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 September 30, 2016

Commission file number 001-33606
__________________________________________________
valirgbcropped.jpg
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of November 1, 2016 there were 79,363,867 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

Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

Table of Contents

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2016 (unaudited) and December 31, 2015
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
(audited)
Assets
 
 
 
Fixed maturities trading, at fair value (amortized cost: 2016—$5,547,838; 2015—$5,556,900)
$
5,576,341

 
$
5,510,331

Short-term investments trading, at fair value (amortized cost: 2016—$2,481,573; 2015—$1,941,615)
2,481,406

 
1,941,635

Other investments, at fair value (cost: 2016—$371,668; 2015—$315,963)
394,695

 
336,856

Cash and cash equivalents
443,992

 
723,109

Restricted cash
113,048

 
73,270

Total investments, cash and cash equivalents
9,009,482

 
8,585,201

Investments in affiliates, equity method (cost: 2016—$86,305; 2015—$70,186)
99,731

 
88,065

Premiums receivable
939,127

 
658,682

Deferred acquisition costs
249,922

 
181,002

Prepaid reinsurance premiums
119,805

 
77,992

Securities lending collateral
10,629

 
4,863

Loss reserves recoverable
444,609

 
350,586

Paid losses recoverable
36,069

 
23,071

Income taxes recoverable
6,879

 
16,228

Deferred tax asset
26,015

 
21,661

Receivable for investments sold
21,854

 
39,766

Intangible assets
117,010

 
121,258

Goodwill
196,758

 
196,758

Accrued investment income
24,906

 
23,897

Other assets
183,357

 
126,782

Total assets
$
11,486,153

 
$
10,515,812

Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,035,987

 
$
2,996,567

Unearned premiums
1,359,438

 
966,210

Reinsurance balances payable
76,429

 
75,380

Securities lending payable
11,095

 
5,329

Deferred tax liability
3,278

 
3,847

Payable for investments purchased
49,435

 
77,475

Accounts payable and accrued expenses
144,086

 
627,331

Notes payable to AlphaCat investors
372,730

 
75,493

Senior notes payable
245,311

 
245,161

Debentures payable
538,168

 
537,668

Total liabilities
5,835,957

 
5,610,461

Commitments and contingent liabilities


 


Redeemable noncontrolling interest
1,559,580

 
1,111,714

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

 

Common shares (Issued: 2016—161,273,353; 2015—160,570,772; Outstanding: 2016—79,443,030; 2015—82,900,617)
28,223

 
28,100

Treasury shares (2016—81,830,323; 2015—77,670,155)
(14,320
)
 
(13,592
)
Additional paid-in capital
827,256

 
1,002,980

Accumulated other comprehensive loss
(21,092
)
 
(12,569
)
Retained earnings
2,897,553

 
2,634,056

Total shareholders’ equity available to Validus
3,867,620

 
3,638,975

Noncontrolling interest
222,996

 
154,662

Total shareholders’ equity
4,090,616

 
3,793,637

Total liabilities, noncontrolling interests and shareholders’ equity
$
11,486,153

 
$
10,515,812

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

3

Table of Contents

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

 
 

 
 
 
 
Gross premiums written
$
372,418

 
$
402,509

 
$
2,309,251

 
$
2,247,901

Reinsurance premiums ceded
(45,006
)
 
(48,810
)
 
(249,070
)
 
(295,553
)
Net premiums written
327,412

 
353,699

 
2,060,181

 
1,952,348

Change in unearned premiums
236,363

 
201,312

 
(351,415
)
 
(248,759
)
Net premiums earned
563,775

 
555,011

 
1,708,766

 
1,703,589

Net investment income
43,514

 
31,572

 
112,232

 
96,212

Net realized gains (losses) on investments
4,397

 
(1,187
)
 
6,537

 
5,226

Change in net unrealized gains on investments
5,459

 
3,916

 
84,331

 
2,467

Income (loss) from investment affiliate
453

 
2,482

 
(4,249
)
 
5,542

Other insurance related (loss) income and other income
(610
)
 
1,526

 
1,627

 
2,566

Foreign exchange (losses) gains
(766
)
 
(2,592
)
 
11,765

 
(9,528
)
Total revenues
616,222

 
590,728

 
1,921,009

 
1,806,074

Expenses
 

 
 

 
 
 
 
Losses and loss expenses
258,394

 
256,010

 
789,971

 
763,085

Policy acquisition costs
113,434

 
105,039

 
328,593

 
307,773

General and administrative expenses
82,443

 
96,886

 
258,339

 
265,146

Share compensation expenses
10,501

 
9,983

 
32,465

 
28,279

Finance expenses
14,521

 
18,512

 
43,890

 
58,161

Total expenses
479,293

 
486,430

 
1,453,258

 
1,422,444

Income before taxes, loss from operating affiliates and income attributable to AlphaCat investors
136,929

 
104,298

 
467,751

 
383,630

Tax expense
(1,830
)
 
(2,018
)
 
(1,418
)
 
(7,132
)
Loss from operating affiliates

 
(7,963
)
 
(23
)
 
(2,241
)
(Income) attributable to AlphaCat investors
(5,564
)
 
(1,438
)
 
(16,278
)
 
(1,438
)
Net income
$
129,535

 
$
92,879

 
$
450,032

 
$
372,819

Net (income) attributable to noncontrolling interests
(37,439
)
 
(26,229
)
 
(96,163
)
 
(66,968
)
Net income available to Validus
92,096

 
66,650

 
353,869

 
305,851

Dividends on preferred shares
(2,252
)
 

 
(2,252
)
 

Net income available to Validus common shareholders
$
89,844

 
$
66,650

 
$
351,617

 
$
305,851

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
129,535

 
$
92,879

 
$
450,032

 
$
372,819

Other comprehensive (loss) income
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
(1,370
)
 
(1,850
)
 
(6,685
)
 
(2,106
)
Change in minimum pension liability, net of tax
(1,101
)
 
(28
)
 
(705
)
 
129

Change in fair value of cash flow hedge
(439
)
 
75

 
(1,133
)
 
(336
)
Other comprehensive loss
(2,910
)
 
(1,803
)
 
(8,523
)
 
(2,313
)
Comprehensive income attributable to noncontrolling interests
(37,439
)
 
(26,229
)
 
(96,163
)
 
(66,968
)
Comprehensive income available to Validus
$
89,186

 
$
64,847

 
$
345,346

 
$
303,538

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic earnings per share available to Validus common shareholders
$
1.12

 
$
0.79

 
$
4.31

 
$
3.63

Earnings per diluted share available to Validus common shareholders
$
1.11

 
$
0.78

 
$
4.24

 
$
3.52

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.32

 
$
1.05

 
$
0.96

 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 

 
 
 
 
Basic
80,134,394

 
82,635,316

 
81,635,496

 
83,296,703

Diluted
81,244,556

 
85,629,494

 
82,938,624

 
86,841,927

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 Shareholders’ Equity
For the Nine Months Ended September 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(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
123

 
504

Balance - end of period
$
28,223

 
$
27,726

 
 
 
 
Treasury shares
 

 
 

Balance - beginning of period
$
(13,592
)
 
$
(12,545
)
Repurchase of common shares
(728
)
 
(831
)
Balance - end of period
$
(14,320
)
 
$
(13,376
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - beginning of period
$
1,002,980

 
$
1,207,493

Offering expenses on preferred shares
(5,148
)
 

Common shares (redeemed) issued, net
(7,754
)
 
16,231

Repurchase of common shares
(195,287
)
 
(203,086
)
Share compensation expenses
32,465

 
28,279

Balance - end of period
$
827,256

 
$
1,048,917

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance - beginning of period
$
(12,569
)
 
$
(8,556
)
Other comprehensive loss
(8,523
)
 
(2,313
)
Balance - end of period
$
(21,092
)
 
$
(10,869
)
 
 
 
 
Retained earnings
 

 
 

Balance - beginning of period
$
2,634,056

 
$
2,372,972

Net income
450,032

 
372,819

Net (income) attributable to noncontrolling interest
(96,163
)
 
(66,968
)
Dividends on preferred shares
(2,252
)
 

Dividends on common shares
(88,120
)
 
(86,256
)
Balance - end of period
$
2,897,553

 
$
2,592,567

 
 
 
 
Total shareholders’ equity available to Validus
$
3,867,620

 
$
3,644,965

 
 
 
 
Noncontrolling interest
$
222,996

 
$
159,116

 
 
 
 
Total shareholders’ equity
$
4,090,616

 
$
3,804,081

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 Nine Months Ended September 30, 2016 and 2015 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(unaudited)
Cash flows provided by operating activities
 

 
 

Net income
$
450,032

 
$
372,819

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

 
 

Share compensation expenses
32,465

 
28,279

Amortization of discount on senior notes
81

 
81

Loss (income) from investment affiliate
4,249

 
(5,542
)
Net realized gains on investments
(6,537
)
 
(5,226
)
Change in net unrealized gains on investments
(84,331
)
 
(2,467
)
Amortization of intangible assets
4,248

 
4,248

Loss from operating affiliates
23

 
2,241

Foreign exchange (gains) losses included in net income
(4,585
)
 
16,549

Amortization of premium on fixed maturity investments
13,381

 
17,866

Change in:
 

 
 

Premiums receivable
(288,048
)
 
(356,734
)
Deferred acquisition costs
(68,920
)
 
(63,960
)
Prepaid reinsurance premiums
(41,813
)
 
(43,331
)
Loss reserves recoverable
(97,742
)
 
(9,111
)
Paid losses recoverable
(13,165
)
 
16,408

Income taxes recoverable
9,034

 
(16,088
)
Deferred tax asset
(4,885
)
 
1,390

Accrued investment income
(1,231
)
 
1,059

Other assets
(83,068
)
 
41,998

Reserve for losses and loss expenses
66,561

 
(61,691
)
Unearned premiums
393,228

 
292,090

Reinsurance balances payable
2,726

 
(38,284
)
Deferred tax liability
(593
)
 
3,323

Accounts payable and accrued expenses
(26,514
)
 
(49,057
)
Net cash provided by operating activities
254,596

 
146,860

 
 
 
 
Cash flows used in investing activities
 

 
 

Proceeds on sales of fixed maturity investments
2,047,496

 
2,888,919

Proceeds on maturities of fixed maturity investments
256,082

 
260,179

Purchases of fixed maturity investments
(2,317,674
)
 
(3,169,834
)
Purchases of short-term investments, net
(540,102
)
 
(226,316
)
Purchases of other investments, net
(53,627
)
 
(6,065
)
Increase in securities lending collateral
(5,766
)
 
(5,991
)
Redemption from operating affiliates
369

 

Investment in investment affiliates, net
(16,307
)
 
(19,086
)
(Increase) decrease in restricted cash
(39,778
)
 
99,001

Net cash used in investing activities
(669,307
)
 
(179,193
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of notes payable to AlphaCat investors
296,527

 
75,607

Net proceeds on issuance of preferred shares
144,852

 

Issuance of common shares, net
(7,631
)
 
16,735

Purchases of common shares under share repurchase program
(196,015
)
 
(203,917
)
Dividends paid on preferred shares
(2,252
)
 

Dividends paid on common shares
(87,901
)
 
(86,401
)
Increase in securities lending payable
5,766

 
5,991

Third party investment in redeemable noncontrolling interest
381,950

 
497,700

Third party redemption of redeemable noncontrolling interest
(17,284
)
 
(86,933
)
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
(412,736
)
 
(161,900
)
Net cash provided by (used in) financing activities
149,847

 
(91,693
)
Effect of foreign currency rate changes on cash and cash equivalents
(14,253
)
 
(13,901
)
Net decrease in cash and cash equivalents
(279,117
)
 
(137,927
)
Cash and cash equivalents - beginning of period
723,109

 
550,401

Cash and cash equivalents - end of period
$
443,992

 
$
412,474

Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the period
$
5,914

 
$
14,959

Interest paid during the period
$
46,072

 
$
46,847

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 for percentages, 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 Validus Holdings. Ltd.'s (the "Company") 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 nine months ended September 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 nine months ended September 30, 2015 and Consolidated Statement of Cash Flows for the nine months ended September 30, 2015:
 
Three Months Ended September 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
518,564

 
$
72,164

 
$
590,728

Total expenses
486,829

 
(399
)
 
486,430

Net (loss) income
(5,013
)
 
97,892

 
92,879

Net loss (income) attributable to noncontrolling interest
71,663

 
(97,892
)
 
(26,229
)
Net income available to Validus
66,650

 

 
66,650

Comprehensive income available to Validus
64,847

 

 
64,847

 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.79

 
$

 
$
0.79

Earnings per diluted share available to common shareholders
$
0.78

 
$

 
$
0.78


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Table of Contents

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


 
Nine Months Ended September 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Total revenues
$
1,799,261

 
$
6,813

 
$
1,806,074

Total expenses
1,420,839

 
1,605

 
1,422,444

Net income
289,032

 
83,787

 
372,819

Net loss (income) attributable to noncontrolling interest
15,042

 
(82,010
)
 
(66,968
)
Net income available to Validus
304,074

 
1,777

 
305,851

Comprehensive income available to Validus
301,761

 
1,777

 
303,538

 
 
 


 
 
Basic earnings per share available to common shareholders
$
3.61

 
$
0.02

 
$
3.63

Earnings per diluted share available to common shareholders
$
3.50

 
$
0.02

 
$
3.52

 
Nine Months Ended September 30, 2015
 
As previously reported
 
Adjustment for adoption of new consolidation guidance
 
Revised
Net cash provided by operating activities
$
51,878

 
$
94,982

 
$
146,860

Net cash used in investing activities
(560,622
)
 
381,429

 
(179,193
)
Net cash provided by (used in) financing activities
367,421

 
(459,114
)
 
(91,693
)
Effect of foreign currency rate changes on cash and cash equivalents
(27,432
)
 
13,531

 
(13,901
)
Net decrease in cash
(168,755
)
 
30,828

 
(137,927
)
Cash and cash equivalents - beginning of period
577,240

 
(26,839
)
 
550,401

Cash and cash equivalents - end of period
408,485

 
3,989

 
412,474

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 for percentages, 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.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments”. This ASU is directed at reducing diversity in practice and addresses eight specific issues in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

9

Table of Contents

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


In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory”. This ASU aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The ASU does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The ASU is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810) - Interests Held Through Related Parties That Are Under Common Control”. The amendments in this ASU does not change the characteristics of a primary beneficiary in current U.S. GAAP. The ASU requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Entities that have not yet adopted ASU 2015-02 are required to adopt the amendments in this update at the same time and should apply the same transition method elected for the application of the ASU. Entities that already have adopted ASU 2015-02 are required to apply the amendments in this update retrospectively to all relevant prior periods beginning with the fiscal year in which ASU 2015-02 initially were applied. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.


10

Table of Contents

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


3. Investments
During the fourth quarter of 2015, the Company enhanced disclosures with respect to 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 the 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 September 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
$
833,897

 
$
4,088

 
$
(439
)
 
$
837,546

Non-U.S. government and government agency
251,863

 
1,503

 
(4,976
)
 
248,390

U.S. states, municipalities and political subdivisions
278,172

 
5,585

 
(396
)
 
283,361

Agency residential mortgage-backed securities
644,403

 
13,980

 
(507
)
 
657,876

Non-agency residential mortgage-backed securities
21,142

 
160

 
(687
)
 
20,615

U.S. corporate
1,509,117

 
19,102

 
(1,542
)
 
1,526,677

Non-U.S. corporate
434,621

 
3,611

 
(6,600
)
 
431,632

Bank loans
598,847

 
1,635

 
(12,945
)
 
587,537

Asset-backed securities
484,480

 
2,607

 
(1,568
)
 
485,519

Commercial mortgage-backed securities
336,297

 
5,388

 
(888
)
 
340,797

Total fixed maturities
5,392,839

 
57,659

 
(30,548
)
 
5,419,950

Short-term investments
197,970

 

 
(167
)
 
197,803

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
1,457

 

 
(498
)
 
959

Hedge funds
12,073

 
5,983

 

 
18,056

Private equity investments
69,353

 
16,157

 
(1,840
)
 
83,670

Fixed income investment funds
232,614

 
823

 

 
233,437

Overseas deposits
53,246

 

 

 
53,246

Mutual funds
2,925

 
2,402

 

 
5,327

Total other investments
371,668

 
25,365

 
(2,338
)
 
394,695

Total managed investments
$
5,962,477

 
$
83,024

 
$
(33,053
)
 
$
6,012,448

Non-managed investments:
 
 
 
 
 
 
 
Catastrophe bonds
$
154,999

 
$
2,890

 
$
(1,498
)
 
$
156,391

Short-term investments
2,283,603

 

 

 
2,283,603

Total non-managed investments
2,438,602

 
2,890

 
(1,498
)
 
2,439,994

Total investments
$
8,401,079

 
$
85,914

 
$
(34,551
)
 
$
8,452,442


11

Table of Contents

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

Fixed income 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


12

Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except for percentages, 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 September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
December 31, 2015
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities:
 
 
 
 
 
 
 
Investment grade fixed maturities
 
 
 
 
 
 
 
AAA
$
2,417,068

 
43.3
%
 
$
2,367,642

 
43.0
%
AA
526,729

 
9.5
%
 
569,386

 
10.3
%
A
1,084,128

 
19.4
%
 
1,031,326

 
18.7
%
BBB
736,400

 
13.2
%
 
691,538

 
12.6
%
Total investment grade managed fixed maturities
4,764,325

 
85.4
%
 
4,659,892

 
84.6
%
Non-investment grade fixed maturities
 
 
 
 
 
 
 
BB
228,798

 
4.1
%
 
235,724

 
4.3
%
B
182,261

 
3.3
%
 
179,069

 
3.2
%
CCC
9,561

 
0.2
%
 
5,706

 
0.1
%
CC

 
0.0
%
 
1,015

 
0.0
%
NR
235,005

 
4.2
%
 
242,546

 
4.4
%
Total non-investment grade fixed maturities
655,625

 
11.8
%
 
664,060

 
12.0
%
Total managed fixed maturities
$
5,419,950

 
97.2
%
 
$
5,323,952

 
96.6
%
 
 
 
 
 
 
 
 
Non-managed fixed maturities:
 
 
 
 
 
 
 
Investment grade catastrophe bonds
 
 
 
 
 
 
 
BBB
$

 
0.0
%
 
$
1,911

 
0.0
%
Total investment grade catastrophe bonds

 
0.0
%
 
1,911

 
0.0
%
Non-investment grade catastrophe bonds
 
 
 
 
 
 
 
BB
31,052

 
0.5
%
 
70,962

 
1.3
%
B
4,922

 
0.1
%
 
30,698

 
0.6
%
NR
120,417

 
2.2
%
 
82,808

 
1.5
%
Total non-investment grade catastrophe bonds
156,391

 
2.8
%
 
184,468

 
3.4
%
Total non-managed fixed maturities
156,391

 
2.8
%
 
186,379

 
3.4
%
Total fixed maturities
$
5,576,341

 
100.0
%
 
$
5,510,331

 
100.0
%

13

Table of Contents

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


The amortized cost and fair value amounts for the Company's fixed maturity investments held at September 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.
 
September 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Managed fixed maturities:
 
 
 
 
 
 
 
Due in one year or less
$
368,627

 
$
366,437

 
$
367,132

 
$
366,019

Due after one year through five years
2,990,875

 
2,992,940

 
2,965,920

 
2,936,053

Due after five years through ten years
433,478

 
441,449

 
548,183

 
539,083

Due after ten years
113,537

 
114,317

 
150,444

 
148,036

 
3,906,517

 
3,915,143

 
4,031,679

 
3,989,191

Asset-backed and mortgage-backed securities
1,486,322

 
1,504,807

 
1,337,374

 
1,334,761

Total managed fixed maturities
$
5,392,839

 
$
5,419,950

 
$
5,369,053

 
$
5,323,952

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds:
 
 
 
 
 
 
 
Due in one year or less
$
40,231

 
$
41,648

 
$
7,504

 
$
7,544

Due after one year through five years
114,018

 
113,992

 
165,093

 
163,575

Due after five years through ten years
750

 
751

 
15,250

 
15,260

Due after ten years

 

 

 

Total non-managed fixed maturities
154,999

 
156,391

 
187,847

 
186,379

Total fixed maturities
$
5,547,838

 
$
5,576,341

 
$
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 September 30, 2016 and December 31, 2015:
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
As at September 30, 2016
 
 
 
 
 
 
 
 
 
 
Fund of hedge funds
 
$
959

 
$
959

 
$

 

 

Hedge funds
 
18,056

 
18,056

 

 

 

Private equity investments
 
83,670

 
83,670

 

 

 

Fixed income investment funds
 
233,437

 
180,695

 
52,742

 
Daily
 
2 days
Overseas deposits
 
53,246

 
53,246

 

 

 

Mutual funds
 
5,327

 

 
5,327

 
Daily
 
Daily
Total other investments
 
$
394,695

 
$
336,626

 
$
58,069

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2015
 
 
 
 
 
 
 
 
 
 
Fund of hedge funds
 
$
1,417

 
$
1,417

 
$

 
 
 
 
Hedge funds
 
20,980

 
20,980

 

 
 
 
 
Private equity investments
 
63,771

 
63,771

 

 
 
 
 
Fixed income 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.

14

Table of Contents

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


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 $180,695 (December 31, 2015: $167,910), has a lock-up period of three years as at September 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 September 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Managed investments:
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
30,572

 
$
26,621

 
$
89,210

 
$
83,727

Other investments
11,768

 
5,086

 
20,666

 
12,288

Restricted cash, cash and cash equivalents
891

 
336

 
2,136

 
1,179

Securities lending income
22

 
4

 
39

 
13

Total gross investment income
43,253

 
32,047

 
112,051

 
97,207

Investment expenses
(2,182
)
 
(2,056
)
 
(6,208
)
 
(5,926
)
Total managed net investment income
$
41,071

 
$
29,991

 
$
105,843

 
$
91,281

Non managed investments:
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
1,970

 
$
1,544

 
$
5,242

 
$
4,851

Restricted cash, cash and cash equivalents
473

 
37

 
1,147

 
80

Total non-managed net investment income
2,443

 
1,581

 
6,389

 
4,931

Total net investment income
$
43,514

 
$
31,572

 
$
112,232

 
$
96,212

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

15

Table of Contents

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


(d)
Net realized and change in net unrealized gains (losses) on investments
The following represents an analysis of net realized and change in net unrealized gains (losses) on investments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Managed fixed maturities, short-term and other investments:
 
 
 
 
 
 
 
Gross realized gains
$
4,544

 
$
1,826

 
$
11,067

 
$
14,275

Gross realized (losses)
(464
)
 
(3,059
)
 
(5,553
)
 
(9,224
)
Net realized gains on investments
4,080

 
(1,233
)
 
5,514

 
5,051

Change in net unrealized gains (losses) on investments
4,652

 
1,765

 
81,782

 
2,508

Total net realized and change in net unrealized gains (losses) on managed investments
$
8,732

 
$
532

 
$
87,296

 
$
7,559

Non-managed fixed maturities and short-term investments:
 
 
 
 
 
 
 
Gross realized gains
$
317

 
$
46

 
$
1,032

 
$
186

Gross realized (losses)

 

 
(9
)
 
(11
)
Net realized gains on investments
317

 
46

 
1,023

 
175

Change in net unrealized (losses) on investments
807

 
2,151

 
2,549

 
(41
)
Total net realized and change in net unrealized (losses) on non-managed investments
1,124

 
2,197

 
3,572

 
134

Total net realized and change in net unrealized gains (losses) on total investments
$
9,856

 
$
2,729

 
$
90,868

 
$
7,693

(e)
Pledged cash and investments
As at September 30, 2016, the Company had $5,104,602 (December 31, 2015: $4,056,788) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $4,975,676 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.
In addition, the Company has pledged cash and investments as collateral under the Company's credit facilities in the total amount of $548,669 (December 31, 2015: $826,535). For further details on the credit facilities, please refer to Note 13, Debt and financing arrangements.”
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 September 30, 2016, Validus Reinsurance, Ltd. was approved as a trusteed reinsurer in 50 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 36 states as at September 30, 2016.

16

Table of Contents

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


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.

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Table of Contents

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


At September 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
$

 
$
837,546

 
$

 
$

 
$
837,546

Non-U.S. government and government agency

 
248,390

 

 

 
248,390

U.S. states, municipalities and political subdivisions

 
283,361

 

 

 
283,361

Agency residential mortgage-backed securities

 
657,876

 

 

 
657,876

Non-agency residential mortgage-backed securities

 
20,615

 

 

 
20,615

U.S. corporate

 
1,526,677

 

 

 
1,526,677

Non-U.S. corporate

 
431,632

 

 

 
431,632

Bank loans

 
335,037

 
252,500

 

 
587,537

Asset-backed securities

 
461,623

 
23,896

 

 
485,519

Commercial mortgage-backed securities

 
340,797

 

 

 
340,797

Total fixed maturities

 
5,143,554

 
276,396

 

 
5,419,950

Short-term investments
176,809

 
20,994

 

 

 
197,803

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds

 

 

 
959

 
959

Hedge funds

 

 

 
18,056

 
18,056

Private equity investments

 

 

 
83,670

 
83,670

Fixed income investment funds

 
31,670

 

 
201,767

 
233,437

Overseas deposits

 

 

 
53,246

 
53,246

Mutual funds

 
5,327

 

 

 
5,327

Total other investments

 
36,997

 

 
357,698

 
394,695

Total managed investments
$
176,809

 
$
5,201,545

 
$
276,396

 
$
357,698

 
$
6,012,448

Non-managed investments