Document
Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016

Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of August 3, 2016 there were 80,337,635 outstanding Common Shares, $0.175 par value per share, of the registrant.
 


Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2016 (unaudited) and December 31, 2015
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets


 


Fixed maturities trading, at fair value (amortized cost: 2016—$5,524,027; 2015—$5,556,900)
$
5,551,586

 
$
5,510,331

Short-term investments trading, at fair value (amortized cost: 2016—$2,369,704; 2015—$1,941,615)
2,369,654

 
1,941,635

Other investments, at fair value (cost: 2016—$338,669; 2015—$315,963)
359,526

 
336,856

Cash and cash equivalents
568,798

 
723,109

Restricted cash
96,022

 
73,270

Total investments and cash
8,945,586

 
8,585,201

Investments in affiliates, equity method (cost: 2016—$86,101; 2015—$70,186)
99,278

 
88,065

Premiums receivable
1,372,000

 
658,682

Deferred acquisition costs
283,213

 
181,002

Prepaid reinsurance premiums
145,567

 
77,992

Securities lending collateral
10,224

 
4,863

Loss reserves recoverable
442,987

 
350,586

Paid losses recoverable
27,648

 
23,071

Income taxes recoverable
8,526

 
16,228

Deferred tax asset
23,745

 
21,661

Receivable for investments sold
13,736

 
39,766

Intangible assets
118,426

 
121,258

Goodwill
196,758

 
196,758

Accrued investment income
24,925

 
23,897

Other assets
105,625

 
126,782

Total assets
$
11,818,244

 
$
10,515,812

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,122,717

 
$
2,996,567

Unearned premiums
1,621,563

 
966,210

Reinsurance balances payable
92,488

 
75,380

Securities lending payable
10,690

 
5,329

Deferred tax liability
3,552

 
3,847

Payable for investments purchased
52,718

 
77,475

Accounts payable and accrued expenses
149,593

 
627,331

Notes payable to AlphaCat investors
370,982

 
75,493

Senior notes payable
245,261

 
245,161

Debentures payable
537,987

 
537,668

Total liabilities
$
6,207,551

 
$
5,610,461

 
 
 
 
Commitments and contingent liabilities


 


Redeemable noncontrolling interest
1,532,283

 
1,111,714

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2016—6,000; 2015—nil)
$
150,000

 
$

Common shares (Issued: 2016—161,252,871; 2015—160,570,772; Outstanding: 2016—80,772,238; 2015—82,900,617)
28,219

 
28,100

Treasury shares (2016—80,480,633; 2015—77,670,155)
(14,084
)
 
(13,592
)
Additional paid-in capital
883,701

 
1,002,980

Accumulated other comprehensive loss
(18,182
)
 
(12,569
)
Retained earnings
2,836,602

 
2,634,056

Total shareholders’ equity available to Validus
3,866,256

 
3,638,975

Noncontrolling interest
212,154

 
154,662

Total shareholders’ equity
$
4,078,410

 
$
3,793,637

 
 
 
 
Total liabilities, noncontrolling interests and shareholders’ equity
$
11,818,244

 
$
10,515,812

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

2

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
764,042

 
$
726,168

 
$
1,936,833

 
$
1,845,392

Reinsurance premiums ceded
(36,229
)
 
(55,418
)
 
(204,064
)
 
(246,743
)
Net premiums written
727,813

 
670,750

 
1,732,769

 
1,598,649

Change in unearned premiums
(154,090
)
 
(98,062
)
 
(587,778
)
 
(450,071
)
Net premiums earned
573,723

 
572,688

 
1,144,991

 
1,148,578

Net investment income
39,257

 
33,611

 
68,718

 
64,640

Net realized gains on investments
2,724

 
2,244

 
2,140

 
6,413

Change in net unrealized gains (losses) on investments
31,428

 
(34,676
)
 
78,872

 
(1,449
)
(Loss) income from investment affiliate
(589
)
 
284

 
(4,702
)
 
3,060

Other insurance related income and other income
824

 
100

 
2,237

 
1,040

Foreign exchange gains (losses)
6,286

 
(2,671
)
 
12,531

 
(6,936
)
Total revenues
653,653

 
571,580

 
1,304,787

 
1,215,346

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
307,130

 
266,146

 
531,577

 
507,075

Policy acquisition costs
107,966

 
104,323

 
215,159

 
202,734

General and administrative expenses
89,688

 
84,025

 
175,896

 
168,260

Share compensation expenses
10,727

 
9,242

 
21,964

 
18,296

Finance expenses
14,166

 
18,682

 
29,369

 
39,649

Total expenses
529,677

 
482,418

 
973,965

 
936,014

 
 
 
 
 
 
 
 
Income before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
123,976

 
89,162

 
330,822

 
279,332

Tax (expense) benefit
(1,706
)
 
(2,549
)
 
412

 
(5,114
)
Income (loss) from operating affiliates

 
1,738

 
(23
)
 
5,722

(Income) attributable to AlphaCat investors
(6,114
)
 

 
(10,714
)
 

Net income
$
116,156

 
$
88,351

 
$
320,497

 
$
279,940

Net (income) attributable to noncontrolling interest
(21,193
)
 
(22,561
)
 
(58,724
)
 
(40,739
)
Net income available to Validus
94,963

 
65,790

 
261,773

 
239,201

Dividends on preferred shares

 

 

 

Net income available to Validus common shareholders
$
94,963

 
$
65,790

 
$
261,773

 
$
239,201

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
116,156

 
$
88,351

 
$
320,497

 
$
279,940

Other comprehensive (loss) income
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
(3,287
)
 
2,763

 
(5,315
)
 
(256
)
Change in minimum pension liability, net of tax
479

 
422

 
396

 
157

Change in fair value of cash flow hedge
64

 
390

 
(694
)
 
(411
)
Other comprehensive (loss) income
(2,744
)
 
3,575

 
(5,613
)
 
(510
)
Comprehensive (income) attributable to noncontrolling interest
(21,193
)
 
(22,561
)
 
(58,724
)
 
(40,739
)
Comprehensive income available to Validus
$
92,219

 
$
69,365

 
$
256,160

 
$
238,691

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 
 

 
 
 
 
Basic
81,950,833

 
84,003,549

 
82,386,047

 
83,627,396

Diluted
83,373,003

 
87,313,154

 
83,785,659

 
87,448,142

 
 
 
 
 
 
 
 
Basic earnings per share available to Validus common shareholders
$
1.16

 
$
0.77

 
$
3.18

 
$
2.83

Earnings per diluted share available to Validus common shareholders
$
1.14

 
$
0.75

 
$
3.12

 
$
2.74

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.32

 
$
0.70

 
$
0.64

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

3

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Preferred shares
 
 
 
Balance - beginning of period
$

 
$

Preferred shares issued
150,000

 

Balance - end of period
$
150,000

 
$

 
 
 
 
Common shares
 

 
 

Balance - beginning of period
$
28,100

 
$
27,222

Common shares issued, net
119

 
494

Balance - end of period
$
28,219

 
$
27,716

 
 
 
 
Treasury shares
 

 
 

Balance - beginning of period
$
(13,592
)
 
$
(12,545
)
Repurchase of common shares
(492
)
 
(595
)
Balance - end of period
$
(14,084
)
 
$
(13,140
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - beginning of period
$
1,002,980

 
$
1,207,493

Offering expenses on preferred shares
(5,148
)
 

Common shares issued, net
(7,504
)
 
14,366

Repurchase of common shares
(128,591
)
 
(142,628
)
Share compensation expenses
21,964

 
18,296

Balance - end of period
$
883,701

 
$
1,097,527

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance - beginning of period
$
(12,569
)
 
$
(8,556
)
Other comprehensive loss
(5,613
)
 
(510
)
Balance - end of period
$
(18,182
)
 
$
(9,066
)
 
 
 
 
Retained earnings
 

 
 

Balance - beginning of period
$
2,634,056

 
$
2,372,972

Dividends on preferred shares

 

Dividends on common shares
(59,227
)
 
(57,874
)
Net income
320,497

 
279,940

Net (income) attributable to noncontrolling interest
(58,724
)
 
(40,739
)
Balance - end of period
$
2,836,602

 
$
2,554,299

 
 
 
 
Total shareholders’ equity available to Validus
$
3,866,256

 
$
3,657,336

 
 
 
 
Noncontrolling interest
$
212,154

 
$
153,523

 
 
 
 
Total shareholders’ equity
$
4,078,410

 
$
3,810,859

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

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Cash flows provided by operating activities
 

 
 

Net income
$
320,497

 
$
279,940

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Share compensation expenses
21,964

 
18,296

Amortization of discount on senior notes
54

 
54

Loss (income) from investment affiliate
4,702

 
(3,060
)
Net realized gains on investments
(2,140
)
 
(6,413
)
Change in net unrealized (gains) losses on investments
(78,872
)
 
1,449

Amortization of intangible assets
2,832

 
2,832

Loss (income) from operating affiliates
23

 
(5,722
)
Foreign exchange (gains) losses included in net income
(6,289
)
 
7,729

Amortization of premium on fixed maturity investments
8,710

 
12,395

Change in:
 

 
 

Premiums receivable
(719,070
)
 
(566,100
)
Deferred acquisition costs
(102,211
)
 
(92,020
)
Prepaid reinsurance premiums
(67,575
)
 
(79,304
)
Loss reserves recoverable
(95,429
)
 
644

Paid losses recoverable
(4,571
)
 
(2,253
)
Income taxes recoverable
7,423

 
(13,931
)
Deferred tax asset
(2,529
)
 
908

Accrued investment income
(1,183
)
 
984

Other assets
(5,272
)
 
90,625

Reserve for losses and loss expenses
147,305

 
(50,240
)
Unearned premiums
655,353

 
529,374

Reinsurance balances payable
18,610

 
(34,472
)
Deferred tax liability
(308
)
 
2,329

Accounts payable and accrued expenses
(32,581
)
 
(61,570
)
Net cash provided by operating activities
69,443

 
32,474

 
 
 
 
Cash flows used in investing activities
 

 
 

Proceeds on sales of fixed maturity investments
1,376,077

 
2,237,966

Proceeds on maturities of fixed maturity investments
184,413

 
186,594

Purchases of fixed maturity investments
(1,537,608
)
 
(2,337,990
)
Purchases of short-term investments, net
(428,040
)
 
(154,804
)
(Purchases) sales of other investments, net
(19,796
)
 
4,101

Increase in securities lending collateral
(5,361
)
 
(6,551
)
Redemption from operating affiliates
369

 

Investment in investment affiliates, net
(16,305
)
 
(23,115
)
(Increase) decrease in restricted cash
(22,752
)
 
32,984

Net cash used in investing activities
(469,003
)
 
(60,815
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of notes payable to AlphaCat investors
294,748

 

Net proceeds on issuance of preferred shares
144,852

 

Issuance of common shares, net
(7,385
)
 
14,860

Purchases of common shares under share repurchase program
(129,083
)
 
(143,223
)
Dividends paid on preferred shares

 

Dividends paid on common shares
(59,961
)
 
(58,718
)
Increase in securities lending payable
5,361

 
6,551

Third party investment in redeemable noncontrolling interest
381,250

 
452,700

Third party redemption of redeemable noncontrolling interest
(10,800
)
 
(80,433
)
Third party investment in noncontrolling interest
171,674

 
9,600

Third party distributions of noncontrolling interest
(127,103
)
 
(158,175
)
Third party subscriptions deployed on AlphaCat Funds and Sidecars
(411,336
)
 
(117,400
)
Net cash provided by (used in) financing activities
252,217

 
(74,238
)
 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(6,968
)
 
(8,730
)
Net decrease in cash and cash equivalents
(154,311
)
 
(111,309
)
Cash and cash equivalents - beginning of period
723,109

 
550,401

Cash and cash equivalents - end of period
$
568,798

 
$
439,092

Taxes paid during the period
$
3,837

 
$
14,192

Interest paid during the period
$
27,552

 
$
27,248

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

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Table of Contents

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



1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the "Consolidated Financial Statements") 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, 2015, as filed with the U.S. Securities and Exchange Commission (the "SEC").
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
During the fourth quarter of 2015, the Company early adopted Accounting Standards Update ("ASU") 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” issued by the United States Financial Accounting Standards Board (“FASB”), which changed the method in which the Company determines whether entities are consolidated by the Company. The adoption of this amended accounting guidance was implemented utilizing a full retrospective application for all periods presented in the Company's Consolidated Financial Statements.
The amended guidance includes changes in the identification of the primary beneficiary of investment companies considered to be VIEs. These changes resulted in the Company concluding that it is considered to be the primary beneficiary of the AlphaCat sidecars, the AlphaCat ILS funds and the BetaCat ILS funds and therefore the Company is required to consolidate these entities. The adoption of the amended guidance also resulted in the Company concluding that it was no longer required to consolidate PaCRe Ltd. ("PaCRe") due to the change in the VIE definition of "kick-out" rights under the amended guidance. The cumulative effect of these changes on the Company's retained earnings through the six months ended June 30, 2015 was a gain of $405.
The following tables present the impact of the application of the amended accounting guidance on the Company's Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and Consolidated Statement of Cash Flows for the six months ended June 30, 2015:
 
Three Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
591,492

 
$
(19,912
)
 
$
571,580

Total expenses
480,511

 
1,907

 
482,418

Net income
81,657

 
6,694

 
88,351

Net (income) attributable to noncontrolling interest
(17,644
)
 
(4,917
)
 
(22,561
)
Net income available to Validus
64,013

 
1,777

 
65,790

Comprehensive income available to Validus
67,588

 
1,777

 
69,365

 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.75

 
$
0.02

 
$
0.77

Earnings per diluted share available to common shareholders
$
0.73

 
$
0.02

 
$
0.75


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Table of Contents

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


 
Six Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
1,280,697

 
$
(65,351
)
 
$
1,215,346

Total expenses
934,010

 
2,004

 
936,014

Net income
294,045

 
(14,105
)
 
279,940

Net (income) attributable to noncontrolling interest
(56,621
)
 
15,882

 
(40,739
)
Net income available to Validus
237,424

 
1,777

 
239,201

Comprehensive income available to Validus
236,914

 
1,777

 
238,691

 
 
 


 
 
Basic earnings per share available to common shareholders
$
2.81

 
$
0.02

 
$
2.83

Earnings per diluted share available to common shareholders
$
2.72

 
$
0.02

 
$
2.74

 
Six Months Ended June 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Net cash (used in) provided by operating activities
$
(228,841
)
 
$
261,315

 
$
32,474

Net cash used in investing activities
(290,517
)
 
229,702

 
(60,815
)
Net cash provided by (used in) financing activities
389,593

 
(463,831
)
 
(74,238
)
Effect of foreign currency rate changes on cash and cash equivalents
(13,765
)
 
5,035

 
(8,730
)
Net decrease in cash
(143,530
)
 
32,221

 
(111,309
)
Cash and cash equivalents - beginning of period
577,240

 
(26,839
)
 
550,401

Cash and cash equivalents - end of period
433,710

 
5,382

 
439,092

In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company's financial position and results of operations as at the end of and for the periods presented. 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 FASB.

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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)


2. Recent accounting pronouncements
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). The guidance in this ASU 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. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing”. The amendments in these ASU's clarify the implementation guidance within ASU 2014-09 on principal versus agent considerations and the aspects of identifying performance obligations, respectively, while retaining the related principals in those areas. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients”. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments provide clarifying guidance in a few narrow areas and add practical expedients to reduce the potential for diversity in practice as well as the cost and complexity of applying the guidance. The original effective date for the amendments in ASU 2014-09 was for annual reporting periods beginning after December 15, 2016; however, in August 2015, the FASB delayed the effective date by one year through the issuance of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. As such, the new effective date is for interim and annual reporting periods beginning after December 15, 2017. Entities may adopt the standard as of the original effective date; however, earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The amendments in this ASU increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring the disclosure of key information about leasing arrangements. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting”. The amendments in this ASU simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.


8

Table of Contents

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


3. Investments
During the fourth quarter of 2015, the Company enhanced disclosures around the allocation of invested assets and the related returns between managed and non-managed investments. Managed investments represent assets governed by the Company’s investment policy statement (“IPS”), whereas non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 5, "Variable interest entities," for further details. As such, prior period disclosures have been revised to conform to current period presentation.
The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with U.S. GAAP guidance for "Financial Instruments." As such, all investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income for the period.
The amortized cost (or cost), gross unrealized gains and (losses) and fair value of the Company's investments as at June 30, 2016 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
924,350

 
$
7,536

 
$
(83
)
 
$
931,803

Non-U.S. government and government agency
217,796

 
2,146

 
(4,692
)
 
215,250

U.S. states, municipalities, political subdivisions
278,756

 
7,049

 
(393
)
 
285,412

Agency residential mortgage-backed securities
662,468

 
14,713

 
(398
)
 
676,783

Non-agency residential mortgage-backed securities
23,858

 
271

 
(740
)
 
23,389

U.S. corporate
1,539,711

 
20,350

 
(4,014
)
 
1,556,047

Non-U.S. corporate
367,473

 
3,264

 
(6,331
)
 
364,406

Bank loans
613,414

 
574

 
(16,926
)
 
597,062

Asset-backed securities
429,890

 
2,352

 
(2,902
)
 
429,340

Commercial mortgage-backed securities
308,712

 
6,048

 
(727
)
 
314,033

Total fixed maturities
5,366,428

 
64,303

 
(37,206
)
 
5,393,525

Short-term investments
189,678

 

 
(50
)
 
189,628

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,457

 

 
(498
)
 
959

Hedge funds
12,463

 
6,162

 

 
18,625

Private equity investments
62,119

 
14,457

 
(3,270
)
 
73,306

Investment funds
203,128

 
743

 

 
203,871

Overseas deposits
55,301

 

 

 
55,301

Mutual funds
4,201

 
3,263

 

 
7,464

Total other investments
338,669

 
24,625

 
(3,768
)
 
359,526

Total managed investments
$
5,894,775

 
$
88,928

 
$
(41,024
)
 
$
5,942,679

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
157,599

 
$
2,114

 
$
(1,652
)
 
$
158,061

Short-term investments
2,180,026

 

 

 
2,180,026

Total non-managed investments
2,337,625

 
2,114

 
(1,652
)
 
2,338,087

Total investments
$
8,232,400

 
$
91,042

 
$
(42,676
)
 
$
8,280,766


9

Table of Contents

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


The amortized cost (or cost), gross unrealized gains and (losses) and fair value of the Company's investments as at December 31, 2015 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
940,428

 
$
333

 
$
(3,559
)
 
$
937,202

Non-U.S. government and government agency
241,549

 
257

 
(3,838
)
 
237,968

U.S. states, municipalities, political subdivisions
299,929

 
2,322

 
(962
)
 
301,289

Agency residential mortgage-backed securities
606,676

 
6,361

 
(2,455
)
 
610,582

Non-agency residential mortgage-backed securities
27,025

 
310

 
(415
)
 
26,920

U.S. corporate
1,503,614

 
1,594

 
(15,257
)
 
1,489,951

Non-U.S. corporate
453,178

 
797

 
(7,405
)
 
446,570

Bank loans
592,981

 
275

 
(17,045
)
 
576,211

Asset-backed securities
440,363

 
344

 
(3,583
)
 
437,124

Commercial mortgage-backed securities
263,310

 
131

 
(3,306
)
 
260,135

Total fixed maturities
5,369,053

 
12,724

 
(57,825
)
 
5,323,952

Short-term investments
237,349

 
20

 

 
237,369

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,457

 

 
(40
)
 
1,417

Hedge funds
14,018

 
6,962

 

 
20,980

Private equity investments
53,489

 
12,751

 
(2,469
)
 
63,771

Investment funds
188,121

 
600

 

 
188,721

Overseas deposits
54,484

 

 

 
54,484

Mutual funds
4,394

 
3,089

 

 
7,483

Total other investments
315,963

 
23,402

 
(2,509
)
 
336,856

Total managed investments
$
5,922,365

 
$
36,146

 
$
(60,334
)
 
$
5,898,177

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
187,847

 
$
635

 
$
(2,103
)
 
$
186,379

Short-term investments
1,704,266

 

 

 
1,704,266

Total non-managed investments
1,892,113

 
635

 
(2,103
)
 
1,890,645

Total investments
$
7,814,478

 
$
36,781

 
$
(62,437
)
 
$
7,788,822


10

Table of Contents

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


(a)
Fixed maturity investments
The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investments as at June 30, 2016 and December 31, 2015.
 
June 30, 2016
 
December 31, 2015
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,446,839

 
44.1
%
 
$
2,367,642

 
43.0
%
AA
508,086

 
9.2
%
 
569,386

 
10.3
%
A
1,045,965

 
18.8
%
 
1,031,326

 
18.7
%
BBB
741,800

 
13.4
%
 
691,538

 
12.6
%
Total investment grade managed fixed maturities
4,742,690

 
85.5
%
 
4,659,892

 
84.6
%
 
 
 
 
 
 
 
 
BB
227,436

 
4.0
%
 
235,724

 
4.3
%
B
183,127

 
3.3
%
 
179,069

 
3.2
%
CCC
8,331

 
0.2
%
 
5,706

 
0.1
%
CC
113

 
0.0
%
 
1,015

 
0.0
%
NR
231,828

 
4.2
%
 
242,546

 
4.4
%
Total non-investment grade managed fixed maturities
650,835

 
11.7
%
 
664,060

 
12.0
%
Total managed fixed maturities
$
5,393,525

 
97.2
%
 
$
5,323,952

 
96.6
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
BBB
$

 
0.0
%
 
$
1,911

 
0.0
%
Total investment grade non-managed catastrophe bonds

 
0.0
%
 
1,911

 
0.0
%
 
 
 
 
 
 
 
 
BB
41,412

 
0.7
%
 
70,962

 
1.3
%
B
6,161

 
0.1
%
 
30,698

 
0.6
%
NR
110,488

 
2.0
%
 
82,808

 
1.5
%
Total non-investment grade non-managed catastrophe bonds
158,061

 
2.8
%
 
184,468

 
3.4
%
Total non-managed fixed maturities
158,061

 
2.8
%
 
186,379

 
3.4
%
Total fixed maturities
$
5,551,586

 
100.0
%
 
$
5,510,331

 
100.0
%

11

Table of Contents

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


The amortized cost and fair value amounts for the Company's fixed maturity investments held at June 30, 2016 and December 31, 2015 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
Due in one year or less
$
349,115

 
$
348,137

 
$
367,132

 
$
366,019

Due after one year through five years
2,990,421

 
2,996,295

 
2,965,920

 
2,936,053

Due after five years through ten years
485,899

 
492,101

 
548,183

 
539,083

Due after ten years
116,065

 
113,447

 
150,444

 
148,036

 
3,941,500

 
3,949,980

 
4,031,679

 
3,989,191

Asset-backed and mortgage-backed securities
1,424,928

 
1,443,545

 
1,337,374

 
1,334,761

Total managed fixed maturities
$
5,366,428

 
$
5,393,525

 
$
5,369,053

 
$
5,323,952

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
28,445

 
$
29,328

 
$
7,504

 
$
7,544

Due after one year through five years
128,614

 
128,185

 
165,093

 
163,575

Due after five years through ten years
540

 
548

 
15,250

 
15,260

Due after ten years

 

 

 

Total non-managed fixed maturities
157,599

 
158,061

 
187,847

 
186,379

Total fixed maturities
$
5,524,027

 
$
5,551,586

 
$
5,556,900

 
$
5,510,331

(b)
Other investments
The following tables set forth certain information regarding the Company's other investment portfolio as at June 30, 2016 and December 31, 2015:
Other investments
 
Fair Value as at June 30, 2016
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
959

 
$
959

 
$

 

 

Hedge funds
 
18,625

 
18,625

 

 

 

Private equity investments
 
73,306

 
73,306

 

 

 

Investment funds
 
203,871

 
181,536

 
22,335

 
Daily
 
2 days
Overseas deposits
 
55,301

 
55,301

 

 

 

Mutual funds
 
7,464

 

 
7,464

 
Daily
 
Daily
Total other investments
 
$
359,526

 
$
329,727

 
$
29,799

 
 
 
 
(a)
The redemption frequency and notice periods only apply to investments without redemption restrictions.

12

Table of Contents

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


Other investments
 
Fair value as at December 31, 2015
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
1,417

 
$
1,417

 
$

 

 

Hedge funds
 
20,980

 
20,980

 

 

 

Private equity investments
 
63,771

 
63,771

 

 

 

Investment funds
 
188,721

 
167,910

 
20,811

 
Daily
 
2 days
Overseas deposits
 
54,484

 
54,484

 

 

 

Mutual funds
 
7,483

 

 
7,483

 
Daily
 
Daily
Total other investments
 
$
336,856

 
$
308,562

 
$
28,294

 
 
 
 
(a)
The redemption frequency and notice periods only apply to investments without redemption restrictions.
Other investments include alternative investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities.
Certain securities included in other investments are subject to redemption restrictions and are unable to be redeemed from the funds. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments would liquidate over five to ten years from inception of the funds. In addition, one of the investment funds with a fair value of $171,187 (December 31, 2015: $167,910), has a lock-up period of three years as at June 30, 2016 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company's ability to withdraw from the overseas deposit funds is restricted by an annual and quarterly funding and release process for Lloyd's market participants.
The Company's maximum exposure to any of these alternative investments is limited to the amount invested and any remaining capital commitments. Refer to Note 15, "Commitments and contingencies," for further details. As at June 30, 2016, the Company does not have any plans to sell any of the other investments listed above.
(c)Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
30,621

 
$
29,433

 
$
58,638

 
$
57,106

Other investments
8,026

 
4,014

 
8,898

 
7,202

Restricted cash, cash and cash equivalents
380

 
427

 
1,245

 
843

Securities lending income
12

 
6

 
17

 
9

Total gross investment income
39,039

 
33,880

 
68,798

 
65,160

Investment expenses
(2,190
)
 
(2,026
)
 
(4,026
)
 
(3,870
)
Total managed net investment income
$
36,849

 
$
31,854

 
$
64,772

 
$
61,290

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
1,977

 
$
1,733

 
$
3,272

 
$
3,307

Restricted cash, cash and cash equivalents
431

 
24

 
674

 
43

Total non-managed net investment income
2,408

 
1,757

 
3,946

 
3,350

Total net investment income
$
39,257

 
$
33,611

 
$
68,718

 
$
64,640


13

Table of Contents

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


Managed net investment income from other investments includes distributed and undistributed net income from certain investment funds.
(d)
Net realized gains and change in net unrealized gains (losses) on investments
The following represents an analysis of net realized gains and the change in net unrealized gains (losses) on investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
3,306

 
$
6,140

 
$
6,523

 
$
12,449

Gross realized (losses)
(786
)
 
(4,036
)
 
(5,089
)
 
(6,165
)
Net realized gains on investments
2,520

 
2,104

 
1,434

 
6,284

Change in net unrealized gains (losses) on investments
30,052

 
(33,926
)
 
77,130

 
743

Total net realized and change in net unrealized gains (losses) on managed investments
$
32,572

 
$
(31,822
)
 
$
78,564

 
$
7,027

Non-managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
204

 
$
140

 
$
715

 
$
140

Gross realized (losses)

 

 
(9
)
 
(11
)
Net realized gains on investments
204

 
140

 
706

 
129

Change in net unrealized (losses) on investments
1,376

 
(750
)
 
1,742

 
(2,192
)
Total net realized and change in net unrealized (losses) on non-managed investments
1,580

 
(610
)
 
2,448

 
(2,063
)
Total net realized and change in net unrealized gains (losses) on total investments
$
34,152

 
$
(32,432
)
 
$
81,012

 
$
4,964

(e)
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 13, Debt and financing arrangements.”
 
 
June 30, 2016
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$

 
$

$300,000 syndicated secured letter of credit facility
 
300,000

 
105,575

 
151,166

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
11,805

 
48,380

AlphaCat Re secured letter of credit facility
 
20,000

 
20,000

 
30,191

IPC bi-lateral facility
 
25,000

 
5,666

 

$236,000 Flagstone bi-lateral facility
 
236,000

 
195,622

 
322,520

Total
 
$
690,000

 
$
338,668

 
$
552,257


14

Table of Contents

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



 
 
December 31, 2015
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$

 
$

$300,000 syndicated secured letter of credit facility
 
300,000

 
235,540

 
370,909

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
10,543

 
47,607

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,153

IPC bi-lateral facility
 
25,000

 
9,241

 

$236,000 Flagstone bi-lateral facility
 
236,000

 
193,764

 
377,866

Total
 
$
700,000

 
$
479,088

 
$
826,535

In addition, $4,687,599 of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments were pledged during the normal course of business as at June 30, 2016 (December 31, 2015: $4,056,788). Of those, $4,564,394 were held in trust (December 31, 2015: $4,007,215). 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 Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd. ("Validus Re Swiss") and Talbot as an alien insurer/reinsurer by certain regulators.
During December 2014, Validus Reinsurance, Ltd. established a Multi-Beneficiary Reinsurance Trust ("MBRT") to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As a result, cedants domiciled in that state will receive automatic credit in their regulatory filings for the reinsurance provided prospectively by the Company. As of June 30, 2016, Validus Reinsurance, Ltd. was approved as a trusteed reinsurer in 48 states as well as Puerto Rico and the District of Columbia. In addition, Validus Re Swiss established a MBRT in December 2015 and was approved as a trusteed reinsurer in 9 states as at June 30, 2016.
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.

15

Table of Contents

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


At June 30, 2016, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$

 
$
931,803

 
$

 
$

 
$
931,803

Non-U.S. government and government agency

 
215,250

 

 

 
215,250

U.S. states, municipalities and political subdivisions

 
285,412

 

 

 
285,412

Agency residential mortgage-backed securities

 
676,783

 

 

 
676,783

Non-agency residential mortgage-backed securities

 
23,389

 

 

 
23,389

U.S. corporate

 
1,556,047

 

 

 
1,556,047

Non-U.S. corporate

 
364,406

 

 

 
364,406

Bank loans

 
353,914

 
243,148

 

 
597,062

Asset-backed securities

 
416,957

 
12,383

 

 
429,340

Commercial mortgage-backed securities

 
314,033

 

 

 
314,033

Total fixed maturities

 
5,137,994

 
255,531

 

 
5,393,525

Short-term investments
186,276

 
3,352

 

 

 
189,628

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds

 

 

 
959

 
959

Hedge funds

 

 

 
18,625

 
18,625

Private equity investments

 

 

 
73,306