2014.09.30 - 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
Form 10-Q
__________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
|
| | |
BERMUDA | | 98-0501001 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 278-9000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | |
Large accelerated filer x | | Accelerated filer o |
| | |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 5, 2014 there were 87,376,871 outstanding Common Shares, $0.175 par value per share, of the registrant.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2014 (unaudited) and December 31, 2013
(Expressed in thousands of U.S. dollars, except share and per share information)
|
| | | | | | | |
| September 30,
2014 | | December 31,
2013 |
| (unaudited) | | |
Assets |
|
| |
|
|
Fixed maturities, at fair value (amortized cost: 2014—$4,668,585; 2013—$5,522,853) | $ | 4,670,173 |
| | $ | 5,542,258 |
|
Short-term investments, at fair value (amortized cost: 2014—$1,684,997; 2013—$751,734) | 1,684,982 |
| | 751,778 |
|
Other investments, at fair value (cost: 2014—$714,508; 2013—$637,728) | 718,633 |
| | 618,316 |
|
Cash and cash equivalents | 843,747 |
| | 1,056,346 |
|
Total investments and cash | 7,917,535 |
| | 7,968,698 |
|
Investments in affiliates | 217,612 |
| | 141,243 |
|
Premiums receivable | 936,306 |
| | 697,233 |
|
Deferred acquisition costs | 186,277 |
| | 134,269 |
|
Prepaid reinsurance premiums | 129,809 |
| | 103,251 |
|
Securities lending collateral | 9,056 |
| | 3,392 |
|
Loss reserves recoverable | 298,502 |
| | 370,154 |
|
Paid losses recoverable | 62,991 |
| | 80,080 |
|
Intangible assets | 103,287 |
| | 106,407 |
|
Goodwill | 20,393 |
| | 20,393 |
|
Accrued investment income | 15,415 |
| | 18,876 |
|
Other assets | 155,867 |
| | 202,436 |
|
Total assets | $ | 10,053,050 |
| | $ | 9,846,432 |
|
| | | |
Liabilities | | | |
Reserve for losses and loss expenses | $ | 2,752,168 |
| | $ | 3,030,399 |
|
Unearned premiums | 1,158,429 |
| | 824,496 |
|
Reinsurance balances payable | 141,482 |
| | 154,874 |
|
Securities lending payable | 9,522 |
| | 3,858 |
|
Deferred income taxes | 11,687 |
| | 19,086 |
|
Net payable for investments purchased | 54,735 |
| | 19,383 |
|
Accounts payable and accrued expenses | 186,649 |
| | 278,187 |
|
Notes payable to operating affiliates | 655,976 |
| | 439,272 |
|
Senior notes payable | 247,279 |
| | 247,198 |
|
Debentures payable | 539,953 |
| | 541,416 |
|
Total liabilities | $ | 5,757,880 |
| | $ | 5,558,169 |
|
| | | |
Commitments and contingent liabilities |
|
| |
|
|
Redeemable noncontrolling interest | 70,473 |
| | 86,512 |
|
| | | |
Shareholders’ equity | | | |
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2014—155,253,556; 2013—154,488,497; Outstanding: 2014—89,112,271; 2013—96,044,312) | $ | 27,169 |
| | $ | 27,036 |
|
Treasury shares (2014—66,141,285; 2013—58,444,185) | (11,575 | ) | | (10,228 | ) |
Additional paid-in-capital | 1,413,145 |
| | 1,677,894 |
|
Accumulated other comprehensive loss | (2,738 | ) | | (617 | ) |
Retained earnings | 2,276,409 |
| | 2,010,009 |
|
Total shareholders’ equity available to Validus | 3,702,410 |
| | 3,704,094 |
|
Noncontrolling interest | 522,287 |
| | 497,657 |
|
Total shareholders’ equity | $ | 4,224,697 |
| | $ | 4,201,751 |
|
| | | |
Total liabilities, noncontrolling interests and shareholders’ equity | $ | 10,053,050 |
| | $ | 9,846,432 |
|
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30,
2014 | | September 30,
2013 | | September 30,
2014 | | September 30,
2013 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
Revenues | |
| | |
| | | | |
Gross premiums written | $ | 358,974 |
| | $ | 356,760 |
| | $ | 2,026,639 |
| | $ | 2,163,833 |
|
Reinsurance premiums ceded | (30,137 | ) | | (39,415 | ) | | (275,610 | ) | | (348,027 | ) |
Net premiums written | 328,837 |
| | 317,345 |
| | 1,751,029 |
| | 1,815,806 |
|
Change in unearned premiums | 165,859 |
| | 213,943 |
| | (307,373 | ) | | (205,999 | ) |
Net premiums earned | 494,696 |
| | 531,288 |
| | 1,443,656 |
| | 1,609,807 |
|
Net investment income | 25,261 |
| | 20,009 |
| | 69,909 |
| | 71,868 |
|
Net realized gains (losses) on investments | 4,595 |
| | (6,320 | ) | | 16,193 |
| | (1,190 | ) |
Change in net unrealized (losses) gains on investments | (84,974 | ) | | 69,967 |
| | 16,146 |
| | (78,618 | ) |
Income from investment affiliate | 1,754 |
| | 1,044 |
| | 7,881 |
| | 4,274 |
|
Other (loss) income | (4,080 | ) | | (2,806 | ) | | 14,985 |
| | 4,297 |
|
Foreign exchange (losses) gains | (11,441 | ) | | 6,036 |
| | (14,761 | ) | | 4,735 |
|
Total revenues | 425,811 |
| | 619,218 |
| | 1,554,009 |
| | 1,615,173 |
|
| | | | | | | |
Expenses | |
| | |
| | | | |
Losses and loss expenses | 224,125 |
| | 177,965 |
| | 545,541 |
| | 587,780 |
|
Policy acquisition costs | 86,404 |
| | 94,900 |
| | 251,006 |
| | 275,663 |
|
General and administrative expenses | 83,319 |
| | 81,089 |
| | 231,606 |
| | 232,335 |
|
Share compensation expenses | 8,764 |
| | 10,527 |
| | 24,252 |
| | 19,483 |
|
Finance expenses | 15,354 |
| | 15,317 |
| | 47,380 |
| | 47,252 |
|
Transaction expenses | 149 |
| | — |
| | 3,401 |
| | — |
|
Total expenses | 418,115 |
| | 379,798 |
| | 1,103,186 |
| | 1,162,513 |
|
| | | | | | | |
Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors | 7,696 |
| | 239,420 |
| | 450,823 |
| | 452,660 |
|
Tax benefit (expense) | 953 |
| | (5 | ) | | (398 | ) | | 220 |
|
Income from operating affiliates | 3,761 |
| | 1,463 |
| | 13,580 |
| | 8,779 |
|
(Income) attributable to operating affiliate investors | (25,807 | ) | | (11,815 | ) | | (82,833 | ) | | (42,156 | ) |
Net (loss) income | $ | (13,397 | ) | | $ | 229,063 |
| | $ | 381,172 |
| | $ | 419,503 |
|
Net loss (income) attributable to noncontrolling interest | 53,069 |
| | (45,694 | ) | | (25,745 | ) | | 17,831 |
|
Net income available to Validus | $ | 39,672 |
| | $ | 183,369 |
| | $ | 355,427 |
| | $ | 437,334 |
|
| | | | | | | |
Other comprehensive (loss) income | |
| | |
| | | | |
Foreign currency translation adjustments | (5,198 | ) | | 4,390 |
| | (2,121 | ) | | (5,209 | ) |
| | | | | | | |
Other comprehensive (loss) income | $ | (5,198 | ) | | $ | 4,390 |
| | $ | (2,121 | ) | | $ | (5,209 | ) |
| | | | | | | |
Comprehensive income available to Validus | $ | 34,474 |
| | $ | 187,759 |
| | $ | 353,306 |
| | $ | 432,125 |
|
| | | | | | | |
Earnings per share | |
| | |
| | | | |
Weighted average number of common shares and common share equivalents outstanding | |
| | |
| | | | |
Basic | 90,593,329 |
| | 99,834,563 |
| | 91,665,950 |
| | 103,451,396 |
|
Diluted | 91,939,610 |
| | 103,613,766 |
| | 95,937,641 |
| | 105,264,913 |
|
| | | | | | | |
Basic earnings per share available to common shareholders | $ | 0.42 |
| | $ | 1.82 |
| | $ | 3.83 |
| | $ | 4.06 |
|
Earnings per diluted share available to common shareholders | $ | 0.41 |
| | $ | 1.77 |
| | $ | 3.70 |
| | $ | 3.99 |
|
| | | | | | | |
Cash dividends declared per share | $ | 0.30 |
| | $ | 0.30 |
| | $ | 0.90 |
| | $ | 2.90 |
|
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2014 and 2013 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
| | | | | | | |
| September 30,
2014 | | September 30,
2013 |
| (unaudited) | | (unaudited) |
Common shares | |
| | |
|
Balance - Beginning of period | $ | 27,036 |
| | $ | 26,722 |
|
Common shares issued, net | 133 |
| | 296 |
|
Balance - End of period | $ | 27,169 |
| | $ | 27,018 |
|
| | | |
Treasury shares | |
| | |
|
Balance - Beginning of period | $ | (10,228 | ) | | $ | (7,836 | ) |
Repurchase of common shares | (1,347 | ) | | (1,699 | ) |
Balance - End of period | $ | (11,575 | ) | | $ | (9,535 | ) |
| | | |
Additional paid-in capital | |
| | |
|
Balance - Beginning of period | $ | 1,677,894 |
| | $ | 2,160,478 |
|
Common shares redeemed, net | (3,822 | ) | | (134 | ) |
Repurchase of common shares | (285,179 | ) | | (355,485 | ) |
Share compensation expenses | 24,252 |
| | 19,483 |
|
Balance - End of period | $ | 1,413,145 |
| | $ | 1,824,342 |
|
| | | |
Accumulated other comprehensive loss | |
| | |
|
Balance - Beginning of period | $ | (617 | ) | | $ | (2,953 | ) |
Amounts reclassified to retained earnings | — |
| | 4,290 |
|
Other comprehensive loss | (2,121 | ) | | (5,209 | ) |
Balance - End of period | $ | (2,738 | ) | | $ | (3,872 | ) |
| | | |
Retained earnings | |
| | |
|
Balance - Beginning of period | $ | 2,010,009 |
| | $ | 1,844,416 |
|
Dividends | (89,027 | ) | | (331,251 | ) |
Net income | 381,172 |
| | 419,503 |
|
Net (income) loss attributable to noncontrolling interest | (25,745 | ) | | 17,831 |
|
Amounts reclassified from accumulated other comprehensive loss | — |
| | (4,290 | ) |
Balance - End of period | $ | 2,276,409 |
| | $ | 1,946,209 |
|
| | | |
Total shareholders’ equity available to Validus | $ | 3,702,410 |
| | $ | 3,784,162 |
|
| | | |
Noncontrolling interest | $ | 522,287 |
| | $ | 471,933 |
|
| | | |
Total shareholders’ equity | $ | 4,224,697 |
| | $ | 4,256,095 |
|
| | | |
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2014 and 2013 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
| | | | | | | |
| September 30, 2014 | | September 30, 2013 |
| (unaudited) | | (unaudited) |
Cash flows provided by (used in) operating activities | |
| | |
|
Net income | $ | 381,172 |
| | $ | 419,503 |
|
Adjustments to reconcile net income to cash provided by (used in) operating activities: | |
| | |
|
Share compensation expenses | 24,252 |
| | 19,483 |
|
Gain on sale of subsidiary | (709 | ) | | — |
|
Gain on deconsolidation of subsidiary | (1,372 | ) | | — |
|
Amortization of discount on senior notes | 81 |
| | 81 |
|
Income from investment affiliate | (7,881 | ) | | (4,274 | ) |
Net realized (gains) losses on investments | (16,193 | ) | | 1,190 |
|
Change in net unrealized (gains) losses on investments | (16,146 | ) | | 78,618 |
|
Amortization of intangible assets | 3,120 |
| | 3,120 |
|
Income from operating affiliates | (13,580 | ) | | (8,779 | ) |
Foreign exchange losses included in net income | 10,841 |
| | 4,927 |
|
Amortization of premium on fixed maturities | 11,922 |
| | 14,870 |
|
Change in: | |
| | |
|
Premiums receivable | (241,175 | ) | | (226,154 | ) |
Deferred acquisition costs | (52,008 | ) | | (19,951 | ) |
Prepaid reinsurance premiums | (26,558 | ) | | (69,469 | ) |
Loss reserves recoverable | 70,444 |
| | 20,411 |
|
Paid losses recoverable | 17,245 |
| | 16,218 |
|
Income taxes recoverable | — |
| | (3,099 | ) |
Accrued investment income | 3,431 |
| | 3,466 |
|
Other assets | 30,125 |
| | (11,214 | ) |
Reserve for losses and loss expenses | (271,063 | ) | | (293,673 | ) |
Unearned premiums | 333,933 |
| | 275,468 |
|
Reinsurance balances payable | (12,836 | ) | | (634 | ) |
Deferred income taxes | (7,385 | ) | | 2,565 |
|
Accounts payable and accrued expenses | (70,809 | ) | | (17,783 | ) |
Net cash provided by operating activities | 148,851 |
| | 204,890 |
|
| | | |
Cash flows provided by (used in) investing activities | |
| | |
|
Proceeds on sales of investments | 3,587,124 |
| | 3,598,080 |
|
Proceeds on maturities of investments | 466,872 |
| | 406,079 |
|
Purchases of fixed maturities | (3,161,908 | ) | | (4,414,320 | ) |
(Purchases) sales of short-term investments, net | (961,264 | ) | | 348,554 |
|
Purchases of other investments, net | (69,932 | ) | | (21,793 | ) |
Increase in securities lending collateral | (5,664 | ) | | (796 | ) |
Redemption of investment in operating affiliates | 58,547 |
| | 86,657 |
|
Purchase of investment in investment affiliate | — |
| | (13,089 | ) |
Proceeds on sale of subsidiary | 16,459 |
| | — |
|
Net cash used in investing activities | (69,766 | ) | | (10,628 | ) |
| | | |
Cash flows provided by (used in) financing activities | |
| | |
|
Net proceeds on issuance of notes payable to operating affiliates | 43,175 |
| | 418,299 |
|
(Redemption) issuance of common shares, net | (3,689 | ) | | 162 |
|
Purchases of common shares under share repurchase program | (286,526 | ) | | (357,184 | ) |
Dividends paid | (89,719 | ) | | (329,201 | ) |
Increase in securities lending payable | 5,664 |
| | 796 |
|
Investment in third party redeemable noncontrolling interest | 50,704 |
| | 62,790 |
|
Investment in third party noncontrolling interest | — |
| | 58,500 |
|
Net cash used in financing activities | (280,391 | ) | | (145,838 | ) |
| | | |
Effect of foreign currency rate changes on cash and cash equivalents | (11,293 | ) | | (13,185 | ) |
| | | |
Net (decrease) increase in cash | (212,599 | ) | | 35,239 |
|
| | | |
Cash and cash equivalents - beginning of period | $ | 1,056,346 |
| | $ | 1,219,379 |
|
| | | |
Cash and cash equivalents - end of period | $ | 843,747 |
| | $ | 1,254,618 |
|
| | | |
Taxes paid during the period | $ | 7,286 |
| | $ | 5,325 |
|
| | | |
Interest paid during the period | $ | 46,421 |
| | $ | 44,112 |
|
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
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 (the "Consolidated Financial Statements") include Validus Holdings, Ltd. and its wholly and majority owned 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 on Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission (the "SEC").
In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) 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. To facilitate comparison of information, certain amounts in prior periods have been reclassified to conform to current period presentation. The consolidated statement of cash flows for the nine months ended September 30, 2013 includes a reclassification of $19,400 that increased net cash flows used in financing activities and net cash flows provided by operating activities to revise the presentation of subscriptions received in advance from third party investors. For the three and nine months ended September 30, 2013, $11,815 and $42,156 respectively, have been reclassified into income attributable to operating affiliate investors from finance expenses to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ materially from those estimates. The Company’s principal estimates include:
•reserve for losses and loss expenses;
•premium estimates for business written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•reinsurance recoverable balances including the provision for uncollectible amounts; and
•investment valuation of financial assets.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the U.S. Financial Accounting Standards Board (“FASB”).
2. Recent accounting pronouncements
Adoption of New Accounting Standards
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
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 became effective for the Company on January 1, 2014. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Financial Services - Investment Companies - Amendments to the Scope, Measurement, and Disclosure Requirements
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 determine whether it is an investment company. The amendments became effective for the Company on January 1, 2014. The Company performed an assessment and has concluded that the AlphaCat ILS funds meet the characteristics outlined in this Update and therefore will continue to be treated as investment companies.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
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 2013-11). 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 became effective for the Company on January 1, 2014. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In June 2014, the FASB issued Accounting Standard Update No. 2014-12, “Compensation - Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (ASU 2014-12). The amendments in this Update apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Earlier 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 August 2014, the FASB issued Accounting Standard Update 2014-13, “Consolidation (Topic 810) - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” (ASU 2014-13). The fair value of the financial assets of a collateralized financing entity, as determined under GAAP, may differ from the fair value of its financial liabilities even when the financial liabilities have recourse only to the financial assets. The amendments in this Update provide an alternative to Topic 820 for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity to eliminate that difference. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
In August 2014, the FASB issued Accounting Standard Update 2014-15, “Presentation of Financial Statements - Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). The amendments in this Update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the impact of this guidance; however, it will not have a material impact on the Company's Consolidated Financial Statements.
3. Investments
| |
(a) | Fixed maturity, short-term and other investments |
The Company's investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related changes in 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 September 30, 2014 were as follows:
|
| | | | | | | | | | | | | | | |
| Amortized Cost or Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
U.S. government and government agency | $ | 786,318 |
| | $ | 1,735 |
| | $ | (1,798 | ) | | $ | 786,255 |
|
Non-U.S. government and government agency | 383,378 |
| | 1,775 |
| | (3,956 | ) | | 381,197 |
|
U.S. states, municipalities and political subdivisions | 73,996 |
| | 557 |
| | (188 | ) | | 74,365 |
|
Agency residential mortgage-backed securities | 368,646 |
| | 7,877 |
| | (1,296 | ) | | 375,227 |
|
Non-agency residential mortgage-backed securities | 17,370 |
| | 238 |
| | (409 | ) | | 17,199 |
|
U.S. corporate | 1,168,304 |
| | 5,601 |
| | (4,987 | ) | | 1,168,918 |
|
Non-U.S. corporate | 593,619 |
| | 4,071 |
| | (3,055 | ) | | 594,635 |
|
Bank loans | 488,904 |
| | 616 |
| | (5,732 | ) | | 483,788 |
|
Catastrophe bonds | 47,574 |
| | 1,305 |
| | (541 | ) | | 48,338 |
|
Asset-backed securities | 566,135 |
| | 981 |
| | (664 | ) | | 566,452 |
|
Commercial mortgage-backed securities | 174,341 |
| | 48 |
| | (590 | ) | | 173,799 |
|
Total fixed maturities | 4,668,585 |
| | 24,804 |
| | (23,216 | ) | | 4,670,173 |
|
Total short-term investments (b) | 1,684,997 |
| | 4 |
| | (19 | ) | | 1,684,982 |
|
Other investments | | | | | | | |
Fund of hedge funds | 2,802 |
| | 162 |
| | (921 | ) | | 2,043 |
|
Hedge funds (a) | 570,372 |
| | 101,610 |
| | (104,142 | ) | | 567,840 |
|
Private equity investments | 11,295 |
| | 3,832 |
| | (108 | ) | | 15,019 |
|
Investment funds | 123,840 |
| | 350 |
| | — |
| | 124,190 |
|
Mutual funds | 6,199 |
| | 3,342 |
| | — |
| | 9,541 |
|
Total other investments | 714,508 |
| | 109,296 |
| | (105,171 | ) | | 718,633 |
|
Total investments including noncontrolling interests | $ | 7,068,090 |
| | $ | 134,104 |
| | $ | (128,406 | ) | | $ | 7,073,788 |
|
Noncontrolling interest (a) | $ | (502,830 | ) | | $ | (86,263 | ) | | $ | 93,728 |
| | $ | (495,365 | ) |
Redeemable noncontrolling interest (b) | $ | (11,637 | ) | | $ | — |
| | $ | — |
| | $ | (11,637 | ) |
Total investments excluding noncontrolling interests | $ | 6,553,623 |
| | $ | 47,841 |
| | $ | (34,678 | ) | | $ | 6,566,786 |
|
| |
(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 and included in the Consolidated Balance Sheets as noncontrolling interest. |
| |
(b) | Included in the short-term investments balance are investments held by one AlphaCat ILS fund which is consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest. |
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, 2013 were as follows:
|
| | | | | | | | | | | | | | | |
| Amortized Cost or Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
U.S. government and government agency | $ | 1,368,826 |
| | $ | 2,589 |
| | $ | (6,736 | ) | | $ | 1,364,679 |
|
Non-U.S. government and government agency | 454,578 |
| | 6,511 |
| | (2,021 | ) | | 459,068 |
|
U.S. states, municipalities and political subdivisions | 42,978 |
| | 459 |
| | (317 | ) | | 43,120 |
|
Agency residential mortgage-backed securities | 305,450 |
| | 8,310 |
| | (2,261 | ) | | 311,499 |
|
Non-agency residential mortgage-backed securities | 16,530 |
| | 143 |
| | (914 | ) | | 15,759 |
|
U.S. corporate | 1,328,960 |
| | 9,208 |
| | (5,684 | ) | | 1,332,484 |
|
Non-U.S. corporate | 711,581 |
| | 5,917 |
| | (3,173 | ) | | 714,325 |
|
Bank loans | 712,859 |
| | 5,659 |
| | (1,402 | ) | | 717,116 |
|
Catastrophe bonds | 72,000 |
| | 2,551 |
| | — |
| | 74,551 |
|
Asset-backed securities | 509,091 |
| | 1,409 |
| | (843 | ) | | 509,657 |
|
Total fixed maturities | 5,522,853 |
| | 42,756 |
| | (23,351 | ) | | 5,542,258 |
|
Total short-term investments (b) | 751,734 |
| | 45 |
| | (1 | ) | | 751,778 |
|
Other investments | | | | | | | |
Fund of hedge funds | 3,141 |
| | 83 |
| | (921 | ) | | 2,303 |
|
Hedge funds (a) | 584,518 |
| | 71,641 |
| | (95,076 | ) | | 561,083 |
|
Private equity investments | 12,333 |
| | 1,410 |
| | (258 | ) | | 13,485 |
|
Investment funds | 31,537 |
| | 92 |
| | — |
| | 31,629 |
|
Mutual funds | 6,199 |
| | 3,617 |
| | — |
| | 9,816 |
|
Total other investments | 637,728 |
| | 76,843 |
| | (96,255 | ) | | 618,316 |
|
Total investments including noncontrolling interests | $ | 6,912,315 |
| | $ | 119,644 |
| | $ | (119,607 | ) | | $ | 6,912,352 |
|
Noncontrolling interest (a) | (512,121 | ) | | (62,850 | ) | | 85,569 |
| | (489,402 | ) |
Redeemable noncontrolling interest (b) | $ | (18,365 | ) | | $ | — |
| | $ | — |
| | $ | (18,365 | ) |
Total investments excluding noncontrolling interests | $ | 6,381,829 |
| | $ | 56,794 |
| | $ | (34,038 | ) | | $ | 6,404,585 |
|
| |
(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 and included in the Consolidated Balance Sheets as noncontrolling interest. |
| |
(b) | Included in the short-term investments balance are investments held by two AlphaCat ILS funds which are consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest. |
As of June 30, 2014, the Company changed the methodology of assigning investment ratings to its fixed maturities portfolio. In prior periods, investment ratings were the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. As of June 30, 2014, investment ratings are the median of Moody’s, Standard & Poor’s and Fitch, presented in Standard & Poor’s equivalent rating. For investments where only two ratings are available, the lower of the two ratings shall apply, 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. The December 31, 2013 comparative data was restated as a result, to conform to current period presentation.
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 September 30, 2014 and December 31, 2013.
|
| | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Estimated Fair Value | | % of Total | | Estimated Fair Value | | % of Total |
AAA | $ | 2,174,861 |
| | 46.6 | % | | $ | 2,510,781 |
| | 45.3 | % |
AA | 594,858 |
| | 12.7 | % | | 696,998 |
| | 12.6 | % |
A | 960,153 |
| | 20.6 | % | | 1,233,716 |
| | 22.3 | % |
BBB | 363,626 |
| | 7.8 | % | | 323,085 |
| | 5.8 | % |
Total investment-grade fixed maturities | 4,093,498 |
| | 87.7 | % | | 4,764,580 |
| | 86.0 | % |
| | | | | | | |
BB | 283,954 |
| | 6.1 | % | | 354,992 |
| | 6.4 | % |
B | 269,380 |
| | 5.8 | % | | 383,639 |
| | 6.9 | % |
CCC | 1,341 |
| | — | % | | 2,453 |
| | — | % |
CC | 2,330 |
| | — | % | | 2,496 |
| | 0.1 | % |
C | 146 |
| | — | % | | 235 |
| | — | % |
D/NR | 19,524 |
| | 0.4 | % | | 33,863 |
| | 0.6 | % |
Total non-investment grade fixed maturities | 576,675 |
| | 12.3 | % | | 777,678 |
| | 14.0 | % |
Total fixed maturities | $ | 4,670,173 |
| | 100.0 | % | | $ | 5,542,258 |
| | 100.0 | % |
The amortized cost and estimated fair value amounts for fixed maturities held at September 30, 2014 and December 31, 2013 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 277,213 |
| | $ | 278,507 |
| | $ | 688,855 |
| | $ | 692,768 |
|
Due after one year through five years | 2,678,792 |
| | 2,679,938 |
| | 3,603,459 |
| | 3,613,847 |
|
Due after five years through ten years | 496,922 |
| | 491,364 |
| | 396,389 |
| | 395,633 |
|
Due after ten years | 89,166 |
| | 87,687 |
| | 3,079 |
| | 3,095 |
|
| 3,542,093 |
| | 3,537,496 |
| | 4,691,782 |
| | 4,705,343 |
|
Asset-backed and mortgage-backed securities | 1,126,492 |
| | 1,132,677 |
| | 831,071 |
| | 836,915 |
|
Total fixed maturities | $ | 4,668,585 |
| | $ | 4,670,173 |
| | $ | 5,522,853 |
| | $ | 5,542,258 |
|
Net investment income was derived from the following sources:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2014 | | September 30, 2013 | | September 30, 2014 | | September 30, 2013 |
Fixed maturities and short-term investments | $ | 22,544 |
| | $ | 20,936 |
| | $ | 68,048 |
| | $ | 74,618 |
|
Other investments | 2,879 |
| | — |
| | 2,879 |
| | — |
|
Cash and cash equivalents | 1,581 |
| | 1,079 |
| | 4,534 |
| | 3,241 |
|
Securities lending income | 1 |
| | 3 |
| | 5 |
| | 3 |
|
Total gross investment income | 27,005 |
| | 22,018 |
| | 75,466 |
| | 77,862 |
|
Investment expenses | (1,744 | ) | | (2,009 | ) | | (5,557 | ) | | (5,994 | ) |
Total net investment income | $ | 25,261 |
| | $ | 20,009 |
| | $ | 69,909 |
| | $ | 71,868 |
|
Net investment income from other investments includes distributed and undistributed net income from certain investment funds.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
| |
(c) | Net realized gains (losses) and change in net unrealized (losses) gains on investments |
The following represents an analysis of net realized gains (losses) and the change in net unrealized (losses) gains on investments:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2014 | | September 30, 2013 | | September 30, 2014 | | September 30, 2013 |
Fixed maturities, short-term and other investments | |
| | |
| | | | |
Gross realized gains (a) | $ | 8,075 |
| | $ | 7,706 |
| | $ | 23,184 |
| | $ | 25,578 |
|
Gross realized (losses) | (3,480 | ) | | (14,026 | ) | | (6,991 | ) | | (26,768 | ) |
Net realized gains (losses) on investments | 4,595 |
| | (6,320 | ) | | 16,193 |
| | (1,190 | ) |
Change in net unrealized (losses) gains on investments (a) | (84,974 | ) | | 69,967 |
| | 16,146 |
| | (78,618 | ) |
Total net realized gains (losses) and change in net unrealized (losses) gains on investments including noncontrolling interest | (80,379 | ) | | 63,647 |
| | 32,339 |
| | (79,808 | ) |
Noncontrolling interest (a) | 52,595 |
| | (42,579 | ) | | (22,613 | ) | | 25,766 |
|
Total net realized gains (losses) and change in net unrealized (losses) gains on investments excluding noncontrolling interest | $ | (27,784 | ) | | $ | 21,068 |
| | $ | 9,726 |
| | $ | (54,042 | ) |
| |
(a) | Includes change in net unrealized gains (losses) and realized gains 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 and is included in the Consolidated Statements of Comprehensive Income as net loss (income) attributable to noncontrolling interest. |
The following tables outline investments pledged as collateral under the Company's credit facilities. For further details on the credit facilities, please refer to Note 12: “Debt and financing arrangements.”
|
| | | | | | | | | | | | |
| | September 30, 2014 |
Description | | Commitment | | Issued and Outstanding | | Investments and cash pledged as collateral |
$400,000 syndicated unsecured letter of credit facility | | $ | 400,000 |
| | $ | — |
| | $ | — |
|
$525,000 syndicated secured letter of credit facility | | 525,000 |
| | 301,340 |
| | 393,720 |
|
$200,000 secured bi-lateral letter of credit facility | | 200,000 |
| | 19,743 |
| | 35,414 |
|
Talbot FAL facility | | 25,000 |
| | 25,000 |
| | 31,054 |
|
PaCRe senior secured letter of credit facility | | 10,000 |
| | 294 |
| | — |
|
AlphaCat Re secured letter of credit facility | | 30,000 |
| | 30,000 |
| | 30,059 |
|
IPC bi-lateral facility | | 40,000 |
| | 16,975 |
| | 96,633 |
|
$375,000 Flagstone bi-lateral facility | | 375,000 |
| | 288,739 |
| | 456,458 |
|
Total | | $ | 1,605,000 |
| | $ | 682,091 |
| | $ | 1,043,338 |
|
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
| | | | | | | | | | | | |
| | December 31, 2013 |
Description | | Commitment | | Issued and Outstanding | | Investments and cash pledged as collateral |
$400,000 syndicated unsecured letter of credit facility | | $ | 400,000 |
| | $ | — |
| | $ | — |
|
$525,000 syndicated secured letter of credit facility | | 525,000 |
| | 358,567 |
| | 507,620 |
|
$200,000 secured bi-lateral letter of credit facility | | 200,000 |
| | 16,726 |
| | 130,256 |
|
Talbot FAL facility | | 25,000 |
| | 25,000 |
| | 30,801 |
|
PaCRe senior secured letter of credit facility | | 10,000 |
| | 294 |
| | — |
|
AlphaCat Re secured letter of credit facility | | 24,800 |
| | 24,800 |
| | 24,806 |
|
IPC bi-lateral facility | | 40,000 |
| | 20,177 |
| | 98,465 |
|
$375,000 Flagstone bi-lateral facility | | 375,000 |
| | 305,686 |
| | 454,458 |
|
Total | | $ | 1,599,800 |
| | $ | 751,250 |
| | $ | 1,246,406 |
|
In addition, $3,035,784 of cash and cash equivalents, short-term investments and fixed maturities were pledged during the normal course of business as at September 30, 2014 (December 31, 2013: $2,947,475). Of those, $3,030,932 were held in trust (December 31, 2013: $2,942,508). Pledged assets are generally for the benefit of the Company's cedants and policyholders, to support AlphaCat's fully collateralized reinsurance transactions and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators.
4. Fair value measurements
| |
(a) | Classification within the fair value hierarchy |
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.
There have been no material changes in the Company's valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
At September 30, 2014, 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 | $ | — |
| | $ | 786,255 |
| | $ | — |
| | $ | 786,255 |
|
Non-U.S. government and government agency | — |
| | 381,197 |
| | — |
| | 381,197 |
|
U.S. states, municipalities and political subdivisions | — |
| | 74,365 |
| | — |
| | 74,365 |
|
Agency residential mortgage-backed securities | — |
| | 375,227 |
| | — |
| | 375,227 |
|
Non-agency residential mortgage-backed securities | — |
| | 17,199 |
| | — |
| | 17,199 |
|
U.S. corporate | — |
| | 1,168,918 |
| | — |
| | 1,168,918 |
|
Non-U.S. corporate | — |
| | 594,635 |
| | — |
| | 594,635 |
|
Bank loans | — |
| | 483,788 |
| | — |
| | 483,788 |
|
Catastrophe bonds | — |
| | 43,337 |
| | 5,001 |
| | 48,338 |
|
Asset-backed securities | — |
| | 566,452 |
| | — |
| | 566,452 |
|
Commercial mortgage-backed securities | — |
| | 173,799 |
| | — |
| | 173,799 |
|
Total fixed maturities | — |
| | 4,665,172 |
| | 5,001 |
| | 4,670,173 |
|
Total short-term investments (b) | 1,671,911 |
| | 13,071 |
| | — |
| | 1,684,982 |
|
Other investments | | | | | | | |
Fund of hedge funds | — |
| | — |
| | 2,043 |
| | 2,043 |
|
Hedge funds (a) | — |
| | — |
| | 567,840 |
| | 567,840 |
|
Private equity investments | — |
| | — |
| | 15,019 |
| | 15,019 |
|
Investment funds | — |
| | 21,310 |
| | 102,880 |
| | 124,190 |
|
Mutual funds | — |
| | 9,541 |
| | — |
| | 9,541 |
|
Total other investments | — |
| | 30,851 |
| | 687,782 |
| | 718,633 |
|
Total investments including noncontrolling interests | $ | 1,671,911 |
| | $ | 4,709,094 |
| | $ | 692,783 |
| | $ | 7,073,788 |
|
Noncontrolling interest (a) | $ | — |
| | $ | — |
| | $ | (495,365 | ) | | $ | (495,365 | ) |
Redeemable noncontrolling interest (b) | $ | (11,637 | ) | | $ | — |
| | $ | — |
| | $ | (11,637 | ) |
Total investments excluding noncontrolling interests | $ | 1,660,274 |
| | $ | 4,709,094 |
| | $ | 197,418 |
| | $ | 6,566,786 |
|
| |
(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 and included in the Consolidated Balance Sheets as noncontrolling interest. |
| |
(b) | Included in the short-term investments balance are investments held by one AlphaCat ILS fund which is consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest. |
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, 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 | $ | — |
| | $ | 1,364,679 |
| | $ | — |
| | $ | 1,364,679 |
|
Non-U.S. government and government agency | — |
| | 459,068 |
| | — |
| | 459,068 |
|
U.S. states, municipalities and political subdivisions | — |
| | 43,120 |
| | — |
| | 43,120 |
|
Agency residential mortgage-backed securities | — |
| | 311,499 |
| | — |
| | 311,499 |
|
Non-agency residential mortgage-backed securities | — |
| | 15,759 |
| | — |
| | 15,759 |
|
U.S. corporate | — |
| | 1,332,484 |
| | — |
| | 1,332,484 |
|
Non-U.S. corporate | — |
| | 714,325 |
| | — |
| | 714,325 |
|
Bank loans | — |
| | 717,116 |
| | — |
| | 717,116 |
|
Catastrophe bonds | — |
| | 74,551 |
| | — |
| | 74,551 |
|
Asset-backed securities | — |
| | 509,657 |
| | — |
| | 509,657 |
|
Total fixed maturities | — |
| | 5,542,258 |
| | — |
| | 5,542,258 |
|
Total short-term investments (b) | 747,215 |
| | 4,563 |
| | — |
| | 751,778 |
|
Other investments | | | | | | | |
Fund of hedge funds | — |
| | — |
| | 2,303 |
| | 2,303 |
|
Hedge funds (a) | — |
| | — |
| | 561,083 |
| | 561,083 |
|
Private equity investments | — |
| | — |
| | 13,485 |
| | 13,485 |
|
Investment fund | — |
| | 31,629 |
| | — |
| | 31,629 |
|
Mutual funds | — |
| | 9,816 |
| | — |
| | 9,816 |
|
Total other investments | — |
| | 41,445 |
| | 576,871 |
| | 618,316 |
|
Total investments including noncontrolling interests | $ | 747,215 |
| | $ | 5,588,266 |
| | $ | 576,871 |
| | $ | 6,912,352 |
|
Noncontrolling interest (a) | $ | — |
| | $ | — |
| | $ | (489,402 | ) | | $ | (489,402 | ) |
Redeemable noncontrolling interest (b) | $ | (18,365 | ) | | $ | — |
| | $ | — |
| | $ | (18,365 | ) |
Total investments excluding noncontrolling interests | $ | 728,850 |
| | $ | 5,588,266 |
| | $ | 87,469 |
| | $ | 6,404,585 |
|
| |
(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 and included in the Consolidated Balance Sheets as noncontrolling interest. |
| |
(b) | Included in the short-term investments balance are investments held by two AlphaCat ILS funds which are consolidated by the Company but in which the Company has an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest. |
At September 30, 2014, Level 3 investments excluding the noncontrolling interests totaled $197,418 (December 31, 2013: $87,469), representing 3.0% (December 31, 2013: 1.4%) of total investments, excluding noncontrolling interests, measured at fair value on a recurring basis.
| |
(b) | Level 1 assets measured at fair value |
Short term investments
Short term investments categorized as Level 1 consist primarily of highly liquid securities, all 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. The Company has determined that certain of its short-term investments, held in highly liquid money market-type funds, should be included in Level 1 as their fair values are based on quoted market prices in active markets.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
| |
(c) | Level 2 assets measured at fair value |
Fixed maturity investments
Fixed maturity investments included in Level 2 include U.S. government and government agency, non-U.S. government and government agency, U.S. states, municipalities and political subdivisions, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, U.S. corporate, non-U.S. corporate, bank loans, catastrophe bonds, asset-backed securities and commercial mortgage-backed securities.
In general, valuation of the Company's fixed maturity investment portfolios is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company's fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
U.S. states, municipalities and political subdivisions
The Company's U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.
Agency residential mortgage-backed securities
The Company's agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Non-agency residential mortgage-backed securities
The Company's non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other 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
Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company's corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company's non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Bank loans
The Company's bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company's bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Catastrophe bonds
Catastrophe bonds are based on broker or underwriter bid indications. To the extent that these indications are based on significant unobservable inputs, the relevant bonds will be classified as a Level 3 asset.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short term investments
Short term investments consist primarily of highly liquid securities, all with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments is generally determined using amortized cost which approximates fair value. The Company has determined that, other than highly liquid money market-type funds, the remaining 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.
Investment funds
Investment funds classified as Level 2 assets consists of one pooled investment which is invested in fixed income securities with high credit ratings. The investment fund is only open to Lloyd’ Trust Fund participants. The fair value of units in the investment fund is based on the net asset value of the fund as reported by Lloyd’s Treasury & Investment Management.
Mutual funds
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.
| |
(d) | Level 3 assets measured at fair value |
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, private equity investments, an investment fund and certain catastrophe bonds are the only financial instruments in this category as at September 30, 2014. 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 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.
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 August 31, 2014 NAV was used as a basis for fair value measurement in the Company's September 30, 2014 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at September 30, 2014 based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated 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.
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 $567,840 at September 30, 2014 (December 31, 2013: $561,083). The hedge funds consist of investments in five Paulson & Co. managed funds (the "Paulson hedge funds") and one hedge fund assumed in the acquisition of Flagstone Reinsurance Holdings, S.A. (the "Flagstone Acquisition") (the "Flagstone hedge fund").
The Paulson hedge funds' administrator provides monthly reported NAVs with a one-month delay in its valuation. As a result, the funds' administrator's August 31, 2014 NAV was used as a partial basis for fair value measurement in the Company's September 30, 2014 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV at September 30, 2014 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, the Company's valuation estimates have not materially differed from the subsequent NAVs.
The Flagstone hedge fund's administrator provides quarterly NAVs with a three-month delay in valuation. As a result, the June 30, 2014 NAV was used as a basis for fair value measurement in the Company's September 30, 2014 Consolidated Balance Sheet.
As these valuation techniques incorporate both observable and significant unobservable inputs, both the Paulson hedge funds and the Flagstone hedge fund are classified as Level 3 assets. The Paulson hedge funds are subject to quarterly liquidity.
Private equity investments
Private equity investments consist of investments in five private equity funds. The private equity funds' respective fund administrators provide quarterly or semi-annual NAVs with a three-month or six-month delay in valuation as well as audited NAVs as at December 31. As a result, the June 30, 2014 or March 31, 2014 NAV was used as a basis for fair value measurement in the Company's September 30, 2014 Consolidated Balance Sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the private equity investments are classified as Level 3 assets.
Investment funds
Investment funds classified as Level 3 assets consists of one structured securities fund that invests across asset backed securities, residential mortgage backed securities and commercial mortgage backed securities. The fair value of units in the investment fund is based on the NAV of the fund as reported by the independent fund administrator. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation. As a result, the fund administrator's August 31, 2014 NAV was used as a basis for fair value measurement in the Company's September 30, 2014 Consolidated Balance Sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the investment fund investment is classified as a Level 3 asset.
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 a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2014 and 2013:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2014 | | September 30, 2013 | | September 30, 2014 | | September 30, 2013 |
Level 3 investments - Beginning of period | $ | 746,396 |
| | $ | 505,158 |
| | $ | 576,871 |
| | $ | 556,234 |
|
Purchases | 25,784 |
| | 33,154 |
| | 125,784 |
| | 98,669 |
|
Sales | (24,175 | ) | | (35,264 | ) | | (49,508 | ) | | (80,095 | ) |
Settlements | — |
| | — |
| | (1,500 | ) | | — |
|
Net realized gains | 2,554 |
| | 4,503 |
| | 8,198 |
| | 4,843 |
|
Change in net unrealized gains (losses) | (57,776 | ) | | 42,917 |
| | 26,235 |
| | (29,183 | ) |
Transfers into Level 3 | — |
| | — |
| | 6,703 |
| | — |
|
Level 3 investments - End of period | $ | 692,783 |
| | $ | 550,468 |
| | $ | 692,783 |
| | $ | 550,468 |
|
Noncontrolling interest (a) | (495,365 | ) | | (465,472 | ) | | (495,365 | ) | | (465,472 | ) |
Level 3 investments excluding noncontrolling interest | $ | 197,418 |
| | $ | 84,996 |
| | $ | 197,418 |
| | $ | 84,996 |
|
| |
(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 and included in the Consolidated Balance Sheets as noncontrolling interest. |
There have not been any transfers into or out of Levels 1, 2 and 3 during the three months ended September 30, 2014 or 2013. During the nine months ended September 30, 2014 there was a transfer of investments from Level 2 into Level 3 of the fair value hierarchy. This transfer was due to a reassessment of the extent of unobservable inputs used in establishing the fair value of certain catastrophe bonds. There were no transfers into or out of Level 3 during the nine months ended September 30, 2013.
5. Investments in affiliates
The following table presents the Company's investments in affiliates as at September 30, 2014 and December 31, 2013:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
Investment affiliate | $ | 42,381 |
| | $ | 34,500 |
|
Operating affiliates | 175,231 |
| | 106,743 |
|
Investments in affiliates | $ | 217,612 |
| | $ | 141,243 |
|
Aquiline Financial Services Fund II L.P.
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Partnership") representing a total capital commitment of $50,000 (the "Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of July 2, 2010 (the "Limited Partnership Agreement"). Pursuant to the terms of the Limited Partnership Agreement, the Commitment will expire on July 2, 2015.
The Partnership provides quarterly capital account statements with a three-month delay in its valuation. As a result, the Partnership's June 30, 2014 capital account statement was used as the basis for calculating the Company's share of Partnership income for the period.
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 a reconciliation of the beginning and ending investment in the Company's investment affiliate balance for the three and nine months ended September 30, 2014 and 2013:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30,
2014 | | September 30,
2013 | | September 30,
2014 | | September 30,
2013 |
Investment affiliate, beginning of period | $ | 40,627 |
| | $ | 25,352 |
| | $ | 34,500 |
| | $ | 15,218 |
|
Capital contributions | — |
| | 6,185 |
| | — |
| | 13,089 |
|
Income from investment affiliate | 1,754 |
| | 1,044 |
| | 7,881 |
| | 4,274 |
|
Investment affiliate, end of period | $ | 42,381 |
| | $ | 32,581 |
| | $ | 42,381 |
| | $ | 32,581 |
|
The following table presents the Company's investment in the Partnership as at September 30, 2014:
|
| | | | | | | | | | | | | |
| Investment in investment affiliate |
| Investment at cost | | Voting ownership % | | Equity Ownership | | Carrying Value |
Aquiline Financial Services Fund II L.P. | $ | 32,110 |
| | — | % | | 6.7 | % | | $ | 42,381 |
|
The following table presents the Company's investment in the Partnership as at December 31, 2013:
|
| | | | | | | | | | | | | |
| Investment in investment affiliate |
| Investment at cost | | Voting ownership % | | Equity Ownership | | Carrying Value |
Aquiline Financial Services Fund II L.P. | $ | 32,110 |
| | — | % | | 6.7 | % | | $ | 34,500 |
|
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. AlphaCat Re 2011 was a market facing entity and the Company's investment in AlphaCat Re 2011 has been treated as an equity method investment.
AlphaCat Re 2011 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2011.The Company's portion of the returns made during the three and nine months ended September 30, 2014 and 2013 are included in the tables below.
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. AlphaCat Re 2012 was a market facing entity and the Company's investment in AlphaCat Re 2012 has been treated as an equity method investment.
AlphaCat Re 2012 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2012.The Company's portion of the returns made during the three and nine months ended September 30, 2014 and 2013 are included in the tables below.
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
AlphaCat 2013, Ltd.
On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, Ltd. ("AlphaCat 2013"), an entity formed for the purpose of investing in collateralized reinsurance and retrocession on a worldwide basis. AlphaCat 2013 deployed its capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”) and the Company's investment in AlphaCat 2013 has been treated as an equity method investment.
AlphaCat 2013 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2013. The Company's portion of the returns made during the three and nine months ended September 30, 2014 and 2013 are included in the tables below.
AlphaCat 2014, Ltd.
On December 20, 2013, the Company joined with other investors in capitalizing AlphaCat 2014, Ltd. (“AlphaCat 2014”), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2014 renewal season. AlphaCat 2014 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2014 has been treated as an equity method investment.
AlphaCat ILS funds
The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and insurance linked securities ("ILS") contracts. AlphaCat ILS funds all deploy their capital through the AlphaCat Master Fund Ltd. (the “Master Fund”) and AlphaCat Re. All three funds are variable interest entities, with one being consolidated by the Company as the primary beneficiary and one being accounted for as an equity method investment because the Company holds an equity interest of 7.9% and has significant influence. The third fund had been consolidated by the Company as the primary beneficiary from its formation through to December 31, 2013. However, on January 1, 2014 the fund received $35,000 in additional third party subscriptions, resulting in a reduction of the Company’s equity interest below 50%. Since the Company retains significant influence, this fund has been deconsolidated and accounted for as an equity method investment from January 1, 2014. The fair value of the retained interest, based on the fair value of the underlying instruments in Master Fund and AlphaCat Re, amounted to $113,455 at January 1, 2014. The deconsolidation resulted in a gain of $1,372 which is included in the Consolidated Statements of Comprehensive Income as other income for the nine months ended September 30, 2014. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.
AlphaCat Master Fund Ltd. and AlphaCat Reinsurance Ltd.
The Company utilizes Master Fund and AlphaCat Re for the purpose of investing in capital market products and writing collateralized reinsurance, respectively, on behalf of certain entities within the AlphaCat operating segment. Master Fund and AlphaCat Re are market facing entities which enter into transactions on behalf of AlphaCat 2013, AlphaCat 2014 and the AlphaCat ILS funds. The Company owns all of the voting equity interest in Master Fund and AlphaCat Re and, as a result, their financial statements are included in the Consolidated Financial Statements of the Company.
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 investment in operating affiliates for the three and nine months ended September 30, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2014 |
| AlphaCat Re 2011 | | AlphaCat Re 2012 | | AlphaCat 2013 | | AlphaCat 2014 | | AlphaCat ILS funds | | Total |
As at June 30, 2014 | $ | 4,172 |
| | $ | 2,204 |
| | $ | 2,580 |
| | $ | 25,014 |
| | $ | 139,022 |
| | $ | 172,992 |
|
Return of investment | |