Edgar Filing: VALIDUS HOLDINGS LTD

2015.03.31 - 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 March 31, 2015

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 May 6, 2015 there were 84,581,781 outstanding Common Shares, $0.175 par value per share, of the registrant.

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INDEX



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets as at March 31, 2015 (unaudited) and December 31, 2014	2

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	3

Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)	5

Notes to Consolidated Financial Statements (unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	59

Item 3. Quantitative and Qualitative Disclosures About Market Risk	108

Item 4. Controls and Procedures	110

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	110

Item 1A. Risk Factors	110

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	111

Item 3. Defaults Upon Senior Securities	112

Item 4. Mine Safety Disclosure	112

Item 5. Other Information	112

Item 6. Exhibits	113

Signatures	114

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at March 31, 2015 (unaudited) and December 31, 2014

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



	March 31, 2015			December 31, 2014
	(unaudited)
Assets
Fixed maturities, at fair value (amortized cost: 2015—$5,458,443; 2014—$5,534,494)	$	5,484,479		$	5,532,731
Short-term investments, at fair value (amortized cost: 2015—$1,183,410; 2014—$1,051,222)	1,183,342			1,051,074
Other investments, at fair value (cost: 2015—$908,405; 2014—$879,176)	881,995			813,011
Cash and cash equivalents	471,129			577,240
Restricted cash	186,423			173,003
Total investments and cash	8,207,368			8,147,059
Investments in affiliates	263,332			261,483
Premiums receivable	1,114,102			707,647
Deferred acquisition costs	240,835			161,295
Prepaid reinsurance premiums	192,694			81,983
Securities lending collateral	5,337			470
Loss reserves recoverable	375,882			377,466
Paid losses recoverable	27,034			38,078
Income taxes recoverable	10,597			—
Deferred tax asset	30,847			23,821
Receivable for investments sold	24,803			18,318
Intangible assets	125,508			126,924
Goodwill	195,897			195,897
Accrued investment income	23,230			24,865
Other assets	216,984			164,633
Total assets	$	11,054,450		$	10,329,939

Liabilities
Reserve for losses and loss expenses	$	3,199,362		$	3,234,394
Unearned premiums	1,452,179			990,564
Reinsurance balances payable	101,426			127,128
Securities lending payable	5,803			936
Deferred tax liability	13,265			5,541
Payable for investments purchased	123,556			68,574
Accounts payable and accrued expenses	177,944			318,245
Notes payable to operating affiliates	919,684			671,465
Senior notes payable	247,333			247,306
Debentures payable	537,561			539,277
Total liabilities	$	6,778,113		$	6,203,430

Commitments and contingent liabilities
Redeemable noncontrolling interest	98,777			79,956

Shareholders’ equity
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2015—156,749,783; 2014—155,554,224; Outstanding: 2015—83,634,915; 2014—83,869,845)	$	27,431		$	27,222
Treasury shares (2015—73,114,868; 2014—71,684,379)	(12,795		)	(12,545		)
Additional paid-in-capital	1,162,485			1,207,493
Accumulated other comprehensive loss	(12,641		)	(8,556		)
Retained earnings	2,518,629			2,374,344
Total shareholders’ equity available to Validus	3,683,109			3,587,958
Noncontrolling interest	494,451			458,595
Total shareholders’ equity	$	4,177,560		$	4,046,553

Total liabilities, noncontrolling interests and shareholders’ equity	$	11,054,450		$	10,329,939

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2015 and 2014 (unaudited)

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



	Three Months Ended
	March 31, 2015			March 31, 2014
	(unaudited)			(unaudited)
Revenues
Gross premiums written	$	1,119,498		$	1,011,991
Reinsurance premiums ceded	(190,840		)	(194,908		)
Net premiums written	928,658			817,083
Change in unearned premiums	(350,904		)	(334,126		)
Net premiums earned	577,754			482,957
Net investment income	31,021			23,362
Net realized gains on investments	4,169			3,740
Change in net unrealized gains on investments	72,204			55,693
Income from investment affiliate	2,776			5,348
Other insurance related income and other income	4,832			13,830
Foreign exchange losses	(3,551		)	(6,478		)
Total revenues	689,205			578,452

Expenses
Losses and loss expenses	240,929			162,671
Policy acquisition costs	98,636			85,649
General and administrative expenses	85,028			74,445
Share compensation expenses	9,054			7,147
Finance expenses	19,852			15,900
Total expenses	453,499			345,812

Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors	235,706			232,640
Tax (expense) benefit	(2,565		)	40
Income from operating affiliates	2,453			4,927
(Income) attributable to operating affiliate investors	(23,206		)	(31,710		)
Net income	$	212,388		$	205,897
Net (income) attributable to noncontrolling interest	(38,977		)	(43,509		)
Net income available to Validus	$	173,411		$	162,388

Other comprehensive (loss) income
Change in foreign currency translation adjustments	(3,019		)	462
Change in minimum pension liability, net of tax	(265		)	—
Change in fair value of cash flow hedge	(801		)	—
Other comprehensive (loss) income	$	(4,085	)	$	462

Comprehensive income available to Validus	$	169,326		$	162,850

Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic	83,251,243			93,451,999
Diluted	87,583,129			97,799,519

Basic earnings per share available to common shareholders	$	2.07		$	1.72
Earnings per diluted share available to common shareholders	$	1.98		$	1.66

Cash dividends declared per share	$	0.32		$	0.30

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2015 and 2014 (unaudited)

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



	March 31, 2015			March 31, 2014
	(unaudited)			(unaudited)
Common shares
Balance - Beginning of period	$	27,222		$	27,036
Common shares issued, net	209			19
Balance - End of period	$	27,431		$	27,055

Treasury shares
Balance - Beginning of period	$	(12,545	)	$	(10,228	)
Repurchase of common shares	(250		)	(939		)
Balance - End of period	$	(12,795	)	$	(11,167	)

Additional paid-in capital
Balance - Beginning of period	$	1,207,493		$	1,677,894
Common shares issued, net	3,796			2,011
Repurchase of common shares	(57,858		)	(196,400		)
Share compensation expenses	9,054			7,147
Balance - End of period	$	1,162,485		$	1,490,652

Accumulated other comprehensive loss
Balance - Beginning of period	$	(8,556	)	$	(617	)
Other comprehensive (loss) income	(4,085		)	462
Balance - End of period	$	(12,641	)	$	(155	)

Retained earnings
Balance - Beginning of period	$	2,374,344		$	2,010,009
Dividends	(29,126		)	(29,718		)
Net income	212,388			205,897
Net (income) attributable to noncontrolling interest	(38,977		)	(43,509		)
Balance - End of period	$	2,518,629		$	2,142,679

Total shareholders’ equity available to Validus	$	3,683,109		$	3,649,064

Noncontrolling interest	$	494,451		$	540,934

Total shareholders’ equity	$	4,177,560		$	4,189,998

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2015 and 2014 (unaudited)

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



	March 31, 2015			March 31, 2014
	(unaudited)			(unaudited)
Cash flows provided by (used in) operating activities
Net income	$	212,388		$	205,897
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses	9,054			7,147
Gain on deconsolidation of subsidiary	—			(1,372		)
Amortization of discount on senior notes	27			27
Income from investment affiliate	(2,776		)	(5,348		)
Net realized gains on investments	(4,169		)	(3,740		)
Change in net unrealized gains on investments	(72,204		)	(55,693		)
Amortization of intangible assets	1,416			1,040
Income from operating affiliates	(2,453		)	(4,927		)
Foreign exchange losses (gains) included in net income	8,788			(4,347		)
Amortization of premium on fixed maturities	6,747			4,117
Change in:
Premiums receivable	(409,847		)	(393,543		)
Deferred acquisition costs	(79,540		)	(68,098		)
Prepaid reinsurance premiums	(110,711		)	(115,112		)
Loss reserves recoverable	(205		)	21,832
Paid losses recoverable	10,976			43,054
Income taxes recoverable	(10,759		)	—
Deferred tax asset	(7,132		)	—
Accrued investment income	1,558			2,366
Other assets	(53,575		)	13,558
Reserve for losses and loss expenses	(22,700		)	(105,842		)
Unearned premiums	461,615			449,238
Reinsurance balances payable	(24,646		)	57,765
Deferred tax liability	7,585			3,551
Accounts payable and accrued expenses	(147,978		)	(95,997		)
Net cash used in operating activities	(228,541		)	(44,427		)

Cash flows provided by (used in) investing activities
Proceeds on sales of investments	1,190,559			984,356
Proceeds on maturities of investments	93,732			124,716
Purchases of fixed maturities	(1,163,707		)	(782,290		)
Purchases of short-term investments, net	(133,104		)	(107,437		)
(Purchases) sales of other investments, net	(29,291		)	7,059
Increase in securities lending collateral	(4,867		)	(1,485		)
Investment in operating affiliates	(1,070		)	—
Redemption from operating affiliates	24,150			43,366
Investment in investment affiliates	(19,700		)	—
(Increase) decrease in restricted cash	(13,420		)	91,274
Net cash (used in) provided by investing activities	(56,718		)	359,559

Cash flows provided by (used in) financing activities
Proceeds on issuance of notes payable to operating affiliates	621,864			154,028
Repayments on notes payable to operating affiliates	(365,883		)	(184,628		)
Issuance of common shares, net	4,005			2,030
Purchases of common shares under share repurchase program	(58,108		)	(197,339		)
Dividends paid	(28,217		)	(29,330		)
Increase in securities lending payable	4,867			1,485
Third party investment in redeemable noncontrolling interest	15,700			—
Third party redemption of redeemable noncontrolling interest	—			(10,496		)
Net cash provided by (used in) financing activities	194,228			(264,250		)

Effect of foreign currency rate changes on cash and cash equivalents	(15,080		)	4,890

Net (decrease) increase in cash	(106,111		)	55,772

Cash and cash equivalents - beginning of period	$	577,240		$	734,148

Cash and cash equivalents - end of period	$	471,129		$	789,920

Taxes paid during the period	$	7,187		$	152

Interest paid during the period	$	19,188		$	19,174

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

1. Basis of preparation and consolidation

These unaudited Consolidated Financial Statements (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, 2014, 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. The Consolidated Statement of Cash Flows for the three months ended March 31, 2014 includes a revision to increase net cash provided by investing activities by $94,768. There are no changes to the sub-totals of net cash used in operating activities, financing activities or the effect of foreign currency rate changes on cash and cash equivalents. This revision resulted in an increase in net cash of $94,768 for the three months ended March 31, 2014.

The effect of this revision does not impact any per-share amounts or other components of equity or net assets in the statement of financial position in the prior period presented. The Company does not believe this revision is material to the prior period. The Company has revised these prior period amounts to provide comparability with current period cash flows. 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

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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” (ASU 2015-02). The amendments in this update modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. The amendment also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The amendment also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it could have a material impact on the Company’s Consolidated Financial Statements.

In April 2015, the FASB issued Accounting Standard Update 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in this Update simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued. 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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

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 March 31, 2015 were as follows:



	Amortized Cost or Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government and government agency	$	768,112		$	3,867		$	(278	)	$	771,701
Non-U.S. government and government agency	244,372			1,771			(2,610		)	243,533
U.S. states, municipalities and political subdivisions	347,348			3,749			(254		)	350,843
Agency residential mortgage-backed securities	522,951			11,725			(442		)	534,234
Non-agency residential mortgage-backed securities	32,393			360			(645		)	32,108
U.S. corporate	1,436,724			10,929			(1,507		)	1,446,146
Non-U.S. corporate	509,705			4,827			(3,951		)	510,581
Bank loans	464,761			1,417			(4,838		)	461,340
Catastrophe bonds	129,711			556			(3,050		)	127,217
Asset-backed securities	702,298			2,755			(788		)	704,265
Commercial mortgage-backed securities	300,068			2,828			(385		)	302,511
Total fixed maturities	5,458,443			44,784			(18,748		)	5,484,479
Total short-term investments (a)	1,183,410			11			(79		)	1,183,342
Other investments
Fund of hedge funds	1,915			76			(921		)	1,070
Preferred stock	2,945			60			—			3,005
Hedge funds (b)	595,753			95,124			(129,559		)	561,318
Private equity investments	48,140			5,831			(1,119		)	52,852
Investment funds	253,453			561			—			254,014
Mutual funds	6,199			3,537			—			9,736
Total other investments	908,405			105,189			(131,599		)	881,995
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	7,550,258		$	149,984		$	(150,426	)	$	7,549,816
Assets managed on behalf of operating affiliates (a)	(751,473		)	—			—			(751,473		)
Catastrophe bonds	(129,711		)	(556		)	3,050			(127,217		)
Noncontrolling interest (b)	(525,330		)	(79,346		)	116,603			(488,073		)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	6,143,744		$	70,082		$	(30,773	)	$	6,183,053

(a)

Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, 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.


(b)	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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2014 were as follows:



	Amortized Cost or Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. government and government agency	$	759,232		$	1,755		$	(901	)	$	760,086
Non-U.S. government and government agency	279,493			1,215			(1,980		)	278,728
U.S. states, municipalities and political subdivisions	448,668			1,780			(825		)	449,623
Agency residential mortgage-backed securities	520,685			9,697			(1,151		)	529,231
Non-agency residential mortgage-backed securities	37,954			369			(516		)	37,807
U.S. corporate	1,500,963			3,960			(5,217		)	1,499,706
Non-U.S. corporate	564,386			2,765			(3,989		)	563,162
Bank loans	457,537			200			(8,733		)	449,004
Catastrophe bonds	75,822			768			(926		)	75,664
Asset-backed securities	647,422			1,250			(1,190		)	647,482
Commercial mortgage-backed securities	242,332			598			(692		)	242,238
Total fixed maturities	5,534,494			24,357			(26,120		)	5,532,731
Total short-term investments (a)	1,051,222			13			(161		)	1,051,074
Other investments
Fund of hedge funds	2,570			125			(920		)	1,775
Preferred stock	6,535			—			(201		)	6,334
Hedge funds (b)	570,371			60,792			(134,203		)	496,960
Private equity investments	48,995			4,987			(611		)	53,371
Investment funds	244,506			437			(111		)	244,832
Mutual funds	6,199			3,540			—			9,739
Total other investments	879,176			69,881			(136,046		)	813,011
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	7,464,892		$	94,251		$	(162,327	)	$	7,396,816
Assets managed on behalf of operating affiliates (a)	(696,924		)	—			—			(696,924		)
Catastrophe bonds	(75,822		)	(768		)	926			(75,664		)
Noncontrolling interest (b)	(502,830		)	(48,446		)	120,782			(430,494		)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	6,189,316		$	45,037		$	(40,619	)	$	6,193,734

(a)


(b)	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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at March 31, 2015 and December 31, 2014.



	March 31, 2015				December 31, 2014
	Estimated Fair Value		% of Total		Estimated Fair Value		% of Total
AAA	$	2,473,674	45.1	%	$	2,494,239	45.1	%
AA	660,150		12.0	%	848,226		15.4	%
A	1,087,156		19.8	%	1,086,091		19.6	%
BBB	570,464		10.4	%	505,208		9.1	%
Total investment-grade fixed maturities	4,791,444		87.3	%	4,933,764		89.2	%

BB	307,561		5.6	%	362,972		6.6	%
B	247,983		4.5	%	145,240		2.6	%
CCC	4,365		0.1	%	12,733		0.2	%
CC	3,286		0.1	%	3,926		0.1	%
C	—		—	%	1,344		—	%
D/NR	129,840		2.4	%	72,752		1.3	%
Total non-investment grade fixed maturities	693,035		12.7	%	598,967		10.8	%
Total fixed maturities	$	5,484,479	100.0	%	$	5,532,731	100.0	%

The amortized cost and estimated fair value amounts for fixed maturities held at March 31, 2015 and December 31, 2014 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.



	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	291,651	$	292,276	$	312,843	$	313,248
Due after one year through five years	2,921,246		2,928,600		3,163,225		3,159,200
Due after five years through ten years	571,599		572,771		497,175		491,870
Due after ten years	116,237		117,716		112,858		111,655
	3,900,733		3,911,363		4,086,101		4,075,973
Asset-backed and mortgage-backed securities	1,557,710		1,573,116		1,448,393		1,456,758
Total fixed maturities	$	5,458,443	$	5,484,479	$	5,534,494	$	5,532,731


(b)	Net investment income

Net investment income was derived from the following sources:



	Three Months Ended
	March 31, 2015			March 31, 2014
Fixed maturities and short-term investments	$	29,239		$	23,297
Other investments	3,188			—
Restricted cash and cash and cash equivalents	435			1,957
Securities lending income	3			2
Total gross investment income	32,865			25,256
Investment expenses	(1,844		)	(1,894		)
Total net investment income	$	31,021		$	23,362

Net investment income from other investments includes distributed and undistributed net income from certain investment funds.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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


(c)	Net realized gains and change in net unrealized gains on investments

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



	Three Months Ended
	March 31, 2015			March 31, 2014
Fixed maturities, short-term and other investments
Gross realized gains	$	6,309		$	5,296
Gross realized (losses)	(2,140		)	(1,556		)
Net realized gains on investments	4,169			3,740
Change in net unrealized gains on investments (a)	72,204			55,693
Total net realized and change in net unrealized gains on investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	76,373			59,433
Assets managed on behalf of operating affiliates	—			—
Catastrophe bonds	2,336			797
Noncontrolling interest (a)	(35,079		)	(42,002		)
Total net realized and change in net unrealized gains on investments excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	43,630		$	18,228


(a)	Includes the change in net unrealized 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.


(d)	Pledged investments

The following tables outline investments and cash 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.”



	March 31, 2015
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		268,907		400,774
$30,000 secured bi-lateral letter of credit facility	30,000		14,747		27,019
Talbot FAL facility	25,000		25,000		31,221
PaCRe senior secured letter of credit facility	10,000		39		—
AlphaCat Re secured letter of credit facility	30,000		30,000		30,097
IPC bi-lateral facility	25,000		12,543		100,549
$230,000 Flagstone bi-lateral facility	230,000		209,070		373,664
Total	$	1,275,000	$	560,306	$	963,324

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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



	December 31, 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		276,455		395,750
$200,000 secured bi-lateral letter of credit facility	200,000		15,649		35,645
Talbot FAL facility	25,000		25,000		31,048
PaCRe senior secured letter of credit facility	10,000		294		—
AlphaCat Re secured letter of credit facility	30,000		30,000		30,078
IPC bi-lateral facility	40,000		15,897		99,437
$375,000 Flagstone bi-lateral facility	375,000		198,389		430,782
Total	$	1,605,000	$	561,684	$	1,022,740

In addition, $3,267,654 of cash and cash equivalents, restricted cash, short-term investments and fixed maturities were pledged during the normal course of business as at March 31, 2015 (December 31, 2014: $3,150,295). Of those, $3,208,722 were held in trust (December 31, 2014: $3,122,074). 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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

At March 31, 2015, 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	$	—		$	771,701		$	—		$	771,701
Non-U.S. government and government agency	—			243,533			—			243,533
U.S. states, municipalities and political subdivisions	—			350,843			—			350,843
Agency residential mortgage-backed securities	—			534,234			—			534,234
Non-agency residential mortgage-backed securities	—			32,108			—			32,108
U.S. corporate	—			1,446,146			—			1,446,146
Non-U.S. corporate	—			510,581			—			510,581
Bank loans	—			381,621			79,719			461,340
Catastrophe bonds	—			124,217			3,000			127,217
Asset-backed securities	—			704,265			—			704,265
Commercial mortgage-backed securities	—			302,511			—			302,511
Total fixed maturities	—			5,401,760			82,719			5,484,479
Total short-term investments (a)	1,084,139			92,389			6,814			1,183,342
Other investments
Fund of hedge funds	—			—			1,070			1,070
Preferred stock	—			3,005			—			3,005
Hedge funds (b)	—			—			561,318			561,318
Private equity investments	—			—			52,852			52,852
Investment funds	—			91,131			162,883			254,014
Mutual funds	—			9,736			—			9,736
Total other investments	—			103,872			778,123			881,995
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	1,084,139		$	5,598,021		$	867,656		$	7,549,816
Assets managed on behalf of operating affiliates (a)	(751,473		)	—			—			(751,473		)
Catastrophe bonds	—			(124,217		)	(3,000		)	(127,217		)
Noncontrolling interest (b)	—			—			(488,073		)	(488,073		)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	332,666		$	5,473,804		$	376,583		$	6,183,053

(a)


(b)	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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

At December 31, 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	$	—		$	760,086		$	—		$	760,086
Non-U.S. government and government agency	—			278,728			—			278,728
U.S. states, municipalities and political subdivisions	—			449,623			—			449,623
Agency residential mortgage-backed securities	—			529,231			—			529,231
Non-agency residential mortgage-backed securities	—			37,807			—			37,807
U.S. corporate	—			1,499,706			—			1,499,706
Non-U.S. corporate	—			563,162			—			563,162
Bank loans	—			416,256			32,748			449,004
Catastrophe bonds	—			70,664			5,000			75,664
Asset-backed securities	—			647,482			—			647,482
Commercial mortgage-backed securities	—			242,238			—			242,238
Total fixed maturities	—			5,494,983			37,748			5,532,731
Total short-term investments (a)	942,716			108,358			—			1,051,074
Other investments
Fund of hedge funds	—			—			1,775			1,775
Preferred stock	—			6,334			—			6,334
Hedge funds (b)	—			—			496,960			496,960
Private equity investments	—			—			53,371			53,371
Investment fund	—			140,045			104,787			244,832
Mutual funds	—			9,739			—			9,739
Total other investments	—			156,118			656,893			813,011
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	942,716		$	5,759,459		$	694,641		$	7,396,816
Assets managed on behalf of operating affiliates (a)	(696,924		)	—			—			(696,924		)
Catastrophe bonds	—			(70,664		)	(5,000		)	(75,664		)
Noncontrolling interest (b)	—			—			(430,494		)	(430,494		)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest	$	245,792		$	5,688,795		$	259,147		$	6,193,734

(a)


(b)	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.

At March 31, 2015, Level 3 investments excluding the noncontrolling interests totaled $376,583 (December 31, 2014: $259,147), representing 6.1% (December 31, 2014: 4.2%) of total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interests, measured at fair value on a recurring basis.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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


(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.


(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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

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.

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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

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 of 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 majority of 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. To the extent that these valuations are based on significant unobservable inputs, the relevant short term investments will be classified as a Level 3 asset.

Preferred stock

The Company's preferred stock portfolio contains preferred term securities typically sold by non-public financial services companies, through a collateralized debt obligation product and are classified as Level 2 assets. The fair value of these investments is determined based on quoted market prices in active markets.

Investment funds

Investment funds classified as Level 2 assets includes one pooled investment which is invested in fixed income securities with high credit ratings. The investment fund is only open to Lloyd’s 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.

Also included within investment funds is the Company's share of a portfolio of Lloyd's overseas deposits, which is also classified as a Level 2 asset. The underlying deposits are managed centrally by Lloyd's and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd's.

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, certain bank loans, an investment fund and certain catastrophe bonds are the only financial instruments in this category as at March 31, 2015. 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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

Bank loans

Included in the bank loans portfolio is a collection of loan participations held through an intermediary. These investments are classified as Level 3 assets. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary.

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 which was used as a basis for fair value measurement in the Company's March 31, 2015 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at March 31, 2015 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.

Hedge funds

The hedge funds were valued at $561,318 at March 31, 2015 (December 31, 2014: $496,960). 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 which was used as a partial basis for fair value measurement in the Company's March 31, 2015 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV as at March 31, 2015 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 which was used as a basis for fair value measurement in the Company's March 31, 2015 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

The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation in the Company's March 31, 2015 Consolidated Balance Sheet. These private equity investments vary in investment strategies and are not actively traded in any open markets. As this valuation technique can incorporate 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 which was used as a basis for fair value measurement in the Company's March 31, 2015 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.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

The following table 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 months ended March 31, 2015 and 2014:



	Three Months Ended
	March 31, 2015			March 31, 2014
Level 3 investments - Beginning of period	$	694,641		$	576,871
Purchases	145,789			—
Sales	(7,602		)	(3,589		)
Settlements	(3,995		)	—
Net realized (losses) gains	(11		)	10
Change in net unrealized gains	38,834			49,326
Transfers into Level 3	—			6,703
Level 3 investments - End of period	$	867,656		$	629,321
Catastrophe Bonds	(3,000		)	—
Noncontrolling interest (a)	(488,073		)	(531,403		)
Level 3 investments - End of period excluding catastrophe bonds and noncontrolling interest	$	376,583		$	97,918


(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 March 31, 2015. During the three months ended March 31, 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.

5. Investments in affiliates

The following table presents the Company's investments in affiliates as at March 31, 2015 and December 31, 2014:



	March 31, 2015		December 31, 2014
Investment affiliates	$	85,982	$	63,506
Operating affiliates	177,350		197,977
Investments in affiliates	$	263,332	$	261,483


(a)	Investment affiliate

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 "Aquiline II General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II 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 of the Fund dated January 9, 2013 (the "Aquiline II Limited Partnership Agreement").

On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is also governed by the terms of the Aquiline II Limited Partnership Agreement.

The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

Aquiline Financial Services Fund III L.P.

On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company is committing and agreeing to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of November 7, 2014 (the “Aquiline III Limited Partnership Agreement”).

The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliates balance for the three months ended March 31, 2015 and 2014:



	Three Months Ended
	March 31, 2015		March 31, 2014
Investment affiliates, beginning of period	$	63,506	$	34,500
Capital contributions	19,700		—
Income from investment affiliate	2,776		5,348
Investment affiliates, end of period	$	85,982	$	39,848

The following table presents the Company's investment in the Partnerships as at March 31, 2015:



	Investment in investment affiliate
	Investment at cost		Voting ownership %		Equity Ownership		Carrying Value
Aquiline Financial Services Fund II L.P.	$	56,563	—	%	8.1	%	$	71,844
Aquiline Financial Services Fund III L.P.	$	14,138	—	%	13.7	%	$	14,138
Total	$	70,701					$	85,982

The following table presents the Company's investment in the Partnership as at December 31, 2014:



	Investment in investment affiliate
	Investment at cost		Voting ownership %		Equity Ownership		Carrying Value
Aquiline Financial Services Fund II L.P.	$	51,001	—	%	8.1	%	$	63,506


(b)	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. 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 months ended March 31, 2015 and 2014 are included in the tables below.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

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 months ended March 31, 2015 and 2014 are included in the tables below.

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 months ended March 31, 2015 and 2014 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.

The risk periods for a majority of the AlphaCat 2014 risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2014. The Company's portion of the returns made during the three months ended March 31, 2015 are included in the table below.

AlphaCat 2015, Ltd.

On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, Ltd. ("AlphaCat 2015"), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2015 renewal season. AlphaCat 2015 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2015 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 primarily deploy their capital through the AlphaCat Master Fund Ltd. (the "AlphaCat Master Fund") and AlphaCat Re. All of the funds are variable interest entities, with one being consolidated by the Company as the primary beneficiary and the remaining funds being accounted for as equity method investments because the Company holds an equity interest of less than 50% and has significant influence. One of these funds 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 retained significant influence, this fund was 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 AlphaCat Master Fund and AlphaCat Re, amounted to $113,455 as 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 insurance related income for the year ended December 31, 2014. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

AlphaCat Master Fund Ltd. and AlphaCat Reinsurance Ltd.

The Company utilizes AlphaCat 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. AlphaCat Master Fund and AlphaCat Re are market facing entities which enter into transactions on behalf of AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds. The Company owns all of the voting equity interest in AlphaCat Master Fund and AlphaCat Re and, as a result, their financial statements are included in the Consolidated Financial Statements of the Company.

BetaCat ILS funds

The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk issued under Rule 144A of the Securities Act of 1933, following a passive buy-and-hold investment strategy. One of the funds is a variable interest entity and is consolidated by the Company as the primary beneficiary. The remaining fund is consolidated by the Company as it owns all of the voting equity interest. The Company's maximum exposure to either of the funds is the amount of capital invested at any given time. As at March 31, 2015, no third party subscriptions had been received.

The following tables present a reconciliation of the beginning and ending investment in operating affiliates for the three months ended March 31, 2015 and 2014:



	Three Months Ended March 31, 2015
	AlphaCat Re 2011			AlphaCat Re 2012			AlphaCat 2013			AlphaCat 2014			AlphaCat 2015		AlphaCat ILS funds		Total
As at December 31, 2014	$	4,606		$	735		$	1,068		$	28,085		$	25,600	$	137,883	$	197,977
Purchase of shares	—			—			—			—			—		1,070		1,070
Return of investment	—			—			—			(24,150		)	—		—		(24,150		)
Income from operating affiliates	(10		)	(25		)	(14		)	(100		)	1,316		1,286		2,453
As at March 31, 2015	$	4,596		$	710		$	1,054		$	3,835		$	26,916	$	140,239	$	177,350



	Three Months Ended March 31, 2014
	AlphaCat Re 2011			AlphaCat Re 2012			AlphaCat 2013			AlphaCat 2014		AlphaCat ILS funds		Total
As at December 31, 2013	$	9,809		$	1,313		$	51,744		$	21,982	$	21,895	$	106,743
Return of investment	(5,825		)	—			(37,541		)	—		—		(43,366		)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund	—			—			—			—		113,455		113,455
Income from operating affiliates	193			(36		)	1,475			1,611		1,684		4,927
As at March 31, 2014	$	4,177		$	1,277		$	15,678		$	23,593	$	137,034	$	181,759

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at March 31, 2015:



	Investment in operating affiliates
	Cost		Voting ownership %		Equity ownership %		Carrying value
AlphaCat Re 2011	$	4,596	43.7	%	22.3	%	$	4,596
AlphaCat Re 2012	710		49.0	%	37.9	%	710
AlphaCat 2013	1,054		40.9	%	19.7	%	1,054
AlphaCat 2014	3,835		42.3	%	19.6	%	3,835
AlphaCat 2015	25,600		40.0	%	20.0	%	26,916
AlphaCat ILS funds	134,161		n/a		(a)		140,239
Total	$	169,956					$	177,350


(a)	Equity ownership in the funds was 7.6%, 25.2% and 9.1%, respectively as at March 31, 2015.



	Investment in operating affiliates
	Cost		Voting ownership %		Equity ownership %	Carrying value
AlphaCat Re 2011	$	4,606	43.7	%