339,805       32.8 %
Worldwide excluding United States (1)
    33,942       127,191       (9,282 )     151,851       14.7 %
Europe
    46,582       37,908       (3,213 )     81,277       7.9 %
Latin America and Caribbean
    18,456       32,596       (14,893 )     36,159       3.5 %
Japan
    14,807       3,707             18,514       1.8 %
Canada
    652       6,378       (652 )     6,378       0.6 %
Rest of the world (2)
    20,875                   20,875       2.0 %
 
                             
Sub-total, non United States
    135,314       207,780       (28,040 )     315,054       30.5 %
Worldwide including United States (1)
    36,706       31,062       (2,287 )     65,481       6.3 %
Marine and Aerospace (3)
    139,667       177,298       (2,381 )     314,584       30.4 %
 
                             
Total
  $ 609,686     $ 463,033     $ (37,795 )   $ 1,034,924       100.0 %
 
                             
 
(1)   Represents risks in two or more geographic zones.
 
(2)   Represents risks in one geographic zone.
 
(3)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following is a discussion and analysis of the Company’s consolidated results of operations for the three and six months ended June 30, 2010 and 2009 and the Company’s consolidated financial condition, liquidity and capital resources at June 30, 2010 and December 31, 2009. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2009, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
     The Company was formed on October 19, 2005 and completed the acquisitions of Talbot Holdings Ltd. (“Talbot”) and IPC Holdings, Ltd. (“IPC”) on July 2, 2007 and September 4, 2009, respectively. For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Executive Overview
     The Company underwrites from two distinct global operating segments, Validus Re and Talbot. Validus Re, the Company’s principal reinsurance operating segment, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating segment, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd’s of London (“Lloyd’s”) and which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yacht and onshore energy business on behalf of the Talbot syndicate and others.
     The Company’s strategy is to concentrate primarily on short-tail risks, which is an area where management believes current prices and terms provide an attractive risk adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”) in exchange for common shares and cash. IPC’s operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to increase the Company’s capital base and gain a strategic advantage in the current reinsurance market. This acquisition created a leading Bermuda carrier in the short-tail reinsurance market that facilitates stronger relationships with major reinsurance intermediaries.
Business Outlook and Trends
     The Company was formed in October 2005 in response to the supply/demand imbalance resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed substantial increases in premium rates in 2006 compared to 2005 levels. During the years ended December 31, 2007 and 2008, the Company experienced increased competition in most lines of business. Capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates in most lines. However, during 2008, the insurance and reinsurance industry incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global financial crisis. In the wake of these events, the January 2009 renewal season saw decreased competition and increased premium rates due to

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relatively scarce capital and increased demand. During 2009, the Company observed reinsurance demand stabilization and industry capital recovery from investment portfolio gains. In 2009, there were few notable large losses affecting the worldwide (re)insurance industry and no major hurricanes making landfall in the United States.
     The January 2010 renewal period saw business being withdrawn from the market, notably catastrophe excess of loss, resulting in the Company writing less business in these lines and reducing the Company’s aggregate loss exposure. Despite the elevated level of catastrophe activity during the first quarter of 2010, principally the Chilean earthquake which stands among the most costly industry losses in history outside of the United States, the Company continues to see increased competition and decreased premium rates in most classes of business. During the July 2010 renewal period, Validus Re experienced continued rate decreases in the U.S. The Talbot segment, has also experienced pricing pressures in most classes of business, with the exception of the property treaty, offshore energy, financial institution and political risk lines, which have been experiencing favorable renewal terms and conditions following recent losses.
Financial Measures
     The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders:
     Annualized return on average equity represents the level of net income available to shareholders generated from the average shareholders’ equity during the period. Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. Percentages for the quarter and interim periods are annualized. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.
                 
    Three Months Ended
    June 30,
    2010   2009
Annualized return on average equity
    19.5 %     26.4 %
 
               
     The decrease in annualized return on average equity for the three months ended June 30, 2010 was driven primarily by an increase in notable loss events incurred. Notable loss events for the three months ended June 30, 2010 were $70.5 million as compared to $11.0 million for the three months ended June 30, 2009. Net income for the three months ended June 30, 2010 increased by $42.2 million, or 30.7% compared to the three months ended June 30, 2009.
     Diluted book value per common share is considered by management to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per common share increased by $1.64, or 5.7%, from $28.66 at March 31, 2010 to $30.30 at June 30, 2010. The increase was substantially due to the earnings generated in the three months ended June 30, 2010, partially offset by dividends of $0.22 per share and per share equivalent paid in the period. Diluted book value per common share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book value per common share. Diluted book value per common share is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise). A reconciliation of diluted book value per common share to book value per common share is presented below in the section entitled “Non-GAAP Financial Measures.”
     Cash dividends per common share are an integral part of the value created for shareholders. The Company declared a quarterly cash dividend of $0.22 per common share in the second quarter of 2010. On August 4, 2010, the Company announced a quarterly cash dividend of $0.22 per each common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on September 30, 2010 to holders of record on September 15, 2010.

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     Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses) and gain on bargain purchase, net of expenses. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the three months ended June 30, 2010 and 2009 was $109.7 million and $92.2 million, respectively. The increase was primarily due to an increase in net premiums earned, partially offset by an increase in loss and loss expenses during the three months ended June 30, 2010. Underwriting income is a Non-GAAP financial measure as described in detail and reconciled in the section below entitled “Underwriting Income.”
Critical Accounting Policies and Estimates
     There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements:
    Reserve for losses and loss expenses;
 
    Premiums;
 
    Reinsurance premiums ceded and reinsurance recoverable; and
 
    Investment valuation.
     Critical accounting policies and estimates are discussed further in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two significant operating segments are Validus Re and Talbot.
Results of Operations
     Validus Re commenced operations on December 16, 2005. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information.

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The following table presents results of operations for the three and six months ended June 30, 2010 and 2009:
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)   2010     2009 (a)     Pro Forma 2009 (c)     2010     2009 (a)     Pro Forma 2009 (c)  
Gross premiums written
  $ 516,861     $ 425,032     $ 552,581     $ 1,387,795     $ 1,034,924     $ 1,396,818  
Reinsurance premiums ceded
    (67,726 )     (62,291 )     (64,486 )     (158,465 )     (134,803 )     (138,467 )
 
                                   
Net premiums written
    449,135       362,741       488,095       1,229,330       900,121       1,258,351  
Change in unearned premiums
    (11,191 )     (34,541 )     (63,697 )     (333,692 )     (253,162 )     (416,486 )
 
                                   
Net premiums earned
    437,944       328,200       424,398       895,638       646,959       841,865  
 
                                               
Losses and loss expenses
    194,894       124,751       116,334       673,425       256,585       287,277  
Policy acquisition costs
    74,126       64,438       74,344       150,302       125,887       145,631  
General and administrative expenses
    52,379       41,200       51,108       105,948       79,279       99,341  
Share compensation expenses
    6,846       5,632       8,107       13,422       12,986       17,950  
 
                                   
Total underwriting deductions
    328,245       236,021       249,893       943,097       474,737       550,199  
 
                                               
Underwriting income (loss) (b)
    109,699       92,179       174,505       (47,459 )     172,222       291,666  
 
                                               
Net investment income
    34,809       26,963       44,540       69,108       53,735       88,987  
Other income
    2,697       1,017       1,036       3,585       1,774       1,800  
Finance expenses
    (13,218 )     (10,752 )     (10,752 )     (28,369 )     (18,475 )     (18,858 )
 
                                   
Operating income (loss) before taxes (b)
    133,987       109,407       209,329       (3,135 )     209,256       363,595  
Tax (expense) benefit
    (4,187 )     976       976       (3,490 )     1,502       1,502  
 
                                   
Net operating income (loss) (b)
    129,800       110,383       210,305       (6,625 )     210,758       365,097  
 
                                               
Net realized gains (losses) on investments
    12,441       (2,650 )     2,430       23,839       (26,071 )     (24,909 )
Net unrealized gains on investments
    41,640       37,249       109,554       57,053       59,402       100,053  
Foreign exchange (losses) gains
    (4,099 )     8,432       10,111       (12,863 )     4,232       2,765  
Transaction expenses
          (15,851 )                 (15,851 )      
 
                                   
Net income
  $ 179,782     $ 137,563     $ 332,400     $ 61,404     $ 232,470     $ 443,006  
 
                                   
Selected ratios:
                                               
Net premiums written / Gross premiums written
    86.9 %     85.3 %     88.3 %     88.6 %     87.0 %     90.1 %
 
                                               
Losses and loss expenses
    44.5 %     38.0 %     27.4 %     75.2 %     39.7 %     34.1 %
Policy acquisition costs
    16.9 %     19.6 %     17.5 %     16.8 %     19.5 %     17.3 %
General and administrative expenses (d)
    13.5 %     14.3 %     14.0 %     13.3 %     14.3 %     13.9 %
 
                                   
Expense ratio
    30.4 %     33.9 %     31.5 %     30.1 %     33.8 %     31.2 %
 
                                   
Combined ratio
    74.9 %     71.9 %     58.9 %     105.3 %     73.5 %     65.3 %
 
                                   
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) and operating income (loss) that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of underwriting income (loss) measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”
 
c)   Pro Forma combined Validus Holdings, Ltd. and IPC Holdings Ltd. income statement for the three months and six months ended June 30, 2009.
 
d)   The general and administrative ratio includes share compensation expenses.

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    Three Months Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)   2010     2009 (a)     Pro Forma 2009 (c)     2010     2009 (a)     Pro Forma 2009 (c)  
Validus Re
                                               
Gross premiums written
  $ 284,328     $ 199,560     $ 327,109     $ 924,623     $ 609,686     $ 971,580  
Reinsurance premiums ceded
    (41,175 )     (43,070 )     (45,265 )     (54,285 )     (56,359 )     (60,023 )
 
                                   
Net premiums written
    243,153       156,490       281,844       870,338       553,327       911,557  
Change in unearned premiums
    18,888       7,207       (21,949 )     (324,376 )     (215,183 )     (378,507 )
 
                                   
Net premiums earned
    262,041       163,697       259,895       545,962       338,144       533,050  
 
                                               
Losses and loss expenses
    123,793       41,121       32,704       472,713       96,583       127,275  
Policy acquisition costs
    37,979       29,120       39,026       81,482       57,697       77,441  
General and administrative expenses
    10,983       14,149       24,057       27,295       27,941       48,003  
Share compensation expenses
    1,749       1,548       4,023       3,378       3,220       8,184  
 
                                   
Total underwriting deductions
    174,504       85,938       99,810       584,868       185,441       260,903  
 
                                   
Underwriting income (loss) (b)
    87,537       77,759       160,085       (38,906 )     152,703       272,147  
 
                                   
 
                                               
Talbot
                                               
Gross premiums written
  $ 253,710     $ 235,113     $ 235,113     $ 524,251     $ 463,033     $ 463,033  
Reinsurance premiums ceded
    (47,728 )     (28,862 )     (28,862 )     (165,259 )     (116,239 )     (116,239 )
 
                                   
Net premiums written
    205,982       206,251       206,251       358,992       346,794       346,794  
Change in unearned premiums
    (30,079 )     (41,748 )     (41,748 )     (9,316 )     (37,979 )     (37,979 )
 
                                   
Net premiums earned
    175,903       164,503       164,503       349,676       308,815       308,815  
Losses and loss expenses
    71,101       83,630       83,630       200,712       160,002       160,002  
Policy acquisition costs
    38,647       36,114       36,114       73,592       69,271       69,271  
General and administrative expenses
    24,960       21,927       21,927       50,508       42,141       42,141  
Share compensation expenses
    1,468       2,098       2,098       3,027       4,433       4,433  
 
                                   
Total underwriting deductions
    136,176       143,769       143,769       327,839       275,847       275,847  
 
                                   
Underwriting income (b)
    39,727       20,734       20,734       21,837       32,968       32,968  
 
                                   
 
                                               
Corporate & Eliminations
                                               
Gross premiums written
  $ (21,177 )   $ (9,641 )   $ (9,641 )   $ (61,079 )   $ (37,795 )   $ (37,795 )
Reinsurance premiums ceded
    21,177       9,641       9,641       61,079       37,795       37,795  
 
                                   
Net premiums written
                                   
Change in unearned premiums
                                   
 
                                   
Net premiums earned
                                   
 
                                               
Losses and loss expenses
                                   
Policy acquisition costs
    (2,500 )     (796 )     (796 )     (4,772 )     (1,081 )     (1,081 )
General and administrative expenses
    16,436       5,124       5,124       28,145       9,197       9,197  
Share compensation expenses
    3,629       1,986       1,986       7,017       5,333       5,333  
 
                                   
Total underwriting deductions
    17,565       6,314       6,314       30,390       13,449       13,449  
 
                                   
Underwriting (loss) (b)
    (17,565 )     (6,314 )     (6,314 )     (30,390 )     (13,449 )     (13,449 )
 
                                   
 
                                               
 
                                   
Total underwriting income (loss) (b)
  $ 109,699     $ 92,179     $ 174,505     $ (47,459 )   $ 172,222     $ 291,666  
 
                                   
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”
 
c)   Pro Forma combined Validus Holdings, Ltd. and IPC Holdings Ltd. income statement for the three and six months ended June 30, 2009.

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Three Months Ended June 30, 2010 compared to Three Months Ended June 30, 2009
     Net income for the three months ended June 30, 2010 was $179.8 million compared to net income of $137.6 million for the three months ended June 30, 2009, an increase of $42.2 million or 30.7%. The primary factors driving the increase in net income were:
  Increase in underwriting income of $17.5 million due primarily to an increase in net premiums earned of $109.7 million primarily relating to the IPC Acquisition. This was partially offset by an increase in underwriting deductions of $92.2 million including $70.5 million of notable loss events included in loss and loss expenses. Underwriting deductions also include policy acquisition costs, general and administrative expenses and share compensation expenses;
  Decrease in transaction expenses of $15.9 million relating to the IPC Acquisition that were absent in the three months ended June 30, 2010;
  Increase in net investment income and net realized gains on investments of $7.8 million and $15.1 million respectively, and;
  Increase in net unrealized gains on investments of $4.4 million.
The above items were partially offset by the following factor:
  An adverse movement in foreign exchange of $12.5 million.
The change in net income for the three months ended June 30, 2010 of $42.2 million as compared to the three months ended June 30, 2009 is described in the following table:
                                 
    Three Months Ended June 30, 2010  
    Increase (Decrease) Over the Three Months Ended June 30, 2009  
                    Corporate and        
(Dollars in thousands)   Validus Re (a)     Talbot     Eliminations     Total (a)  
Notable losses — net loss and loss expenses (c)
  $ (59,571 )   $ (10,920 )   $     $ (70,491 )
Notable losses — net reinstatement premiums (c)
    7,721       (4,420 )           3,301  
Other underwriting income (loss)
    61,628       34,333       (11,251 )     84,710  
 
                       
Underwriting income (loss) (b)
    9,778       18,993       (11,251 )     17,520  
Net investment income
    9,131       (442 )     (843 )     7,846  
Other income
    575       2,173       (1,068 )     1,680  
Finance expenses
    (630 )     3,444       (5,280 )     (2,466 )
 
                       
 
    18,854       24,168       (18,442 )     24,580  
Taxes
    (66 )     (5,098 )     1       (5,163 )
 
                       
 
    18,788       19,070       (18,441 )     19,417  
 
                               
Transaction expenses
                15,851       15,851  
Net realized gains (losses) on investments
    12,503       2,588             15,091  
Net unrealized gains on investments
    (96 )     4,487             4,391  
Foreign exchange (losses) gains
    (2,670 )     (9,792 )     (69 )     (12,531 )
 
                       
 
                               
Net income (loss)
  $ 28,525     $ 16,353     $ (2,659 )   $ 42,219  
 
                       
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.

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(b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”
 
(c)   Notable losses for the three months ended include: Deepwater Horizon, Aban Pearl, Bangkok riots, and Perth hailstorm.
Gross Premiums Written
     Gross premiums written for the three months ended June 30, 2010 were $516.9 million compared to $425.0 million for the three months ended June 30, 2009, an increase of $91.8 million or 21.6%. The increase in gross premiums written was driven primarily by the impact of the IPC Acquisition. The property and marine lines increased by $84.8 million and $7.9 million, respectively, while the specialty lines decreased by $1.0 million. Details of gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 340,289       65.8 %   $ 255,442       60.1 %     33.2 %
Marine
    92,380       17.9 %     84,431       19.9 %     9.4 %
Specialty
    84,192       16.3 %     85,159       20.0 %     (1.1 )%
 
                               
Total
  $ 516,861       100.0 %   $ 425,032       100.0 %     21.6 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re gross premiums written for the three months ended June 30, 2010 were $284.3 million compared to $199.6 million for the three months ended June 30, 2009, an increase of $84.8 million or 42.5%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 261,568       92.0 %   $ 183,898       92.1 %     42.2 %
Marine
    15,410       5.4 %     3,957       2.0 %     289.4 %
Specialty
    7,350       2.6 %     11,705       5.9 %     (37.2 )%
 
                               
Total
  $ 284,328       100.0 %   $ 199,560       100.0 %     42.5 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The impact of the IPC Acquisition has been the primary driver for the increase in gross premiums written. The additional capacity was used to increase lines on renewing deals and to write new business totaling $47.3 million. The Singapore branch of Validus Re commenced writing business in January 2010 and contributed an additional $10.2 million in gross premiums written during the three months ended June 30, 2010.
     The increase in gross premiums written in the property lines of $77.7 million was due to primarily to a $48.9 million increase in new and renewing business and the $10.2 million in new premiums contributed by the Singapore branch, as described above. There was $6.3 million increase in earned premium adjustments. The increase in gross premiums written of $11.5 million in the marine lines was due primarily to a $7.9 million increase in reinstatement premiums mainly relating to the Aban Pearl and Deepwater Horizon events. The decrease in gross premiums written in specialty lines of $4.4 million was primarily due to a $3.1 million decrease in premiums in new and renewing business.

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     Gross premiums written under the quota share, surplus treaty and excess of loss contracts between Validus Re and Talbot increased by $11.6 million on the property lines, $0.2 million on the marine lines and decreased by $0.3 million of the specialty lines as compared to the three months ended June 30, 2009. These reinsurance agreements with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended June 30, 2010 were $253.7 million compared to $235.1 million for the three months ended June 30, 2009, an increase of $18.6 million or 7.9%. The $253.7 million of gross premiums written translated at 2009 rates of exchange would have been $255.7 million during the three months ended June 30, 2010, an increase of $2.0 million. Details of Talbot gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 97,529       38.4 %   $ 78,769       33.5 %     23.8 %
Marine
    79,355       31.3 %     82,657       35.2 %     (4.0 )%
Specialty
    76,826       30.3 %     73,687       31.3 %     4.3 %
 
                               
Total
  $ 253,710       100.0 %   $ 235,113       100.0 %     7.9 %
 
                               
     The increase in gross premiums written in the property lines of $18.8 million was primarily due to $16.1 million of gross premiums written on the onshore energy lines. The onshore energy team starting writing business during the first quarter of 2009 which is the main reason for the increase over the three months ended June 30, 2009. In addition, there was a $4.9 million increase in gross premiums written in the property treaty lines, most of which was written by Validus Reaseguros, Inc., which acts as an approved Lloyd’s cover holder for Syndicate 1183 targeting the Latin American and Caribbean markets. This was offset by a reduction of $2.6 million on the property direct lines.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended June 30, 2010 were $67.7 million compared to $62.3 million for the three months ended June 30, 2009, an increase of $5.4 million or 8.7%. Reinsurance premiums ceded on the marine and specialty lines increased by $8.3 million and $0.6 million respectively, partially offset by a decrease in the property lines of $3.4 million, as described below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 53,828       79.5 %   $ 57,238       91.9 %     (6.0 )%
Marine
    10,923       16.1 %     2,633       4.2 %     314.8 %
Specialty
    2,975       4.4 %     2,420       3.9 %     22.9 %
 
                               
Total
  $ 67,726       100.0 %   $ 62,291       100.0 %     8.7 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re reinsurance premiums ceded for the three months ended June 30, 2010 were $41.2 million compared to $43.1 million for the three months ended June 30, 2009, a decrease of $1.9 million or 4.4%.

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    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 33,933       82.4 %   $ 42,705       99.1 %     (20.5 )%
Marine
    7,242       17.6 %     209       0.5 %   NM
Specialty
          0.0 %     156       0.4 %     (100.0 )%
 
                               
Total
  $ 41,175       100.0 %   $ 43,070       100.0 %     (4.4 )%
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
NM: Not meaningful
     Reinsurance premiums ceded on the property lines decreased by $8.8 million, primarily due to a reduction of $11.2 million in U.S. property cover, offset by an increase of $5.4 million in international property cover. Reinsurance premiums ceded on the marine lines increased by $7.0 million, due to the purchase of $6.3 million in industry loss warranties.
Talbot. Talbot reinsurance premiums ceded for the three months ended June 30, 2010 were $47.7 million compared to $28.9 million for the three months ended June 30, 2009, an increase of $18.9 million or 65.4%. This increase was primarily due to an increase in quota share costs following the increase in premiums written under the energy-on shore lines, additional surplus and quota share costs following the increase in premiums written through Talbot’s overseas offices.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 38,702       81.1 %   $ 21,758       75.3 %     77.9 %
Marine
    6,066       12.7 %     4,607       16.0 %     31.7 %
Specialty
    2,960       6.2 %     2,497       8.7 %     18.5 %
 
                               
Total
  $ 47,728       100.0 %   $ 28,862       100.0 %     65.4 %
 
                               
Reinsurance premiums ceded on the property lines increased by $16.9 million. The increase was due primarily to the increased premiums written under the onshore energy lines. In addition, reinsurance premiums ceded under third party quota share, surplus treaty and excess of loss contracts on the property lines increased by $5.4 million, as compared to the three months ended June 30, 2009. Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re for the three months ended June 30, 2010 were $21.2 million compared to $9.6 million for the three months ended June 30, 2009, an increase of $11.6 million. These reinsurance agreements with Validus Re are eliminated upon consolidation.
Net Premiums Written
     Net premiums written for the three months ended June 30, 2010 were $449.1 million compared to $362.7 million for the three months ended June 30, 2009, an increase of $86.4 million, or 23.8%. The ratios of net premiums written to gross premiums written for the three months ended June 30, 2010 and 2009 were 86.9% and 85.3%, respectively. Details of net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 286,463       63.8 %   $ 198,204       54.7 %     44.5 %
Marine
    81,455       18.1 %     81,798       22.5 %     (0.4 )%
Specialty
    81,217       18.1 %     82,739       22.8 %     (1.8 )%
 
                               
Total
  $ 449,135       100.0 %   $ 362,741       100.0 %     23.8 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.

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Validus Re. Validus Re net premiums written for the three months ended June 30, 2010 were $243.2 million compared to $156.5 million for the three months ended June 30, 2009, an increase of $86.7 million or 55.4%. Details of net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 227,635       93.6 %   $ 141,193       90.2 %     61.2 %
Marine
    8,168       3.4 %     3,748       2.4 %     117.9 %
Specialty
    7,350       3.0 %     11,549       7.4 %     (36.4 )%
 
                               
Total
  $ 243,153       100.0 %   $ 156,490       100.0 %     55.4 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The increase in Validus Re net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 85.5% and 78.4% for the three months ended June 30, 2010 and 2009, respectively, reflecting the increase in gross premiums written while reinsurance premiums ceded remained relatively stable.
Talbot. Talbot net premiums written for the three months ended June 30, 2010 were $206.0 million compared to $206.3 million for the three months ended June 30, 2009, a decrease of $0.3 million or 0.1%. Details of net premiums written by line of business are provided below:
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 58,827       28.5 %   $ 57,011       27.6 %     3.2 %
Marine
    73,289       35.6 %     78,050       37.9 %     (6.1 )%
Specialty
    73,866       35.9 %     71,190       34.5 %     3.8 %
 
                               
Total
  $ 205,982       100.0 %   $ 206,251       100.0 %     (0.1 )%
 
                               
     The decrease in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded, in particular the lower net premium resulting from the increase in reinsurance premiums. The ratios of net premiums written to gross premiums written for the three months ended June 30, 2010 and 2009 were 81.2% and 87.7%, respectively, reflecting the significant increase in quota share costs on the onshore energy lines.
Change in Unearned Premiums
     Change in unearned premiums for the three months ended June 30, 2010 was ($11.2) million compared to ($34.5) million for the three months ended June 30, 2009, a change of $23.3 million or 67.6%.

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    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (93,012 )   $ (60,905 )     52.7 %
Change in prepaid reinsurance premium
    81,821       26,364       210.4 %
 
                   
Net change in unearned premium
  $ (11,191 )   $ (34,541 )     (67.6 )%
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re’s net change in unearned premiums for the three months ended June 30, 2010 were $18.9 million compared to $7.2 million for the three months ended June 30, 2009, a change of $11.7 million or 162.1%.
                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (75,680 )   $ (19,410 )     289.9 %
Change in prepaid reinsurance premium
    94,568       26,617       255.3 %
 
                   
Net change in unearned premium
  $ 18,888     $ 7,207       162.1 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The Validus Re net change in unearned premium has increased for the three months ended June 30, 2010 primarily due to the earning effect from historical IPC gross premiums written.
Talbot. The Talbot net change in unearned premiums for the three months ended June 30, 2010 was ($30.1) million compared to ($41.7) million for the three months ended June 30, 2009, a change of $11.7 million, or 28.0%.
                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (17,332 )   $ (41,495 )     (58.2 )%
Change in prepaid reinsurance premium
    (12,747 )     (253 )       NM
 
                   
Net change in unearned premium
  $ (30,079 )   $ (41,748 )     (28.0 )%
 
                   
 
NM: Not meaningful
     The Talbot net change in unearned premium has decreased for the three months ended June 30, 2010 primarily due to the seasonality of earnings of gross premiums written previously to the current quarter.
Net Premiums Earned
     Net premiums earned for the three months ended June 30, 2010 were $437.9 million compared to $328.2 million for the three months ended June 30, 2009, an increase of $109.7 million or 33.4%. The increase in net premiums earned was driven by increased premiums earned of $98.3 million and $11.4 million in the Validus Re and Talbot segments, respectively.

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    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30 , 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 223,597       51.0 %   $ 143,843       43.8 %     55.4 %
Marine
    111,565       25.5 %     100,953       30.8 %     10.5 %
Specialty
    102,782       23.5 %     83,404       25.4 %     23.2 %
 
                               
Total
  $ 437,944       100.0 %   $ 328,200       100.0 %     33.4 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re net premiums earned for the three months ended June 30, 2010 were $262.0 million compared to $163.7 million for the three months ended June 30, 2009, an increase of $98.3 million or, 60.1%.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 186,444       71.1 %   $ 110,185       67.3 %     69.2 %
Marine
    48,154       18.4 %     33,584       20.5 %     43.4 %
Specialty
    27,443       10.5 %     19,928       12.2 %     37.7 %
 
                               
Total
  $ 262,041       100.0 %   $ 163,697       100.0 %     60.1 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The increase in net premiums earned was due primarily to $18.8 million of historical IPC premiums earned from business in force at the time of the IPC Acquisition, and an increase of $54.4 million of premiums earned on contracts incepting in the first quarter of the year which is consistent with the increase in new and renewing premiums compared to the three months ended June 30, 2009. In addition, there was a $8.3 million increase in reinstatement premiums earned, and a $9.2 million increase in related party premiums earned through the Talbot quota share, surplus treaty and excess of loss.
Talbot. Talbot net premiums earned for the three months ended June 30, 2010 were $175.9 million compared to $164.5 million for the three months ended June 30, 2009, an increase of $11.4 million or 6.9%.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 37,152       21.1 %   $ 33,658       20.4 %     10.4 %
Marine
    63,413       36.1 %     67,369       41.0 %     (5.9 )%
Specialty
    75,338       42.8 %     63,476       38.6 %     18.7 %
 
                               
Total
  $ 175,903       100.0 %   $ 164,503       100.0 %     6.9 %
 
                               
     The increase in net premiums earned is due primarily to the increased levels of gross premiums written by the onshore energy, aviation and other treaty classes over the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, as discussed above.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended June 30, 2010 were $194.9 million compared to $124.8 million for the three months ended June 30, 2009, an increase of $70.1 million or 56.2%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended June 30, 2010 and 2009 were 44.5% and 38.0%, respectively. Details of loss ratios by line of business are provided below.

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    Three Months Ended   Three Months Ended    
    June 30, 2010   June 30, 2009 (a)   % Change
Property
    31.3 %     16.8 %     14.5  
Marine
    76.0 %     48.6 %     27.4  
Specialty
    38.9 %     61.8 %     (22.9 )
All lines
    44.5 %     38.0 %     6.5  
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended June 30, 2010:
                                 
    Three Months Ended June 30, 2010  
(Dollars in thousands)   Validus     Talbot     Eliminations     Total  
Gross reserves at period beginning
  $ 1,025,073     $ 1,164,550     $ (212,734 )   $ 1,976,889  
Losses recoverable at period beginning
    (57,480 )     (354,210 )     212,734       (198,956 )
 
                       
Net reserves at period beginning
    967,593       810,340             1,777,933  
 
                       
 
                               
Incurred losses — current period
    141,670       102,787             244,457  
Incurred losses — change in prior accident years
    (17,877 )     (31,686 )           (49,563 )
 
                       
Incurred losses
    123,793       71,101             194,894  
 
                       
 
                               
Paid losses
    (112,582 )     (65,850 )           (178,432 )
Foreign exchange
    (9,471 )     (398 )           (9,869 )
 
                       
Net reserves at period end
    969,333       815,193             1,784,526  
 
                       
Losses recoverable
    60,145       327,522       (194,063 )     193,604  
 
                       
Gross reserves at period end
    1,029,478       1,142,715       (194,063 )     1,978,130  
 
                       
     The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. Favorable loss development on prior years totaled $49.6 million. $17.9 million of the favorable loss development on prior years related to the Validus Re segment and $31.7 million related to the Talbot segment. Favorable loss reserve development benefitted the Company’s loss ratio by 11.3 percentage points for the three months ended June 30, 2010. For the three months ended June 30, 2010, the Company incurred $70.5 million from notable loss events described below, which represented 16.1 percentage points of the loss ratio. During the three months ended June 30, 2010, the Company also incurred $20.0 million for a reserve for potential development on 2010 events, which represented 4.6 percentage points on the loss ratio. For the three months ended June 30, 2009, the Company incurred $11.0 million of losses attributable to a commercial flight loss, which represented 3.4 percentage points of the loss ratio. The Company’s loss ratio, excluding prior year development and notable loss events for the three months ended June 30, 2010 and 2009 were 39.7% and 38.6%, respectively.
     Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation of recent losses. The Company’s actual ultimate net loss may vary materially from estimates.
     At June 30, 2010 and 2009, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the critical accounting policies and estimates as discussed in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The Company did not make any significant changes in the assumptions or methodology used in its reserving process for the three months ended June 30, 2010.

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    As at June 30, 2010  
                    Total Gross Reserve for  
(Dollars in thousands)   Gross Case Reserves     Gross IBNR     Losses and Loss Expenses  
Property
  $ 487,032     $ 472,328     $ 959,360  
Marine
    314,443       295,970       610,413  
Specialty
    150,746       257,611       408,357  
 
                 
Total
  $ 952,221     $ 1,025,909     $ 1,978,130  
 
                 
                         
    As at June 30, 2010  
                    Total Net Reserve for  
(Dollars in thousands)   Net Case Reserves     Net IBNR     Losses and Loss Expenses  
Property
  $ 457,214     $ 459,665     $ 916,879  
Marine
    256,096       266,363       522,459  
Specialty
    129,523       215,665       345,188  
 
                 
Total
  $ 842,833     $ 941,693     $ 1,784,526  
 
                 
During the three months ended June 30, 2010, the Company incurred and estimated $70.5 million of losses in connection with the notable loss events below, which represented 16.1 percentage points of the loss ratio. During the three months ended June 30, 2009, the Company incurred $11.0 million in connection with notable events, which represented 3.4 percentage points of the loss ratio.
                                                     
Second Quarter 2010 Notable Loss   Three months ended June 30, 2010  
Events (1)   Validus Re     Talbot     Total  
        Losses and             Losses and             Losses and        
        Loss             Loss             Loss        
(Dollars in thousands)   Description   Expenses (2)     % of NPE     Expenses (2)     % of NPE     Expenses (2)     % of NPE  
Deepwater Horizon
  Oil rig and spill   $ 33,681       12.9 %   $ 10,420       5.9 %   $ 44,101       10.1 %
Aban Pearl
  Oil rig     10,000       3.8 %     500       0.3 %     10,500       2.4 %
Bangkok riots
  Terrorism     7,500       2.9 %                 7,500       1.7 %
Perth hailstorm
  Hailstorm     8,390       3.1 %                 8,390       1.9 %
 
                                     
Total
      $ 59,571       22.7 %   $ 10,920       6.2 %   $ 70,491       16.1 %
 
                                     
                                                     
Second Quarter 2009 Notable Loss   Three months ended June 30, 2009  
Events   Validus Re     Talbot     Total  
        Losses and             Losses and             Losses and        
        Loss             Loss             Loss        
(Dollars in thousands)   Description   Expenses (2)     % of NPE     Expenses (2)     % of NPE     Expenses (2)     % of NPE  
Commercial Flight
  Specialty loss   $ 2,715       1.7 %   $ 8,300       5.0 %   $ 11,015       3.4 %
 
                                     
Total
      $ 2,715       1.7 %   $ 8,300       5.0 %   $ 11,015       3.4 %
 
                                     
 
(1)   These 2010 notable loss event amounts are based on management’s estimates following a review of the Company’s potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events may vary materially from these estimates.
 
(2)   Net of reinsurance but not net of reinstatement premiums. Reinstatement premiums were $3.3 million for the three months ended June 30, 2010.

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Validus Re. Validus Re losses and loss expenses for the three months ended June 30, 2010 were $123.8 million compared to $41.1 million for the three months ended June 30, 2009, an increase of $82.7 million or 201.0%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 47.2% and 25.1% for the three months ended June 30, 2010 and 2009, respectively. Favorable loss development on prior years totaled $17.9 million and benefited the Validus Re loss ratio by 6.8 percentage points. For the three months ended June 30, 2010, Validus Re incurred notable loss events as identified above of $59.6 million, which represented 22.7 percentage points of the loss ratio. For the three months ended June 30, 2009, Validus Re incurred $2.7 million of notable losses, which represented 1.7 percentage points of the loss ratio. Validus Re segment loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2010 and 2009 were 31.4% and 25.2%, respectively. Details of loss ratios by line of business and period of incurrence are provided below.
                         
    Three Months Ended June 30,  
                       
    2010     2009 (a)     % Change  
Property — current year
    40.6 %     21.2 %     19.4  
Property — change in prior accident years
    (7.3 )%     (2.7 )%     (4.6 )
 
                 
Property — loss ratio
    33.3 %     18.5 %     14.8  
 
                       
Marine — current year
    117.5 %     39.7 %     77.8  
Marine — change in prior accident years
    (7.5 )%     0.0 %     (7.5 )
 
                 
Marine — loss ratio
    110.0 %     39.7 %     70.3  
 
                       
Specialty — current year
    34.3 %     37.1 %     (2.8 )
Specialty — change in prior accident years
    (2.3 )%     0.0 %     (2.3 )
 
                 
Specialty – loss ratio
    32.0 %     37.1 %     (5.1 )
 
                       
All lines — current year
    54.1 %     26.9 %     27.2  
All lines — change in prior accident years
    (6.9 )%     (1.8 )%     (5.1 )
 
                 
All lines — loss ratio
    47.2 %     25.1 %     22.1  
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     For the three months ended June 30, 2010, Validus Re property lines include $75.7 million related to current year losses and $13.6 million of favorable development relating to prior accident years. This favorable development is attributable to reduced loss estimates for the U.K. flood loss and windstorm Kyrill, as well as lower expected claim development elsewhere. For the three months ended June 30, 2010, Validus Re’s property lines incurred $8.4 million of notable losses, which represented 4.5 percentage points of the property line loss ratio. For the three months ended June 30, 2009, Validus Re’s property lines did not experience any notable loss events. Validus Re property lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2010 and 2009 were 36.1% and 21.2%, respectively.
     For the three months ended June 30, 2010, Validus Re marine lines include $56.6 million related to current year losses and $3.7 million of favorable development relating to prior accident years. For the three months ended June 30, 2010, Validus Re’s marine lines incurred $43.7 million of notable losses, which represented 90.7 percentage points of the marine lines loss ratio. For the three months ended June 30, 2009, Validus Re’s marine lines did not experience any notable loss events. Validus Re marine line loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2010 and 2009 were 26.8 and 39.7%, respectively.

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     For the three months ended June 30, 2010, Validus Re specialty lines include $9.4 million related to current year losses and $0.6 million of favorable development relating to prior accident years. For the three months ended June 30, 2010, Validus Re’s specialty lines incurred $7.5 million of notable losses, which represented 27.3 percentage points of the specialty line loss ratio. For the three months ended June 30, 2009, Validus Re’s specialty lines incurred $2.7 million of notable losses, which represented 13.6 percentage points of the specialty loss ratio. Validus Re specialty lines loss ratios, excluding prior year development and the loss events identified above, for the three months ended June 30, 2010 and 2009 were 7.0% and 23.5%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended June 30, 2010 were $71.1 million compared to $83.6 million for the three months ended June 30, 2009, a decrease of $12.5 million, or 15.0%. The loss ratio was 40.4% and 50.8% for the three months ended June 30, 2010 and 2009, respectively. For the three months ended June 30, 2010 Talbot incurred losses of $102.8 million related to current year losses and $31.7 million in favorable development relating to prior accident years. For the three months ended June 30, 2010, Talbot incurred $10.9 million of notable losses, which represented 6.2 percentage points of the loss ratio. For the three months ended June 30, 2009, Talbot incurred $8.3 million of notable losses, or 5.0 percentage points of the loss ratio. Talbot loss ratios, excluding prior year loss development and loss events identified above, for the three months ended June 30, 2010 and three months ended June 30, 2009 were 52.2% and 52.0% respectively. Details of loss ratios by line of business and calendar period are provided below.
                         
    Three Months Ended June 30,  
                       
    2010     2009     % Change  
Property — current year
    48.0 %     34.5 %     13.5  
Property — change in prior accident years
    (26.5 )%     (23.5 )%     (3.0 )
 
                 
Property — loss ratio
    21.5 %     11.0 %     10.5  
 
                       
Marine — current year
    67.3 %     59.8 %     7.5  
Marine — change in prior accident years
    (17.0 )%     (6.7 )%     (10.3 )
 
                 
Marine — loss ratio
    50.3 %     53.1 %     (2.8 )
 
                       
Specialty — current year
    56.1 %     66.2 %     (10.1 )
Specialty — change in prior accident years
    (14.7 )%     3.4 %     (18.1 )
 
                 
Specialty – loss ratio
    41.4 %     69.6 %     (28.2 )
 
                       
All lines — current year
    58.4 %     57.0 %     1.4  
All lines — change in prior accident years
    (18.0 )%     (6.2 )%     (11.8 )
 
                 
All lines — loss ratio
    40.4 %     50.8 %     (10.4 )
     For the three months ended June 30, 2010, Talbot property lines include $17.8 million related to current year losses and $9.8 million of favorable development relating to prior accident years. The favorable development is attributable to lower than expected claim development on the property facultative and binder accounts, together with favorable development on hurricanes Katrina and Ike. Talbot property line loss ratio, excluding prior year development and loss events noted above for the three months ended June 30, 2010 and 2009 were 48.0% and 34.5%, respectively.
     For the three months ended June 30, 2010, Talbot marine lines include $42.7 million related to current year losses and $10.8 million of favorable development relating to prior accident years. The prior year favorable development is primarily due to lower than expected loss development on the Hull lines. For the three months ended June 30, 2010, Talbot’s marine lines incurred $10.9 million of notable losses, which represented 17.2 percentage points of the loss ratio. For the three months ended June 30, 2009, Talbot’s marine lines did not experience any notable loss events. Talbot marine lines loss ratios, excluding prior year development and loss events noted above, for the three months ended June 30, 2010 and 2009 were 50.1% and 59.8%, respectively.

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     For the three months ended June 30, 2010, Talbot specialty lines include $42.3 million relating to current year losses and $11.0 million due to favorable development on prior accident years. The favorable development in prilarily due to lower than expected claims across most specialty sub classes. For the three months ended June 30, 2009, Talbot’s specialty lines incurred $8.3 million of losses attributable to a commercial flight loss, which represented 13.1 percentage points of the loss ratio. Talbot specialty lines loss ratios, excluding prior year development and the loss events identified above, for the three months ended June 30, 2010 and 2009 were 56.1% and 53.1%, respectively.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended June 30, 2010 were $74.1 million compared to $64.4 million for the three months ended June 30, 2009, an increase of $9.7 million or 15.0%. Policy acquisition costs as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 16.9% and 19.6%, respectively. The changes in policy acquisition costs are due to the factors described below.
                                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 30,614       41.3 %     13.7 %   $ 22,796       35.4 %     15.8 %     34.3 %
Marine
    22,982       31.0 %     20.6 %     23,590       36.6 %     23.4 %     (2.6 )%
Specialty
    20,530       27.7 %     20.0 %     18,052       28.0 %     21.6 %     13.7 %
 
                                           
Total
  $ 74,126       100.0 %     16.9 %   $ 64,438       100.0 %     19.6 %     15.0 %
 
                                           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re policy acquisition costs for the three months ended June 30, 2010 were $38.0 million compared to $29.1 million for the three months ended June 30, 2009, an increase of $8.9 million or 30.4%.
                                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 27,182       71.6 %     14.6 %   $ 18,052       62.0 %     16.4 %     50.6 %
Marine
    7,707       20.3 %     16.0 %     8,290       28.5 %     24.7 %     (7.0 )%
Specialty
    3,090       8.1 %     11.3 %     2,778       9.5 %     13.9 %     11.2 %
 
                                           
Total
  $ 37,979       100.0 %     14.5 %   $ 29,120       100.0 %     17.8 %     30.4 %
 
                                           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Policy acquisition costs include brokerage, commission and excise tax and are generally driven by contract terms and are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Validus Re policy acquisition costs as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 14.5% and 17.8%, respectively. The Validus Re policy acquisition ratio decrease on the property and marine lines is primarily due to the effects of the earned premium adjustments and the impact of reinstatement premiums earned with lower related policy acquisition costs for three months ended June 30, 2010. The Validus Re policy acquisition cost ratio decreased on the specialty lines for three months ended June 30, 2010 due primarily to an adjustment to a profit commission in IPC related business.
Talbot. Talbot policy acquisition costs for the three months ended June 30, 2010 were $38.6 million compared to $36.1 million for the three months ended June 30, 2009, an increase of $2.5 million or 7.0%.

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    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 5,824       15.1 %     15.7 %   $ 5,540       15.3 %     16.5 %     5.1 %
Marine
    15,314       39.6 %     24.1 %     15,300       42.4 %     22.7 %     0.1 %
Specialty
    17,509       45.3 %     23.2 %     15,274       42.3 %     24.1 %     14.6 %
 
                                           
Total
  $ 38,647       100.0 %     22.0 %   $ 36,114       100.0 %     22.0 %     7.0 %
 
                                           
     Policy acquisition costs as a percent of net premiums earned were 22.0% in each of the three months ended June 30, 2010 and 2009.
General and Administrative Expenses
     General and administrative expenses for the three months ended June 30, 2010 were $52.4 million compared to $41.2 million for the three months ended June 30, 2009, an increase of $11.2 million or 27.1%. The increase was a result of increased expenses in the Talbot and Corporate segments, offset by a decrease in the Validus Re segment.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    General and     General and     General and     General and        
    Adminstrative     Adminstrative     Adminstrative     Adminstrative        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 10,983       21.0 %   $ 14,149       34.4 %     (22.4 )%
Talbot
    24,960       47.6 %     21,927       53.2 %     13.8 %
Corporate & Eliminations
    16,436       31.4 %     5,124       12.4 %     220.8 %
 
                               
Total
  $ 52,379       100.0 %   $ 41,200       100.0 %     27.1 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     General and administrative expenses of $52.4 million in the three months ended June 30, 2010 represents 12.0% percentage points of the expense ratio. Share compensation expense is discussed in the following section.
Validus Re. Validus Re general and administrative expenses for the three months ended June 30, 2010 were $11.0 million compared to $14.1 million for the three months ended June 30, 2009, a decrease of $3.2 million or 22.4%. General and administrative expenses have decreased primarily as a result of a decrease in salaries and benefits driven by the reallocation of staff into the Corporate segment from the Validus Re segment over the three months ended June 30, 2009. General and administrative expenses are generally comprised of salaries and benefits, professional fees, rent and office expenses. Validus Re’s general and administrative expenses as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 4.2% and 8.6%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended June 30, 2010 were $25.0 million compared to $21.9 million for the three months ended June 30, 2009, an increase of $3.0 million or 13.8%. General and administrative expenses have increased primarily as a result of an increase of $2.0 million in Talbot’s syndicate costs, Lloyd’s subscription and central fund costs due to higher gross premiums written. Talbot’s general and administrative expenses as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 14.2% and 13.3%, respectively.
     Corporate & Eliminations. Corporate general and administrative expenses for the three months ended June 30, 2010 were $16.4 million compared to $5.1 million for the three months ended June 30, 2009, an increase of $11.3 million or 220.8%. During the first quarter of 2010, to better align the Company’s operating and reporting structure with its current strategy, there was a change in segment structure. This change was to allocate all ‘non-core

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underwriting’ expenses, predominantly general and administration and stock compensation expenses to the Corporate segment. Prior periods have not been restated as the change is immaterial to the Consolidated Financial Statements. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other cost relating to the Company as a whole. In addition, general and administrative expenses have increased as a result of an increase in staff from 66 at June 30, 2009 to 89 at June 30, 2010. There was an increase of $2.6 million in general legal and corporate expenses for the three months ended June 30, 2010.
Share Compensation Expenses
     Share compensation expenses for the three months ended June 30, 2010 were $6.8 million compared to $5.6 million for the three months ended June 30, 2009, an increase of $1.2 million or 21.6%. These expenses are non-cash and have no net effect on total shareholders’ equity, as they are balanced by an increase in additional paid-in capital.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2010     June 30, 2009 (a)        
    Share     Share     Share     Share        
    Compensation     Compensation     Compensation     Compensation        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 1,749       25.6 %   $ 1,548       27.4 %     13.0 %
Talbot
    1,468       21.4 %     2,098       37.3 %     (30.0 )%
Corporate & Eliminations
    3,629       53.0 %     1,986       35.3 %     82.7 %
 
                               
Total
  $ 6,846       100.0 %   $ 5,632       100.0 %     21.6 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Share compensation expenses of $6.8 million in the three months ended June 30, 2010 represent 1.5 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expenses for the three months ended June 30, 2010 were $1.7 million compared to $1.5 million for the three months ended June 30, 2009. Share compensation expenses as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 0.7% and 0.9%, respectively.
Talbot. Talbot share compensation expenses for the three months ended June 30, 2010 were $1.5 million compared to $2.1 million for the three months ended June 30, 2009. The decrease from the prior year was due to the impact of accelerated vesting during 2009. Share compensation expenses as a percent of net premiums earned for the three months ended June 30, 2010 and 2009 were 0.8% and 1.3%, respectively.
Corporate & Eliminations. Corporate share compensation expenses for the three months ended June 30, 2010 were $3.6 million compared to $2.0 million for the three months ended June 30, 2009, an increase of $1.6 million or 82.7%.
Selected Ratios
     The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The net loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses (including share compensation expenses) by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2010 and 2009.
                         
    Three Months Ended     Three Months Ended      
    June 30, 2010     June 30, 2009 (a)     % Change  
Losses and loss expenses
    44.5 %     38.0 %     6.5  
Policy acquisition costs
    16.9 %     19.6 %     (2.7 )
General and administrative expenses (b)
    13.5 %     14.3 %     (0.8 )
 
                 
Expense ratio
    30.4 %     33.9 %     (3.5 )
 
                 
Combined ratio
    74.9 %     71.9 %     3.0  
 
                 

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    Three Months Ended     Three Months Ended      
Validus Re   June 30, 2010     June 30, 2009 (a)     % Change  
Losses and loss expenses
    47.2 %     25.1 %     22.1  
Policy acquisition costs
    14.5 %     17.8 %     (3.3 )
General and administrative expenses (b)
    4.9 %     9.6 %     (4.7 )
 
                 
Expense ratio
    19.4 %     27.4 %     (8.0 )
 
                 
Combined ratio
    66.6 %     52.5 %     14.1  
 
                 

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    Three Months Ended     Three Months Ended      
Talbot   June 30, 2010     June 30, 2009     % Change  
Losses and loss expenses
    40.4 %     50.8 %     (10.4 )
Policy acquisition costs
    22.0 %     22.0 %      
General and administrative expenses (b)
    15.0 %     14.6 %     0.4  
 
                 
Expense ratio
    37.0 %     36.6 %     0.4  
 
                 
Combined ratio
    77.4 %     87.4 %     (10.0 )
 
                 
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
(b)   Includes general and administrative expenses and share compensation expenses.
     General and administrative expense ratios for the three months ended June 30, 2010 and 2009 were 13.5% and 14.3%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.
                                 
    Three Months Ended     Three Months Ended  
    June 30, 2010     June 30, 2009 (a)  
            Expenses as % of             Expenses as % of  
            Net Earned             Net Earned  
(Dollars in thousands)   Expenses     Premiums     Expenses     Premiums  
General and administrative expenses
  $ 52,379       12.0 %   $ 41,200       12.6 %
Share compensation expenses
    6,846       1.5 %     5,632       1.7 %
 
                       
Total
  $ 59,225       13.5 %   $ 46,832       14.3 %
 
                       
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Underwriting Income
     Underwriting income for the three months ended June 30, 2010 was $109.7 million compared to underwriting income of $92.2 million for the three months ended June 30, 2009, an increase of $17.5 million, or 19.0%.
                                         
    Three Months Ended June 30,        
            % of Sub             % of Sub        
(Dollars in thousands)   2010     Total     2009 (a)     Total     % Change  
Validus Re
  $ 87,537       68.8 %   $ 77,759       78.9 %     12.6 %
Talbot
    39,727       31.2 %     20,734       21.1 %     91.6 %
 
                               
Sub-total
    127,264       100.0 %     98,493       100.0 %     29.2 %
 
                                   
Corporate & Eliminations
    (17,565 )             (6,314 )             178.2 %
 
                                   
Total
  $ 109,699             $ 92,179               19.0 %
 
                                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.

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     The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP financial measure. Underwriting income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Operations and Comprehensive Income line items, as illustrated below.
                 
    Three Months Ended     Three Months Ended  
(Dollars in thousands)   June 30, 2010     June 30, 2009 (a)  
Underwriting income
  $ 109,699     $ 92,179  
Net investment income
    34,809       26,963  
Other income
    2,697       1,017  
Finance expenses
    (13,218 )     (10,752 )
Transaction expenses
          (15,851 )
Net realized gains (losses) on investments
    12,441       (2,650 )
Net unrealized gains on investments
    41,640       37,249  
Foreign exchange (losses) gains
    (4,099 )     8,432  
 
           
Net income before tax
  $ 183,969     $ 136,587  
 
           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Underwriting income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.
     The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of underwriting income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its underwriting business and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s underlying business performance. The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the bonus component of the total annual incentive compensation.
     Underwriting income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of underwriting income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides more prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of underwriting income to net income.
Net Investment Income

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     Net investment income for the three months ended June 30, 2010 was $34.8 million compared to $27.0 million for the three months ended June 30, 2009, an increase of $7.8 million or 29.1%. Net investment income increased due primarily to a larger fixed maturity portfolio as a result of the IPC Acquisition. Net investment income is comprised of accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended June 30, 2010 and 2009 are as presented below.
                         
    Three Months Ended     Three Months Ended        
(Dollars in thousands)   June 30, 2010     June 30, 2009 (a)     % Change  
Fixed maturities and short-term investments
  $ 36,346     $ 26,396       37.7 %
Cash and cash equivalents
    311       1,120       (72.2 )%
Securities lending income
    49       173       (71.7 )%
 
                   
Total gross investment income
    36,706       27,689       32.6 %
Investment expenses
    (1,897 )     (726 )     161.3 %
 
                   
Net investment income
  $ 34,809     $ 26,963       29.1 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Annualized effective investment yield is based on the weighted average investments held calculated on a simple period average and excludes net unrealized gains (losses), foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances. The Company’s annualized effective investment yield was 2.37% and 3.08% for the three months ended June 30, 2010 and 2009, respectively, and the average duration at June 30, 2010 was 2.2 years (December 31, 2009 – 2.2 years).
Finance Expenses
     Finance expenses for the three months ended June 30, 2010 were $13.2 million compared to $10.8 million for the three months ended June 30, 2009, an increase of $2.5 million or 22.9%. The increase was primarily driven by $5.6 million in interest expense on the 8.875% Senior Notes due 2040 which were issued in the first quarter of 2010, partially offset by a $3.3 million decrease in payments under the Talbot third party FAL facility.
     Finance expenses also include the amortization of debt offering costs and discounts and fees related to our credit facilities.
                         
    Three Months Ended June 30,        
(Dollars in thousands)   2010     2009 (a)     % Change  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,589     $ 3,589       0.0 %
8.480% Junior Subordinated Deferrable Debentures
    3,028       3,348       (9.6 )%
8.875% Senior Notes due 2040
    5,597           NM  
Credit facilities
    1,109       476       133.0 %
Talbot FAL facility
    (89 )     42       NM  
Talbot other interest
    (16 )         NM  
Talbot third party FAL facility
          3,297     NM  
 
                   
Finance expenses
  $ 13,218     $ 10,752       22.9 %
 
                   
 
NM: Not Meaningful
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Capital in Lloyd’s entities, whether personal or corporate, is required to be set annually for the prospective year and held by Lloyd’s in trust (“Funds at Lloyd’s” or “FAL”). In underwriting years up to and including 2007, Talbot’s FAL has been provided both by Talbot and by third parties, thereafter Talbot’s FAL has been provided exclusively by the Company. Because the third party FAL providers remain “on risk” until each year of account that their support closes (normally after three years). Talbot must retain third party FAL even if a third party FAL provider

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has ceased to support the active underwriting year. This is achieved by placing such FAL in escrow outside Lloyd’s. Thus, the total FAL facility available to the Company is the total FAL for active and prior underwriting years, although the Company can only apply specific FAL against losses incurred by an underwriting year that such FAL is contracted to support. With effect from December 31, 2009, the last year of account supported by the Talbot third party FAL facility closed and all liability, ceased and all third party FAL was returned to its providers.
     For each year of account up to and including the 2007 year of account, between 30% and 40% of an amount equivalent to each underwriting years’ profit is payable to Talbot third party FAL providers. However, some of these costs are fixed. There are no FAL finance charges related to the 2008, 2009 and 2010 years of account as there were no third party FAL providers in those periods. The FAL finance charges relate to total syndicate profit (underwriting income, investment income and realized and unrealized capital gains and losses).
     FAL finance charges are based on syndicate profit but include fixed elements. FAL finance charges for the three months ended June 30, 2010 were $nil compared to $3.3 million for the three months ended June 30, 2009, a decrease of $3.3 million.
Tax (Expense) Benefit
     Tax expense for the three months ended June 30, 2010 was ($4.2) million compared to a benefit of $1.0 million for the three months ended June 30, 2009, an increase of $5.2 million. For the three months ended June 30, 2010, Talbot incurred higher UK taxable profits which increased the tax expense by $0.9 million.
Net Realized Gains (Losses) on Investments
     Net realized gains on investments for the three months ended June 30, 2010 were $12.4 million compared to losses of ($2.7) million for the three months ended June 30, 2009, an increase of $15.1 million.
Net Unrealized Gains on Investments
     Net unrealized gains on investments for the three months ended June 30, 2010 were $41.6 million compared to gains of $37.2 million for the three months ended June 30, 2009 an increase of $4.4 million or 11.8%. The net unrealized gains in the three months ended June 30, 2010 resulted primarily from improved market conditions for fixed income securities.
     Net unrealized gains on investments are recorded as a component of net income. The Company has adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance sheet date. Consistent with these standards, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Certain non-Agency RMBS securities were identified as trading in inactive markets. The change in fair value for the identified non-Agency RMBS securities was a $2.6 million decrease in net unrealized loss on investments for the three months ended June 30, 2010. Further details are provided in the Investments section below.
Transaction Expenses
     On July 9, 2009, the Company announced that the boards of directors of both the Company and IPC had approved a definitive amalgamation agreement. During the three months ended June 30, 2009, the Company incurred $15.9 million in relation to the proposed acquisition of and amalgamation agreement with IPC. Transaction expenses are comprised of primarily legal, corporate advisory and audit related services.
Other Income
     Other income for the three months ended June 30, 2010 was $2.7 million compared to $1.0 million for the three months ended June 30, 2009, an increase of $1.7 million or 165.2%.
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