10-Q
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, 2008
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.)
19 Par-La-Ville Road, Hamilton, Bermuda HM 11
(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 þ 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 definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
         
 
  Large accelerated filer o   Accelerated filer o
 
  Non-accelerated filer þ (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of November 13, 2008, there were 74,878,137 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

INDEX
         
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    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    35  
 
       
    86  
 
       
    87  
 
       
       
 
       
    89  
 
       
    89  
 
       
    89  
 
       
    89  
 
       
    89  
 
       
    89  
 
       
    89  
 
       
    91  
 EX-10.12.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-10.13.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-10.14.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-10.15.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-10.16.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-10.18.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATION

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2008 and December 31, 2007
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
                 
    September 30,          
    2008
(Unaudited)
    December 31,
2007
 
Assets
               
Fixed maturities, at fair value (amortized cost: 2008 - $2,666,085; 2007 - $2,403,074)
  $ 2,595,476     $ 2,411,398  
Short-term investments, at fair value (amortized cost: 2008 - $327,048; 2007 - $251,150)
    325,273       250,623  
Cash and cash equivalents
    335,367       444,698  
 
           
Total cash and investments
    3,256,116       3,106,719  
Premiums receivable
    529,039       401,241  
Deferred acquisition costs
    129,946       105,562  
Prepaid reinsurance premiums
    49,824       22,817  
Securities lending collateral
    158,411       164,324  
Loss reserves recoverable
    173,463       134,404  
Paid losses recoverable
    3,516       7,810  
Net receivable for investments sold
    11,820        
Income taxes recoverable
    2,331       3,325  
Intangible assets
    128,258       131,379  
Goodwill
    20,393       20,393  
Accrued investment income
    15,596       19,960  
Other assets
    30,883       26,290  
 
           
Total assets
  $ 4,509,596     $ 4,144,224  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 1,272,844     $ 926,117  
Unearned premiums
    693,304       557,344  
Reinsurance balances payable
    53,253       36,848  
Securities lending payable
    161,727       164,324  
Deferred income taxes
    21,117       16,663  
Net payable for investments purchased
          31,426  
Accounts payable and accrued expenses
    86,440       126,702  
Debentures payable
    304,300       350,000  
 
           
Total liabilities
    2,592,985       2,209,424  
 
               
Commitments and contingent liabilities (Note 8)
               
Shareholders’ equity
               
Ordinary shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (2008 - 74,878,137; 2007 - 74,199,836)
    13,104       12,985  
Additional paid-in capital
    1,403,904       1,384,604  
Accumulated other comprehensive loss
    (1,528 )     (49 )
Retained earnings
    501,131       537,260  
 
           
Total shareholders’ equity
    1,916,611       1,934,800  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 4,509,596     $ 4,144,224  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive (Loss) Income
For the Three and Nine Months Ended September 30, 2008 and 2007
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
                                 
    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2008     September 30, 2007     September 30, 2008     September 30, 2007  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenues
                               
Gross premiums written
  $ 269,236     $ 245,271     $ 1,170,749     $ 797,641  
Reinsurance premiums ceded
    (35,139 )     (7,906 )     (121,438 )     (65,644 )
 
                       
Net premiums written
    234,097       237,365       1,049,311       731,997  
Change in unearned premiums
    105,229       58,161       (108,823 )     (191,949 )
 
                       
Net premiums earned
    339,326       295,526       940,488       540,048  
Net investment income
    36,379       36,560       108,857       74,799  
Realized gain on repurchase of debentures
                8,752        
Net realized (losses) gains on investments
    (13,667 )     1,010       (8,348 )     823  
Net unrealized (losses) gains on investments
    (14,649 )     7,681       (72,608 )     3,136  
Other income
    1,269       1,330       3,666       1,330  
Foreign exchange (losses) gains
    (44,933 )     5,818       (35,843 )     9,210  
 
                       
Total revenues
    303,725       347,925       944,964       629,346  
 
                               
Expenses
                               
Losses and loss expense
    318,464       87,263       580,578       176,426  
Policy acquisition costs
    60,425       50,945       173,545       81,000  
General and administrative expenses
    30,120       44,793       101,139       67,088  
Share compensation expense
    6,012       6,132       19,818       10,054  
Finance expenses
    14,517       17,886       48,796       26,331  
Fair value of warrants issued
          2,893             2,893  
 
                       
Total expenses
    429,538       209,912       923,876       363,792  
 
                       
 
                               
Net (loss) income before taxes
    (125,813 )     138,013       21,088       265,554  
Income tax expense
    487       1,488       4,992       1,527  
 
                       
Net (loss) income
  $ (126,300 )   $ 136,525     $ 16,096     $ 264,027  
 
                       
 
                               
Comprehensive (loss) income
                               
Currency translation adjustments
    (1,556 )     (640 )     (1,479 )     (640 )
 
                       
Comprehensive (loss) income
  $ (127,856 )   $ 135,885     $ 14,617     $ 263,387  
 
                       
 
                               
Earnings (loss) per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    74,864,724       69,107,336       74,435,840       62,024,179  
Diluted
    74,864,724       71,868,835       77,922,718       64,243,860  
 
Basic (loss) earnings  per share
  $ (1.71 )   $ 1.98     $ 0.15     $ 4.26  
 
                       
Diluted (loss) earnings  per share
  $ (1.71 )   $ 1.90     $ 0.14     $ 4.11  
 
                       
 
                               
Cash dividends declared per share
  $ 0.20           $ 0.60        
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2008 and 2007
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
                 
    Nine months ended  
    September 30, 2008     September 30, 2007  
    (Unaudited)     (Unaudited)  
Common shares
               
Balance — Beginning of period
  $ 12,985     $ 10,234  
Issue of common shares
    119       2,751  
 
           
Balance — End of period
  $ 13,104     $ 12,985  
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 1,384,604     $ 1,048,025  
Issue of common shares, net of expenses
    (518 )     317,753  
Stock option expense
    3,171       2,930  
Fair value of warrants qualifying as equity
          2,893  
Share compensation expense
    16,647       7,123  
 
           
Balance — End of period
  $ 1,403,904     $ 1,378,724  
 
           
 
               
Accumulated other comprehensive income (loss)
               
Balance — Beginning of period
  $ (49 )   $ 875  
Currency translation adjustments
    (1,479 )     (640 )
Cumulative effect of adoption of fair value option
          (875 )
 
           
Balance — End of period
  $ (1,528 )   $ (640 )
 
           
 
               
Retaining earnings
               
Balance — Beginning of period
  $ 537,260     $ 133,389  
Cumulative effect of adoption of fair value option
          875  
Dividends
    (52,225 )      
Net income
    16,096       264,027  
 
           
Balance — End of period
  $ 501,131     $ 398,291  
 
           
 
               
Total shareholders’ equity
  $ 1,916,611     $ 1,789,360  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2008 and 2007
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
                 
    Nine months ended     Nine months ended  
    September 30, 2008     September 30, 2007  
    (Unaudited)     (Unaudited)  
Cash flows provided by operating activities
               
Net income for the period
  $ 16,096     $ 264,027  
Adjustments to reconcile net income to cash provided by operating activities:
               
Share compensation expense
    19,818       10,053  
Net realized (losses) gains on sales of investments
    8,348       (823 )
Net unrealized (losses) gains on investments
    72,608       (3,136 )
Fair value of Warrants expensed
          2,893  
Amortization of intangible assets
    3,121       1,040  
Foreign exchange on cash and cash equivalents included in net income
    19,768       (7,714 )
Amortization of discounts on fixed maturities
    2,226       (9,168 )
Realized gain on repurchase of debentures
    (8,752 )      
Changes in:
               
Premiums receivable
    (134,822 )     (109,676 )
Deferred acquisition costs
    (26,635 )     (27,559 )
Prepaid reinsurance premiums
    (28,149 )     236  
Losses recoverable
    (41,145 )     2,319  
Paid losses recoverable
    4,279       16,480  
Taxes recoverable
    2,436       (525 )
Accrued investment income
    (4,466 )     (1,305 )
Other assets
    3,861       3,697  
Reserve for losses and loss expense
    369,962       88,283  
Unearned premiums
    147,461       191,703  
Reinsurance balances payable
    17,779       (18,110 )
Deferred taxation
    6,083       2,096  
Accounts payable and accrued expenses
    (52,500 )     3,288  
 
           
Net cash provided by operating activities
    397,377       408,099  
 
           
 
               
Cash flows used in investing activities
               
Proceeds on maturity of investments
    264,103       891,202  
Proceeds on sales of investments
    1,770,892        
Purchases of fixed maturities
    (2,355,159 )     (1,338,169 )
(Purchases) sales of short-term investments, net
    (74,290 )     115,365  
Increase (decrease) in securities lending collateral
    2,597       (47,692 )
Purchase of subsidiary, net of cash required
          (18,809 )
 
           
Net cash used in investing activities
    (391,857 )     (398,103 )
 
           
 
               
Cash flows provided by financing activities
               
(Redemption) net proceeds on issuance of debentures payable
    (36,948 )     198,000  
Issue of common shares, net of expenses
    (398 )     320,504  
Dividends paid
    (50,570 )      
Increase (decrease) in securities lending payable
    (2,597 )     47,692  
 
           
Net cash (used in) provided by financing activities
    (90,513 )     566,196  
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    (24,338 )     11,593  
 
               
Net (decrease) increase in cash
    (109,331 )     587,785  
 
               
Cash and cash equivalents — Beginning of period
    444,698       63,643  
 
           
Cash and cash equivalents — End of period
  $ 335,367     $ 651,428  
 
           
Net taxes (recovered) paid during the period
  $ (2,467 )   $ 37  
 
           
Interest paid during the period
  $ 20,802     $ 15,131  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
1. Basis of preparation and consolidation
     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly owned subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.
     In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. During the third quarter of 2008, Hurricanes Ike and Gustav were significant loss events for the industry. The Company’s hurricane reserves estimates relating to these catastrophes are based on a ‘ground up’ estimate and analysis of contracts believed to be exposed to these events, together with internal data compiled from underwriters, actuaries and claims teams combined. Preliminary information from cedants, brokers and industry models has been considered in the process. Actual losses may vary from this estimate. The results of operations for any interim period are not necessarily indicative of the results for a full year. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board. The unaudited consolidated financial statements include the results of operations and cash flows of Talbot Holdings Ltd. (“Talbot”) since the date of acquisition of July 2, 2007 and not any prior periods (including for comparative purposes).
2. Recent accounting pronouncements
     In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement 133” (“FAS 161”). This statement expands the disclosure requirements of FAS 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair values and amounts of gains and losses on derivative contracts, and credit risk related contingent features in derivative agreements. The statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FAS 161 is not expected to have a material impact on the Company’s consolidated financial statements.
     In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This statement improves financial reporting by providing a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. This statement assigns a hierarchical rank to the various sources of accounting literature from Level A through Level D. FAS 162 will be effective 60 days after the SEC’s approval of the PCAOB’s amendments to AU Section 411. The adoption of FAS 162 is not expected to have a material impact on the Company’s consolidated financial statements.
     In May 2008, the FASB issued FAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60” (“FAS 163”). This statement decreases the inconsistencies in Statement No. 60 in the accounting for financial guarantee insurance contracts by insurance companies. FAS 163 addresses the differing views in Statement No. 60 regarding the recognition and measurement of premium revenues and claim liabilities and enhances the disclosure requirements for insurance contracts. FAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FAS 163 is not expected to have a material impact on the Company’s consolidated financial statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share amounts)
     In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (“EPS”) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s consolidated financial statements.
     In August 2008, the FASB issued proposed amendments to FAS 128, “Earnings per Share” (“proposed amendments to FAS 128”). The proposed amendments to FAS 128 reflect the FASB’s efforts to converge with International Accounting Standards and to improve the guidance on earnings per share (“EPS”). The proposed amendments to FAS 128 would be retrospectively applied to all prior-period EPS data. An effective date has not been established. The Company will continue to evaluate the potential impact of this guidance.
     In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 amends FAS 157 by incorporating an example to illustrate key considerations in determining the fair value of a financial asset in an inactive market. FSP FAS 157-3 is effective October 10, 2008 and should be applied to prior periods for which financial statements have not been issued. Pursuant to FSP FAS 157-3, the Company has elected to use fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable for certain investments in residential mortgage backed securities.
3. Investments
     During the first quarter of 2007, the Company adopted FAS 157 and FAS 159. Prior to January 1, 2007, the Company’s investments in fixed maturities were classified as available-for-sale and carried at fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. The Company believes that accounting for its investment portfolio as trading more closely reflects its investment guidelines. Beginning on January 1, 2007, the Company’s investments in fixed maturities were classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings.
     During the third quarter of 2008, the Company adopted FSP FAS 157-3. Consistent with this statement, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.
a) Classification within the fair value hierarchy under FAS 157
     Under FAS 157, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy in FAS 157 prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.

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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 amounts)
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative approaches but for which the Company typically obtained independent external valuation information including, cash and certain cash instruments such as money market funds, overnight repos and commercial paper. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include U.S. Treasuries, sovereign debt, corporate debt and U.S. agency and non-agency mortgage and asset-backed securities. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. Financial instruments in this category include certain residential mortgage-backed securities.
     At September 30, 2008, the Company’s investments are allocated between levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 737,667     $     $ 737,667  
Other Sovereign and Sovereign Agency
          117,787             117,787  
Agency Residential mortgage-backed securities
          445,316             445,316  
Corporate
          449,991             449,991  
Foreign Corporate
          176,434             176,434  
States, municipalities, political subdivision
          15,030             15,030  
Asset-backed securities
          157,997             157,997  
Non-Agency Residential mortgage-backed securities
          148,574       130,028       278,602  
Commercial mortgage-backed securities
          216,652             216,652  
 
                       
Total fixed maturities
            2,465,448       130,028       2,595,476  
Total short-term investments
    289,134       36,139             325,273  
 
                       
Total
  $ 289,134     $ 2,501,587     $ 130,028     $ 2,920,749  
 
                       
 
     At December 31, 2007, the Company’s investments are allocated between levels 1, 2 and 3 as follows:
 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 707,703     $     $ 707,703  
Other Sovereign and Sovereign Agency
          141,493             141,493  
Agency Residential mortgage-backed securities
          421,665             421,665  
Corporate
          488,127             488,127  
Asset-backed securities
          191,455             191,455  
Non-Agency Residential mortgage-backed securities
          301,967             301,967  
Commercial mortgage-backed securities
          158,988             158,988  
 
                       
Total fixed maturities
          2,411,398             2,411,398  
Total short-term investments
    215,052       35,571             250,623  
 
                       
Total
  $ 215,052     $ 2,446,969     $     $ 2,662,021  
 
                       
     The table in section (c) below shows the aggregate cost (or amortized cost) and fair value of the Company’s marketable securities, by investment type, as of the periods indicated.

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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 amounts)
     At September 30, 2008, Level 3 assets totaled $130,028, representing 4.5% of total assets measured at fair value on a recurring basis.
     The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2008:
                 
    Residential mortgage-backed securities  
    Three months ended     Nine months ended  
    September 30, 2008     September 30, 2008  
Level 3 investments — Beginning of period
  $     $  
Net payments, purchases and sales
           
Realized losses
           
Unrealized gains (losses)
           
Net transfers in (out)
    130,028       130,028  
 
           
Level 3 investments — End of period
  $ 130,028     $ 130,028  
 
           
     At September 30, 2008, $10,356 of unrealized losses was recorded in income attributable to the residential mortgage-backed securities measured at fair value on a recurring basis using Level 3 inputs.
b) Net investment income
     Net investment income is derived from the following sources:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2008     2007     2008     2007  
Fixed maturities and short-term investments
  $ 32,443     $ 24,076     $ 98,654     $ 54,589  
Securities lending income
    261       59       1,150       66  
Cash and cash equivalents
    4,308       13,252       11,524       22,025  
 
                       
Total gross investment income
    37,012       37,387       111,328       76,680  
Investment expenses
    (633 )     (827 )     (2,471 )     (1,881 )
 
                       
Net investment income
  $ 36,379     $ 36,560     $ 108,857     $ 74,799  
 
                       
     The following represents an analysis of net realized gains (losses) and the change in unrealized gains (losses) of investments:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2008     2007     2008     2007  
Fixed maturities, short-term investments and cash equivalents
                               
Gross realized gains
  $ 3,653     $ 1,517     $ 14,965     $ 1,761  
Gross realized losses
    (17,320 )     (507 )     (23,313 )     (938 )
 
                       
Net realized (losses) gains on investments
    (13,667 )     1,010       (8,348 )     823  
Change in unrealized losses of securities lending
    (2,422 )           (3,316 )      
Change in unrealized (losses) gains of investments
    (12,227 )     7,681       (69,292 )     3,136  
 
                       
Total net realized (losses) gains and change in unrealized gains (losses) of investments
  $ (28,316 )   $ 8,691     $ (80,956 )   $ 3,959  
 
                       

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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 amounts)
c) Fixed maturity and short-term investments
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at September 30, 2008 are as follows:
                                 
            Gross     Gross unrealized     Estimated fair  
    Amortized Cost     unrealized gains     losses     value  
U.S. Government and Government Agency
  $ 730,913     $ 8,242     $ (1,488 )   $ 737,667  
Other Sovereign and Sovereign Agency
    126,070       497       (8,780 )     117,787  
Agency Residential mortgage-backed securities
    442,554       3,449       (687 )     445,316  
Corporate
    469,772       807       (20,588 )     449,991  
Foreign Corporate
    186,312       405       (10,283 )     176,434  
States, municipalities, political subdivision
    15,043             (13 )     15,030  
Asset-backed securities
    160,684       55       (2,742 )     157,997  
Non-Agency Residential mortgage-backed securities
    308,748       36,391       (66,537 )     278,602  
Commercial mortgage-backed securities
    225,989       21       (9,358 )     216,652  
                             
Total fixed maturities
    2,666,085       49,867       (120,476 )     2,595,476  
Total short-term investments
    327,048       7       (1,782 )     325,273  
 
                       
Total
  $ 2,993,133     $ 49,874     $ (122,258 )   $ 2,920,749  
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2007 are as follows:
                                 
            Gross     Gross unrealized     Estimated fair  
    Amortized Cost     unrealized gains     losses     value  
U.S. Government and Government Agency
  $ 700,697     $ 7,163     $ (157 )   $ 707,703  
Other Sovereign and Sovereign Agency
    143,744       1,003       (3,254 )     141,493  
Agency Residential mortgage-backed securities
    417,358       4,544       (237 )     421,665  
Corporate
    486,752       4,346       (2,971 )     488,127  
Asset-backed securities
    191,413       641       (599 )     191,455  
Non-Agency Residential mortgage-backed securities
    305,391       1,818       (5,242 )     301,967  
Commercial mortgage-backed securities
    157,719       1,317       (48 )     158,988  
 
                       
Total fixed maturities
    2,403,074       20,832       (12,508 )     2,411,398  
Total short-term investments
    251,150       63       (590 )     250,623  
 
                       
Total
  $ 2,654,224     $ 20,895     $ (13,098 )   $ 2,662,021  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at September 30, 2008 and December 31, 2007. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

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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 amounts)
                                 
    September 30, 2008     December 31, 2007  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 2,097,056       80.8 %   $ 2,029,573       84.2 %
AA+
    35,378       1.4 %     37,458       1.6 %
AA
    53,716       2.1 %     51,091       2.1 %
AA-
    124,677       4.8 %     96,578       4.0 %
A+
    111,547       4.3 %     88,181       3.7 %
A
    122,471       4.7 %     70,666       2.9 %
A-
    41,427       1.6 %     29,948       1.2 %
BBB+
    6,040       0.2 %     7,903       0.3 %
BBB
    2,205       0.1 %           0.0 %
BB
    959       0.0 %           0.0 %
 
                       
Total
  $ 2,595,476       100.0 %   $ 2,411,398       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at September 30, 2008 and December 31, 2007 are shown 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, 2008     December 31, 2007  
    Amortized     Estimated     Amortized     Estimated  
    cost     fair value     cost     fair value  
Due in one year or less
  $ 161,572     $ 160,194     $ 197,833     $ 198,466  
Due after one year through five years
    1,259,911       1,233,096       1,083,470       1,087,758  
Due after five years through ten years
    78,434       76,720       29,509       30,427  
Due after ten years
    28,193       26,899       20,381       20,672  
 
                       
 
    1,528,110       1,496,909       1,331,193       1,337,323  
Asset-backed and mortgage-backed securities
    1,137,975       1,098,567       1,071,881       1,074,075  
 
                       
Total
  $ 2,666,085     $ 2,595,476     $ 2,403,074     $ 2,411,398  
 
                       
     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At September 30, 2008 approximately $99,294 (December 31, 2007: $104,524) of letters of credit were issued and outstanding under this facility for which $99,525 of investments were pledged as collateral (December 31, 2007: $109,164). During the prior year the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s. At September 30, 2008, $100,000 (December 31, 2007: $100,000) of letters of credit were issued and outstanding under this facility for which $103,002 of investments were pledged as collateral (December 31, 2007: $118,121). In addition, $64,251 of investments are held in trust at September 30, 2008 (December 31, 2007: $nil).
     Cash and cash equivalents and investments in Talbot of $1,023,214 at September 30, 2008 were held in trust for the benefit of cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2007: $1,064,430).
d) Securities lending
     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at September 30, 2008, the Company had $157,085 (December 31, 2007: $161,579) in securities on loan. During the three months ended September 30, 2008, the Company had recorded a $3,316 unrealized loss on this collateral on its statements of operations (December 31, 2007: $nil).

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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 amounts)
     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 25.5 days (December 31, 2007: 42.9 days). As at September 30, 2008, the securities lending collateral reinvested by the Company in connection with its securities lending program is allocated between levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 59,364     $     $ 59,364  
Asset-backed securities
          20,086             20,086  
Short-term investments
    56,221       20,726             76,947  
Agency
          2,014             2,014  
 
                       
 
  $ 56,221     $ 102,190     $     $ 158,411  
 
                       
 
     As at December 31, 2007, the securities lending collateral reinvested by the Company in connection with its securities lending program are allocated between levels 1, 2 and 3 as follows:
 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 49,055     $     $ 49,055  
Asset-backed securities
          11,515             11,515  
Short-term investments
    97,797       5,957             103,754  
 
                       
 
  $ 97,797     $ 66,527     $     $ 164,324  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at September 30, 2008 and December 31, 2007. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    September 30, 2008     December 31, 2007  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 51,625       32.6 %   $ 18,611       11.3 %
AA+
    4,960       3.1 %     2,999       1.8 %
AA
    20,687       13.1 %     15,997       9.7 %
AA-
    16,004       10.1 %     11,954       7.3 %
A+
    4,996       3.1 %     9,010       5.5 %
A
    3,793       2.4 %     7,956       4.9 %
NR
    125       0.1 %           0.0 %
 
                       
 
    102,190       64.5 %     66,527       40.5 %
NR (1)
    56,221       35.5 %     97,797       59.5 %
 
                       
Total
  $ 158,411       100.0 %   $ 164,324       100.0 %
 
                       
 
(1)   This amount relates to cash and is therefore not a rated security.
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested held at September 30, 2008 and December 31, 2007 are shown 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.

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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 amounts)
                                 
    September 30, 2008     December 31, 2007  
    Amortized     Estimated     Amortized     Estimated fair  
    cost     fair value     cost     value  
Due in one year or less
  $ 80,234     $ 78,961     $ 103,793     $ 104,151  
Due after one year through five years
    81,493       79,450       60,469       60,173  
 
                       
Total
  $ 161,727     $ 158,411     $ 164,262     $ 164,324  
 
                       
4. Reinsurance
     The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits, and increase aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.
a) Credit risk
     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. 100.0% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) at September 30, 2008 were from reinsurers rated A- or better, or from reinsurers posting full collateral, and included $32,529 of IBNR recoverable (December 31, 2007: $35,340). Reinsurance recoverables by reinsurer are as follows:
                                 
    September 30, 2008     December 31, 2007  
    Reinsurance             Reinsurance        
    recoverable     % of Total     recoverable     % of Total  
Top 10 reinsurers
  $ 166,672       94.2 %   $ 129,978       91.4 %
Other reinsurers balances > $1 million
    7,673       4.3 %     8,700       6.1 %
Other reinsurers balances < $1 million
    2,634       1.5 %     3,536       2.5 %
 
                       
Total
  $ 176,979       100.0 %   $ 142,214       100.0 %
 
                       
                     
        September 30, 2008  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 53,591       32.2 %
Hannover Re
  AA-     30,627       18.4 %
Lloyd’s syndicates
  A+     28,073       16.8 %
Allianz
  AA     13,927       8.4 %
Munich Re
  AA-     13,418       8.1 %
Swiss Re
  AA-     12,392       7.4 %
Aspen Insurance UK Limited
  A     5,557       3.3 %
Transatlantic Reinsurance Co.
  AA-     3,553       2.1 %
Platinum Underwriters Bermuda Ltd.
  A     3,006       1.8 %
Axa
  AA     2,528       1.5 %
 
               
 
      $ 166,672       100.0 %
 
             

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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 amounts)
                     
        December 31, 2007  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Hannover Re
  AA-   $ 31,630       24.4 %
Lloyd’s syndicates
  A+     29,613       22.8 %
Swiss Re
  AA-     18,758       14.4 %
Munich Re
  AA-     14,322       11.0 %
Allianz
  AA     13,461       10.4 %
Axa
  AA     7,418       5.7 %
Aspen Insurance UK Limited
  A     4,978       3.8 %
National Indemnity Company
  AAA     4,738       3.6 %
Transatlantic Reinsurance Co.
  AA-     2,970       2.3 %
Max Re Ltd.
  A-     2,090       1.6 %
 
               
 
      $ 129,978       100.0 %
 
             
     At September 30, 2008 and December 31, 2007, the provision for uncollectible reinsurance relating to losses recoverable was $2,957 and $3,106. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $176,979 reinsurance recoverable at September 30, 2008, $53,591 was collateralized (December 31, 2007: $nil).
     The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
     At September 30, 2008, the use of different assumptions within the model could have a material effect on the provision for uncollectible reinsurance reflected in the Company’s consolidated financial statements. To the extent the creditworthiness of the Company’s reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision.
b) Collateralized quota share retrocession treaties
     Between May 8, 2006 and July 28, 2006, Validus Re entered into retrocessional reinsurance agreements with Petrel Re Limited (“Petrel”), a Bermuda reinsurance company. These agreements include quota share reinsurance agreements (“Petrel Collateralized Quota Shares”) whereby Petrel assumes a quota share of certain lines of marine & energy and other lines of business assumed by Validus Re for unaffiliated third parties for the 2006 and 2007 underwriting years. Under the terms of the reinsurance agreements, the Company has determined it is not required to consolidate the assets, liabilities and results of operations of Petrel under the terms of FIN 46(R). Petrel is a separate legal entity in which the Company has no equity investment, management or board interests or related party relationships. The collateralized quota share retrocessional reinsurance agreement with Petrel was not extended beyond the 2007 underwriting year.
     Petrel is required to contribute funds into a trust (the “Petrel Trust”) for the benefit of Validus Re. Under the Petrel Collateralized Quota Shares, the amount required to be on deposit in the Petrel Trust is the sum of (i) full aggregate outstanding limits in excess of unpaid premium and related ceding commission on all in force covered policies plus (ii) an amount determined by Validus Re in its discretion to support known losses under covered policies (the “Required Amount of Available Assets”). If the actual amounts on deposit in the Petrel Trust, together with certain other amounts (the “Available Assets”), do not at least equal the Required Amount of Available Assets, Validus Re will, among other things, cease ceding business on a prospective basis.
     Validus Re pays a reinsurance premium to Petrel in the amount of the ceded percentage of the original gross premiums written on the business reinsured with Petrel less a ceding commission, which includes a reimbursement of direct acquisition expenses as well as a commission to Validus Re for generating the business. The Petrel

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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 amounts)
Collateralized Quota Shares also provides for a profit commission to Validus Re based on the underwriting results for the 2006 and 2007 underwriting years on a cumulative basis.
     For the three months ended September 30, 2008 and 2007 Validus Re ceded $(69) and $7,291 of premiums written through the Petrel Collateralized Quota Shares. The earned portion of premiums ceded to Petrel for the three months ended September 30, 2008 and 2007 was $(69) and $14,629. For the nine months ended September 30, 2008 and 2007 Validus Re ceded $(2,013) and $53,195 of premiums written through the Petrel Collateralized Quota Shares. The earned portion of premiums ceded to Petrel for the nine months ended September 30, 2008 and 2007 was $8,198 and $36,045.
     On December 22, 2007, Validus Re entered into a collateralized retrocessional reinsurance agreement with an unaffiliated third party whereby the Company cedes certain business underwritten in the marine offshore energy lines. For the three months ended September 30, 2008 and 2007 Validus Re ceded $3,994 and $nil of premiums written through this agreement. The earned portions of premiums ceded for the three months ended September 30, 2008 and 2007 were $7,744 and $nil. For the nine months ended September 30, 2008 and 2007 Validus Re ceded $18,554 and $nil of premiums written through this agreement. The earned portions of premiums ceded for the nine months ended September 30, 2008 and 2007 were $14,230 and $nil.
5. Share capital
     A reverse stock split of the outstanding shares of the Company was approved by the shareholders effective immediately following the Company’s Annual General Meeting on March 1, 2007, whereby each 1.75 outstanding shares was consolidated into 1 share, and the par value of the Company’s shares was increased to $0.175 per share. This share consolidation has been reflected retroactively in these financial statements.
a) Authorized and issued
     The Company’s authorized share capital is 571,428,571 ordinary voting and non-voting ordinary shares with a par value of $0.175 each. The holders of ordinary voting shares are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.
     As of December 31, 2005, the Company had issued 58,423,173 common shares at a price of $17.50 in a private offering. Shares issued consisted of both voting common shares and non-voting common shares which are identical in all respects, other than with respect to voting and conversion of non-voting common shares. Of the shares issued at December 31, 2005, 14,057,138 were non-voting and an additional 5,714,285 shares converted to non-voting upon the filing of the Company’s registration statement for its initial public offering (“IPO”). Proceeds from this issuance, after offering expenses, were $999,997. These proceeds were used for general corporate purposes.
     The Company issued an additional 59,427 voting shares in a private offering in February 2006 at a price of $17.50 for net proceeds of $1,030.
     On July 2, 2007, the Company acquired Talbot and agreed to issue an additional 18,415 common shares to certain employees of Talbot. These employees had elected to receive common shares of the Company in lieu of a cash settlement for the purchase of their Talbot shares. The issued common shares of the Company were valued at $23.00 per share and were issued on July 2, 2007.
     On July 30, 2007, the Company completed its IPO, selling 15,244,888 common shares at a price of $22.00 per share. The net proceeds to the Company from the IPO were approximately $310,731, after deducting the underwriters’ discount and fees. On July 31, 2007, the Company used $188,971 of the net proceeds to fully repay borrowings and to pay accrued interest under its unsecured credit facility. The Company used the remaining $121,760 of net proceeds to make a capital contribution to Validus Reinsurance, Ltd. to support the future growth of

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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 amounts)
reinsurance operations and to pay certain expenses related to the Talbot acquisition and make a $3,000 payment to Aquiline in connection with the termination of the Advisory Agreement.
     On August 27, 2007, the Company issued an additional 453,933 common shares at a price of $22.00 per share pursuant to the underwriters’ option to purchase additional common shares. The net proceeds to the Company of $9,349 were contributed to Validus Reinsurance, Ltd. Inclusive of the net proceeds from the underwriters’ option to purchase additional common shares, total proceeds from the IPO were approximately $320,080 and capital contributed to Validus Reinsurance, Ltd. was approximately $127,312.
     During the three months ended September 30, 2008, no warrants or options were exercised. During the nine months ended September 30, 2008, 31,580 warrants were exercised, resulting in the net share issuance of 18,980 common shares. During the nine months ended September 30, 2008, 24,661 options were exercised resulting in the issuance of 24,661 common shares.
     During the three and nine months ended September 30, 2008, 498,024 Employee Seller Shares vested, resulting in the issuance of 498,024 common shares. During the three and nine months ended September 30, 2008, 181,053 Restricted Share Awards vested, resulting in the issuance of 136,636 common shares.
b) Warrants
     The Company’s founder and sponsoring investors provided their insurance industry expertise, resources and relationships during the period ended December 31, 2005 to ensure that the Company would be fully operational with key management in place in time for the January 2006 renewal season. In return for these services the founder and sponsoring investors were issued warrants. Until July 30, 2007, the IPO date, agreements with the founder and sponsoring investors provided that the warrants represented, in the aggregate, 12.0% of the fully diluted shares of the Company (assuming exercise of all options, warrants and any other rights to purchase common shares) and were subject to adjustment such that the warrants would continue to represent, in the aggregate, 12.0% of the fully diluted shares of the Company until such time as the Company consummated an initial public offering, amalgamation, merger or another such similar corporate event. In consideration for the founder’s and sponsoring investors’ commitments, the Company had issued as at September 30, 2008 warrants to the founding shareholder and sponsoring investors to purchase, in the aggregate, up to 8,680,149 (December 31, 2007 — to 8,711,729) common shares. Of those issued 2,090,815 (December 31, 2007 — 2,090,185) of the warrants are to purchase non-voting common shares. The 12.0% agreement expired on the consummation of the IPO. No further warrants are anticipated to be issued.
     In February 2006 and July 2007 additional warrants were issued to the founding shareholder and sponsoring investors to maintain the allocation at 12.0% of the fully diluted shares of the Company pursuant to the anti-dilution provision of the warrants. 8,593 warrants were issued in February 2006 and 256,409 warrants were issued in July 2007.
     The warrants may be settled using either the physical settlement or net-share settlement methods. The warrants have been classified as equity instruments, in accordance with EITF 00-19: “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The warrants were initially measured at an aggregate fair value of $75,091 and recorded to additional paid-in capital. The founding shareholder’s warrants in the amount of $25,969 were accounted for as a deduction from additional paid-in capital and the balance of $49,122 was expensed. The additional warrants issued for the period ended December 31, 2006 increased the fair value to $75,168 with the increase of $77 expensed. The additional warrants issued for the period ended December 31, 2007 increased the fair value to $78,060 with the increase of $2,893 expensed.
     The fair value of each warrant issued was estimated on the date of grant using the Black-Scholes option-pricing model. The volatility assumption used, of approximately 30.0%, was derived from the historical volatility of the

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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 amounts)
share price of a range of publicly-traded Bermuda reinsurance companies of a similar business nature to the Company. No allowance was made for any potential illiquidity associated with the private trading of the Company’s shares. The other assumptions in the warrant-pricing model were as follows:
                         
    December 15, 2005     February 3, 2006     July 24, 2007  
    issuance   issuance   issuance
Warrants issued
    8,446,727       8,593       256,409  
Average strike price
  $ 17.50     $ 17.50     $ 20.00  
Volatility
    30.0 %     30.0 %     30.0 %
Risk-free rate
    4.5 %     4.5 %     4.5 %
Expected dividend yield
    0.0 %     0.0 %     0.0 %
Expected term (years)
    10.0       10.0       8.0  
Calculated fair-value per warrant
  $ 8.89     $ 8.89     $ 11.28  
     During the three months ended September 30, 2008, no warrants were exercised. During the nine months ended September 30, 2008, 31,580 warrants were exercised, resulting in the net share issuance of 18,980 common shares.
c) Dividends
     On February 20, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on March 17, 2008 to holders of record on March 3, 2008.
     On May 9, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on June 5, 2008 to holders of record on May 22, 2008.
     On August 7, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on September 4, 2008 to holders of record on August 21, 2008. The Company did not declare any dividends for the three and nine months ended September 30, 2007.
6. Stock plans
a) Long-term incentive plan
     The Company’s Long Term Incentive Plan (“LTIP”) provides for grants to employees of any option, stock appreciation right (“SAR”), restricted share, restricted share unit, performance share, performance unit, dividend equivalent or other share-based award. The total number of shares reserved for issuance under the LTIP is 13,126,896 shares. The LTIP is administered by the Compensation Committee of the Board of Directors. No SARs, performance shares, performance units or dividend equivalents have been granted to date. Grant prices are established at the estimated fair market value of the Company’s common shares at the date of grant.
b) LTIP options
     Options granted under the LTIP may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest ratably. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: risk free interest rate of 3.88%,(2007: 4.5%) expected life of 7 years, (2007: 7 years) expected volatility of 30% (2007: 30%) and a dividend yield of 3.20% (2007: nil). Expected volatility is based on stock price volatility of comparable publicly-traded companies. The company uses the simplified method outlined in the SEC Staff Accounting Bulletin 110 to estimate expected lives for options granted during the period as historical exercise data

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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 amounts)
is not available and the options meet the requirement as set out in the bulletin. Share expense of $1,080 was recorded for the three months ended September 30, 2008 (2007: $1,086) related to the options, with a corresponding increase to additional paid-in capital. Share expense of $3,171 was recorded for the nine months ended September 30, 2008 (2007: $2,930) related to the options, with a corresponding increase to additional paid-in capital. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to the options for the nine months ended September 30, 2008 is as follows:
                         
            Weighted     Weighted average  
            average grant     grant date  
    Options     date fair value     exercise price  
Options outstanding, December 31, 2007
    2,761,176     $ 7.61     $ 17.82  
Options granted
    164,166       6.73       24.73  
Options exercised
    (24,661 )     7.35       17.50  
Options forfeited
    (11,099 )     8.33       18.46  
 
                 
Options outstanding, September 30, 2008
    2,889,582     $ 7.56     $ 18.21  
 
                 
Options exercisable at September 30, 2008
    1,032,392     $ 7.49     $ 17.67  
 
                 
     Activity with respect to options for the year ended December 31, 2007 is as follows:
                         
            Weighted     Weighted average  
            average grant     grant date  
    Options     date fair value     exercise price  
Options outstanding, December 31, 2006
    2,568,894     $ 7.35     $ 17.50  
Options granted
    206,464       10.88       21.44  
Options exercised
                 
Options forfeited
    (14,182 )     10.30       20.39  
 
                 
Options outstanding, December 31, 2007
    2,761,176     $ 7.61     $ 17.82  
 
                 
Options exercisable at December 31, 2007
    908,361     $ 7.36     $ 17.52  
 
                 
     At September 30, 2008 there was $10,219 (December 31, 2007: $12,340) of total unrecognized compensation expense related to the outstanding options that is expected to be recognized over a weighted-average period of 2.5 years (December 31, 2007: 3.1 years).
c) LTIP restricted shares
     Restricted shares granted under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share expense of $3,767 (2007: $1,629) was recorded for the three months ended September 30, 2008 related to the restricted shares. Share expense of $10,334 (2007: $3,707) was recorded for the nine months ended September 30, 2008 related to the restricted shares. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares for the nine months ended September 30, 2008 is as follows:
                 
            Weighted
average grant
 
    Restricted shares     date fair value  
Restricted shares outstanding, December 31, 2007
    2,158,220     $ 20.44  
Restricted shares granted
    864,649       24.39  
Restricted shares vested
    (181,053 )     21.93  
Restricted shares forfeited
    (17,264 )     22.62  
 
           
Restricted shares outstanding, September 30, 2008
    2,824,552     $ 21.57  
 
           
     Activity with respect to unvested restricted shares for the period ended December 31, 2007 is as follows:

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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 amounts)
                 
            Weighted
average grant
 
    Restricted shares     date fair value  
         
Restricted shares outstanding, December 31, 2006
    733,964     $ 17.52  
Restricted shares granted
    1,428,306       21.94  
Restricted shares vested
           
Restricted shares forfeited
    (4,050 )     20.39  
 
           
Restricted shares outstanding, December 31, 2007
    2,158,220     $ 20.44  
 
           
     At September 30, 2008 there was $33,085 (December 31, 2007: $25,116) of total unrecognized compensation expense related to the outstanding restricted shares that is expected to be recognized over a weighted-average period of 3.2 years (December 31, 2007: 3.4 years).
d) Employee Seller Shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot, the Company issued 1,209,741 restricted shares to Talbot employees (the “Employee Seller Shares”). Upon consummation of the acquisition, the Employee Seller Shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s bye-laws. However, the Employee Seller Shares are subject to a restricted period during which the Employee Seller Shares are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of Employee Seller Shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period will end for 25% of the Employee Seller Shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that after four years forfeiture will be completely extinguished. Share expense of $1,153 and $3,417, respectively, was recorded for the three months ended September 30, 2008 and 2007. Share expense of $6,286 and $3,417, respectively, was recorded for the nine months ended September 30, 2008 and 2007. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares for the nine months ended September 30, 2008 is as follows:
                 
            Weighted
average grant
 
    Restricted shares     date fair value  
         
Employee seller shares outstanding, December 31, 2007
    1,209,741     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (498,024 )     22.01  
Employee seller shares forfeited
    (17,079 )     22.01  
 
           
Employee seller shares outstanding, September 30, 2008
    694,638     $ 22.01  
 
           
     Activity with respect to unvested restricted shares for the year ended December 31, 2007 is as follows:
                 
            Weighted
average grant
 
    Restricted shares     date fair value  
         
Employee seller shares outstanding, December 31, 2006
        $  
Employee seller shares granted
    1,209,741       22.01  
Employee seller shares vested
           
Employee seller shares forfeited
           
 
           
Employee seller shares outstanding, December 31, 2007
    1,209,741     $ 22.01  
 
           
     At September 30, 2008 there was $12,190 (December 31, 2007: $18,852) of total unrecognized compensation expense related to the outstanding restricted shares that is expected to be recognized over a weighted-average period of 2.8 years (December 31, 2007: 3.1 years).

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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 amounts)
e) Restricted Share Units
     Restricted share units under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share expense of $12 (2007: $nil) was recorded for the three months ended September 30, 2008 related to the restricted shares units. Share expense of $27 (2007: $nil) was recorded for the nine months ended September 30, 2008 related to the restricted shares units. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares units for the nine months ended September 30, 2008 is as follows:
                 
    Restricted     Weighted
average grant
 
    shares units     date fair value  
             
Restricted share units outstanding, December 31, 2007
        $  
Restricted share units granted
    11,853       25.28  
Restricted share units vested
           
Restricted share units forfeited
           
 
           
Restricted share units outstanding, September 30, 2008
    11,853     $ 25.28  
 
           
     At September 30, 2008 there was $223 of total unrecognized compensation expense related to the outstanding restricted shares units that is expected to be recognized over a weighted-average period of 4.6 years.
f) Total Share Expense
     The breakdown of share expense is as follows:
                                 
    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2008     September 30, 2007     September 30, 2008     September 30, 2007  
LTIP options
  $ 1,080     $ 1,086     $ 3,171     $ 2,930  
LTIP restricted shares
    3,767       1,629       10,334       3,707  
LTIP restricted share units
    12             27        
Employee seller shares
    1,153       3,417       6,286       3,417  
 
                       
Total share compensation expense
  $ 6,012     $ 6,132     $ 19,818     $ 10,054  
 
                       
7. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at September 30, 2008 was:
                         
    Commitment     Outstanding  (1)   Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       154,300       154,300  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       99,524        
Talbot FAL facility
    100,000       100,000        
Talbot third party FAL facility (2)
    144,015       144,015        
 
                 
Total
  $ 1,294,015     $ 647,839     $ 304,300  
 
                 

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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 amounts)
 
(1)  
Indicates utilization of commitment amount, not drawn borrowings.
 
(2)  
Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks. For the 2006 and 2007 years of account, Talbot’s underwriting was supported by various third parties (“Talbot third party FAL facility”). The members of the Talbot third party FAL facility provided FAL, in the form of cash, investments and undrawn letters of credit provided by various banks, in exchange for payment calculated principally by reference to the Syndicate 1183’s 2006 and 2007 results, as appropriate, when they are declared.
     The financing structure at December 31, 2007 was:
                         
    Commitment     Outstanding     Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       200,000       200,000  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       104,524        
Talbot FAL facility
    100,000       100,000        
Talbot third party FAL facility
    174,365       174,365        
 
                 
Total
  $ 1,324,365     $ 728,889     $ 350,000  
 
                 
     Finance expenses consist of interest on our junior subordinated deferrable debentures, the amortization of debt offering costs, fees relating to our credit facilities and the costs of FAL. Finance expenses for the three and nine months ended September 30, 2008 were as follows:
                                 
    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2008     September 30, 2007     September 30, 2008     September 30, 2007  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,593     $ 10,765     $ 10,774  
8.480% Junior Subordinated Deferrable Debentures
    3,509       4,294       11,517       4,598  
Credit facilities
    218       1,141       692       2,101  
Talbot FAL facilities
    44             169        
Talbot other interest
    (194 )     76       (81 )     76  
Talbot third party FAL facility
    7,352       8,782       25,734       8,782  
 
                       
Total
  $ 14,517     $ 17,886     $ 48,796     $ 26,331  
 
                       
b) Junior subordinated deferrable debentures
     On June 15, 2006, the Company participated in a private placement of $150,000 of junior subordinated deferrable interest debentures due 2036 (the “9.069% Junior Subordinated Deferrable Debentures”). The 9.069% Junior Subordinated Deferrable Debentures mature on June 15, 2036, are redeemable at the Company’s option at par beginning June 15, 2011, and require quarterly interest payments by the Company to the holders of the 9.069% Junior Subordinated Deferrable Debentures. Interest will be payable at 9.069% per annum through June 15, 2011,

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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 amounts)
and thereafter at a floating rate of three-month LIBOR plus 355 basis points, reset quarterly. The proceeds of $150,000 from the sale of the 9.069% Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, are being used by the Company to fund Validus Re segment operations and for general working capital purposes. Debt issuance costs of $3,750 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On June 21, 2007, the Company participated in a private placement of $200,000 of junior subordinated deferrable interest debentures due 2037 (the “8.480% Junior Subordinated Deferrable Debentures”). The 8.480% Junior Subordinated Deferrable Debentures mature on June 15, 2037, are redeemable at the Company’s option at par beginning June 15, 2012, and require quarterly interest payments by the Company to the holders of the 8.480% Junior Subordinated Deferrable Debentures. Interest will be payable at 8.480% per annum through June 15, 2012, and thereafter at a floating rate of three-month LIBOR plus 295 basis points, reset quarterly. The proceeds of $200,000 from the sale of the 8.480% Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, were used by the Company to fund the purchase of Talbot Holdings Ltd. Debt issuance costs of $2,000 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On April 29, 2008, the Company repurchased from an unaffiliated financial institution $45,700 principal amount of its 8.480% Junior Subordinated Deferrable Debentures due 2037 at an aggregate price of $36,560, plus accrued and unpaid interest of $474. The repurchase resulted in the recognition of a realized gain of $8,752 for the nine months ended September 30, 2008.
     Future expected payments of interest and principal on the Junior Subordinated Deferrable Debentures are as follows:
         
2008
  $ 6,672  
2009
    26,688  
2010
    26,688  
2011
    169,887  
2012 and thereafter
    160,842  
 
     
Total minimum future payments
  $ 390,777  
 
     
c) Credit facilities
     On March 14, 2006 (the “effective date”), the Company entered into a 364-day $100,000 revolving credit facility and a three-year $200,000 secured letter of credit facility. The credit facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. Associated with each of these bank facilities are various covenants that include, among other things, (i) the requirement under the revolving credit facility that the Company at all times maintain a minimum level of consolidated net worth of at least 65% of consolidated net worth calculated as of the effective date, (ii) the requirement under the letter of credit facility that the Company initially maintain a minimum level of consolidated net worth of at least 65% of the consolidated net worth as calculated as of the effective date, and thereafter to be increased quarterly by an amount equal to 50% of consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares of the Company during such quarter, and (iii) the requirement under each of the facilities that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.30:1.00. The Company was in compliance with the covenants at December 31, 2006 and for the period then ended.
     On March 12, 2007, the Company entered into a new $200,000 three-year unsecured facility, as subsequently amended on October 25, 2007, which provides for letter of credit availability for Validus Reinsurance, Ltd. and our other subsidiaries and revolving credit availability for the Company (the full $200,000 of which is available for letters of credit and/or revolving loans), and a new $500,000 five-year secured letter of credit facility, as

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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 amounts)
subsequently amended, which provides for letter of credit availability for Validus Reinsurance, Ltd. and our other subsidiaries. The new credit facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. The new credit facilities replaced our existing 364-day $100,000 senior unsecured revolving credit facility and our existing three-year $200,000 senior secured letter of credit facility, which have each been terminated.
     The credit facilities contain affirmative covenants that include, among other things, (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $872,000, and commencing with the end of the fiscal quarter ending March 31, 2007 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re Ltd. and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). For purposes of covenant compliance (i) “net worth” is calculated with investments carried at amortized cost and (ii) “consolidated total debt” does not include the Company’s junior subordinated deferrable debentures. The credit facilities also contain restrictions on our ability to pay dividends and other payments in respect of equity interests at any time that we are otherwise in default with respect to certain provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others. As of September 30, 2008 and throughout the reporting periods presented, where appropriate, the Company was in compliance with all covenants and restrictions under the credit facilities.
     On July 2, 2007, the Company made a draw upon the $200,000 unsecured credit facility in the amount of $188,000. These funds were used to fund a portion of the cash purchase price for the Company’s acquisition of Talbot and associated expenses. The interest rate set in respect of borrowing amounts under its credit facility borrowings as of July 2, 2007 was 6.0% per annum. On July 31, 2007, the Company fully repaid these borrowings and paid accrued interest with $188,971 of proceeds from its initial public offering. As of September 30, 2008, we have $99,294 in outstanding letters of credit under our five-year secured letter of credit facility (December 31, 2007: $104,524) and no amounts outstanding under our three-year unsecured facility (December 31, 2007: $nil).
     On November 25, 2003, Talbot entered into a standby Letter of Credit facility as subsequently amended (the “2003 Talbot FAL facility”). The 2003 Talbot FAL facility provided for dollar-based letter of credit availability for Talbot and designated subsidiaries for the purpose of providing funds at Lloyd’s. The commitment amount under the 2003 Talbot FAL facility of $30,000 was provided by Lloyds TSB Bank plc. The 2003 Talbot FAL facility contains affirmative covenants that include, among other things, (i) the requirement that Talbot maintain a minimum level of consolidated tangible net worth, (ii) the requirement that Talbot maintain at all times a consolidated net borrowings to consolidated tangible net worth ratio not greater than 0.35:1.00, (iii) the requirement that Talbot’s subordinated FAL (Funds at Lloyd’s which in accordance with the applicable providers agreement, is intended to be drawn in priority to any letters of credit under the 2003 Talbot FAL facility ) be at least $200,000, and (iv) a requirement that the forecast losses of the syndicate not exceed 7.5% of the syndicate premium limit in any one open year of account and a requirement that the per scenario estimated net losses not exceed 15% of the syndicate premium limit in any year of account. The 2003 Talbot FAL facility also contained restrictions on Talbot’s ability to incur debt at the parent or subsidiary level, sell assets, incur liens, merge or consolidate with others and make investments or change investment strategy. This facility was cancelled in November 2007 and replaced by a $100,000 standby Letter of Credit facility.
     On March 10, 2006, Talbot entered into $25,000 revolving loan facility, as subsequently amended (the “Talbot Revolving Loan Facility”), which provided for dollar or sterling-based revolving credit availability for Talbot. The facility limit for the Talbot Revolving Loan Facility automatically reduced to $7,500 at July 1, 2007. The Talbot Revolving Loan Facility was provided by Lloyds TSB Bank plc. The Talbot Revolving Loan Facility contains affirmative covenants that include, among other things the requirement that Talbot maintain a minimum level of consolidated tangible net worth and also contains restrictions on Talbot’s ability to incur debt, incur liens and sell or transfer assets on non-arms length terms. As of December 31, 2006 and throughout the reporting periods presented,

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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 amounts)
where appropriate, the Company was in compliance with all covenants and restrictions. This facility was cancelled in November 2007 and Lloyds TSB Bank plc entered into the $200,000 three-year unsecured facility by assuming $7,500 from the existing syndicate of commercial banks.
     On October 25, 2007, the Company entered into the First Amendment to each of its Three-Year Unsecured Letter of Credit Facility Agreement, dated as of March 12, 2007 and its Five-Year Secured Letter of Credit Facility Agreement, dated as of March 12, 2007 (together, the “Credit Facilities”), among the Company, Validus Reinsurance, Ltd., the Lenders party thereto, and JPMorgan Chase Bank, National Association, as administrative agent, to provide for, among other things, additional capacity to incur up to $100,000 under a new Funds at Lloyd’s Letter of Credit Facility (“FAL LoC Facility”) to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2008 and 2009 underwriting years of account. The amendment also modifies certain provisions in the Credit Facilities in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default.
     On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility (the “Talbot FAL facility”) to provide funds at Lloyd’s; this facility is guaranteed by the Company and is secured against the assets of Validus Reinsurance, Ltd. The Talbot FAL facility was provided by a syndicate of commercial banks arranged by Lloyds TSB Bank plc and ING Bank N.V., London Branch. The Talbot FAL Facility contains affirmative covenants that include, among other things, (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $1,164,265, and commencing with the end of the fiscal quarter ending December 31, 2007 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, and (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00. This Talbot FAL facility replaced the 2003 Talbot FAL facility.
     The Talbot FAL facility also contains restrictions on our ability to incur debt at our subsidiaries, incur liens or sell assets. Other than in respect of existing and future preferred and hybrid securities, the payment of dividends and other payments in respect of equity interests are not permitted at any time that we are in default with respect to certain provisions under the credit facilities. As of September 30, 2008, Talbot had $100,000 in outstanding letters of credit and was in compliance with all covenants and restrictions under the Talbot FAL facility.
d) Funds at Lloyd’s
     Talbot’s underwriting at Lloyd’s is supported by Funds at Lloyd’s (“FAL”) comprising: cash, investments and undrawn letters of credit provided by various banks on behalf of various companies and persons under reinsurance and other agreements. The FAL are provided in exchange for payment calculated principally by reference to the syndicate’s results, as appropriate, when they are declared. The amounts of cash, investments and letters of credit at September 30, 2008 supporting the 2008 underwriting year amount to $316,483, all of which is provided by the Company. A third party FAL facility comprising $144,015 which supports the 2006 and 2007 underwriting years has now been withdrawn from Lloyd’s and placed in escrow, however, the funds remain available to pay losses on those years for which that FAL has been contracted to support.
8. Commitments and contingencies
a) Concentrations of credit risk
     The Company’s investments are managed following prudent standards of diversification. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In addition, the Company limits its exposure to any single issuer to 3% or less of its investment portfolio, excluding treasury and agency securities. The minimum credit rating of any security purchased is A-/A3 and; where investments are downgraded, the Company permits a holding of up to 2% in

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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 amounts)
aggregate market value, or 10% with written pre-authorization. At September 30, 2008, 0.6% of the portfolio had ratings below A-/A3, none of which were rated below BB or Baa3. Also at September 30, 2008, the Company did not have an aggregate exposure to any single issuer of more than 2.2% of our investment portfolio, other than with respect to U.S. government securities.
b) Funds at Lloyd’s
     Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks. The amounts of cash, investments and letters of credit at September 30, 2008 amount to $316,483 (December 31, 2007: $316,483).
     For the 2006 and 2007 years of account, the Company’s underwriting was supported by various third parties (“Talbot third party FAL facility”). The members of the Talbot third party FAL facility provided FAL, in the form of cash, investments and undrawn letters of credit provided by various banks, in exchange for payment calculated principally by reference to the Syndicate 1183’s 2006 and 2007 results, as appropriate, when they are declared.
     The Talbot third party FAL facility support each year of account as follows:
                 
    2006     2007  
    Underwriting year     Underwriting year  
Common to both years
  $ 105,990     $ 105,990  
2006 only
    22,500        
2007 only
          15,525  
 
           
Total
  $ 128,490     $ 121,515  
 
           
     The FAL are provided for each year of account as follows:
                         
    2006     2007     2008  
    Underwriting year     Underwriting year     Underwriting year  
Company funds
  $ 110,075     $ 115,000     $ 216,483  
Talbot third party FAL facility
    128,490       121,515        
Talbot FAL facility
    30,000       30,000       100,000  
 
                 
Total FAL
  $ 268,565     $ 266,515     $ 316,483  
 
                 
     The amounts provided under the Talbot FAL facility would become a liability of the Company in the event of the syndicate declaring a loss at a level which would call on this arrangement.
     The amounts provided under the Talbot third party FAL facility would not become a liability of the Company in the event of the syndicate declaring a loss at a level which would call on such arrangements.
     The amounts which the Company provides as FAL is not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.

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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 amounts)
c) Lloyd’s New Central Fund
     Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3.0% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2008 capacity at Lloyd’s of £325,000 the September 30, 2008 exchange rate of £0.56 equals $1.00 and assuming the maximum 3% assessment the Company could be assessed approximately $17,355.
9. Related party transactions
     The transactions listed below are classified as related party transactions as each counterparty has either a direct or indirect shareholding in the Company.
a)  
    Merrill Lynch entities own 5,714,285 non-voting shares in the Company, hold warrants to purchase 1,067,187 shares and have an employee on the Board of Directors who does not receive compensation from the Company. Merrill Lynch warrants are convertible to non-voting shares as described in note 5. In addition, entities affiliated with Merrill Lynch were the initial purchasers of $40,000 of the 9.069% Junior Subordinated Deferrable Debentures.
 
b)  
    The Company entered into an agreement on December 8, 2005 with BlackRock Financial Management, Inc. (“BlackRock”) under which BlackRock was appointed as an investment manager of part of its investment portfolio. The Company incurred $401 and $539 during the three months ended September 30, 2008 and 2007 and $1,624 and $1,293 during the nine months ended September 30, 2008 and 2007, of which $488 was included in accounts payable and accrued expenses at September 30, 2008 (December 31, 2007: $787). Merrill Lynch is a shareholder of Blackrock.
 
c)  
    The Company entered into an agreement on December 8, 2005 with Goldman Sachs Asset Management and its affiliates (“GSAM”) under which GSAM was appointed as an investment manager of part of the Company’s investment portfolio. Goldman Sachs entities, which own 14,057,137 non-voting shares in the Company, hold warrants to purchase 1,604,410 non-voting shares, and have an employee on the Board of Directors who does not receive compensation from the Company. The Company incurred $291 and $201 during the three months ended September 30, 2008 and 2007 and $1,038 and $587 during the nine months ended September 30, 2008 and 2007, of which $527 was included in accounts payable and accrued expenses at September 30, 2008 (December 31, 2007: $460).
 
d)  
    Vestar Capital entities, which own 8,571,427 shares in the Company, hold warrants to purchase 972,810 shares, are shareholders of PARIS RE Holdings Limited (“Paris Re”), and have an employee on the Board of Directors who does not receive compensation from the Company. Pursuant to reinsurance agreements with Paris Re, the Company recognized $nil of gross premiums written during both three month periods ended September 30, 2008 and 2007 and $5,885 and $nil during the nine months ended September 30, 2008 and 2007, of which $3,959 was included in premiums receivable at September 30, 2008 (December 31, 2007: $nil). The earned premiums adjustment of $(194) and $nil was recorded for the three months ended September 30, 2008 and 2007.
 
e)  
    Aquiline entities, which own 6,857,143 shares in the Company, hold warrants to purchase 3,193,865 shares, and have three employees on the Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Pursuant to reinsurance agreements with Group Ark, the Company recognized $nil of gross premiums written during both three month periods ended September 30, 2008 and 2007 and $nil during the nine months ended September 30, 2008 and 2007, of which $nil was included in premiums receivable at September 30, 2008 (December 31, 2007: $nil). The Company also recognized $433 and $180 of reinsurance premiums ceded during the three month periods ended September 30, 2008 and 2007 and

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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 amounts)
$1,531 and $180 during the nine months ended September 30, 2008 and 2007, of which $294 was included in reinsurance balances payable at September 30, 2008 (December 31, 2007: $91) and $813 was included in prepaid reinsurance premiums at September 30, 2008 (December 31, 2007: $nil).
f)  
    Certain members of the Company’s management and staff have provided guarantees to 1384 Capital Ltd, a company formed to facilitate the provision of Funds at Lloyd’s (“FAL”) by such management and staff. The Company incurred $227 and $316 of finance expenses to such management and staff in respect of such provision of FAL for the three months ended September 30, 2008 and 2007 and $806 and $668 during the nine months ended September 30, 2008 and 2007, of which $751 was included in accounts payable and accrued expenses at September 30, 2008 (December 31, 2007: $889).
10. Earnings (loss) per share
     In 2007 a reverse stock split of the outstanding shares of the Company was approved by a vote by the shareholders, whereby each 1.75 outstanding shares was consolidated into 1 share. This reverse stock split has been reflected retroactively in the calculation of earnings per share.
     The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2008 and 2007:
                                 
    Three months     Three months     Nine months     Nine months  
    ended     ended     ended     ended  
    September 30,     September 30,     September 30,     September 30,  
    2008     2007     2008     2007  
Basic earnings (loss) per share
                               
Net (loss) income
  $ (126,300 )   $ 136,525     $ 16,096     $ 264,027  
Less: Dividends and distributions declared on outstanding warrants
    (1,739 )           (5,217 )      
 
                       
Net (loss) income available to common shareholders
  $ (128,039 )   $ 136,525     $ 10,879     $ 264,027  
 
                               
Weighted average shares — basic ordinary shares outstanding
    74,864,724       69,107,336       74,435,840       62,024,179  
 
                       
Basic (loss) earnings per share
  $ (1.71 )   $ 1.98     $ 0.15     $ 4.26  
 
                       
 
                               
Diluted earnings (loss) per share
                               
Net (loss) income
  $ (126,300 )   $ 136,525     $ 16,096     $ 264,027  
 
Less: Dividends and distributions declared on outstanding warrants
    (1,739 )           (5,217 )      
 
                       
Net (loss) income available to common shareholders
  $ (128,039 )   $ 136,525     $ 10,879     $ 264,027  
Weighted average shares — basic ordinary shares outstanding
    74,864,724       69,107,336       74,435,840       62,024,179  
Share equivalents:
                               
Warrants
          2,058,548       2,065,282       1,720,334  
Deferred share units
                2,546        
Unvested restricted share units
                236        
Unvested restricted share awards
          669,086       1,236,546       488,059  
Stock options
          33,865       182,268       11,288  
 
                       
Weighted average shares — diluted
    74,864,724       71,868,835       77,922,718       64,243,860  
 
                       
 
Diluted (loss) earnings per share
  $ (1.71 )   $ 1.90     $ 0.14     $ 4.11  
 
                       

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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 amounts)
     Due to the net loss incurred in the three months ended September 30, 2008, share equivalents were not included in the computation of diluted earnings per share, because of their anti-dilutive effect. Share equivalents that would result in the issuance of common shares of 86,799 were outstanding for the three months ended September 30, 2007, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive. Share equivalents that would result in the issuance of common shares of 94,925 and 169,632 were outstanding for the nine months ended September 30, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.
     In the basic earnings per share calculation, dividends and distributions declared on warrants outstanding are deducted from net income. In calculating diluted earnings per share, we also consider the impact of increasing the number of dilutive shares by a portion of the warrants outstanding, calculated using the treasury stock method. Whichever adjustment is more dilutive is incorporated in the calculation of diluted earnings per share.
11. Segment information
     The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments, “Validus Re” and “Talbot” respectively, have been determined under FAS 131, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each business requires different strategies.
Validus Re
     The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business is property, marine and specialty which includes aerospace, terrorism, life and accident & health and workers’ compensation catastrophe.
Talbot
     The Talbot segment writes a wide range of marine, property and specialty classes of business. The specialty lines include; political violence, political risk, marine & aviation war, accident & health, bloodstock/livestock, financial institutions, aviation treaty, and contingency.
Corporate and other reconciling items
     The Company has a “Corporate” function, which includes the activities of the parent company, and which carries out functions for the group. “Corporate” also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. The only revenue earned by “Corporate” is a minor amount of interest income that is incidental to the activities of the enterprise. For internal reporting purposes, “Corporate” is reflected separately as a business unit, however “Corporate” is not considered an operating segment under these circumstances and FAS 131. Other reconciling items include, but are not limited to, the elimination of intersegment revenues and expenses and unusual items that are not allocated to segments.
     The following tables summarize the underwriting results of our operating segments and corporate segment:

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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 amounts)
                                 
                    Corporate and        
                    other        
                    reconciling        
Quarter ended September 30, 2008   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 125,029     $ 157,307     $ (13,100 )   $ 269,236  
Reinsurance premiums ceded
    (36,286 )     (11,953 )     13,100       (35,139 )
 
                       
Net premiums written
    88,743       145,354             234,097  
Change in unearned premiums
    92,653       12,576             105,229  
 
                       
Net premiums earned
    181,396       157,930             339,326  
Losses and loss expense
    217,081       101,383             318,464  
Policy acquisition costs
    26,520       34,026       (121 )     60,425  
General and administrative expenses
    7,972       17,851       4,297       30,120  
Share compensation expense
    1,809       1,164       3,039       6,012  
 
                       
 
                               
Underwriting (loss) income
  $ (71,986 )   $ 3,506     $ (7,215 )   $ (75,695 )
 
                       
 
                               
Net investment income
    25,984       11,737       (1,342 )     36,379  
Net realized losses on investments
    (12,528 )     (1,139 )           (13,667 )
Net unrealized (losses) gains on investments
    (15,946 )     1,297             (14,649 )
Foreign exchange losses
    (22,919 )     (22,014 )           (44,933 )
Other income
    121       1,269       (121 )     1,269  
Finance expenses
    (213 )     (7,201 )     (7,103 )     (14,517 )
 
                       
 
                               
Net loss before taxes
    (97,487 )     (12,545 )     (15,781 )     (125,813 )
 
                               
Taxes
    31       456             487  
 
                       
 
                               
Net loss
  $ (97,518 )   $ (13,001 )   $ (15,781 )   $ (126,300 )
 
                       
 
                               
Loss and loss expense ratio (1)
    119.7 %     64.2 %             93.9 %
Policy acquisition cost ratio(1)
    14.6 %     21.5 %             17.8 %
General and administrative expense ratio(1)
    5.4 %     12.0 %             10.6 %
 
                         
Expense ratio
    20.0 %     33.5 %             28.4 %
 
                         
 
                               
Combined ratio(1)
    139.7 %     97.7 %             122.3 %
 
                         
 
                               
Total assets
  $ 2,741,721     $ 1,763,614     $ 4,261     $ 4,509,596  
 
                       
 
(1)  
Ratios are based on net premiums earned. The general and administrative expense ratio includes share expenses.

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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 amounts)
                                 
                    Corporate        
                    and other        
                    reconciling        
Quarter ended September 30, 2007   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 102,229     $ 143,042     $     $ 245,271  
Reinsurance premiums ceded
    (7,291 )     (615 )           (7,906 )
 
                       
Net premiums written
    94,938       142,427             237,365  
Change in unearned premiums
    57,055       1,106             58,161  
 
                       
Net premiums earned
    151,993       143,533             295,526  
Losses and loss expense
    38,131       49,132             87,263  
Policy acquisition costs
    18,161       32,784             50,945  
General and administrative expenses
    9,527       25,258       7,008       41,793  
Share compensation expense
    1,281       731       4,120       6,132  
 
                       
 
                               
Underwriting income (loss)
  $ 84,893     $ 35,628     $ (11,128 )   $ 109,393  
 
                       
 
                               
Net investment income
    22,706       13,360       494       36,560  
Net realized gains (losses) on investments
    1,122       (112 )           1,010  
Net unrealized gains on investments
    5,881       1,800             7,681  
Foreign exchange gains
    4,372       1,446             5,818  
Other income
          1,330             1,330  
Fair value of warrants
                (2,893 )     (2,893 )
Aquiline termination fee
                (3,000 )     (3,000 )
Finance expenses
    (174 )     (8,858 )     (8,854 )     (17,886 )
 
                       
 
                               
Net income (loss) before taxes
    118,800       44,594       (25,381 )     138,013  
 
                               
Taxes
    8       1,480             1,488  
 
                       
 
                               
Net income (loss)
  $ 118,792     $ 43,114     $ (25,381 )   $ 136,525  
 
                       
 
                               
Loss and loss expense ratio (1)
    25.1 %     34.2 %             29.5 %
Policy acquisition cost ratio(1)
    11.9 %     22.8 %             17.3 %
General and administrative expense ratio(1)
    7.1 %     18.1 %             16.2 %
 
                         
Expense ratio
    19.0 %     40.9 %             33.5 %
 
                         
 
                               
Combined ratio(1)
    44.1 %     75.2 %             63.0 %
 
                         
 
                               
Total assets
  $ 2,442,649     $ 1,678,359     $ 5,594     $ 4,126,602  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share expenses.

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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 amounts)
                                 
                    Corporate        
                    and other        
                    reconciling        
Nine months ended September 30, 2008   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 643,898     $ 556,335     $ (29,484 )   $ 1,170,749  
Reinsurance premiums ceded
    (61,237 )     (89,685 )     29,484       (121,438 )
 
                       
Net premiums written
    582,661       466,650             1,049,311  
Change in unearned premiums
    (93,498 )     (15,325 )           (108,823 )
 
                       
Net premiums earned
    489,163       451,325             940,488  
Losses and loss expense
    324,673       255,905             580,578  
Policy acquisition costs
    72,232       101,458       (145 )     173,545  
General and administrative expenses
    27,306       58,561       15,272       101,139  
Share compensation expense
    4,632       3,266       11,920       19,818  
 
                       
 
                               
Underwriting income (loss)
  $ 60,320     $ 32,135     $ (27,047 )   $ 65,408  
 
                       
 
Net investment income
    76,736       34,445       (2,324 )     108,857  
Net realized (losses) gains on investments
    (13,711 )     5,363             (8,348 )
Net unrealized losses on investments
    (58,617 )     (13,991 )           (72,608 )
Realized gain on repurchase of debentures
                8,752       8,752  
Foreign exchange losses
    (15,647 )     (20,196 )           (35,843 )
Other income
    145       3,666       (145 )     3,666  
Finance expenses
    (655 )     (25,821 )     (22,320 )     (48,796 )
 
                       
 
                               
Net income (loss) before taxes
    48,571       15,601       (43,084 )     21,088  
 
                               
Taxes
    78       4,914             4,992  
 
                       
 
                               
Net income (loss)
  $ 48,493     $ 10,687     $ (43,084 )   $ 16,096  
 
                       
 
Loss and loss expense ratio (1)
    66.4 %     56.7 %             61.7 %
Policy acquisition cost ratio (1)
    14.8 %     22.5 %             18.5 %
General and administrative expense ratio (1)
    6.5 %     13.7 %             12.9 %
 
                         
Expense ratio
    21.3 %     36.2 %             31.4 %
 
                         
 
                               
Combined ratio (1)
    87.7 %     92.9 %             93.1 %
 
                         
 
Total assets
  $ 2,741,721     $ 1,763,614     $ 4,261     $ 4,509,596  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share expenses.

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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 amounts)
                                 
                    Corporate        
                    and other        
                    reconciling        
Nine months ended September 30, 2007   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 654,599     $ 143,042     $     $ 797,641  
Reinsurance premiums ceded
    (65,029 )     (615 )           (65,644 )
 
                       
Net premiums written
    589,570       142,427             731,997  
Change in unearned premiums
    (193,055 )     1,106             (191,949 )
 
                       
Net premiums earned
    396,515       143,533             540,048  
Losses and loss expense
    127,294       49,132             176,426  
Policy acquisition costs
    48,216       32,784             81,000  
General and administrative expenses
    23,553       25,258       15,277       64,088  
Share compensation expense
    2,824       731       6,499       10,054  
 
                       
 
                               
Underwriting income (loss)
  $ 194,628     $ 35,628     $ (21,776 )   $ 208,480  
 
                       
 
                               
Net investment income
    60,942       13,360       497       74,799  
Net realized gains (losses) on investments
    935       (112 )           823  
Net unrealized gains on investments
    1,336       1,800             3,136  
Fair value of warrants issued
                (2,893 )     (2,893 )
Foreign exchange gains
    7,764       1,446             9,210  
Other income
          1,330             1,330  
Aquiline termination fee
                (3,000 )     (3,000 )
Finance expenses
    (1,143 )     (8,858 )     (16,330 )     (26,331 )
 
                       
 
                               
Net income (loss) before taxes
    264,462       44,594       (43,502 )     265,554  
 
                               
Taxes
    47       1,480             1,527  
 
                       
 
                               
Net income (loss)
  $ 264,415     $ 43,114     $ (43,502 )   $ 264,027  
 
                       
 
                               
Loss and loss expense ratio (1)
    32.1 %     34.2 %             32.7 %
Policy acquisition cost ratio (1)
    12.2 %     22.8 %             15.0 %
General and administrative expense ratio (1)
    6.6 %     18.1 %             13.7 %
 
                         
Expense ratio
    18.8 %     40.9 %             28.7 %
 
                         
 
                               
Combined ratio (1)
    50.9 %     75.2 %             61.4 %
 
                         
 
                               
Total assets
  $ 2,442,649     $ 1,678,359     $ 5,594     $ 4,126,602  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share expenses.

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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 amounts)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Three months ended September 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations(3)     Total     %  
United States
  $ 82,468     $ 11,435     $     $ 93,903       34.9 %
 
Worldwide excluding United States (1)
    10,555       49,263       (8,489 )     51,329       19.1 %
Europe
    2,166       13,589             15,755       5.9 %
Latin America and Caribbean
    22       17,628             17,650       6.6 %
Japan
    251       426             677       0.2 %
Canada
          2,261             2,261       0.8 %
 
                             
Sub-total, non United States
    12,994       83,167       (8,489 )     87,672       32.6 %
 
Worldwide including United States (1)
    4,846       12,105       (4,611 )     12,340       4.5 %
Marine and Aerospace (2)
    24,721       50,600             75,321       28.0 %
 
                             
Total
  $ 125,029     $ 157,307     $ (13,100 )   $ 269,236       100.0 %
 
                             
                                 
    Three months ended September 30, 2007  
    Gross premiums written  
    Validus Re     Talbot     Total (3)     %  
United States
  $ 68,575     $ 14,681     $ 83,256       34.1 %
 
Worldwide excluding United States(1)
    5,602       56,303       61,905       25.2 %
Europe
    2,576       12,447       15,023       6.1 %
Latin America and Caribbean
    444       6,443       6,887       2.8 %
Japan
    258       306       564       0.2 %
Canada
          2,383       2,383       1.0 %
 
                       
Sub-total, non United States
    8,880       77,882       86,762       35.3 %
 
Worldwide including United States (1)
    11,056       12,588       23,644       9.6 %
Marine and Aerospace (2)
    13,718       37,891       51,609       21.0 %
 
                       
Total
  $ 102,229     $ 143,042     $ 245,271       100.0 %
 
                       
                                         
    Nine months ended September 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations(3)     Total     %  
United States
  $ 342,661     $ 48,513     $ (1,979 )   $ 389,195       33.2 %
 
Worldwide excluding United States (1)
    37,096       166,499       (8,489 )     195,106       16.7 %
Europe
    41,900       44,599             86,499       7.4 %
Latin America and Caribbean
    5,657       33,155             38,812       3.3 %
Japan
    9,699       3,323             13,022       1.1 %
Canada
          7,976             7,976       0.7 %
 
                             
Sub-total, non United States
    94,352       255,552       (8,489 )     341,415       29.2 %
 
Worldwide including United States (1)
    69,758       49,377       (19,016 )     100,119       8.6 %
Marine and Aerospace (2)
    137,127       202,893             340,020       29.0 %
 
                             
Total
  $ 643,898     $ 556,335     $ (29,484 )   $ 1,170,749       100.0 %
 
                             

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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 amounts)
                                 
    Nine months ended September 30, 2007  
    Gross premiums written  
    Validus Re     Talbot     Total (3)     %  
United States
  $ 329,644     $ 14,681     $ 344,325       43.2 %
 
Worldwide excluding United States (1)
    35,072       56,303       91,375       11.5 %
Europe
    46,940       12,447       59,387       7.4 %
Latin America and Caribbean
    7,549       6,443       13,992       1.8 %
Japan
    7,673       306       7,979       1.0 %
Canada
          2,383       2,383       0.3 %
 
                       
Sub-total, non United States
    97,234       77,882       175,116       22.0 %
 
Worldwide including United States (1)
    80,335       12,588       92,923       11.6 %
Marine and Aerospace (2)
    147,386       37,891       185,277       23.2 %
 
                       
Total
  $ 654,599     $ 143,042     $ 797,641       100.0 %
 
                       
 
(1)   Represents risks in two or more geographic zones.
 
(2)  
Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.
 
(3)  
Intersegment premiums of $29,484 have been eliminated for the nine months ended September 30, 2008 (September 30, 2007: $nil). Intersegment premiums of $13,100 have been eliminated for the three months ended September 30, 2008 (September 30, 2007: $nil).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following is a discussion and analysis of the Company’s consolidated results of operations for the three and nine months ended September 30, 2008 and 2007 and the Company’s consolidated financial condition and liquidity and capital resources at September 30, 2008 and December 31, 2007. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. The Company completed the acquisition of Talbot Holdings Ltd. (“Talbot”) on July 2, 2007. As a result, Talbot is only included in the Company’s consolidated results from July 2, 2007 through September 30, 2008. Talbot is not included in consolidated results for the first six months of 2007. This discussion and analysis pertains to the results of the Company inclusive of Talbot from the date of acquisition. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2007, the discussions of critical accounting policies and the qualitative and quantitative disclosures about market risk contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
     The Company was formed on October 19, 2005 and has limited historical financial and operating information. Insurance and reinsurance companies face substantial risk in their initial stages of development. See “Cautionary Note Regarding Forward-Looking Statements”. In addition, for a variety of reasons, including the Company’s recent formation, the acquisition of Talbot and relatively few significant catastrophe events in 2006, 2007 and the first half of 2008, the Company’s historical financial results may not accurately indicate future performance. The Risk Factors set forth in Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2007 present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Executive Overview
     The Company underwrites from two distinct global operating subsidiaries, Validus Re and Talbot. Validus Re, the Company’s principal reinsurance operating subsidiary, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating subsidiary, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages syndicate 1183 at Lloyd’s of London (“Lloyd’s”), and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yachts, marinas and fine art business on behalf of the Talbot syndicate and others.
     The Company’s strategy is to concentrate primarily on short-tail risks, which is an area where management believes current prices and terms provide an attractive risk adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
Business Outlook and Trends
     The Company was formed in October 2005 in response to the supply/demand imbalance resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed substantial increases in premium rates in 2006 compared to 2005 levels. During the year ended December 31, 2007 and the first nine months of 2008, the Company experienced increased competition in most lines of business. Capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers has increased the supply of insurance and reinsurance which has resulted in a softening of rates in most lines. In addition, during the nine months ended September 30, 2008, the Company observed cedents retaining more risk as their capital bases have increased.
     During the quarter ended September 30, 2008, the insurance and reinsurance industry incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global financial crisis. In the wake of these events the

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Company expects increased demand for reinsurance as clients seek capital relief and volatility management. As the January renewal season approaches, a continued strong capital position will enable the Company to write premiums in those lines of business with increasingly attractive opportunities.
Financial Measures
     The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders:
     Annualized (loss) return on average equity represents the level of net (loss) income available to shareholders generated from the average shareholders’ equity during the period. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow revenue only when returns meet or exceed internal requirements. Details of annualized (loss) return on average equity are provided below.
                                         
    Three months ended   Nine months ended   Year ended
    September 30,   September 30,   September 30,   September 30,   December 31,
    2008   2007   2008   2007   2007
Annualized (loss) return on average equity
    (25.4 )%     35.1 %     1.1 %     25.3 %     29.9 %
     Diluted book value per common share is considered by management to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per common share decreased $1.54, or 6.1%, from $25.12 at June 30, 2008 to $23.58 at September 30, 2008. Diluted book value per common share decreased $0.42, or 1.8%, from $24.00 at December 31, 2007 to $23.58 at September 30, 2008. The decrease was due primarily to third quarter catastrophe losses and net realized and unrealized losses, and dividends declared on our common shares and common share equivalents. This decrease was partially offset by earnings generated in the first six months of 2008.
     Cash dividends per common share are an integral part of the value created for shareholders. The Company declared quarterly cash dividends of $0.20 per common share in the first three quarters of 2008. On November 7, 2008, the Company announced a quarterly cash dividend of $0.20 per each common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on December 4, 2008 to holders of record on November 20, 2008.
     Underwriting (loss) income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments, and foreign exchange gains (losses). The Company believes the reporting of underwriting (loss) income enhances the understanding of results by highlighting the underlying performance of the Company’s core insurance and reinsurance operations. Underwriting loss for the three months ended September 30, 2008 and underwriting income for the three months ended September 30, 2007 were $75.7 million and $109.4 million, respectively. Underwriting income for the nine months ended September 30, 2008 and 2007 were $65.4 million and $208.5 million, respectively. Underwriting income is a Non-GAAP financial measure as described in detail in the section below entitled “Underwriting Income”.
Critical Accounting Policies and Estimates
     There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements:
    Reserve for losses and loss expenses;
 
    Premiums;

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    Reinsurance premiums ceded and reinsurance recoverable; and
 
    Investment valuation.
     Critical accounting policies and estimates are discussed further in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two segments are its significant operating subsidiaries, Validus Re and Talbot.
Results of Operations
     Validus Holdings, Ltd. and Validus Re were formed on October 19, 2005, and Validus Re commenced operations on December 16, 2005. Neither company had prior operating histories. The Company began writing reinsurance contracts on January 1, 2006. On July 2, 2007, the Company acquired Talbot and consolidates Talbot as of that date. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with U.S. GAAP and relevant SEC guidance.

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     The following table presents results of operations for the three and nine months ended September 30, 2008 and 2007 and the pro forma results of operations for the nine months ended September 30, 2007:
                                         
    Three months     Three months     Nine months        
    ended     ended     ended        
    September 30,     September 30,     September 30,     Nine months ended  
    2008     2007     2008     September 30, 2007  
    Actual     Actual     Actual     Actual     Pro Forma (1)  
    (Dollars in thousands)   (Dollars in thousands)
Gross premiums written
  $ 269,236     $ 245,271     $ 1,170,749     $ 797,641     $ 1,186,952  
Reinsurance premiums ceded
    (35,139 )     (7,906 )     (121,438 )     (65,644 )     (142,267 )
 
                             
Net premiums written
    234,097       237,365       1,049,311       731,997       1,044,685  
Change in unearned premiums
    105,229       58,161       (108,823 )     (191,949 )     (219,802 )
 
                             
Net premiums earned
    339,326       295,526       940,488       540,048       824,883  
 
                                       
Losses and loss expenses
    318,464       87,263       580,578       176,426       319,640  
Policy acquisition costs
    60,425       50,945       173,545       81,000       142,466  
General and administrative expenses
    30,120       41,793       101,139       64,088       107,684  
Share compensation expense
    6,012       6,132       19,818       10,054       12,389  
 
                             
Total underwriting expenses
    415,021       186,133       875,080       331,568       582,179  
 
                                       
Underwriting (loss) income (2)
    (75,695 )     109,393       65,408       208,480       242,704  
Net investment income
    36,379       36,560       108,857       74,799       94,680  
Other income
    1,269       1,330       3,666       1,330       3,495  
Finance expenses
    (14,517 )     (17,886 )     (48,796 )     (26,331 )     (52,222 )
 
                             
Operating (loss) income before taxes
    (52,564 )     129,397       129,135       258,278       288,657  
 
                                       
Taxes
    487       1,488       4,992       1,527       2,724  
 
                             
 
                                       
Operating (loss) income after tax
    (53,051 )     127,909       124,143       256,751       285,933  
 
                             
 
                                       
Net realized (losses) gains on investments
    (13,667 )     1,010       (8,348 )     823       (406 )
Net unrealized (losses) gains on investments
    (14,649 )     7,681       (72,608 )     3,136       3,135  
Realized gain on repurchase of debentures
                8,752              
Foreign exchange (losses) gains
    (44,933 )     5,818       (35,843 )     9,210       10,393  
Fair value of warrants issued
          (2,893 )           (2,893 )     (2,893 )
Aquiline termination fee
          (3,000 )           (3,000 )     (3,000 )
 
                             
Net (loss) income after taxes
  $ (126,300 )   $ 136,525     $ 16,096     $ 264,027     $ 293,162  
 
                             
Comprehensive (loss) income
                                       
Foreign currency translation adjustments
    (1,556 )     (640 )     (1,479 )     (640 )      
 
                             
Comprehensive (loss) income
  $ (127,856 )   $ 135,885     $ 14,617     $ 263,387     $ 293,162  
 
                             
Selected ratios
                                       
Net premiums written/ Gross premiums written
    86.9 %     96.8 %     89.6 %     91.8 %     88.0 %
Losses and loss expenses ratio
    93.9 %     29.5 %     61.7 %     32.7 %     38.7 %
Policy acquisition cost ratio
    17.8 %     17.3 %     18.5 %     15.0 %     17.3 %
General and administrative expense ratio
    10.6 %     16.2 %     12.9 %     13.7 %     14.6 %
 
                             
Expense ratio
    28.4 %     33.5 %     31.4 %     28.7 %     31.9 %
 
                             
Combined ratio
    122.3 %     63.0 %     93.1 %     61.4 %     70.6 %
 
                             
 
(1)  
The results of operations for Talbot are consolidated only from the July 2, 2007 date of acquisition. The pro forma results of operations including Talbot are presented for the nine months ended September 30, 2007 for comparative purposes only.
 
(2)  
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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    Three months     Three months     Nine months     Nine months  
    ended     ended     ended     ended  
    September 30,     September 30,     September 30,     September 30,  
    2008     2007 (1)     2008     2007 (1)  
    (Dollars in thousands)     (Dollars in thousands)  
VALIDUS RE
                               
Gross premiums written
  $ 125,029     $ 102,229     $ 643,898     $ 654,599  
Reinsurance premiums ceded
    (36,286 )     (7,291 )     (61,237 )     (65,029 )
 
                       
Net premiums written
    88,743       94,938       582,661       589,570  
Change in unearned premiums
    92,653       57,055       (93,498 )     (193,055 )
 
                       
Net premiums earned
    181,396       151,993       489,163       396,515  
 
                               
Losses and loss expenses
    217,081       38,131       324,673       127,294  
Policy acquisition costs
    26,520       18,161       72,232       48,216  
General and administrative expenses
    7,972       9,527       27,306       23,553  
Share compensation expense
    1,809       1,281       4,632       2,824  
 
                       
Total underwriting expenses
    253,382       67,100       428,843       201,887  
 
                               
Underwriting (loss) income (2)
    (71,986 )     84,893       60,320       194,628  
 
                       
 
                               
TALBOT
                               
Gross premiums written
  $ 157,307     $ 143,042     $ 556,335     $ 143,042  
Reinsurance premiums ceded
    (11,953 )     (615 )     (89,685 )     (615 )
 
                       
Net premiums written
    145,354       142,427       466,650       142,427  
Change in unearned premiums
    12,576       1,106       (15,325 )     1,106  
 
                       
Net premiums earned
    157,930       143,533       451,325       143,533  
 
                               
Losses and loss expenses
    101,383       49,132       255,905       49,132  
Policy acquisition costs
    34,026       32,784       101,458       32,784  
General and administrative expenses
    17,851       25,258       58,561       25,258  
Share compensation expense
    1,164       731       3,266       731  
 
                       
Total underwriting expenses
    154,424       107,905       419,190       107,905  
 
                       
 
                               
Underwriting income (2)
    3,506       35,628       32,135       35,628  
 
                       
 
                               
CORPORATE & ELIMINATIONS
                               
Gross premiums written
  $ (13,100 )   $     $ (29,484 )   $  
Reinsurance premiums ceded
    13,100             29,484        
 
                       
Net premiums written
                       
Policy acquisition costs
    (121 )           (145 )      
General and administrative expenses
    4,297       7,008       15,272       15,277  
Share compensation
    3,039       4,120       11,920       6,499  
 
                       
Total underwriting expenses
    7,215       11,128       27,047       21,776  
 
                               
Underwriting (loss) income (2)
    (7,215 )     (11,128 )     (27,047 )     (21,776 )
 
                       
 
                               
Total underwriting (loss) income (2)
  $ (75,695 )   $ 109,393     $ 65,408     $ 208,480  
 
                       
 
(1)  
The results of operations for Talbot are consolidated only from the July 2, 2007 date of acquisition. No pre-acquisition results of operations for Talbot are presented in the analysis above.
 
(2)  
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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Three months ended September 30, 2008 compared to three months ended September 30, 2007
     Net loss for the three months ended September 30, 2008 was $126.3 million compared to net income of $136.5 million for the three months ended September 30, 2007, a decrease of $262.8 million or 192.5%. The primary factors driving the decrease in net (loss) income were:
   
Decrease in underwriting (loss) income of $185.1 million due primarily to increased losses and loss expense of $183.4 million and $22.1 million, respectively, as a result of Hurricanes Ike and Gustav. These losses were offset by increased earned reinstatement premiums of $19.7 million as a result of Hurricanes Ike and Gustav.
 
   
Decrease in net realized and unrealized (losses) gains on investments of $14.7 million and $22.3 million, respectively. These changes were principally the result of market value declines due to interest rate movements and widening credit spreads resulting from extreme volatility in the financial markets; and
 
   
Decrease in foreign exchange (losses) gains of $50.8 million due to a decline in the value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency.
     The change in net (loss) income for the three months ended September 30, 2008 of $262.8 million is described in the following table:
                                 
    Three months ended September 30, 2008  
    Increase (decrease) over the three months ended September 30, 2007  
                    Corporate        
                    and other        
                    reconciling        
    Validus Re     Talbot     items     Total  
    (Dollars in thousands)  
Hurricanes Ike and Gustav — net losses and loss expenses
  $ (172,635 )   $ (32,878 )   $     $ (205,513 )
Hurricanes Ike and Gustav — net reinstatement premiums
    19,268       392             19,660  
Other underwriting (loss) income items
    (3,512 )     364       3,913       765  
 
                       
Underwriting (loss) income
    (156,879 )     (32,122 )     3,913       (185,088 )
Net investment income (loss)
    3,278       (1,623 )     (1,836 )     (181 )
Other income (loss)
    121       (61 )     (121 )     (61 )
Finance expenses
    (39 )     1,657       1,751       3,369  
 
                       
 
    (153,519 )     (32,149 )     3,707       (181,961 )
 
                               
Taxes
    (23 )     1,024             1,001  
 
                       
 
    (153,542 )     (31,125 )     3,707       (180,960 )
 
                               
Net realized (losses) gains on investments
    (13,650 )     (1,027 )           (14,677 )
Net unrealized (losses) gains on investments
    (21,827 )     (503 )           (22,330 )
Foreign exchange (losses) gains
    (27,291 )     (23,460 )           (50,751 )
Fair value of warrants issued
                2,893       2,893  
Aquiline termination fee
                3,000       3,000  
 
                       
 
                               
Net (loss) income
  $ (216,310 )   $ (56,115 )   $ 9,600     $ (262,825 )
 
                       
Gross Premiums Written
     Gross premiums written for the three months ended September 30, 2008 were $269.2 million compared to $245.3 million for the three months ended September 30, 2007, an increase of $24.0 million or 9.8%. The increase in gross premiums written was driven primarily by the property and marine lines which increased by $8.7 million and $19.9 million, respectively.
     Details of gross premiums written by line of business are provided below.

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    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Gross premiums     Gross premiums     Gross premiums     Gross premiums        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 123,831       46.0 %   $ 115,173       47.0 %     7.5 %
Marine
    83,273       30.9 %     63,361       25.8 %     31.4 %
Specialty
    62,132       23.1 %     66,737       27.2 %     (6.9 )%
 
                               
Total
  $ 269,236       100.0 %   $ 245,271       100.0 %     9.8 %
 
                               
Validus Re. Validus Re gross premiums written for the three months ended September 30, 2008 were $125.0 million compared to $102.2 million for the three months ended September 30, 2007, an increase of $22.8 million or 22.3%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Gross premiums     Gross premiums     Gross premiums     Gross premium        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 97,545       78.0 %   $ 86,623       84.7 %     12.6 %
Marine
    19,154       15.3 %     8,345       8.2 %     129.5 %
Specialty
    8,330       6.7 %     7,261       7.1 %     14.7 %
 
                               
Total
  $ 125,029       100.0 %   $ 102,229       100.0 %     22.3 %
 
                               
     The increase in Validus Re gross premiums written was driven by increases in the property and marine lines of $10.9 million and $10.8 million, respectively. The increase in the property line was due primarily to $15.2 million of reinstatement premiums after losses resulting from Hurricanes Ike and Gustav. The increase in the marine line was due primarily to $4.1 million of reinstatement premiums.
     Talbot. Talbot gross premiums written for the three months ended September 30, 2008 were $157.3 million compared to $143.0 million for the three months ended September 30, 2007, an increase of $14.3 million or 10.0%. Details of gross premiums written by line of business are provided below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Gross premiums     Gross premiums     Gross premiums     Gross premiums        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 35,194       22.4 %   $ 28,550       20.0 %     23.3 %
Marine
    66,676       42.4 %     55,016       38.4 %     21.2 %
Specialty
    55,437       35.2 %     59,476       41.6 %     (6.8 )%
 
                               
Total
  $ 157,307       100.0 %   $ 143,042       100.0 %     10.0 %
 
                               
     The increase is due principally to property treaty business written through the Latin American office based in Miami, new lines of business such as accident and health and bloodstock and livestock and certain marine lines. This increase was offset by reductions in the war and financial institutions lines due to timing of inceptions and reduced premium rates.

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Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended September 30, 2008 were $35.1 million compared to $7.9 million for the three months ended September 30, 2007, an increase of $27.2 million or 344.5%. Validus Re increased its property ceded reinsurance premiums by $25.0 million, as discussed below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Reinsurance     Reinsurance     Reinsurance     Reinsurance        
    Premiums     Premiums     Premiums     Premiums        
    Ceded     Ceded (%)     Ceded     Ceded (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 27,823       79.1 %   $ 7,266       91.9 %     282.9 %
Marine
    4,977       14.2 %     (30 )     (0.4 )%   NM  
Specialty
    2,339       6.7 %     670       8.5 %     249.1 %
 
                               
Total
  $ 35,139       100.0 %   $ 7,906       100.0 %     344.5 %
 
                               
 
NM   Not Meaningful
Validus Re. Validus Re reinsurance premiums ceded for the three months ended September 30, 2008 were $36.3 million compared to $7.3 million for the three months ended September 30, 2007, an increase of $29.0 million or 397.7%.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Reinsurance     Reinsurance     Reinsurance     Reinsurance        
    Premiums     Premiums     Premiums     Premiums        
    Ceded     Ceded (%)     Ceded     Ceded (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 32,265       88.9 %   $ 7,282       99.9 %     343.1 %
Marine
    3,871       10.7 %     9       0.1 %   NM  
Specialty
    150       0.4 %           0.0 %   NM  
 
                               
Total
  $ 36,286       100.0 %   $ 7,291       100.0 %     397.7 %
 
                               
 
NM   Not Meaningful
     Effective July 1, 2008, Validus Re purchased retrocessional coverage providing $87.5 million of limit via an ultimate net loss agreement which resulted in the recognition of $29.5 million of reinsurance premiums ceded in the three months ended September 30, 2008. The purchased retrocessional coverage includes ultimate net loss coverage that attaches at $150.0 million of onshore property losses.
Talbot. Talbot reinsurance premiums ceded for the three months ended September 30, 2008 were $12.0 million compared to $0.6 million for the three months ended September 30, 2007, an increase of $11.4 million.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Reinsurance     Reinsurance     Reinsurance     Reinsurance        
    Premiums     Premiums     Premiums     Premiums        
    Ceded     Ceded (%)     Ceded     Ceded (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 4,466       37.4 %   $ (16 )     (2.6 )%   NM  
Marine
    3,663       30.6 %     (39 )     (6.3 )%   NM  
Specialty
    3,824       32.0 %     670       108.9 %     470.7 %
 
                               
Total
  $ 11,953       100.0 %   $ 615       100.0 %     1843.6 %
 
                               
 
NM   Not Meaningful
     The increase in reinsurance premiums ceded on the property and marine accounts was primarily a result of the quota share and surplus treaty contracts with Validus Re. Specialty reinsurance ceded was higher than during the three months ended September 30, 2007 due to an additional excess of loss cover and quota share contract purchased

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in the three months ended September 30, 2008 on the aviation treaty account. During the three months ended September 30, 2007, there was a reduction of $1.2 million on previously estimated reinsurance spend.
Net Premiums Written
     Net premiums written for the three months ended September 30, 2008 were $234.1 million compared to $237.4 million for the three months ended September 30, 2007, a decrease of $3.3 million or 1.4%. Details of net premiums written by line of business are provided below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net premiums     Net premiums     Net premiums     Net premiums        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 96,008       41.1 %   $ 107,907       45.5 %     (11.0 )%
Marine
    78,296       33.4 %     63,391       26.7 %     23.5 %
Specialty
    59,793       25.5 %     66,067       27.8 %     (9.5 )%
 
                               
Total
  $ 234,097       100.0 %   $ 237,365       100.0 %     (1.4 )%
 
                               
     Premium rates in most lines have declined during the nine months ended September 30, 2008. As a result of the Company’s decision to grow revenue only when returns meet or exceed internal requirements, net premiums written have remained consistent with the three month period ended September 30, 2007.
     Validus Re. Validus Re net premiums written for the three months ended September 30, 2008 were $88.7 million compared to $94.9 million for the three months ended September 30, 2007, a decrease of $6.2 million or 6.5%. Details of net premiums written by line of business are provided below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net premiums     Net premiums     Net premiums     Net premiums        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 65,280       73.6 %   $ 79,341       83.6 %     (17.7 )%
Marine
    15,283       17.2 %     8,336       8.8 %     83.3 %
Specialty
    8,180       9.2 %     7,261       7.6 %     12.7 %
 
                               
Total
  $ 88,743       100.0 %   $ 94,938       100.0 %     (6.5 )%
 
                               
     The decrease in Validus Re net premiums written was driven primarily by the property line which accounted for $14.1 million of the decrease. The decrease in property line net premiums written was a result of increased reinsurance premium ceded partially offset by increased reinstatement premiums written, as discussed above.
     The ratio of net premiums written to gross premiums written were 71.0% and 92.9% for the three month periods ended September 30, 2008 and 2007, respectively. This decrease was attributable to the timing of retrocessional coverage placed on July 1, 2008, as discussed above.
     Talbot. Talbot net premiums written for the three months ended September 30, 2008 were $145.4 million compared to $142.4 million for the three months ended September 30, 2007, an increase of $3.0 million or 2.1%. Details of net premiums written by line of business are provided below.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net premiums     Net premiums     Net premiums     Net premiums        
    written     written (%)     written     written (%)     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 30,728       21.1 %   $ 28,566       20.1 %     7.6 %
Marine
    63,013       43.4 %     55,055       38.6 %     14.5 %
Specialty
    51,613       35.5 %     58,806       41.3 %     (12.2 )%
 
                               
Total
  $ 145,354       100.0 %   $ 142,427       100.0 %     2.1 %
 
                               

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     The increase in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written for the three month periods ended September 30, 2008 and 2007 were 92.4% and 99.6%, respectively. This decrease was due primarily to the increased reinsurance ceded to the Validus Re segment.
Change in Unearned Premiums
     Change in unearned premiums for the three months ended September 30, 2008 was $105.2 million compared to $58.2 million for the three months ended September 30, 2007, an increase of $47.1 million or 80.9%.
                         
    Three months     Three months        
    ended September     ended September        
    30, 2008     30, 2007     % Change  
    (Dollars in thousands)          
Change in gross unearned premium
  $ 96,183     $ 90,787       5.9 %
Change in prepaid reinsurance premium
    9,046       (32,626 )     (127.7 )%
 
                   
Net change in unearned premium
  $ 105,229     $ 58,161       80.9 %
 
                   
     Validus Re. Validus Re’s change in unearned premiums for the three months ended September 30, 2008 was $92.7 million compared to $57.1 million for the three months ended September 30, 2007, an increase of $35.6 million or 62.4%. The increase was due partially to $19.3 million of earned reinstatement premiums as a result of Hurricanes Ike and Gustav losses and the relative maturation of the Company’s risks-attaching business.
     Talbot. The Talbot change in unearned premiums for the three months ended September 30, 2008 was $12.6 million compared to $1.1 million for the three months ended September 30, 2007, an increase of $11.5 million.
                         
    Three months     Three months        
    ended September     ended September        
    30, 2008     30, 2007     % Change  
    (Dollars in thousands)          
Change in gross unearned premium
  $ 20,720     $ 23,102       (10.3 )%
Change in prepaid reinsurance premium
    (8,144 )     (21,996 )     (63.0 )%
 
                   
Net change in unearned premium
  $ 12,576     $ 1,106       1,037.3 %
 
                   
     The difference in gross unearned premiums arises from a change in business mix and premium volume. In respect of prepaid reinsurance premiums, the difference arises from the non-renewal of several low level reinsurance covers in the 2008 excess of loss reinsurance program.
Net Premiums Earned
     Net premiums earned for the three months ended September 30, 2008 were $339.3 million compared to $295.5 million for the three months ended September 30, 2007, an increase of $43.8 million or 14.8%. The increase in net premiums earned was driven by increased premiums earned at Validus Re and Talbot of $29.4 million and $14.4 million, respectively.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums     %  
    Earned     Earned %     Earned     Earned %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 165,028       48.6 %   $ 149,294       50.5 %     10.5 %
Marine
    101,110       29.8 %     75,338       25.5 %     34.2 %
Specialty
    73,188       21.6 %     70,894       24.0 %     3.2 %
 
                               
Total
  $ 339,326       100.0 %   $ 295,526       100.0 %     14.8 %
 
                               

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Validus Re. Validus Re net premiums earned for the three months ended September 30, 2008 were $181.4 million compared to $152.0 million for the three months ended September 30, 2007, an increase of $29.4 million or 19.3%.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums     %  
    Earned     Earned %     Earned     Earned %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 132,307       73.0 %   $ 116,985       77.0 %     13.1 %
Marine
    29,980       16.5 %     20,375       13.4 %     47.1 %
Specialty
    19,109       10.5 %     14,633       9.6 %     30.6 %
 
                               
Total
  $ 181,396       100.0 %   $ 151,993       100.0 %     19.3 %
 
                               
     The increase in net premiums earned reflects the benefit of earning premiums on business written in 2007 and 2006. Contracts written on a risks-attaching basis are generally earned over 24 months and therefore have less immediate effect on premiums earned than contracts written on a losses-occurring basis which are generally earned on a 12 month basis. Reinstatement premiums of $19.3 million related to Hurricane Ike and Gustav were fully earned in the quarter.
     Talbot. Talbot net premiums earned for the three months ended September 30, 2008 were $157.9 million compared to $143.5 million for the three months ended September 30, 2007, an increase of $14.4 million or 10.0%.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums     %  
    Earned     Earned %     Earned     Earned %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 32,721       20.7 %   $ 32,309       22.5 %     1.3 %
Marine
    71,130       45.1 %     54,963       38.3 %     29.4 %
Specialty
    54,079       34.2 %     56,261       39.2 %     (3.9 )%
 
                               
Total
  $ 157,930       100.0 %   $ 143,533       100.0 %     10.0 %
 
                               
     The increase in marine net premiums earned was due mainly to additional gross premium written booked in the year on the 2007 cargo and yachts accounts. During the three months ended September 30, 2007, reductions were made to prior period gross premium written estimates, resulting in reduced earned premiums.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended September 30, 2008 were $318.5 million compared to $87.3 million for the three months ended September 30, 2007, an increase of $231.2 million or 264.9%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended September 30, 2008 and 2007 were 93.9% and 29.5%, respectively. During the three months ended September 30, 2008, the Company incurred $183.4 million and $22.1 million of loss expense attributable to Hurricanes Ike and Gustav, which represent 54.0 and 6.5 percentage points of the loss ratio, respectively. Details of loss ratios by line of business are provided below.
                         
    Three months ended     Three months ended     Percentage point  
    September 30, 2008     September 30, 2007     change  
Property
    122.4 %     28.0 %     94.4  
Marine
    99.6 %     42.3 %     57.3  
Specialty
    21.4 %     19.2 %     2.2  
 
                   
All lines
    93.9 %     29.5 %     64.4  
 
                   

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     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended September 30, 2008:
                                 
    Three months ended September 30, 2008  
    Validus Re     Talbot     Eliminations     Total  
            (Dollars in thousands)  
Gross reserves at period beginning
  $ 267,639     $ 766,787     $ (4,687 )   $ 1,029,739  
Losses recoverable at period beginning
    (4,517 )     (133,050 )     4,687       (132,880 )
 
                       
Net reserves at period beginning
    263,122       633,737             896,859  
Incurred losses — current year
    220,594       124,016             344,610  
Incurred losses — change in prior accident years
    (3,513 )     (22,633 )           (26,146 )
 
                       
Incurred losses
    217,081       101,383             318,464  
 
                               
Paid losses
    (40,241 )     (54,956 )           (95,197 )
Foreign exchange
          (20,745 )           (20,745 )
 
                       
Net reserves at period end
    439,962       659,419             1,099,381  
Losses recoverable at period end
    53,591       135,670       (15,798 )     173,463  
 
                       
Gross reserves at period end
  $ 493,553     $ 795,089     $ (15,798 )   $ 1,272,844  
 
                       
     The amount recorded represents management’s best estimate of expected losses and loss expenses on premiums earned. The increase in losses and loss expenses was due principally to Hurricanes Ike and Gustav. Favorable loss development on prior years totaled $26.1 million. The $22.6 million favorable loss reserve development in the Talbot segment relates primarily to the 2006 and prior underwriting years as described below. Favorable loss reserve development benefitted the Company’s loss ratio by 7.7 percentage points for the three months ended September 30, 2008.
     Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation of recent losses. The Company’s actual ultimate net losses from recent loss events may vary materially from estimates.
     At September 30, 2008 and 2007, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the critical accounting policies and estimates as discussed in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company did not make any significant changes in the assumptions or methodology used in its reserving process during the three months ended September 30, 2008.
                         
    At September 30, 2008  
                    Total gross  
                    reserve for losses  
    Gross case reserves     Gross IBNR     and loss expenses  
    (Dollars in thousands)  
Property
  $ 233,297     $ 236,476     $ 469,733  
Marine
    261,644       309,672       571,316  
Specialty
    78,100       153,655       231,755  
 
                 
Total
  $ 573,041     $ 699,803     $ 1,272,844  
 
                 
 
    At September 30, 2008  
                    Total net reserve  
                    for losses and  
    Net case reserves     Net IBNR     loss expenses  
    (Dollars in thousands)  
Property
  $ 240,086     $ 224,804     $ 464,890  
Marine
    186,590       242,248       428,838  
Specialty
    68,340       137,313       205,653  
 
                 
Total
  $ 495,016     $ 604,365     $ 1,099,381  
 
                 

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     During the three months ended September 30, 2008, the Company incurred losses related to Hurricanes Ike and Gustav of $183.4 million and $22.1 million, respectively, as detailed in the chart below.
                         
            Net        
    Net Losses and     Reinstatement     Net Effect on Net  
    Loss Expenses (1)     Premiums     (Loss) Income (2)  
    (Dollars in thousands)  
Hurricane Ike
                       
 
Validus Re — Hurricane Ike Property
  $ 120,286     $ (13,867 )   $ 106,419  
Marine
    36,778       (4,098 )     32,680  
Specialty
    125             125  
 
                 
All lines
    157,189       (17,965 )     139,224  
 
                       
Talbot — Hurricane Ike
                       
Property
    15,161       (386 )     14,775  
Marine
    10,478       (6 )     10,472  
Specialty
    544             544  
 
                 
All lines
    26,183       (392 )     25,791  
 
                       
Total — Hurricane Ike
                       
Property
    135,447       (14,253 )     121,194  
Marine
    47,256       (4,104 )     43,152  
Specialty
    669             669  
 
                 
All lines
  $ 183,372     $ (18,357 )   $ 165,015  
 
                       
Hurricane Gustav
                       
 
                       
Validus Re — Hurricane Gustav
                       
Property
  $ 13,946     $ (1,303 )   $ 12,643  
Marine
    1,500             1,500  
Specialty
                 
 
                 
All lines
    15,446       (1,303 )     14,143  
 
                       
Talbot — Hurricane Gustav
                       
Property
    3,695             3,695  
Marine
    2,500             2,500  
Specialty
    500             500  
 
                 
All lines
    6,695             6,695  
 
                       
Total — Hurricane Gustav
                       
Property
    17,641       (1,303 )     16,338  
Marine
    4,000             4,000  
Specialty
    500             500  
 
                 
All lines
  $ 22,141     $ (1,303 )   $ 20,838  
 
                       
Hurricanes Ike and Gustav
                       
 
                       
Property
  $ 153,088     $ (15,556 )   $ 137,532  
Marine
    51,256       (4,104 )     47,152  
Specialty
    1,169             1,169  
 
                 
All lines
  $ 205,513     $ (19,660 )   $ 185,853  
 
                 
 
(1)   Net of reinsurance
 
(2)  
Net effect on net (loss) income includes the sum of estimates of net claims and claim expenses incurred, and earned reinstatement premiums assumed and ceded.
     Validus Re. Validus Re losses and loss expenses for the three months ended September 30, 2008 were $217.1 million compared to $38.1 million for the three months ended September 30, 2007, an increase of $179.0 million or 469.3%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 119.7% and 25.1%

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for the three months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2008, Validus Re incurred $157.2 million and $15.4 million of loss expense attributable to Hurricanes Ike and Gustav, which represent 86.7 and 8.5 percentage points of the loss ratio, respectively. During the three months ended September 30, 2007, Validus Re incurred $10.0 million of loss expense attributable to July 2007 flooding in parts of England, which represented 6.6 percentage points of the loss ratio. Details of loss ratios by line of business and period of incurrence are provided below.
                         
    Three months ended September 30,   Percentage
    2008   2007   point change
Property — current year
    123.2 %     25.4 %     97.8  
Property — change in prior accident years
    (4.8 )%     (2.4 )%     (2.4 )
 
                       
Property — loss ratio
    118.4 %     23.0 %     95.4  
 
                       
Marine — current year
    174.6 %     37.7 %     136.9  
Marine — change in prior accident years
    14.7 %     (1.7 )%     16.4  
 
                       
Marine — loss ratio
    189.3 %     36.0 %     153.2  
 
                       
Specialty — current year
    27.8 %     29.1 %     (1.3 )
Specialty — change in prior accident years
    (8.6 )%     (2.7 )%     (5.9 )
 
                       
Specialty — loss ratio
    19.2 %     26.4 %     (7.2 )
 
                       
All lines — current year
    121.6 %     27.4 %     94.2  
All lines — change in prior accident years
    (1.9 )%     (2.3 )%     0.4  
 
                       
All lines loss ratio
    119.7 %     25.1 %     94.6  
 
     Validus Re paid losses of $40.2 million and $12.7 million for the three months ended September 30, 2008 and 2007, respectively. Losses related to Hurricanes Ike and Gustav represent 90.9 and 10.5 percentage points of the property lines loss ratio, respectively, for the three months ended September 30, 2008. Validus Re experienced favorable development of $3.5 million during both three month periods ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2007, Validus Re incurred $10.0 million of loss expense attributable to flooding in parts of England, which represented 8.5 percentage points of the property lines loss ratio.
 
     Losses related to Hurricanes Ike and Gustav represent 122.7 and 5.0 percentage points of the marine lines loss ratio, respectively, for the three months ended September 30, 2008. The marine lines experienced adverse development in prior accident years loss ratio of $4.4 million, or 14.7 percentage points of the marine lines loss ratio, for the three months ended September 30, 2008.
 
     The specialty lines include $5.3 million related to current year losses. These were partially offset by $1.6 million of favorable development relating to prior accident years.
 
     Talbot. Talbot losses and loss expenses for the three months ended September 30, 2008 were $101.4 million compared to $49.1 million for the three months ended September 30, 2007, an increase of $52.3 million, or 106.4%. The loss ratio was 64.2% and 34.2% for the three months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2008, Talbot incurred $26.2 million and $6.7 million of loss expense attributable to Hurricanes Ike and Gustav, which represent 16.6 and 4.2 percentage points of the loss ratio, respectively. Details of loss ratios by line of business and period of incurrence are provided below.
 
    Three months ended September 30,   Percentage
    2008   2007   point change
Property — current year
    139.0 %     64.5 %     74.5  
Property — change in prior accident years
    (0.2 )%     (18.5 )%     18.3  
 
                       
Property — loss ratio
    138.8 %     46.0 %     92.8  
 
                       
Marine — current year
    79.0 %     57.0 %     22.0  

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    Three months ended September 30,   Percentage
    2008   2007   point change
Marine — change in prior accident years
    (17.2 )%     (12.3 )%     (4.9 )
 
                       
Marine — loss ratio
    61.8 %     44.7 %     17.1  
 
                       
Specialty — current year
    41.3 %     31.8 %     9.5  
Specialty — change in prior accident years
    (19.1 )%     (14.5 )%     (4.6 )
 
                       
Specialty — loss ratio
    22.2 %     17.3 %     4.9  
 
                       
All lines — current year
    78.5 %     48.8 %     29.7  
All lines — change in prior accident years
    (14.3 )%     (14.6 )%     0.3  
 
                       
All lines loss ratio
    64.2 %     34.2 %     30.0  
     Losses related to Hurricanes Ike and Gustav represent 46.3 and 11.3 percentage points of the property lines loss ratio, respectively, for the three months ended September 30, 2008. The property lines include $45.5 million related to current year losses. During the three months ended September 30, 2007, Talbot incurred $11.1 million of loss expense attributable to flooding in parts of England, which represented 34.4 percentage points of the property lines loss ratio.
     Losses related to Hurricanes Ike and Gustav represent 14.7 and 3.5 percentage points of the marine lines loss ratio, respectively, for the three months ended September 30, 2008. The marine lines include $56.3 million related to current year marine losses. These were partially offset by $12.3 million of favorable development relating to prior accident years. The current year loss ratio has increased due mainly to energy and marine treaty losses following Hurricanes Ike and Gustav. There has been favorable development on the hull line due to lower than anticipated attritional losses. There has also been favorable developments on the energy account in respect of Hurricane Katrina and due to a removal of a reserved loss on a political risk claim.
     The specialty lines include $22.3 million relating to current year losses offset by $10.3 million due to favorable development on prior accident year reserves. The favorable development was due principally to a reduction in the war line ratios due to continued low claims activity and reduced provisions for late reported claims in the more developed underwriting years of the financial institutions line.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended September 30, 2008 were $60.4 million compared to $50.9 million for the three months ended September 30, 2007, an increase of $9.5 million or 18.6%. The increase in policy acquisition costs was due primarily to an increase for Validus Re of $8.4 million.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Policy Acquisition     Policy Acquisition     Policy Acquisition     Policy Acquisition     %  
    Costs     Costs %     Costs     Costs %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 24,189       40.0 %   $ 21,503       42.2 %     12.5 %
Marine
    20,796       34.4 %     13,349       26.2 %     55.8 %
Specialty
    15,440       25.6 %     16,093       31.6 %     (4.1 )%
 
                               
Total
  $ 60,425       100.0 %   $ 50,945       100.0 %     18.6 %
 
                               
     Validus Re. Validus Re policy acquisition costs for the three months ended September 30, 2008 were $26.5 million compared to $18.2 million for the three months ended September 30, 2007, an increase of $8.4 million or 46.0%.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Policy Acquisition     Policy Acquisition     Policy Acquisition     Policy Acquisition     %  
    Costs     Costs %     Costs     Costs %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 19,027       71.8 %   $ 14,799       81.5 %     28.6 %
Marine
    4,990       18.8 %     1,306       7.2 %     282.1 %
Specialty
    2,503       9.4 %     2,056       11.3 %     21.7 %
 
                               
Total
  $ 26,520       100.0 %   $ 18,161       100.0 %     46.0 %
 
                               

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     Policy acquisition costs include brokerage, commission and excise tax and are generally driven by contract terms and are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Policy acquisition costs as a percent of net premiums earned for the three months ended September 30, 2008 and 2007 were 14.6% and 11.9%, respectively. The policy acquisition ratio increased largely due to 1.7 and 10.2 percentage point increases on the policy acquisition ratios for the property and marine lines, respectively. The increase in the marine policy acquisition ratio was due to ceding commissions earned during the three months ended September 30, 2007 which were absent during the three months ended September 30, 2008 due to hurricane losses.
Talbot. Talbot policy acquisition costs for the three months ended September 30, 2008 were $34.0 million compared to $32.8 million for the three months ended September 30, 2007, an increase of $1.2 million or 3.8%.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Policy Acquisition     Policy Acquisition     Policy Acquisition     Policy Acquisition     %  
    Costs     Costs %     Costs     Costs %     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Property
  $ 5,283       15.5 %   $ 6,704       20.5 %     (21.2 )%
Marine
    15,806       46.5 %     12,043       36.7 %     31.3 %
Specialty
    12,937       38.0 %     14,037       42.8 %     (7.8 )%
 
                               
Total
    34,026       100.0 %   $ 32,784       100.0 %     3.8 %
 
                               
     Policy acquisition cost ratios were 21.5% and 22.8%, respectively, for the three month periods ended September 30, 2008 and 2007. Policy acquisition costs as a percent of gross premiums earned were 19.1% and 19.7%, respectively, for the three month periods ended September 30, 2008 and 2007.
General and Administrative Expenses
     General and administrative expenses for the three months ended September 30, 2008 were $30.1 million compared to $41.8 million for the three months ended September 30, 2007, a decrease of $11.7 million or 27.9%. The decrease was primarily a result of reduced Talbot expenses.
                                               
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    General and     General and     General and     General and        
    Administrative     Administrative     Administrative     Administrative     %  
    Expenses     Expenses (%)     Expenses     Expenses (%)     Change  
    (Dollars in thousands)     (Dollars in thousands)                  
Validus Re
  $ 7,972       26.4 %   $ 9,527       22.8 %     (16.3 )%
Talbot
    17,851       59.3 %     25,258       60.4 %     (29.3 )%
Corporate & Eliminations
    4,297       14.3 %     7,008       16.8 %     (38.7 )%
 
                               
Total
  $ 30,120       100.0 %   $ 41,793       100.0 %     (27.9 )%
 
                               
     General and administrative expense ratios for the three month periods ended September 30, 2008 and 2007 were 10.6% and 16.2%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.

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    Three months ended     Three months ended  
    September 30, 2008     September 30, 2007  
            Expenses as %             Expenses as %  
            of Net Earned             of Net Earned  
    Expenses     Premiums     Expenses     Premiums  
    (Dollars in thousands)             (Dollars in thousands)          
General and Administrative
  $ 30,120       8.8 %   $ 41,793       14.1 %
Share Compensation
    6,012       1.8 %     6,132       2.1 %
 
                       
Total
  $ 36,132       10.6 %   $ 47,925       16.2 %
 
                       
     General and administrative expenses of $30.1 million in the three months ended September 30, 2008 represents 8.8 percentage points of the expense ratio. Share compensation expense is discussed in the following section.
Validus Re. Validus Re general and administrative expenses for the three months ended September 30, 2008 were $8.0 million compared to $9.5 million for the three months ended September 30, 2007, a decrease of $1.6 million or 16.3%. General and administrative expenses have decreased primarily as a result of reduced profit-related bonus expenses and salary costs despite the increase in staff to 86 at September 30, 2008 from 62 at September 30, 2007. General and administrative expenses are generally comprised of salaries and benefits, professional fees, rent and office expenses. Validus Re’s general and administrative expenses as a percent of net premiums earned for the three month periods ended September 30, 2008 and 2007 were 4.4% and 6.3%, respectively.
Talbot. Talbot general and administrative expenses were $17.9 million and $25.3 million for the three months ended September 30, 2008 and 2007. General and administrative expenses have decreased primarily as a result of reduced salary costs of $4.7 million, as the three months ended September 30, 2007 included charges for one-off bonuses related to the acquisition of Talbot by the Company. The three months ended September 30, 2007 also included a reversal of deferred expenses of $5.2 million. Talbot’s general and administrative expenses as a percent of net premiums earned for the three months ended September 30, 2008 and 2007 were 11.3% and 17.6%, respectively.
Corporate & Eliminations. Corporate general and administrative expenses for the three months ended September 30, 2008 were $4.3 million compared to $7.0 million for the three months ended September 30, 2007, a decrease of $2.7 million or 38.7%. Corporate general and administrative expenses have decreased primarily as a result of reduced profit related bonus expenses. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other cost relating to the Company as a whole.
Share Compensation Expense
     Share compensation expense for the three months ended September 30, 2008 was $6.0 million compared to $6.1 million for the three months ended September 30, 2007, a decrease of $0.1 million or 2.0%. This expense is non-cash and has no net effect on total shareholders’ equity, as it is balanced by an increase in additional paid-in capital.
                                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007        
    Share     Share     Share     Share        
    Compensation     Compensation     Compensation     Compensation     %  
    Expense     Expense (%)     Expense     Expense (%)     Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Validus Re
  $ 1,809       30.1 %   $ 1,281       20.9 %     41.2 %
Talbot
    1,164       19.4 %     731       11.9 %     59.2 %
Corporate & Eliminations
    3,039       50.5 %     4,120       67.2 %     (26.2 )%
 
                               
Total
  $ 6,012       100.0 %   $ 6,132       100.0 %     (2.0 )%
 
                               
     Share compensation expense of $6.0 million in the three months ended September 30, 2008 represents 1.8 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expense for the three months ended September 30, 2008 was $1.8 million compared to $1.3 million for the three months ended September 30, 2007. This increase of $0.5 million or 41.2% was due principally to an increase in staff to 86 at September 30, 2008 from 62 at September 30, 2007. Share compensation expense as a percent of net premiums earned for the three month periods ended September 30, 2008 and 2007 were 1.0% and 0.8%, respectively.

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Talbot. Talbot share compensation expense for the three months ended September 30, 2008 and 2007 was $1.2 million and $0.7 million, respectively. Share compensation expense as a percent of net premiums earned for the three month periods ended September 30, 2008 and September 30, 2007 was 0.7% and 0.5%, respectively.
Corporate & Eliminations. Corporate share compensation expense for the three months ended September 30, 2008 was $3.0 million compared to $4.1 million for the three months ended September 30, 2007, a decrease of $1.1 million or 26.2%. The decrease was primarily a result of $1.2 million in respect of the Employee Seller shares issued to Talbot employees as part of the acquisition of Talbot by the Company.
Selected Ratios
     The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The net loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended September 30, 2008 and 2007.
                         
    Three months ended   Three months ended   Percentage
    September 30, 2008   September 30, 2007   point change
Losses and loss expenses ratio
    93.9 %     29.5 %     64.4  
Policy acquisition cost ratio
    17.8 %     17.3 %     0.5  
General and administrative expense ratio(1)
    10.6 %     16.2 %     (5.6 )
 
                       
Expense ratio
    28.4 %     33.5 %     (5.1 )
 
                       
Combined ratio
    122.3 %     63.0 %     59.3  
 
                       
 
(1)   Includes general and administrative expense, and share compensation expense
                         
    Three months ended   Three months ended   Percentage
Validus Re   September 30, 2008   September 30, 2007   point change
Losses and loss expenses ratio
    119.7 %     25.1 %     94.6  
Policy acquisition cost ratio
    14.6 %     11.9 %     2.7  
General and administrative expense ratio
    5.4 %     7.1 %     (1.7 )
 
                       
Expense ratio
    20.0 %     19.1 %     0.9  
 
                       
Combined ratio
    139.7 %     44.1 %     95.5  
 
                       
                         
    Three months ended   Three months ended   Percentage
Talbot   September 30, 2008   September 30, 2007   point change
Losses and loss expenses ratio
    64.2 %     34.2 %     30.0  
Policy acquisition cost ratio
    21.5 %     22.8 %     (1.3 )
General and administrative expense ratio
    12.0 %     18.1 %     (6.1 )
 
                       
Expense ratio
    33.5 %     40.9 %     (7.4 )
 
                       
Combined ratio
    97.7 %     75.2 %     22.6  
 
                       
Underwriting (Loss) Income
     Underwriting loss for the three months ended September 30, 2008 was $75.7 million compared to income of $109.4 million for the three months ended September 30, 2007, a change of $185.1 million or 169.2%.
                                         
    Three months ended     % of Sub     Three months ended     % of Sub        
    September 30, 2008     total     September 30, 2007     total     % Change  
    (Dollars in thousands)             (Dollars in thousands)                  
Validus Re
  $ (71,986 )     (105.1 )%   $ 84,893       70.4 %     (184.8 )%
Talbot
    3,506       5.1 %     35,628       29.6 %     (90.2 )%
 
                               
Sub total
    (68,480 )     100.0 %     120,521       100.0 %     (156.8 )%
 
                               
Corporate & Eliminations
    (7,215 )             (11,128 )             (35.2 )%
 
                                   
Total
  $ (75,695 )           $ 109,393               (169.2 )%
 
                                   

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     The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP measure as previously defined. Underwriting income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of net investment income (loss), other income, finance expenses, realized gain on repurchase of debentures, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses), fair value of warrants issued and Aquiline termination fee.
                 
    Three months ended     Three months ended  
    September 30, 2008     September 30, 2007  
    (Dollars in thousands)  
Underwriting (loss) income
  $ (75,695 )   $ 109,393  
Net investment income
    36,379       36,560  
Other income
    1,269       1,330  
Finance expenses
    (14,517 )     (17,886 )
Net realized (losses) gains on investments
    (13,667 )     1,010  
Net unrealized gains (losses) on investments
    (14,649 )     7,681  
Foreign exchange gains (losses)
    (44,933 )     5,818  
Fair value of warrants issued
          (2,893 )
Aquiline termination fee
          (3,000 )
 
           
Net income before taxes
  $ (125,813 )   $ 138,013  
 
           
     Underwriting (loss) income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.
     The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of underwriting income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its underwriting business and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s underlying business performance. The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the bonus component of the total annual incentive compensation.
     Underwriting (loss) income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of underwriting income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides

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more prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of underwriting income to net income.
Net Investment Income
     Net investment income for the three months ended September 30, 2008 was $36.4 million compared to $36.6 million for the three months ended September 30, 2007, a decrease of $0.2 million or 0.5%. Net investment income decreased as a result of reduced market yields. Net investment income is comprised of accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended September 30, 2008 and 2007 are as presented below.
                         
    Three months ended     Three months ended        
    September 30, 2008     September 30, 2007     % Change  
    (Dollars in thousands)          
Fixed maturities and short-term investments
  $ 32,443     $ 24,076       34.8 %
Securities lending income
    261       59       342.4 %
Cash and cash equivalents
    4,308       13,252       (67.5 )%
 
                   
Total investment income
    37,012       37,387       (1.0 )%
Investment expenses
    (633 )     (827 )     (23.5 )%
 
                   
Net investment income
  $ 36,379     $ 36,560       (0.5 )%
 
                   
     Investment management fees incurred relate to BlackRock Financial Management, Inc. (“BlackRock”) and Goldman Sachs Asset Management L.P. and its affiliates (“GSAM”). Each of Merrill Lynch & Co, Inc. (“Merrill Lynch”) and Goldman Sachs is a major shareholder of the Company. BlackRock is considered a related party due to its merger in February 2006 with Merrill Lynch Investment Managers. Investment management fees earned by BlackRock for the three month periods ended September 30, 2008 and September 30, 2007 were $0.3 million and $0.5 million, respectively. Investment management fees earned by GSAM for the three month periods ended September 30, 2008 and September 30, 2007 were $0.3 million and $0.2 million, respectively. Management believes that the fees charged were consistent with those that would have been charged by unrelated third parties.
     Annualized effective investment yield is based on the weighted average investments held calculated on a simple period average and excludes net unrealized gains (losses), foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances. The Company’s annualized effective investment yield was 4.5% and 5.1% for the three months ended September 30, 2008 and 2007, respectively, and the average duration at September 30, 2008 was 2.2 years (December 31, 2007 — 2.0 years).
Finance Expenses
     Finance expenses for the three months ended September 30, 2008 were $14.5 million compared to $17.9 million for the three months ended September 30, 2007, a decrease of $3.4 million or 18.8%. The lower finance expenses in 2008 were attributable primarily to the following:
  $0.8 million decrease on the 8.480% Junior Subordinated Deferrable Debentures; and
 
  $1.4 million decrease on Talbot third party FAL facility.
     Finance expenses also include the amortization of debt offering costs and offering discounts and fees related to our credit facilities.

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    Three months
ended
    Three months
ended
       
    September 30, 2008     September 30, 2007     % Change  
    (Dollars in thousands)          
9.069% Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,593       0.2 %
8.480% Junior Subordinated Deferrable Debentures
    3,509       4,294       (18.3 )%
Credit facilities
    218       1,141       (80.9 )%
Talbot FAL facilities
    44           NM     
Talbot other interest
    (194 )     76       (356.6 )%
Talbot third party FAL facility
    7,352       8,782       (16.3 )%
 
                   
Total
  $ 14,517     $ 17,886       (18.8 )%
 
                   
 
NM    Not Meaningful
     Capital in Lloyd’s entities, whether personal or corporate, is required to be set annually for the prospective year and held by Lloyd’s in trust (“Funds at Lloyd’s” or “FAL”). In underwriting years up to and including 2007, Talbot’s FAL has been provided both by Talbot and by third parties, thereafter Talbot’s FAL has been provided exclusively by the Company. Because the third party FAL providers remain “on risk” until each year of account that they support closes (normally after three years) Talbot must retain third party FAL even if a third party FAL provider has ceased to support the active underwriting year. This is achieved by placing such FAL in escrow outside Lloyd’s. Thus the total FAL facility available to the Company is the total FAL for active and prior underwriting years, although the Company can only apply specific FAL against losses incurred by an underwriting year that such FAL is contracted to support.
     For each year of account up to and including the 2007 year of account, between 30% and 40% of an amount equivalent to each underwriting years’ profit is payable to Talbot third party FAL providers. However, some of these costs are fixed. Further, the 2005 underwriting year only became profitable on a cumulative basis in September 2007, thus triggering profit-related payments for that underwriting year.
     The FAL finance charges respond to total syndicate profit (underwriting income, investment income and realized and unrealized capital gains and losses). FAL finance charges and total syndicate profits are analyzed by underwriting year of account as follows:
                                                 
    Three months ended September 30  
                    Total Syndicate     FAL Finance Charges as  
    FAL Finance Charges     Profit     % of Total Syndicate Profit  
Underwriting Year of Account   2008     2007     2008     2007     2008     2007 (1)  
    (Dollars in thousands)                  
2005 (1)
  $     $ 4,744     $     $ 31,295     NM          15.2 %
2006 (1)
    4,801       3,223       12,614       9,334       38.1 %     34.5 %
2007
    2,551       815       5,583       5,234       45.7 %     15.6 %
2008
                (19,051 )               NM    
 
                                       
Total
  $ 7,352     $ 8,782     $ (854 )   $ 45,863       (860.9 )%     19.1 %
 
                                       
 
                                               
Percentage excluding years in deficit
                                  NM          19.1 %
 
(1)   The earliest year of account includes the run-off of prior (closed) years of account.
 
NM   Not meaningful
     FAL finance charges are based on syndicate profit but include fixed elements. Both the 2005 and 2007 years of account were in cumulative loss positions at September 30, 2007 and so provisions for only fixed elements of FAL finance charges were made.
     Total syndicate profit, as set out in the table below, is reconciled to the Talbot segment net income by the addition or subtraction of items noted below.

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    Three months ended September 30  
    2008     2007  
    (Dollars in thousands)  
Total syndicate profit
  $ (854 )   $ 49,455  
FAL Finance expenses
    (7,352 )     (8,782 )
Managing agent’s fee (1)
    2,302       2,474  
Managing agent’s profit commission (2)
    3,241       6,624  
Investment income (3)
    2,613       4,497  
Other segment operating expenses, net (4)
    (10,291 )     (7,903 )
Company share compensation
    (1,163 )     (731 )
Intangible amortization
    (1,040 )     (1,040 )
Income tax expense
    (457 )     (1,480 )
 
           
Talbot segment net (loss) income
  $ (13,001 )   $ 43,114  
 
           
 
(1)   1.5% of syndicate capacity; corresponding syndicate expense reflected in total syndicate profit, above.
 
(2)   15.0% of syndicate profit; corresponding syndicate expense reflected in total syndicate profit, above.
 
(3)   On FAL and on non-syndicate cash balances.
 
(4)   Includes Talbot Holdings Ltd share option expenses.
Net Realized (Losses) Gains on Investments
     Net realized losses on investments for the three months ended September 30, 2008 were $13.7 million compared to gains of $1.0 million for the three months ended September 30, 2007. Net realized losses resulted primarily from the sale of fixed maturity investments in certain financial institutions.
Net Unrealized (Losses) Gains on Investments
     Net unrealized losses on investments for the three months ended September 30, 2008 were $14.6 million compared to gains of $7.7 million for the three months ended September 30, 2007. The net unrealized losses in the three months ended September 30, 2008 resulted primarily from market value declines due to spreads widening as a result of extreme volatility in the financial markets.
     The Company early adopted FAS 157 and the FAS 159 Fair Value Option on January 1, 2007 for its investment portfolio. As a result, for the quarters ended September 30, 2008 and 2007, net unrealized gains on investments are recorded as a component of net income. Talbot also adopted FAS 157 and the FAS 159 Fair Value Option for its investment portfolio upon acquisition by the Company on July 2, 2007. During the three months ended September 30, 2008, the Company adopted FSP FAS 157-3. Consistent with this statement, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Certain non-Agency RMBS securities were identified as trading in inactive markets. The change in fair value measurement process for the identified non-Agency RMBS securities resulted in a $16.5 million reduction in net unrealized loss on investments for the three months ended September 30, 2008. Further details are provided in the Investments section below.
Foreign Exchange (Losses) Gains
     Foreign exchange losses for the three month period ended September 30, 2008 were $44.9 million compared to gains of $5.8 million for the three months ended September 30, 2007, a change of $50.8 million. The foreign exchange losses during the three months ended September 30, 2008 were due to a decline in the value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency. Certain premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect financial results in the future.
     Talbot’s balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $89.3 million. This balance consisted of British pound sterling and Canadian dollars of

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approximately $81.0 million and $8.3 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic exchange rates. All of Talbot’s other balance sheet items are classified as monetary items and are translated at period end exchange rates. During the three months ended September 30, 2008, this translation process resulted in foreign exchange losses that will reverse in future periods as net unearned premiums and deferred acquisition costs are earned. Additional foreign exchange (losses) gains may be incurred on the translation of net unearned premiums and deferred acquisition costs arising from insurance and reinsurance premiums written in future periods.

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     The following table presents results of operations for the three and nine months ended September 30, 2008 and 2007 and the pro forma results of operations for the nine months ended September 30, 2007:
                                         
    Three months     Three months     Nine months        
    ended     ended     ended        
    September 30,     September 30,     September 30,     Nine months ended  
    2008     2007     2008     September 30, 2007  
    Actual     Actual     Actual     Actual     Pro Forma (1)  
    (Dollars in thousands)     (Dollars in thousands)  
Gross premiums written
  $ 269,236     $ 245,271     $ 1,170,749     $ 797,641     $ 1,186,952  
Reinsurance premiums ceded
    (35,139 )     (7,906 )     (121,438 )     (65,644 )     (142,267 )
 
                             
Net premiums written
    234,097       237,365       1,049,311       731,997       1,044,685  
Change in unearned premiums
    105,229       58,161       (108,823 )     (191,949 )     (219,802 )
 
                             
Net premiums earned
    339,326       295,526       940,488       540,048       824,883  
 
                                       
Losses and loss expenses
    318,464       87,263       580,578       176,426       319,640  
Policy acquisition costs
    60,425       50,945       173,545       81,000       142,466  
General and administrative expenses
    30,120       41,793       101,139       64,088       107,684  
Share compensation expense
    6,012       6,132       19,818       10,054       12,389  
 
                             
Total underwriting expenses
    415,021       186,133       875,080       331,568       582,179  
 
                                       
Underwriting (loss) income (2)
    (75,695 )     109,393       65,408       208,480       242,704  
Net investment income
    36,379       36,560       108,857       74,799       94,680  
Other income
    1,269       1,330       3,666       1,330       3,495  
Finance expenses
    (14,517 )     (17,886 )     (48,796 )     (26,331 )     (52,222 )
 
                             
Operating income before taxes
    (52,564 )     129,397       129,135       258,278       288,657  
 
                                       
Taxes
    487       1,488       4,992       1,527       2,724  
 
                             
 
                                       
Operating (loss) income after tax
    (53,051 )     127,909       124,143       256,751       285,933  
 
                             
 
                                       
Net realized (losses) gains on investments
    (13,667 )     1,010       (8,348 )     823       (406 )
Net unrealized (losses) gains on investments
    (14,649 )     7,681       (72,608 )     3,136       3,135  
Realized gain on repurchase of debentures
                8,752              
Foreign exchange (losses) gains
    (44,933 )     5,818       (35,843 )     9,210       10,393  
Fair value of warrants issued
          (2,893 )           (2,893 )     (2,893 )
Aquiline termination fee
          (3,000 )           (3,000 )     (3,000 )
 
                             
Net (loss) income after taxes
  $ (126,300 )   $ 136,525     $ 16,096     $ 264,027     $ 293,162  
 
                             
Comprehensive (loss) income
                                       
Foreign currency translation adjustments
    (1,556 )     (640 )     (1,479 )     (640 )      
 
                             
Comprehensive (loss) income
  $ (127,856 )   $ 135,885     $ 14,617     $ 263,387     $ 293,162  
 
                             
Selected ratios
                                       
Net premiums written/ Gross premiums written
    86.9 %     96.8 %     89.6 %     91.8 %     88.0 %
Losses and loss expenses ratio
    93.9 %     29.5 %     61.7 %     32.7 %     38.7 %
Policy acquisition cost ratio
    17.8 %     17.3 %     18.5 %     15.0 %     17.3 %
General and administrative expense ratio
    10.6