2013.06.30 - 10Q

Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013

Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
As of August 6, 2013 there were 99,823,852 outstanding Common Shares, $0.175 par value per share, of the registrant.
 

1

Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

PART I. FINANCIAL INFORMATION 
ITEM 1. FINANCIAL STATEMENTS

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2013 and December 31, 2012 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2013—$5,322,882; 2012—$5,008,514)
$
5,318,993

 
$
5,085,334

Short-term investments, at fair value (amortized cost: 2013—$611,708; 2012—$1,112,929)
609,778

 
1,114,250

Other investments, at fair value (cost: 2013—$604,092; 2012—$583,068)
514,385

 
564,448

Cash and cash equivalents
1,317,061

 
1,219,379

Total investments and cash
7,760,217

 
7,983,411

Investments in affiliates
110,472

 
172,329

Premiums receivable
1,374,486

 
802,159

Deferred acquisition costs
206,623

 
146,588

Prepaid reinsurance premiums
224,886

 
99,593

Securities lending collateral
1,900

 
225

Loss reserves recoverable
418,693

 
439,967

Paid losses recoverable
22,356

 
46,435

Income taxes recoverable
1,725

 
—

Intangible assets
108,489

 
110,569

Goodwill
20,393

 
20,393

Accrued investment income
19,334

 
21,321

Other assets
318,805

 
177,274

Total assets
$
10,588,379

 
$
10,020,264

 
 
 
 
Liabilities
 

 
 

Reserve for losses and loss expenses
$
3,283,450

 
$
3,517,573

Unearned premiums
1,439,597

 
894,362

Reinsurance balances payable
344,418

 
138,550

Securities lending payable
2,366

 
691

Deferred income taxes
22,600

 
20,259

Net payable for investments purchased
29,031

 
38,346

Accounts payable and accrued expenses
131,903

 
167,577

Variable funding notes
431,093

 
—

Senior notes payable
247,144

 
247,090

Debentures payable
540,476

 
540,709

Total liabilities
$
6,472,078

 
$
5,565,157

 
 
 
 
Commitments and contingent liabilities


 


 
 
 
 
Shareholders’ equity
 

 
 

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2013—154,225,781; 2012—152,698,191; Outstanding: 2013—99,737,461; 2012—107,921,259)
$
26,989

 
$
26,722

Treasury shares (2013—54,488,320; 2012—44,776,932)
(9,535
)
 
(7,836
)
Additional paid-in-capital
1,813,461

 
2,160,478

Accumulated other comprehensive (loss)
(8,262
)
 
(2,953
)
Retained earnings
1,795,203

 
1,844,416

Total shareholders’ equity available to Validus
3,617,856

 
4,020,827

Noncontrolling interest
498,445

 
434,280

Total shareholders’ equity
$
4,116,301

 
$
4,455,107

 
 
 
 
Total liabilities and shareholders’ equity
$
10,588,379

 
$
10,020,264


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

2

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information) 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
702,313

 
$
627,089

 
$
1,807,073

 
$
1,464,378

Reinsurance premiums ceded
(121,396
)
 
(119,052
)
 
(308,612
)
 
(226,104
)
Net premiums written
580,917

 
508,037

 
1,498,461

 
1,238,274

Change in unearned premiums
(33,459
)
 
(60,410
)
 
(419,942
)
 
(339,448
)
Net premiums earned
547,458

 
447,627

 
1,078,519

 
898,826

Net investment income
26,210

 
25,885

 
51,859

 
53,645

Net realized gains on investments
3,409

 
6,154

 
5,130

 
13,686

Net unrealized (losses) on investments
(141,348
)
 
(53,574
)
 
(148,585
)
 
(32,903
)
Income (loss) from investment affiliate
1,753

 
(398
)
 
3,230

 
(398
)
Other income
4,418

 
5,994

 
7,103

 
14,885

Foreign exchange (losses) gains
(8,223
)
 
(652
)
 
(1,301
)
 
2,514

Total revenues
433,677

 
431,036

 
995,955

 
950,255

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
265,044

 
153,692

 
409,815

 
385,681

Policy acquisition costs
87,152

 
76,129

 
180,763

 
154,261

General and administrative expenses
70,967

 
61,635

 
151,246

 
128,010

Share compensation expenses
6,638

 
6,800

 
8,956

 
12,238

Finance expenses
37,830

 
13,706

 
62,276

 
29,985

Total expenses
467,631

 
311,962

 
813,056

 
710,175

 
 
 
 
 
 
 
 
(Loss) income before taxes and income from operating affiliates
(33,954
)
 
119,074

 
182,899

 
240,080

Tax (expense) benefit
(93
)
 
(404
)
 
225

 
(543
)
Income from operating affiliates
3,793

 
3,592

 
7,316

 
6,959

Net (loss) income
$
(30,254
)
 
$
122,262

 
$
190,440

 
$
246,496

Net loss attributable to noncontrolling interest
60,976

 
45,360

 
63,525

 
45,360

Net income available to Validus
$
30,722

 
$
167,622

 
$
253,965

 
$
291,856

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 
 
 
Foreign currency translation adjustments
186

 
(757
)
 
(9,599
)
 
636

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
186

 
$
(757
)
 
$
(9,599
)
 
$
636

 
 
 
 
 
 
 
 
Comprehensive income available to Validus
$
30,908

 
$
166,865

 
$
244,366

 
$
292,492

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 

 
 

 
 
 
 
Basic
103,133,188

 
98,254,186

 
105,259,813

 
98,839,663

Diluted
104,734,643

 
103,667,967

 
107,393,822

 
104,382,030

 
 
 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.28

 
$
1.69

 
$
2.26

 
$
2.92

Diluted earnings per share available to common shareholders
$
0.28

 
$
1.62

 
$
2.21

 
$
2.80

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.30

 
$
0.25

 
$
2.60

 
$
0.50


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

3

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2013 and 2012 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
 
June 30,
2013
 
June 30,
2012
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
26,722

 
$
23,538

Common shares issued, net
267

 
153

Balance - End of period
$
26,989

 
$
23,691

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(7,836
)
 
$
(6,131
)
Repurchase of common shares
(1,699
)
 
(1,212
)
Balance - End of period
$
(9,535
)
 
$
(7,343
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
2,160,478

 
$
1,893,890

Common shares (redeemed), net
(488
)
 
(1,307
)
Repurchase of common shares
(355,485
)
 
(220,040
)
Share compensation expenses
8,956

 
12,238

Balance - End of period
$
1,813,461

 
$
1,684,781

 
 
 
 
Accumulated other comprehensive (loss)
 

 
 

Balance - Beginning of period
$
(2,953
)
 
$
(6,601
)
Amounts reclassified to retained earnings
4,290

 
—

Other comprehensive (loss) income
(9,599
)
 
636

Balance - End of period
$
(8,262
)
 
$
(5,965
)
 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
1,844,416

 
$
1,543,729

Dividends
(298,888
)
 
(52,915
)
Net income
190,440

 
246,496

Net loss attributable to noncontrolling interest
63,525

 
45,360

Amounts reclassified from accumulated other comprehensive income
(4,290
)
 
—

Balance - End of period
$
1,795,203

 
$
1,782,670

 
 
 
 
Total shareholders’ equity available to Validus
$
3,617,856

 
$
3,477,834

 
 
 
 
Noncontrolling interest
$
498,445

 
$
404,740

 
 
 
 
Total shareholders’ equity
$
4,116,301

 
$
3,882,574

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

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2013 and 2012 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2013
 
June 30,
2012
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
190,440

 
$
246,496

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

 
 

Share compensation expenses
8,956

 
12,238

Amortization of discount on senior notes
54

 
54

(Income) loss from investment affiliate
(3,230
)
 
398

Net realized (gains) on investments
(5,130
)
 
(13,686
)
Net unrealized losses on investments
148,585

 
32,903

Amortization of intangible assets
2,080

 
2,080

(Income) from operating affiliates
(7,316
)
 
(6,959
)
Foreign exchange losses (gains) included in net income
30,868

 
(5,844
)
Amortization of premium on fixed maturities
10,163

 
12,253

Change in:
 

 
 

Premiums receivable
(558,107
)
 
(330,214
)
Deferred acquisition costs
(60,035
)
 
(54,667
)
Prepaid reinsurance premiums
(125,293
)
 
(85,006
)
Loss reserves recoverable
20,000

 
1,475

Paid losses recoverable
23,840

 
58,149

Income taxes recoverable
(852
)
 
(2,720
)
Accrued investment income
1,903

 
4,534

Other assets
22,009

 
(11,777
)
Reserve for losses and loss expenses
(216,535
)
 
(43,198
)
Unearned premiums
545,235

 
424,454

Reinsurance balances payable
186,906

 
65,154

Deferred income taxes
2,081

 
2,565

Accounts payable and accrued expenses
(42,917
)
 
(3,518
)
Net cash provided by operating activities
173,705

 
305,164

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
2,686,285

 
1,829,294

Proceeds on maturities of investments
316,860

 
295,192

Purchases of fixed maturities
(3,318,638
)
 
(1,975,225
)
Sales (purchases) of short-term investments, net
500,191

 
(31,629
)
(Purchases) of other investments
(23,674
)
 
(500,632
)
(Increase) decrease in securities lending collateral
(1,675
)
 
4,317

Redemption from (purchase of) investment in operating affiliates
79,307

 
(26,500
)
Purchase of investment in investment affiliate
(6,904
)
 
(3,368
)
Net cash provided by (used in) investing activities
231,752

 
(408,551
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of variable funding notes
262,037

 
—

(Redemption) of common shares, net
(221
)
 
(1,154
)
Purchases of common shares under share repurchase program
(357,184
)
 
(221,252
)
Dividends paid
(297,539
)
 
(56,260
)
Increase (decrease) in securities lending payable
1,675

 
(4,317
)
Third party investment in noncontrolling interest
127,690

 
450,100

Net cash (used in) provided by financing activities
(263,542
)
 
167,117

 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(44,233
)
 
6,736

 
 
 
 
Net increase in cash
97,682

 
70,466

 
 
 
 
Cash and cash equivalents - beginning of period
$
1,219,379

 
$
832,844

 
 
 
 
Cash and cash equivalents - end of period
$
1,317,061

 
$
903,310

 
 
 
 
Taxes paid during the period
$
(1,326
)
 
$
3,764

 
 
 
 
Interest paid during the period
$
24,955

 
$
20,117

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

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Table of Contents


1. Basis of preparation and consolidation
 
These unaudited consolidated financial statements include Validus Holdings, Ltd. and its subsidiaries (together, the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2012, 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 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. The significant estimates reflected in the Company's consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, the valuation of goodwill and intangible assets, reinsurance premiums ceded and reinsurance recoverable balances including the provision for unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ materially from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year. The term "ASC" used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board ("FASB").
On November 30, 2012, the Company acquired all of the outstanding common shares of Flagstone Reinsurance Holdings, S.A. ("Flagstone") in exchange for 0.1935 Company common shares and $2.00 in cash per Flagstone common share (the "Flagstone Acquisition"). For segmental reporting purposes, the results of Flagstone’s operations since the acquisition date have been included within the Validus Re segment in the consolidated financial statements.
On April 25, 2013, the Company acquired Longhorn Re, Ltd., a single contract Bermuda domiciled crop reinsurer.


2. Recent accounting pronouncements

(a) Adoption of new accounting standards

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, "Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements.
In January 2013, the FASB issued Accounting Standards Update No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The objective of ASU 2013-01 is to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of ASU 2011-11 applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in ASU 2011-11. ASU 2011-11 and 2013-01 became effective for fiscal periods beginning on or after January 1, 2013, and as a result, the Company adopted ASU 2011-11 and 2013-01 effective January 1, 2013. The adoption of these new accounting standards impacts disclosures only; therefore they did not have an impact on the Company's consolidated financial statements. Please refer to Note 7: "Derivative instruments".

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Table of Contents

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


Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued Accounting Standard Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The amendments became effective for reporting periods beginning after December 15, 2012, and as a result, the Company adopted ASU 2013-02 effective January 1, 2013. Please refer to Note 14 "Accumulated other comprehensive income (loss)."
(b) Recently issued accounting standards not yet adopted

In March 2013, the FASB issued Accounting Standard Update No. 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). The objective of this update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary within a foreign entity. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. Early adoption is 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.
In June 2013, the FASB issued Accounting Standard Update No. 2013-08, “Financial Services - Investment Companies - Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). The amendments in this Update change the assessment of whether an entity is an investment company by developing a new two-tiered approach for that assessment, which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. Early adoption is prohibited. 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.

In July 2013, the FASB issued Accounting Standard Update No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2013-10”). The amendments in this Update permit the Fed Funds Effective Swap Rate also referred to as the overnight index swap rate (“OIS”) to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury rate and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. Before the amendments in this Update, only the U.S. Treasury rate and the LIBOR swap rate were considered benchmark interest rates in the United States. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. 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.

In July 2013, the FASB issued Accounting Standard Update No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-10”). This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward is not available to settle any additional income taxes that would result from the disallowance of a tax position at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this Update are effective for fiscal years beginning after December 15, 2013. 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.




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Table of Contents

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


3. Investments

(a) Trading Securities

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

The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments at June 30, 2013 were as follows:
 
Amortized Cost or Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
1,209,597

 
$
2,430

 
$
(5,807
)
 
$
1,206,220

Non-U.S. government and government agency
385,458

 
2,089

 
(6,523
)
 
381,024

States, municipalities, political subdivision
44,230

 
485

 
(422
)
 
44,293

Agency residential mortgage-backed securities
338,313

 
9,042

 
(1,841
)
 
345,514

Non-agency residential mortgage-backed securities
25,584

 
121

 
(1,069
)
 
24,636

U.S. corporate
1,378,522

 
9,232

 
(14,224
)
 
1,373,530

Non-U.S. corporate
668,678

 
4,760

 
(7,341
)
 
666,097

Bank loans
750,527

 
5,470

 
(1,378
)
 
754,619

Catastrophe bonds
54,005

 
1,139

 
(381
)
 
54,763

Asset-backed securities
467,968

 
1,670

 
(1,341
)
 
468,297

Total fixed maturities
5,322,882

 
36,438

 
(40,327
)
 
5,318,993

Total short-term investments
611,708

 
30

 
(1,960
)
 
609,778

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
3,733

 
216

 
(921
)
 
3,028

Private equity investments
12,771

 
984

 
(67
)
 
13,688

Hedge funds (a)
581,389

 
22,718

 
(115,665
)
 
488,442

   Mutual funds
6,199

 
3,028

 
—

 
9,227

Total other investments
604,092

 
26,946

 
(116,653
)
 
514,385

Total
$
6,538,682

 
$
63,414

 
$
(158,940
)
 
$
6,443,156

Noncontrolling interest (a)
$
(508,500
)
 
$
(18,492
)
 
$
104,099

 
$
(422,893
)
Total investments excluding noncontrolling interest
$
6,030,182

 
$
44,922

 
$
(54,841
)
 
$
6,020,263


(a)
Included in the Hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.


8
Table of Contents

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


The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2012 were as follows:
 
 
Amortized Cost or Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
1,091,357

 
$
7,957

 
$
(84
)
 
$
1,099,230

Non-U.S. government and government agency
295,602

 
6,904

 
(227
)
 
302,279

States, municipalities, political subdivision
41,286

 
800

 
(23
)
 
42,063

Agency residential mortgage-backed securities
375,368

 
13,708

 
(202
)
 
388,874

Non-agency residential mortgage-backed securities
106,536

 
1,266

 
(1,346
)
 
106,456

U.S. corporate
1,189,173

 
21,681

 
(681
)
 
1,210,173

Non-U.S. corporate
582,115

 
11,373

 
(223
)
 
593,265

Bank loans
663,217

 
10,593

 
(427
)
 
673,383

Catastrophe bonds
56,757

 
481

 
(291
)
 
56,947

Asset-backed securities
607,103

 
5,767

 
(206
)
 
612,664

Total fixed maturities
5,008,514

 
80,530

 
(3,710
)
 
5,085,334

Total short-term investments
1,112,929

 
1,349

 
(28
)
 
1,114,250

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
4,677

 
299

 
(219
)
 
4,757

Private equity investments
12,857

 
94

 
—

 
12,951

Hedge funds (a)
559,335

 
21,814

 
(42,623
)
 
538,526

Mutual funds
6,199

 
2,015

 
—

 
8,214

Total other investments
583,068

 
24,222

 
(42,842
)
 
564,448

Total
$
6,704,511

 
$
106,101

 
$
(46,580
)
 
$
6,764,032

Noncontrolling interest (a)
(450,000
)
 
(19,427
)
 
36,690

 
(432,737
)
Total investments excluding noncontrolling interest
$
6,254,511

 
$
86,674

 
$
(9,890
)
 
$
6,331,295


(a)
Included in the Hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.


9
Table of Contents

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


The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2013 and December 31, 2012. 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, 2013
 
December 31, 2012
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
768,907

 
14.4
%
 
$
1,062,794

 
20.9
%
AA
2,127,840

 
40.0
%
 
1,862,322

 
36.6
%
A
1,216,451

 
22.9
%
 
1,049,969

 
20.6
%
BBB
408,034

 
7.7
%
 
374,447

 
7.4
%
Investment grade
4,521,232

 
85.0
%
 
4,349,532

 
85.5
%
 
 
 
 
 
 
 
 
BB
356,521

 
6.7
%
 
373,907

 
7.4
%
B
409,962

 
7.7
%
 
330,416

 
6.5
%
CCC
4,081

 
0.1
%
 
4,483

 
0.1
%
CC
3,023

 
—
%
 
3,259

 
0.1
%
D/NR
24,174

 
0.5
%
 
23,737

 
0.4
%
Non-Investment grade
797,761

 
15.0
%
 
735,802

 
14.5
%
Total Fixed Maturities
$
5,318,993

 
100.0
%
 
$
5,085,334

 
100.0
%
 
The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2013 and December 31, 2012 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
 
June 30, 2013
 
December 31, 2012
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
818,318

 
$
823,145

 
$
526,529

 
$
530,499

Due after one year through five years
3,291,462

 
3,280,086

 
2,971,118

 
3,018,544

Due after five years through ten years
368,207

 
364,246

 
418,377

 
424,304

Due after ten years
13,030

 
13,069

 
3,483

 
3,993

 
4,491,017

 
4,480,546

 
3,919,507

 
3,977,340

Asset-backed and mortgage-backed securities
831,865

 
838,447

 
1,089,007

 
1,107,994

Total Fixed Maturities
$
5,322,882

 
$
5,318,993

 
$
5,008,514

 
$
5,085,334

 

10
Table of Contents

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


(b)  Net investment income
 
Net investment income was derived from the following sources: 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Fixed maturities and short-term investments
$
26,151

 
$
26,471

 
$
53,682

 
$
53,747

Cash and cash equivalents
1,629

 
1,449

 
2,162

 
3,766

Securities lending income
—

 
1

 
—

 
6

Total gross investment income
27,780

 
27,921

 
55,844

 
57,519

Investment expenses
(1,570
)
 
(2,036
)
 
(3,985
)
 
(3,874
)
Net investment income
$
26,210

 
$
25,885

 
$
51,859

 
$
53,645

 
(c)
Net realized gains (losses) and change in net unrealized gains (losses)
 
The following represents an analysis of net realized gains (losses) and the change in net unrealized (losses) on investments:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
June 30,
2012
 
June 30,
2013
 
June 30,
2012
Fixed maturities, short-term and other investments and cash equivalents
 

 
 

 
 
 
 
Gross realized gains
$
7,152

 
$
9,415

 
$
17,872

 
$
19,423

Gross realized (losses)
(3,743
)
 
(3,261
)
 
(12,742
)
 
(5,737
)
Net realized gains on investments
3,409

 
6,154

 
5,130

 
13,686

Net unrealized gains on securities lending
—

 
—

 
—

 
37

Change in net unrealized (losses) on investments
(141,348
)
 
(53,574
)
 
(148,585
)
 
(32,940
)
Net change in unrealized (losses) on investments
$
(141,348
)
 
$
(53,574
)
 
$
(148,585
)
 
$
(32,903
)
Total net realized gains and change in net unrealized (losses) on investments
$
(137,939
)
 
$
(47,420
)
 
$
(143,455
)
 
$
(19,217
)
Noncontrolling interest (a)
63,694

 
44,882

 
68,345

 
44,882

Total net realized gains and change in net unrealized (losses) on investments excluding noncontrolling interest
$
(74,245
)
 
$
(2,538
)
 
$
(75,110
)
 
$
25,665


(a)
Includes change in net unrealized (losses) on investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.



11
Table of Contents

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


(d) Pledged investments

The following tables outline investments pledged as collateral under the Company's credit facilities. For further details of the credit facilities, please refer to Note 12: “Debt and financing arrangements.”
 
 
June 30, 2013
Description
 
Commitment
 
Issued and Outstanding
 
Investments pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
373,318

 
527,564

$200,000 secured bi-lateral letter of credit facility
 
200,000

 
73,523

 
129,590

Talbot FAL Facility
 
25,000

 
25,000

 
36,508

PaCRe senior secured letter of credit facility
 
10,000

 
258

 
—

IPC bi-lateral facility
 
40,000

 
24,788

 
97,735

$375,000 Flagstone bi-lateral facility
 
375,000

 
313,398

 
450,880

 
 
$
1,575,000

 
$
810,285

 
$
1,242,277

 
 
December 31, 2012
Description
 
Commitment
 
Issued and Outstanding
 
Investments pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
376,570

 
517,210

$500,000 secured bi-lateral letter of credit facility
 
500,000

 
92,402

 
125,991

Talbot FAL Facility
 
25,000

 
25,000

 
41,372

PaCRe senior secured letter of credit facility
 
10,000

 
219

 
—

IPC bi-lateral facility
 
80,000

 
40,613

 
98,593

$550,000 Flagstone bi-lateral facility
 
550,000

 
381,019

 
416,414

 
 
$
2,090,000

 
$
915,823

 
$
1,199,580


4. Fair Value Measurements

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.
 
The three levels of the fair value hierarchy are described below:

•
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.

•
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
 

12
Table of Contents

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


•
Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.

There have been no material changes in the Company's valuation techniques during the period represented by these consolidated financial statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

(b) Level 1 and Level 2 assets measured at fair value

Fixed maturity investments

Fixed maturity investments included in Level 2 are U.S. government and government agency, non-U.S. government and government agency, states, municipalities, political subdivision, agency residential mortgage-backed, non-agency residential mortgage-backed, U.S. corporate, non-U.S. corporate, bank loans, catastrophe bonds and asset backed securities.

In general, the Company's fixed maturity investment portfolios are priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.

In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.

The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company's fixed maturity investments are detailed below by asset class.

U.S. government and government agency

Level 2 - U.S. government and agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.





13
Table of Contents

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


Non-U.S. government and government agency

Level 2 - Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

States, municipalities, political subdivision

Level 2 - The Company's states, municipal and political subdivision portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.

Agency residential mortgage-backed securities

Level 2 - The Company's agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.

Non-agency residential mortgage-backed securities

Level 2 - The Company's non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread ("OAS") model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.

U.S. corporate

Level 2 - Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The Company's corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.

Non - U.S. corporate

Level 2 - Non - U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company's non - U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.





14
Table of Contents

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


Bank loans

Level 2 - The Company's bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company's bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.

Catastrophe bonds

Level 2 - Catastrophe bonds are recorded at fair value and are based on broker or underwriter bid indications.

Asset-backed securities

Level 2 - Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO debt originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

Short term investments

Level 1 & Level 2 - Short term investments consist primarily of highly liquid securities with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value. The Company determined that certain of its short-term investments held in highly liquid money market-type funds would be included in Level 1 as their fair values are based on quoted market prices in active markets.

Mutual funds

Level 2 -Mutual funds consist of two investment funds which are invested in various quoted investments. The fair value of units in the mutual funds is based on the net asset value of the fund as reported by the fund manager.
 
(c) Level 3 assets measured at fair value

Other investments

Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. The Company's hedge funds, a fund of hedge funds and private equity investments are the only financial instruments in this category as at June 30, 2013. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).

Within the hedge fund industry, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager and regular evaluation of fund performance against applicable benchmarks.


15
Table of Contents

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


Hedge funds

The hedge funds were valued at $488,442 at June 30, 2013. The hedge funds consist of an investment in four Paulson & Co. managed funds (the "Paulson hedge funds") and three investment funds assumed from the Flagstone Acquisition (the "Flagstone investment funds"). The Paulson hedge funds' administrator provides monthly reported NAVs with a one-month delay in its valuation. As a result, the funds' administrator's May 31, 2013 NAV was used as a partial basis for fair value measurement in the Company's June 30, 2013 balance sheet. The fund manager provides an estimate of the NAV at June 30, 2013 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. Historically, our valuation estimates have not materially differed from the subsequent NAVs. The Flagstone investment fund administrators provide either monthly or quarterly reported NAVs with a one-month or one-quarter delay in valuation, respectively. As a result, the May 31, 2013 NAV or the March 31, 2013 NAV was used as a basis for fair value measurement in the Company's June 30, 2013 balance sheet. As these valuation techniques incorporate both observable and significant unobservable inputs, both the Paulson hedge funds and the Flagstone investment funds are classified as Level 3 assets. The Paulson hedge funds are subject to quarterly liquidity.

Private equity investments

Private equity investments consist of an investment in three private equity funds assumed from the Flagstone Acquisition. The private equity investments respective fund administrator provides either monthly or quarterly NAVs with a one-month or one-quarter delay in valuation, respectively. As a result, the May 31, 2013 NAV or the March 31, 2013 NAV was used as a basis for fair value measurement in the Company's June 30, 2013 balance sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the private equity investments are classified as Level 3 assets.

Fund of hedge funds

The fund of hedge funds includes a side pocket. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation. As a result, the fund administrator's May 31, 2013 NAV was used as a basis for fair value measurement in the Company's June 30, 2013 balance sheet. The fund manager provides an estimate of the fund NAV at June 30, 2013 based on the estimated performance provided from the underlying third-party funds. To determine the reasonableness of the NAV, the Company compares the one-month delayed fund administrator's NAV to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.


16
Table of Contents

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


At June 30, 2013, 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
$
—

 
$
1,206,220

 
$
—

 
$
1,206,220

Non-U.S. government and government agency
—

 
381,024

 
—

 
381,024

States, municipalities, political subdivision
—

 
44,293

 
—

 
44,293

Agency residential mortgage-backed securities
—

 
345,514

 
—

 
345,514

Non-agency residential mortgage-backed securities
—

 
24,636

 
—

 
24,636

U.S. corporate
—

 
1,373,530

 
—

 
1,373,530

Non-U.S. corporate
—

 
666,097

 
—

 
666,097

Bank loans
—

 
754,619

 
—

 
754,619

Catastrophe bonds
—

 
54,763

 
—

 
54,763

Asset-backed securities
—

 
468,297

 
—

 
468,297

Total fixed maturities
—

 
5,318,993

 
—

 
5,318,993

Short-term investments
583,518

 
26,260

 
—

 
609,778

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
3,028

 
3,028

Private equity investments
—

 
—

 
13,688

 
13,688

Hedge funds (a)
—

 
—

 
488,442

 
488,442

Mutual funds
—

 
9,227

 
—

 
9,227

Total other investments
—

 
9,227

 
505,158

 
514,385

Total
$
583,518

 
$
5,354,480

 
$
505,158

 
$
6,443,156

Noncontrolling interest (a)
—

 
—

 
(422,893
)
 
(422,893
)
Total investments excluding noncontrolling interest
$
583,518

 
$
5,354,480

 
$
82,265

 
$
6,020,263


(a)
Included in the Hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.


17
Table of Contents

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



At December 31, 2012, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. government and government agency
$
—

 
$
1,099,230

 
$
—

 
$
1,099,230

Non-U.S. government and government agency
—

 
302,279

 
—

 
302,279

States, municipalities, political subdivision
—

 
42,063

 
—

 
42,063

Agency residential mortgage-backed securities
—

 
388,874

 
—

 
388,874

Non-agency residential mortgage-backed securities
—

 
106,456

 
—

 
106,456

U.S. corporate
—

 
1,210,173

 
—

 
1,210,173

Non-U.S. corporate
—

 
593,265

 
—

 
593,265

Bank loans
—

 
673,383

 
—

 
673,383

Catastrophe bonds
—

 
56,947

 
—

 
56,947

Asset-backed securities
—

 
612,664

 
—

 
612,664

Total fixed maturities
—

 
5,085,334

 
—

 
5,085,334

Short-term investments
1,063,175

 
51,075

 
—

 
1,114,250

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
4,757

 
4,757

Private equity investments
—

 
—

 
12,951

 
12,951

Hedge funds (a)
—

 
—

 
538,526

 
538,526

Mutual funds
—

 
8,214

 
—

 
8,214

Total other investments
—

 
8,214

 
556,234

 
564,448

Total
$
1,063,175

 
$
5,144,623

 
$
556,234

 
$
6,764,032

Noncontrolling interest (a)
—

 
—

 
(432,737
)
 
(432,737
)
Total investments excluding noncontrolling interest
$
1,063,175

 
$
5,144,623

 
$
123,497

 
$
6,331,295


(a)
Included in the Hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.

At June 30, 2013, Level 3 investments excluding the noncontrolling interest totaled $82,265 (December 31, 2012: $123,497), representing 1.4% (December 31, 2012: 2.0%) of total investments, excluding noncontrolling interest, measured at fair value on a recurring basis.
 

18
Table of Contents

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


The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six months ended June 30, 2013 and 2012:
 
 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
 
Total Fair Market Value
 
Total Fair Market Value
 
 
Other Investments
 
Other Investments
Level 3 investments - Beginning of period
 
$
523,693

 
$
8,325

Purchases
 
65,056

 
500,000

Sales
 
(13,498
)
 
(277
)
Realized gains
 
300

 
21

Unrealized (losses)
 
(70,393
)
 
(48,494
)
Transfers
 
—

 
(4,782
)
Level 3 investments - End of period
 
$
505,158

 
$
454,793

Noncontrolling interest (a)
 
(422,893
)
 
(405,118
)
Level 3 investments excluding noncontrolling interest
 
$
82,265

 
$
49,675


 
 
Six Months Ended June 30, 2013
 
Six Months Ended June 30, 2012
 
 
Total Fair Market Value
 
Total Fair Market Value
 
 
Other Investments
 
Other Investments
Level 3 investments - Beginning of period
 
$
556,234

 
$
8,880

Purchases
 
65,515

 
500,000

Sales
 
(44,831
)
 
(896
)
Realized gains
 
340

 
48

Unrealized (losses)
 
(72,100
)
 
(49,986
)
Transfers
 
—

 
(3,253
)
Level 3 investments - End of period
 
$
505,158

 
$
454,793

Noncontrolling interest (a)
 
(422,893
)
 
(405,118
)
Level 3 investments excluding noncontrolling interest
 
$
82,265

 
$
49,675


(a)
Includes Level 3 investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors.

There have not been any transfers between Levels 1 and 2 during the three and six months ended June 30, 2013 or 2012. There have not been any transfers into or out of Level 3 during the three and six months ended June 30, 2013. During the three months ended June 30, 2012, there was a transfer of the private equity investment out of Level 3 "Other investments" to "Investment in affiliates." Refer to Note 5: "Investments in affiliates."

5. Investments in affiliates

(a) Operating affiliates

AlphaCat Re 2011, Ltd.
 
On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, Ltd. ("AlphaCat Re 2011"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. At the time of formation, Validus Reinsurance, Ltd. ("Validus Re"), a wholly owned subsidiary of the Company, had a majority voting equity

19
Table of Contents

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


interest in AlphaCat Re 2011 and as a result, the financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company.

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

As a result of these transactions, Validus Re maintained an equity interest in AlphaCat Re 2011, however its share of AlphaCat Re 2011's outstanding voting rights decreased to 43.7%. As a result of the Company's voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and the remaining investment in AlphaCat Re 2011 has been treated as an equity method investment effective December 31, 2011.

AlphaCat Re 2011 is now considered "off-risk" as all reinsurance contracts written by the company have expired. As a result, on January 4, 2013, January 23, 2013, May 1, 2013 and May 28, 2013 partial returns of investment were made to the investors of AlphaCat Re 2011. Validus Re's corresponding portion of the return of investment was $52,114.

AlphaCat Re 2012, Ltd.

On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012, Ltd. ("AlphaCat Re 2012"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. The Company holds an equity interest of 37.9% and a voting interest of 49.0% in AlphaCat Re 2012, therefore the investment has been treated as an equity method investment as at June 30, 2013.

AlphaCat Re 2012 is now considered "off-risk" as all reinsurance contracts written by the company have expired. As a result, on February 22, 2013 and June 20, 2013, partial returns of investment were made to the investors of AlphaCat Re 2012. Validus Re's corresponding portion of the return of investment was $27,193.
AlphaCat 2013, Ltd.
On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, Ltd. ("AlphaCat 2013"), a special purpose vehicle formed for the purpose of investing in collateralized reinsurance. The Company holds an equity interest of 19.7% and a voting interest of 40.9% in AlphaCat 2013, therefore the investment has been treated as an equity method investment as at June 30, 2013.

Investment in Insurance Linked Securities ("ILS")
The Company received $219,400 of third party subscriptions in three of the AlphaCat ILS funds as of December 31, 2012. During the three and six months ended June 30, 2013, the Company received $13,500 and $69,190 in additional third party subscriptions, respectively. The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. Two of the funds are variable interest entities and are consolidated by the Company as Validus Re is deemed to be the primary beneficiary. The third fund is also a variable interest entity, however, it is not consolidated by the Company as Validus Re is not deemed to be the primary beneficiary. As a result, the investment in this fund is included in "Investments in affiliates" as at June 30, 2013. Income from this fund was $177 and $326 for the three and six months ended June 30, 2013. The Company's carrying value of this fund amounted to $20,326 and $20,000 as at June 30, 2013 and December 31, 2012, respectively. The Company's maximum exposure to loss with respect to this investment is limited to the investment carrying value reported in the Company's Consolidated Balance Sheets.

The following table presents a reconciliation of the beginning and ending investment in operating affiliates balances for the three and six months ended June 30, 2013 and 2012:

20
Table of Contents

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


 
Three Months Ended June 30, 2013
 
Investment in operating affiliates
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat ILS funds
 
Total
As at March 31, 2013
$
16,805

 
$
27,358

 
$
46,100

 
$
20,149

 
$
110,412

Return of investment
(5,678
)
 
(23,407
)
 
—

 
—

 
(29,085
)
Income from operating affiliates
(73
)
 
1,253

 
2,436

 
177

 
3,793

As at June 30, 2013
$
11,054

 
$
5,204

 
$
48,536

 
$
20,326

 
$
85,120


 
Three Months Ended June 30, 2012
 
Investment in operating affiliates
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
Total
As at March 31, 2012
$
56,398

 
$
—

 
$
56,398

Purchase of shares
—

 
26,500

 
26,500

Income from operating affiliates
2,840

 
752

 
3,592

As at June 30, 2012
$
59,238

 
$
27,252

 
$
86,490

 
Six Months Ended June 30, 2013
 
Investment in operating affiliates
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat ILS funds
 
Total
As at December 31, 2012
$
62,792

 
$
29,319

 
$
45,000

 
$
20,000

 
$
157,111

Return of investment
(52,114
)
 
(27,193
)
 
—

 
—

 
(79,307
)
Income from operating affiliates
376

 
3,078

 
3,536

 
326

 
7,316

As at June 30, 2013
$
11,054

 
$
5,204

 
$
48,536

 
$
20,326

 
$
85,120


 
Six Months Ended June 30, 2012
 
Investment in operating affiliates
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
Total
As at December 31, 2011
$
53,031

 
$
—

 
$
53,031

Purchase of shares
—

 
26,500

 
26,500

Income from operating affiliates
6,207

 
752

 
6,959

As at June 30, 2012
$
59,238

 
$
27,252

 
$
86,490


The following table presents the Company's investments in operating affiliates as at June 30, 2013:
 
Investment in operating affiliates
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
11,128

 
43.7
%
 
22.3
%
 
$
11,054

AlphaCat Re 2012
3,950

 
49.0
%
 
37.9
%
 
5,204

AlphaCat 2013
45,000

 
40.9
%
 
19.7
%
 
48,536

AlphaCat ILS Fund
20,000

 
—
%
 
12.5
%
 
20,326

Total
$
80,078

 
 
 
 
 
$
85,120



21
Table of Contents

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


The following table presents the Company's investments in operating affiliates as at December 31, 2012:
 
Investment in operating affiliates
 
Investment at cost
 
Voting ownership %
 
Equity ownership