e10vq
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, 2010
Commission file number 001-33606
 
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
 
     
BERMUDA
(State or other jurisdiction of
incorporation or organization)
  98-0501001
(I.R.S. Employer
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 278-9000
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
     Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
      (Do not check if a smaller reporting company)  
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
     As of November 3, 2010, there were 107,882,874 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

INDEX
         
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    97  
    98  
    99  
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
EXHIBIT 31.1 CERTIFICATION
EXHIBIT 31.2 CERTIFICATION
EXHIBIT 32 CERTIFICATION

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2010 (unaudited) and December 31, 2009
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    September 30,     December 31,  
    2010     2009  
    (unaudited)          
Assets
               
Fixed maturities, at fair value (amortized cost: 2010 - $5,105,832; 2009 - $4,870,395)
  $ 5,200,285     $ 4,869,378  
Short-term investments, at fair value (amortized cost: 2010 - $228,354; 2009 - $482,632)
    228,356       481,766  
Other investments, at fair value (amortized cost: 2010 - $18,392; 2009 - $35,941)
    19,888       37,615  
Cash and cash equivalents
    518,770       387,585  
 
           
Total investments and cash
    5,967,299       5,776,344  
Premiums receivable
    745,968       551,616  
Deferred acquisition costs
    151,701       112,329  
Prepaid reinsurance premiums
    88,651       73,164  
Securities lending collateral
    33,135       90,350  
Loss reserves recoverable
    268,821       181,765  
Paid losses recoverable
    19,560       14,782  
Income taxes recoverable
    1,027       2,043  
Intangible assets
    119,935       123,055  
Goodwill
    20,393       20,393  
Accrued investment income
    41,464       38,077  
Other assets
    45,288       35,222  
 
           
Total assets
  $ 7,503,242     $ 7,019,140  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 2,020,845     $ 1,622,134  
Unearned premiums
    955,236       724,104  
Reinsurance balances payable
    60,561       65,414  
Securities lending payable
    33,905       90,106  
Deferred income taxes
    23,827       24,508  
Net payable for investments purchased
    14,415       44,145  
Accounts payable and accrued expenses
    96,521       127,809  
Senior notes payable
    246,847        
Debentures payable
    289,800       289,800  
 
           
Total liabilities
    3,741,957       2,988,020  
 
           
 
               
Commitments and contingent liabilities
               
 
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2010 - 132,308,157; 2009 - 131,616,349; Outstanding: 2010 - 109,237,890; 2009 - 128,459,478)
    23,154       23,033  
Treasury shares (2010 - 23,070,267; 2009 - 3,156,871)
    (4,037 )     (553 )
Additional paid-in-capital
    2,193,140       2,675,680  
Accumulated other comprehensive (loss)
    (4,945 )     (4,851 )
Retained earnings
    1,553,973       1,337,811  
 
           
Total shareholders’ equity
    3,761,285       4,031,120  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 7,503,242     $ 7,019,140  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                                   
    Three Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues
                               
Gross premiums written
  $ 344,040     $ 331,028     $ 1,731,835     $ 1,365,951  
Reinsurance premiums ceded
    (35,641 )     (67,687 )     (194,106 )     (202,489 )
 
                       
Net premiums written
    308,399       263,341       1,537,729       1,163,462  
Change in unearned premiums
    124,275       111,376       (209,417 )     (141,786 )
 
                       
Net premiums earned
    432,674       374,717       1,328,312       1,021,676  
Gain on bargain purchase, net of expenses
          302,950             287,099  
Net investment income
    34,033       29,532       103,141       83,267  
Net realized gains (losses) on investments
    23,058       5,429       46,897       (20,642 )
Net unrealized gains on investments
    31,588       50,437       88,641       109,839  
Other income
    1,082       1,101       4,667       2,875  
Foreign exchanges gains (losses)
    10,790       (5,244 )     (2,073 )     (1,012 )
 
                       
Total revenues
    533,225       758,922       1,569,585       1,483,102  
 
                       
 
                               
Expenses
                               
Losses and loss expenses
    158,936       134,152       832,361       390,736  
Policy acquisition costs
    67,074       64,236       217,376       190,125  
General and administrative expenses
    48,831       46,036       154,779       125,315  
Share compensation expenses
    7,618       5,862       21,040       18,848  
Finance expenses
    13,715       11,257       42,084       29,732  
 
                       
Total expenses
    296,174       261,543       1,267,640       754,756  
 
                       
 
                               
Net income before taxes
    237,051       497,379       301,945       728,346  
Tax benefit (expense)
    1,422       1,799       (2,068 )     3,301  
 
                       
Net income
  $ 238,473     $ 499,178     $ 299,877     $ 731,647  
 
                       
 
                               
Comprehensive income
                               
Foreign currency translation adjustments
    1,781       (915 )     (94 )     2,882  
 
                       
Comprehensive income
  $ 240,254     $ 498,263     $ 299,783     $ 734,529  
 
                       
 
                               
Earnings per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    110,601,888       92,492,373       119,414,906       81,458,329  
Diluted
    114,842,742       95,834,809       123,735,683       84,626,505  
 
                               
Basic earnings per share
  $ 2.14     $ 5.38     $ 2.47     $ 8.92  
 
                       
Diluted earnings per share
  $ 2.08     $ 5.21     $ 2.42     $ 8.65  
 
                       
 
                               
Cash dividends declared per share
  $ 0.22     $ 0.20     $ 0.66     $ 0.60  
 
                       
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                       
    September 30, 2010     September 30, 2009  
    (unaudited)     (unaudited)  
Common shares
               
Balance — Beginning of period
  $ 23,033     $ 13,235  
Common shares issued, net
    121       9,709  
 
           
Balance — End of period
  $ 23,154     $ 22,944  
 
           
 
               
Treasury shares
               
Balance — Beginning of period
  $ (553 )   $  
Repurchase of common shares
    (3,484 )      
 
           
Balance — End of period
  $ (4,037 )   $  
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 2,675,680     $ 1,412,635  
Common shares (redeemed) issued, net
    (605 )     1,311,207  
Repurchase of common shares
    (502,975 )      
Share compensation expenses
    21,040       24,279  
 
           
Balance — End of period
  $ 2,193,140     $ 2,748,121  
 
           
 
               
Accumulated other comprehensive (loss)
               
Balance — Beginning of period
  $ (4,851 )   $ (7,858 )
Foreign currency translation adjustments
    (94 )     2,882  
 
           
Balance — End of period
  $ (4,945 )   $ (4,976 )
 
           
 
               
Retained earnings
               
Balance — Beginning of period
  $ 1,337,811     $ 520,722  
Dividends
    (83,715 )     (52,266 )
Net income
    299,877       731,647  
 
           
Balance — End of period
  $ 1,553,973     $ 1,200,103  
 
           
 
               
Total shareholders’ equity
  $ 3,761,285     $ 3,966,192  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    September 30,     September 30,  
    2010     2009  
    (unaudited)     (unaudited)  
Cash flows provided by (used in) operating activities
               
Net income
  $ 299,877     $ 731,647  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expenses
    21,040       24,279  
Gain on bargain purchase
          (352,349 )
Amortization of discount on senior notes
    54        
Net realized (gains) losses on investments
    (46,897 )     20,642  
Net unrealized (gains) on investments
    (88,641 )     (109,838 )
Amortization of intangible assets
    3,120       24,792  
Foreign exchange (gains) on cash and cash equivalents included in net income
    (3,432 )     (10,487 )
Amortization of premium on fixed maturities
    22,936       8,969  
Change in:
               
Premiums receivable
    (194,939 )     (134,007 )
Deferred acquisition costs
    (39,372 )     (8,914 )
Prepaid reinsurance premiums
    (15,487 )     (75,617 )
Loss reserves recoverable
    (87,199 )     42,634  
Paid losses recoverable
    (4,779 )     (8,621 )
Income taxes recoverable
    1,019       (1,486 )
Accrued investment income
    (3,396 )     66  
Other assets
    (9,287 )     (557 )
Reserve for losses and loss expenses
    400,405       (8,900 )
Unearned premiums
    231,132       210,099  
Reinsurance balances payable
    (4,526 )     3,903  
Deferred income taxes
    (608 )     4,731  
Accounts payable and accrued expenses
    (32,356 )     (12,602 )
 
           
Net cash provided by operating activities
    448,664       348,384  
 
           
 
               
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    3,972,225       2,247,581  
Proceeds on maturities of investments
    272,169       466,065  
Purchases of fixed maturities
    (4,495,131 )     (2,792,562 )
Sales of short-term investments, net
    253,340       91,354  
Sales (purchases) of other investments
    18,070       (2,047 )
Decrease in securities lending collateral
    56,201       4,649  
Purchase of subsidiary, net of cash acquired
          (376,878 )
 
           
Net cash provided by (used in) investing activities
    76,874       (361,838 )
 
           
 
               
Cash flows provided by (used in) financing activities
               
Net proceeds on issuance of senior notes
    246,793        
Redemption of common shares, net
    (484 )     (1,774 )
Purchases of common shares under share repurchase program
    (506,459 )      
Dividends paid
    (81,859 )     (50,938 )
(Decrease) in securities lending payable
    (56,201 )     (4,649 )
 
           
Net cash (used in) financing activities
    (398,210 )     (57,361 )
 
           
 
               
Effect of foreign currency rate changes on cash and cash equivalents
    3,857       14,755  
Net increase (decrease) in cash
    131,185       (56,060 )
Cash and cash equivalents — beginning of period
    387,585       449,848  
 
           
Cash and cash equivalents — end of period
  $ 518,770     $ 393,788  
 
           
Taxes paid during the period
  $ 2,358     $ 1,395  
 
           
Interest paid during the period
  $ 30,188     $ 20,016  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
1. Basis of preparation and consolidation
     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
     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, the valuation of goodwill and intangible assets, reinsurance recoverable balances including the provision for unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year. The term “ASC” used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board (“FASB”).
     The consolidated financial statements include the results of operations and cash flows of IPC Holdings Ltd. (“IPC”), since the date of acquisition on September 4, 2009 and not any prior periods (including for comparative purposes), except with respect to “Supplemental Pro Forma Information” included in Note 3.
2. Recent accounting pronouncements
     In June 2009, the FASB issued authoritative guidance on accounting for “Transfers and Servicing” (ASC 860). This update addresses practices that have developed that are not consistent with the original intent and key requirements and concerns that derecognized financial assets and related obligations should continue to be reported in the transferors’ financial statements. This update is effective for financial asset transfers in the interim and annual periods beginning January 1, 2010. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued authoritative guidance which amends the “Consolidation” guidance that applies to Variable Interest Entities (“VIEs”) (ASC 810). This update amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. This update is effective for interim and annual periods beginning January 1, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     In January 2010, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” (ASC 820). This update requires additional disclosures regarding (1) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made; (2) inputs and valuation techniques used to measure fair value for financial assets and liabilities that fall in either Level 2 or Level 3; (3) the activity within Level 3 fair value measurements, including information on a gross basis for purchases, sales, issuances, and settlements; and (4) disaggregation of financial assets and liabilities measured at fair value into classes of financial assets and liabilities. This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning January 1, 2011. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In February 2010, the FASB issued authoritative guidance which amends the “Subsequent Events” guidance (ASC 855). The guidance requires SEC filers to evaluate subsequent events through the date the financial statements are issued, and also exempts SEC filers from disclosing the date through which subsequent events have been evaluated. This update was effective immediately for financial statements that are (1) issued or available to be issued or (2) revised. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In March 2010, the FASB issued authoritative guidance which clarifies the “Embedded Derivatives” guidance (ASC 815). All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments. The amendments in this update are effective for interim periods beginning after June 15, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In April 2010, the FASB issued authoritative guidance which clarifies the “Stock Compensation” guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance is effective for accounting periods beginning on or after December 15, 2010, with earlier application permitted. The Company has evaluated the impact of this guidance, and has concluded that it will not have a material impact on the Company’s consolidated financial statements.
     In October 2010, the FASB issued Accounting Standards Update No. 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). The objective of ASU 2010-26 is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. ASU 2010-26 is effective for interim and annual periods beginning after December 15, 2011 and may be applied prospectively or retrospectively. The Company is currently assessing the potential impact, if any, of the adoption of ASU 2010-26 on the Company’s consolidated financial statements.
3. Business combination
     On September 4, 2009, pursuant to an amalgamation agreement, the Company acquired all of the outstanding common shares of IPC (the “IPC Acquisition”) in exchange for 0.9727 Company common shares and $7.50 cash per IPC common share. IPC’s operations were focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to gain a strategic advantage in the reinsurance market where capacity had been depleted and to increase the Company’s capital base.
     The aggregate purchase price paid by the Company was $1,746,224 for adjusted tangible net assets acquired of $2,076,902. During 2009, the global financial crisis and related market illiquidity led to several publicly traded companies trading at substantial discounts. This was the primary factor responsible for a purchase price less than the book value of IPC’s net assets, and the recognition of a bargain purchase gain on acquisition.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses and asset appraisals. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.
     An adjustment of $50,000 was made to IPC’s net assets acquired in respect of the termination fee (the “Max Termination Fee”) paid under the Agreement and Plan of Amalgamation among Max Capital Group Ltd. (“Max”), IPC and IPC Limited. The Max Termination Fee was advanced to IPC by Validus on July 9, 2009, but was repayable in certain circumstances.
     In addition, at closing, the Company recorded a $21,671 intangible asset for the acquired IPC customer relationships. This intangible asset was related to the acquired broker distribution network and was fair valued using a variation of the income approach. Under this approach, the Company estimated the present value of expected future cash flows to an assumed hypothetical market participant resulting from the existing IPC customer relationships, considering attrition, and discounting at a weighted average cost of capital.
     The composition of purchase price and fair value of net assets acquired is summarized as follows:
                 
Total allocable purchase price
               
IPC shares outstanding at September 4, 2009
    56,110,096          
Exchange ratio
    0.9727          
Validus common shares issued
    54,578,268          
Validus closing share price on September 4, 2009
  $ 24.10          
Total value of Validus shares to be issued
          $ 1,315,337  
Total cash consideration paid at $7.50 per IPC share
            420,826  
Share compensation awards issued to IPC employees
pursuant to the Amalgamation Agreement and earned prior to the Amalgamation
            10,061  
 
             
Total allocable purchase price
            1,746,224  
 
               
Tangible Assets Acquired
               
Cash and investments
  $ 2,463,374          
Receivables (a)
    202,278          
 
             
Tangible Assets Acquired
            2,665,652  
 
               
Liabilities Acquired
               
Net loss reserves and paid losses recoverable
  $ 304,957          
Unearned premiums, net of expenses
    180,370          
Other liabilities
    53,423          
 
             
Liabilities acquired
            538,750  
 
             
 
               
Net tangible assets acquired, at fair value
            2,126,902  
Max Termination Fee
            (50,000 )
 
             
Net tangible assets acquired, at fair value, adjusted
            2,076,902  
 
             
Bargain purchase gain before establishment of intangible assets
            330,678  
 
               
Intangible asset — customer relationships
            21,671  
 
             
Bargain purchase gain on acquisition of IPC
          $ 352,349  
 
             
 
(a)   The fair value of receivables approximates the gross contractual amounts receivable.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company also incurred transaction and termination expenses related to the IPC Acquisition. Transaction expenses included legal, corporate advisory, and audit related services. Termination expenses included severance costs and accelerated share compensation costs in connection with certain IPC employment contracts that have been terminated. Finally, the customer relationships intangible asset has been fully amortized as it is not expected to significantly contribute to the Company’s future cash flows beyond December 31, 2009. The gain on bargain purchase, net of expenses has been presented as a separate line item in the Company’s Consolidated Statements of Operations and Comprehensive Income, and is composed of the following:
                        
    September 30, 2009  
    Three months ended     Nine months ended  
Bargain purchase gain on acquisition of IPC
  $ 352,349     $ 352,349  
Transaction expenses
    (13,597 )     ( 29,448 )
Termination expenses
    (14,131 )     (14,131 )
Amortization of intangible asset — customer relationships
    (21,671 )     (21,671 )
 
           
Gain on bargain purchase, net of expenses
  $ 302,950     $ 287,099  
 
           
     The following selected unaudited information has been provided to present a summary of the results of IPC since the acquisition date, that have been included within the Validus Re segment in the consolidated financial statements.
         
    From Acquisition Date to  
    September 30, 2009  
Net premiums written
  $ (658 )
Total revenue
    57,434  
Total expenses
    13,550  
 
     
Net income
  $ 43,884  
 
     
Supplemental Pro Forma Information
     Operating results of IPC have been included in the consolidated financial statements from the September 4, 2009 acquisition date. The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Company and IPC, assuming the transaction had been effected on January 1, 2009. The unaudited pro forma data is for informational purposes only and does not necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above.
                        
    September 30, 2009  
    Three months ended     Nine months ended  
Net premiums written
  $ 288,605     $ 1,544,270  
Total revenue
    609,620       1,620,181  
Total expenses
    274,365       841,921  
Net income
    335,255       778,260  
Basic earnings per share
  $ 3.61     $ 9.49  
 
           
Diluted earnings per share
  $ 3.50     $ 9.20  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
4. Investments
     The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that 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 U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to 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.
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources 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. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds 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. A hedge fund is the only financial instrument in this category as at September 30, 2010.
     The Company’s external investment advisors had noted illiquidity and dislocation in the non-Agency RMBS market for the period September 30, 2008 through to June 30, 2010. During this period, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, the Company, with assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.
     Consistent with U.S. GAAP, market approach fair value measurements for securities trading in inactive markets are not determinative. In weighing the fair value measurements resulting from market approach and income approach valuation techniques, the Company previously placed less reliance on the market approach fair value measurements. The income approach valuation technique determines the fair value of each security on the basis of contractual cash flows, discounted using a risk-adjusted discount rate. As the income approach valuation technique incorporates both observable and significant unobservable inputs, the securities were included as Level 3 assets with respect to the fair value hierarchy. The foundation for the income approach was the amount and timing of future cash flows.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     During the three months ended September 30, 2010, the Company, with assistance from external investment advisors, determined that market activity had increased for the identified RMBS securities. Therefore, a market approach valuation technique was adopted for the identified RMBS securities. As the market approach incorporates observable inputs, the identified RMBS securities are classified as Level 2 with respect to the fair value hierarchy at September 30, 2010. Subsequent to the balance sheet date, the Company liquidated substantially all of the identified RMBS securities which had previously been classified as Level 3 securities. This did not have a material impact on the Company’s shareholders’ equity.
     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust held in mutual funds. During the fourth quarter of 2009, a majority of the fund of hedge funds was redeemed. The remaining portion is a side pocket valued at $12,332 at September 30, 2010. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s August 31, 2010 NAV was used as a partial basis for fair value measurement in the Company’s September 30, 2010 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund investment manager’s NAV. Immaterial variances are recorded in the following reporting period.
     At September 30, 2010, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 1,923,730     $     $ 1,923,730  
Non-U.S. Government and Government Agency
          641,265             641,265  
States, municipalities, political subdivision
          17,529             17,529  
Agency residential mortgage-backed securities
          453,036             453,036  
Non-Agency residential mortgage-backed securities
          117,886             117,886  
U.S. corporate
          1,353,191             1,353,191  
Non-U.S. corporate
          481,517             481,517  
Catastrophe bonds
          63,818             63,818  
Asset-backed securities
          124,371             124,371  
Commercial mortgage-backed securities
          23,942             23,942  
 
                       
Total fixed maturities
          5,200,285             5,200,285  
Short-term investments
    215,573       12,783             228,356  
Hedge fund
                12,332       12,332  
Mutual funds
          7,556             7,556  
 
                       
Total
  $ 215,573     $ 5,220,624     $ 12,332     $ 5,448,529  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At December 31, 2009, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 1,918,811     $     $ 1,918,811  
Non-U.S. Government and Government Agency
          673,680             673,680  
States, municipalities, political subdivision
          19,359             19,359  
Agency residential mortgage-backed securities
          551,610             551,610  
Non-Agency residential mortgage-backed securities
          52,233       85,336       137,569  
U.S. corporate
          1,027,225             1,027,225  
Non-U.S. corporate
          409,398             409,398  
Catastrophe bonds
          52,351             52,351  
Asset-backed securities
          36,712             36,712  
Commercial mortgage-backed securities
          42,663             42,663  
 
                       
Total fixed maturities
          4,784,042       85,336       4,869,378  
Short-term investments
    479,552       2,214             481,766  
Hedge fund
                25,670       25,670  
Mutual funds
          11,945             11,945  
 
                       
Total
  $ 479,552     $ 4,798,201     $ 111,006     $ 5,388,759  
 
                       
     At September 30, 2010, Level 3 investments totaled $12,332, representing 0.2% of total investments measured at fair value on a recurring basis. At December 31, 2009, Level 3 investments totaled $111,006 representing 2.1% of total investments 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 as at September 30, 2010 and December 31, 2009:
                         
    Nine Months Ended September 30, 2010  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $ 85,336     $ 25,670     $ 111,006  
Payments and purchases
                 
Sales and maturities
          (13,851 )     (13,851 )
Realized gains
          662       662  
Unrealized (losses)
    (6,307 )     (149 )     (6,456 )
Amortization
    (11,841 )           (11,841 )
Transfers (out)
    (67,188 )           (67,188 )
 
                 
 
Level 3 investments — End of period
  $     $ 12,332     $ 12,332  
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                         
    Year Ended December 31, 2009  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments — Beginning of period
  $ 111,318     $     $ 111,318  
Payments and purchases
          115,351       115,351  
Sales and maturities
    (822 )     (92,004 )     (92,826 )
Realized (losses) gains
    (1,284 )     1,609       325  
Unrealized (losses) gains
    (7,329 )     714       (6,615 )
Amortization
    (16,547 )           (16,547 )
Transfers in (out)
                 
 
                 
 
Level 3 investments — End of period
  $ 85,336     $ 25,670     $ 111,006  
 
                 
(b) Net investment income
     Net investment income was derived from the following sources:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
Fixed maturities and short-term investments
  $ 34,531     $ 29,427     $ 106,632     $ 82,341  
Cash and cash equivalents
    960       742       1,857       2,623  
Securities lending income
    49       171       168       683  
 
                       
Total gross investment income
    35,540       30,340       108,657       85,647  
Investment expenses
    (1,507 )     (808 )     (5,516 )     (2,380 )
 
                       
Net investment income
  $ 34,033     $ 29,532     $ 103,141     $ 83,267  
 
                       
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized gains (losses) and the change in net unrealized gains on investments:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
Fixed maturities, short-term and other investments and cash equivalents
                               
Gross realized gains
  $ 23,459     $ 9,795     $ 51,344     $ 23,175  
Gross realized (losses)
    (401 )     (4,366 )     (4,447 )     (43,817 )
 
                       
Net realized gains (losses) on investments
    23,058       5,429       46,897       (20,642 )
Net unrealized gains (losses) on securities lending
    7       1,441       (1,013 )     5,747  
Change in net unrealized gains on investments
    31,581       48,996       89,654       104,092  
 
                       
Total net realized gains (losses) and change in net unrealized gains on
investments
  $ 54,646     $ 55,866     $ 135,538     $ 89,197  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at September 30, 2010 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair Value  
U.S. Government and Government Agency
  $ 1,881,417     $ 42,373     $ (60 )   $ 1,923,730  
Non-U.S. Government and Government Agency
    630,008       18,751       (7,494 )     641,265  
States, municipalities, political subdivision
    17,251       281       (3 )     17,529  
Agency residential mortgage-backed securities
    437,135       16,029       (128 )     453,036  
Non-Agency residential mortgage-backed securities
    159,851       161       (42,126 )     117,886  
U.S. corporate
    1,301,859       51,546       (214 )     1,353,191  
Non-U.S. corporate
    469,275       14,897       (2,655 )     481,517  
Catastrophe bonds
    61,956       2,120       (258 )     63,818  
Asset-backed securities
    123,666       865       (160 )     124,371  
Commercial mortgage-backed securities
    23,414       534       (6 )     23,942  
 
                       
Total fixed maturities
    5,105,832       147,557       (53,104 )     5,200,285  
Total short-term investments
    228,354       2             228,356  
Total other investments
    18,392       1,496             19,888  
 
                       
Total
  $ 5,352,578     $ 149,055     $ (53,104 )   $ 5,448,529  
 
                       
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2009 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair Value  
U.S. Government and Government Agency
  $ 1,912,081     $ 12,308     $ (5,578 )   $ 1,918,811  
Non-U.S. Government and Government Agency
    678,555       7,552       (12,427 )     673,680  
States, municipalities, political subdivision
    19,310       105       (56 )     19,359  
Agency residential mortgage-backed securities
    537,876       14,643       (909 )     551,610  
Non-Agency residential mortgage-backed securities
    176,853       481       (39,765 )     137,569  
U.S. corporate
    1,004,464       23,895       (1,134 )     1,027,225  
Non-U.S. corporate
    411,499       4,781       (6,882 )     409,398  
Catastrophe bonds
    51,236       1,244       (129 )     52,351  
Asset-backed securities
    36,828       411       (527 )     36,712  
Commercial mortgage-backed securities
    41,693       971       (1 )     42,663  
 
                       
Total fixed maturities
    4,870,395       66,391       (67,408 )     4,869,378  
Total short-term investments
    482,632       33       (899 )     481,766  
Total other investments
    35,941       1,674             37,615  
 
                       
Total
  $ 5,388,968     $ 68,098     $ (68,307 )   $ 5,388,759  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at September 30, 2010 and December 31, 2009. 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 information)
                                 
    September 30, 2010     December 31, 2009  
    Estimated Fair                    
    Value     % of Total     Estimated Fair Value     % of Total  
AAA
  $ 3,256,140       62.6 %        $ 3,287,879       67.5 %
AA
    488,871       9.4 %     487,364       10.0 %
A
    1,169,035       22.5 %     925,532       19.0 %
BBB
    130,841       2.5 %     14,416       0.3 %
 
                       
Investment grade
    5,044,887       97.0 %     4,715,191       96.8 %
BB
    49,684       1.0 %     45,191       0.9 %
B
    35,666       0.7 %     59,116       1.2 %
CCC
    58,343       1.1 %     45,194       1.0 %
CC
    7,428       0.1 %           0.0 %
D/NR
    4,277       0.1 %     4,686       0.1 %
 
                       
Non-Investment grade
    155,398       3.0 %     154,187       3.2 %
 
                       
 
                               
Total Fixed Maturities
  $ 5,200,285       100.0 %   $ 4,869,378       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at September 30, 2010 and December 31, 2009 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, 2010     December 31, 2009  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 465,643     $ 467,582     $ 269,889     $ 270,688  
Due after one year through five years
    3,716,150       3,827,180       3,498,792       3,521,167  
Due after five years through ten years
    177,234       183,472       306,065       306,502  
Due after ten years
    2,739       2,816       2,399       2,467  
 
                       
 
    4,361,766       4,481,050       4,077,145       4,100,824  
 
                               
Asset-backed and mortgage-backed securities
    744,066       719,235       793,250       768,554  
 
                       
 
                               
Total
  $ 5,105,832     $ 5,200,285     $ 4,870,395     $ 4,869,378  
 
                       
     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At September 30, 2010, approximately $234,837 (December 31, 2009: $225,823) of letters of credit were issued and outstanding under this facility for which $325,268 of investments were pledged as collateral (December 31, 2009: $314,857). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”). On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At September 30, 2010, $25,000 (December 31, 2009: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,919 of investments were pledged as collateral (December 31, 2009: $128,798). In addition, $1,681,727 of investments were held in trust at September 30, 2010 (December 31, 2009: $1,517,249). Of those, $1,536,794 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2009: $1,408,084).
     The Company assumed two letters of credit facilities as part of the IPC Acquisition. A $250,000 Credit Facility between IPC, IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a $350,000 Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
At March 31, 2010, the IPC Syndicated Facility was closed. At September 30, 2010, the IPC Bi-Lateral Facility had $75,864 (December 31, 2009: $96,047) letters of credit issued and outstanding for which $99,906 (December 31, 2009: $219,004) of investments were held in an associated collateral account.
(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, 2010, the Company had $33,181 (December 31, 2009: $88,146) in securities on loan. During the three months ended September 30, 2010, the Company recorded a $7 unrealized gain on this collateral in its Statements of Operations (September 30, 2009: unrealized gain $1,441). During the nine months ended September 30, 2010, the Company recorded a $1,013 unrealized loss on this collateral in its Statements of Operations (September 30, 2009: unrealized gain $5,747).
     Securities lending collateral reinvested includes corporate floating rate securities and overnight repo with an average reset period of 14.4 days (December 31, 2009: 26.1 days). As at September 30, 2010, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 216     $     $ 216  
Agency
                       
Asset-backed securities
          5,010             5,010  
Short-term investments
    8,298       19,611             27,909  
 
                       
Total
  $ 8,298     $ 24,837     $     $ 33,135  
 
                       
     As at December 31, 2009, the securities lending collateral reinvested by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 14,123     $     $ 14,123  
Agency
          9,363             9,363  
Asset-backed securities
          6,153             6,153  
Short-term investments
    730       59,981             60,711  
 
                       
Total
  $ 730     $ 89,620     $     $ 90,350  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at September 30, 2010 and December 31, 2009. 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 information)
                                 
    September 30, 2010     December 31, 2009  
    Estimated Fair Value     % of Total     Estimated Fair Value     % of Total  
AAA
  $ 10,622       32.1 %        $ 33,501       37.1 %
AA+
    11,016       33.2 %     12,011       13.3 %
AA
          0.0 %     4,998       5.5 %
AA-
    2,983       9.0 %     19,910       22.0 %
A+
          0.0 %     9,999       11.1 %
A
          0.0 %     9,006       10.0 %
NR
    216       0.7 %     195       0.2 %
 
                       
 
    24,837       75.0 %     89,620       99.2 %
NR- Short-term investments (1)
    8,298       25.0 %     730       0.8 %
 
                       
 
                               
Total
  $ 33,135       100.0 %   $ 90,350       100.0 %
 
                       
 
(1)   This amount relates to short-term investments and is therefore not a rated security.
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at September 30, 2010 and December 31, 2009 are shown by contractual maturity below. 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, 2010     December 31, 2009  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 27,905      $ 27,909      $ 68,895      $ 70,074  
Due after one year through five years
    6,000       5,226       21,211       20,276  
 
                       
Total
  $ 33,905     $ 33,135     $ 90,106     $ 90,350  
 
                       
5. Reserve for losses and loss expenses
     Reserves for losses and loss expenses are based in part upon the estimation of case losses reported from brokers, insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed the total reserves.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses as at September 30, 2010 and December 31, 2009:
                 
    Nine Months Ended     Year ended  
    September 30,     December 31,  
    2010     2009  
Reserve for losses and loss expenses, beginning of period
  $ 1,622,134     $ 1,305,303  
Losses and loss expenses recoverable
    (181,765 )     (208,796 )
 
           
Net reserves for losses and loss expenses, beginning of period
    1,440,369       1,096,507  
Net reserves acquired in purchase of IPC
          304,957  
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
               
Current year
    958,406       625,810  
Prior years
    (126,045 )     (102,053 )
 
           
Total incurred losses and loss expenses
    832,361       523,757  
Total net paid losses
    (519,930 )     (507,435 )
Foreign exchange
    (776 )     22,583  
 
           
Net reserve for losses and loss expenses, end of period
    1,752,024       1,440,369  
Losses and loss expenses recoverable
    268,821       181,765  
 
           
Reserve for losses and loss expenses, end of period
  $ 2,020,845     $ 1,622,134  
 
           
6. 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 its 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 or retrocession 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. At September 30, 2010, 99.0% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $132,312 of IBNR recoverable (December 31, 2009: $99,587). Reinsurance recoverables by reinsurer are as follows:
                                 
    September 30, 2010     December 31, 2009  
    Reinsurance             Reinsurance        
    Recoverable     % of Total     Recoverable     % of Total  
Top 10 reinsurers
  $ 211,844       73.5 %     170,810       86.9 %
Other reinsurers’ balances > $1 million
    67,797       23.5 %     19,818       10.1 %
Other reinsurers’ balances < $1 million
    8,740       3.0 %     5,919       3.0 %
 
                       
Total
  $ 288,381       100.0 %     196,547       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 information)
                         
    September 30, 2010  
            Reinsurance        
Top 10 Reinsurers   Rating     Recoverable     % of Total  
Lloyd’s Syndicates
    A+     $ 51,660       24.3 %
Fully collateralized reinsurers
  NR     38,249       18.1 %
Hannover Re
  AA-     23,658       11.2 %
Montpelier Re
    A-       20,000       9.4 %
Munich Re
  AA-     18,852       8.9 %
Everest Re
    A+       13,109       6.2 %
Transatlantic Re
    A+       12,348       5.8 %
Tokio Millennium Re
  AA     11,980       5.7 %
Odyssey Re
    A-       11,773       5.6 %
Brit Insurance
    A+       10,215       4.8 %
 
                   
Total
          $ 211,844       100.0 %
 
                   
                         
    December 31, 2009  
            Reinsurance        
Top 10 Reinsurers   Rating     recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 50,840       29.8 %
Lloyd’s Syndicates
    A+       33,103       19.4 %
Munich Re
  AA-     19,921       11.7 %
Hannover Re
  AA-     13,427       7.8 %
Aspen
    A       11,417       6.7 %
Allianz
  AA     9,645       5.6 %
Swiss Re
    A+       8,995       5.3 %
Transatlantic Re
    A+       8,804       5.1 %
Brit Insurance Limited
    A       8,159       4.8 %
Platinum Underwriters
    A       6,499       3.8 %
 
                   
Total
          $ 170,810       100.0 %
 
                   
     At September 30, 2010 and December 31, 2009, the provision for uncollectible reinsurance relating to losses recoverable was $5,113 and $3,477, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable is first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $288,381 reinsurance recoverable at September 30, 2010, $38,249 was fully collateralized (December 31, 2009: $50,840).
     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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
7. Share capital
a) Authorized and issued
     The Company’s authorized share capital is 571,428,571 voting and non-voting shares with a par value of $0.175 per share. The holders of common voting shares are entitled to receive dividends and 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.
     The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders. This amount is in addition to, and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010 under its previously authorized $400,000 share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased $300,000 in common shares.
     The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
     The following table is a summary of the common shares issued and outstanding:
         
    Common Shares  
Common shares issued, December 31, 2009
    131,616,349  
Restricted share awards vested, net of shares withheld
    369,576  
Restricted share units vested, net of shares withheld
    57,192  
Employee seller shares vested
    203,544  
Options exercised
    58,500  
Warrants exercised
    2,996  
 
     
Common shares issued, September 30, 2010
    132,308,157  
Shares repurchased, September 30, 2010
    (23,070,267 )
 
     
Common shares outstanding, September 30, 2010
    109,237,890  
 
       
         
    Common Shares  
Common shares issued and outstanding, December 31, 2008
    75,624,697  
IPC acquisition issuance
    54,556,762  
Restricted share awards vested, net of shares withheld
    423,746  
Restricted share units vested, net of shares withheld
    360,383  
Employee seller shares vested
    248,085  
Options exercised
    164,834  
Warrants exercised
    237,842  
 
     
Common shares issued, December 31, 2009
    131,616,349  
Shares repurchased, December 31, 2009
    (3,156,871 )
 
     
Common shares outstanding, December 31, 2009
    128,459,478  
 
     

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
b) Warrants
     During the three and nine months ended September 30, 2010, 10,018 warrants were exercised which resulted in the net share issuance of 2,996 common shares. During the three months ended September 30, 2009, nil warrants were exercised. During the nine months ended September 30, 2009, 728,010 warrants were exercised which resulted in the net share issuance of 237,842 common shares.
c) Deferred share units
     Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. The total outstanding deferred share units at September 30, 2010 were 4,694 (December 31, 2009: 4,577).
d) Dividends
     On August 4, 2010, the Company announced a quarterly cash dividend of $0.22 (2009: $0.20) per common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable. This dividend was paid on September 30, 2010 to holders of record on September 15, 2010.
8. Stock plans
a) Long Term Incentive Plan and Short Term Incentive Plan
     The Company’s Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, performance units, dividend equivalents or other share-based awards. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Plan (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares of which 7,218,577 shares are remaining. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs or performance shares have been granted to date. Grant prices are established at the fair market value of the Company’s common shares at the date of grant.
     i. Options
     Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either ratably or at the end of the required service period from the date of grant. All options granted in 2009 were as a result of the IPC Acquisition. 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. The following weighted average assumptions were used for all grants to date:
                                 
               
    Weighted average risk free   Weighted average   Expected life    
Year   interest rate   dividend yield   (years)   Expected volatility
2007 and prior years
    4.5 %     0.0 %     7       30.0 %
2008
    3.5 %     3.2 %     7       30.0 %
2009
    3.9 %     3.7 %     2       34.6 %

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.
     Share compensation expenses of $1,059 were recorded for the three months ended September 30, 2010 (2009: $1,063). Share compensation expenses of $3,133 were recorded for the nine months ended September 30, 2010 (2009: $3,037). The expenses represent 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, 2010 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2009
    3,278,015     $ 6.83     $ 19.88  
Options granted
                 
Options exercised
    (58,500 )     5.97       21.91  
Options forfeited
    (4,317 )     10.30       20.39  
 
                 
Options outstanding, September 30, 2010
    3,215,198     $ 6.84     $ 19.84  
 
                 
Options exercisable at September 30, 2010
    2,545,289     $ 6.05     $ 20.10  
 
                 
     Activity with respect to options for the nine months ended September 30, 2009 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2008
    2,799,938     $ 7.57     $ 18.23  
Options granted
    650,557       3.42       27.27  
Options exercised
    (12,033 )     6.32       21.11  
Options forfeited
    (7,646 )     10.30       20.39  
 
                 
Options outstanding, September 30, 2009
    3,430,816     $ 6.80     $ 19.93  
 
                 
Options exercisable at September 30, 2009
    1,520,416     $ 7.56     $ 17.89  
 
                 
     At September 30, 2010, there were $1,534 (December 31, 2009: $4,713) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.0 years (December 31, 2009: 1.3 years).
     ii. Restricted share awards
     Restricted shares granted under the LTIP and STIP 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 compensation expenses of $5,134 were recorded for the three months ended September 30, 2010 (2009: $3,621). Share compensation expenses of $14,195 were recorded for the nine months ended September 30, 2010 (2009: $12,008). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to unvested restricted shares for the nine months ended September 30, 2010 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2009
    2,525,958     $ 23.43  
Restricted share awards granted
    1,108,169       25.75  
Restricted share awards vested
    (453,851 )     23.43  
Restricted share awards forfeited
    (34,901 )     23.29  
 
           
Restricted share awards outstanding, September 30, 2010
    3,145,375     $ 24.25  
 
           
     Activity with respect to unvested restricted share awards for the nine months ended September 30, 2009 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2008
    2,307,402     $ 22.73  
Restricted share awards granted
    736,030       24.62  
Restricted share awards vested
    (459,910 )     22.32  
Restricted share awards forfeited
    (4,517 )     21.19  
 
           
Restricted share awards outstanding, September 30, 2009
    2,579,005     $ 23.34  
 
           
     At September 30, 2010, there were $50,075 (December 31, 2009: $38,395) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.8 years (December 31, 2009: 2.8 years).
     iii. Restricted share units
     Restricted share units under the LTIP and STIP 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 compensation expenses of $68 were recorded for the three months ended September 30, 2010 (2009: $5,324). Share compensation expenses of $302 were recorded for the nine months ended September 30, 2010 (2009: $5,360). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested restricted share units for the nine months ended September 30, 2010 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2009
    78,591     $ 24.84  
Restricted share units granted
    26,782       25.65  
Restricted share units vested
    (59,019 )     24.76  
Restricted share units forfeited
    (1,094 )     21.49  
 
           
Restricted share units outstanding, September 30, 2010
    45,260     $ 25.50  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to unvested restricted share units for the nine months ended September 30, 2009 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2008
    11,853     $ 25.28  
Restricted share units granted
    228,136       24.76  
Restricted share units vested
    (51,753 )     24.76  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, September 30, 2009
    188,236     $ 24.79  
 
           
     At September 30, 2010, there were $901 (December 31, 2009: $578) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.9 years (December 31, 2009: 2.5 years). Additional restricted share units are issued in lieu of accrued dividends for each unvested restricted share unit. As at September 30, 2010, unvested restricted share units issued in lieu of dividends were 1,476 (December 31, 2009: 858).
b) Employee seller shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot Holdings, Ltd. (“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 they 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 the potential for forfeiture will be completely extinguished.
     Share compensation expenses of $1,357 were recorded for the three months ended September 30, 2010 (2009: $1,285). Share compensation expenses of $3,410 were recorded for the nine months ended September 30, 2010 (2009: $3,874). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested employee seller shares for the nine months ended September 30, 2010 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2009
    410,667     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (203,544 )     22.01  
Employee seller shares forfeited
    (3,551 )     22.01  
 
           
Employee seller shares outstanding, September 30, 2010
    203,572     $ 22.01  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to unvested employee seller shares for the nine months ended September 30, 2009 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2008
    663,375     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (248,085 )     22.01  
Employee seller shares forfeited
    (3,799 )     22.01  
 
           
Employee seller shares outstanding, September 30, 2009
    411,491     $ 22.01  
 
           
     At September 30, 2010, there were $2,726 (December 31, 2009: $6,135) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 0.8 years (December 31, 2009: 1.5 years).
c) Total share compensation expenses
     Total share compensation expenses for the three and nine months ended September 30, 2009 included $5,431 of IPC-related termination expenses which were included in the gain on bargain purchase, net of expenses in the Statements of Operations. The breakdown of share compensation expenses by award type was as follows:
                                                      
    Three Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
Options
  $ 1,059     $ 1,063     $ 3,133     $ 3,037  
Restricted share awards
    5,134       3,621       14,195       12,008  
Restricted share units
    68       5,324       302       5,360  
Employee seller shares
    1,357       1,285       3,410       3,874  
 
                       
Total
  $ 7,618     $ 11,293     $ 21,040     $ 24,279  
 
                       
9. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at September 30, 2010 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       139,800       139,800  
8.875% Senior Notes due 2040
    250,000       250,000       246,847  
$340,000 syndicated unsecured letter of credit facility
    340,000              
$60,000 bilateral unsecured letter of credit facility
    60,000              
$500,000 secured letter of credit facility
    500,000       234,837        
Talbot FAL Facility (2)
    25,000       25,000        
$350,000 IPC Bi-Lateral Facility
    350,000       75,864        
 
                 
Total
  $ 1,875,000     $ 875,501     $ 536,647  
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The financing structure at December 31, 2009 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       139,800       139,800  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       225,823        
Talbot FAL Facility (2)
    25,000       25,000        
$250,000 IPC Syndicated Facility
    16,537       16,537        
$350,000 IPC Bi-Lateral Facility
    350,000       96,047        
 
                 
Total
  $ 1,441,537     $ 653,207     $ 289,800  
 
                 
 
(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.
     Finance expenses consist of interest on our junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, fees relating to our credit facilities and the costs of FAL as follows:
                                                      
    Three Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,588       10,765       10,765  
8.480% Junior Subordinated Deferrable Debentures
    3,029       3,348       9,086       10,044  
8.875% Senior Notes due 2040
    5,597             15,172        
Credit facilities
    1,501       395       3,921       1,235  
Talbot FAL Facility
          62       333       167  
Talbot other interest
                59        
Talbot third party FAL facility
          3,864       2,748       7,521  
 
                       
Total
  $ 13,715     $ 11,257     $ 42,084     $ 29,732  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(b) $250,000 8.875% Senior Notes due 2040
     On January 21, 2010, the Company offered and sold $250,000 of Senior Notes due 2040 (the “8.875% Senior Notes”) in a registered public offering. The 8.875% Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole any time or in part from time to time at a make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 8.875% Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity or early redemption. Interest on the 8.875% Senior Notes is payable semi-annually in arrears on January 26 and July 26 of each year, commencing on July 26, 2010. The net proceeds of $243,967 from the sale of the 8.875% Senior Notes, after the deduction of commissions paid to the underwriters in the transaction and other expenses, was used by the Company for general corporate purposes, which included the repurchase of its outstanding capital stock and payment of dividends to shareholders. Debt issuance costs of $2,808 were deferred as an asset and amortized over the life of the 8.875% Senior Notes.
     The 8.875% Senior Notes are unsecured and unsubordinated obligations and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 8.875% Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 8.875% Senior Notes will be structurally subordinated to all obligations of the Company’s subsidiaries.
     Future expected payments of interest on the 8.875% Senior Notes are as follows:
         
2011
    22,187  
2012
    22,187  
2013
    22,187  
2014
    22,187  
2015 and thereafter
    565,783  
 
     
Total minimum future payments
  $ 654,531  
 
     
(c) 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 is payable at 9.069% per annum through June 15, 2011, 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, were 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 year ended December 31, 2008.
     On December 1, 2009, the Company repurchased from an unaffiliated financial institution $14,500 principal amount of its 8.480% Junior Subordinated Deferrable Debentures due 2037 at an aggregate price of $9,933, plus accrued and unpaid interest of $246. The repurchase resulted in the recognition of a realized gain of $4,444 for the year ended December 31, 2009.
     Future expected payments of interest and principal on the 9.069% and 8.480% Junior Subordinated Deferrable Debentures are as follows:
         
2010
  $ 6,365  
2011
    168,657  
2012
    145,727  
2013 and thereafter
     
 
     
Total minimum future payments
  $ 320,749  
 
     
(d) Credit facilities
     (i) $340,000 syndicated unsecured letter of credit facility, $60,000 bilateral unsecured letter of credit facility and $500,000 secured letter of credit facility
     On March 12, 2007, the Company entered into a $200,000 three-year unsecured facility, as subsequently amended on October 25, 2007 and September 4, 2009. The facility was refinanced at maturity on March 12, 2010 with a three-year $340,000 syndicated unsecured letter of credit facility and a $60,000 bilateral unsecured letter of credit facility which provides for letter of credit availability for Validus Re and our other subsidiaries and revolving credit availability for the Company (the “Three Year Facilities”) (the full $400,000 of which is available for letters of credit and/or revolving loans).
     On March 12, 2007, the Company entered into a $500,000 five-year secured letter of credit facility, as subsequently amended on October 25, 2007, July 24, 2009, and March 12, 2010, which provides for letter of credit availability for Validus Re and our other subsidiaries (the “Five Year Facility” and, together with the Three Year Facilities, the “Credit Facilities”). The Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. On October 25, 2007, the Company entered into the First Amendment to the Credit Facilities 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 (as described below) 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 modified 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 September 4, 2009, the Company announced that it had entered into Amendments to each of its $500,000 five-year secured letter of credit facility; $200,000 three-year unsecured facility and $100,000 Talbot FAL facility to amend a specific investment restriction clause in order to permit the completion of the IPC Acquisition. The amendment also modified and updated certain pricing and covenant terms.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     As amended, the Credit Facilities contain covenants that include, among other things, (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least 70% of consolidated net worth ($2,925,590) and, commencing with the end of the fiscal quarter ending December 31, 2009 to be increased quarterly by an amount equal to 50% of its 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 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, 2010, there was $234,837 in outstanding letters of credit under the Five Year Facility (December 31, 2009: $225,823) and $nil outstanding under the Three Year Facilities (December 31, 2009: $nil).
     As of September 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
     (ii) Talbot FAL Facility
     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 for the 2008 and 2009 underwriting years of account; this facility is guaranteed by the Company and is secured against the assets of Validus Re. 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.
     On November 19, 2009, the Company entered into an Amendment and Restatement of the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000, and to extend the support to the 2010 and 2011 underwriting years of account.
     As amended, the Talbot FAL Facility contains affirmative covenants that include, among other things, (i) the requirement that we initially maintain a minimum level of consolidated net worth of at least 70% of consolidated net worth ($2,607,219), and commencing with the end of the fiscal quarter ending September 30, 2009 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 we maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00.
     The Talbot FAL Facility also contains restrictions on our ability to incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others. 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, 2010 the Company had $25,000 in outstanding letters of credit under this facility.
     As of September 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL Facility.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     (iii) IPC Syndicated Facility and IPC Bi-Lateral Facility
     IPC obtained letters of credit through the IPC Syndicated Facility and the IPC Bi-Lateral Facility (the “IPC Facilities”). In July, 2009, certain terms of these facilities were amended including suspending IPC’s ability to increase existing letters of credit or to issue new letters of credit. Effective March 31, 2010, the IPC Syndicated Facility was closed. As of September 30, 2010, $75,864 of outstanding letters of credit were issued under the IPC Bi-Lateral Facility.
     As of September 30, 2010 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC Facilities.
10. 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, excluding treasury and agency securities. The minimum credit rating of any security purchased is Baa3/BBB- and where investments are downgraded, the Company permits a holding of up to 2% in aggregate market value, or 10% with written pre-authorization. At September 30, 2010, 2.9% of the investment portfolio had a split rating below Baa3/BBB- and the Company did not have an aggregate exposure to any single issuer of more than 1.4% of its investment portfolio, other than with respect to government and agency securities.
b) Funds at Lloyd’s
     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.
     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, 2010 amounted to $452,000 (December 31, 2009: $452,000) of which $25,000 is provided under the Talbot FAL Facility (December 31, 2009: $25,000).
c) Lloyd’s 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% of a member’s underwriting capacity in any one year. This levy is affected by the split of sterling and US dollar business expected to be written by the syndicate. 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 2010 estimated underwriting capacity at Lloyd’s of £600,000, the September 30, 2010 exchange rate of £1 equals $1.5805 and assuming the maximum 3% assessment, the Company would be assessed approximately $28,449.
11. Related party transactions
     a) On December 8, 2005, the Company entered into agreements with BlackRock Financial Management, Inc. (“BlackRock”) under which BlackRock provides investment management services for part of the Company’s investment portfolio. Merrill Lynch is a shareholder of Blackrock. Merrill Lynch entities, which are now wholly-owned subsidiaries of Bank of America Corp, own 5,714,285 non-voting shares and 658,614 voting shares in the Company hold warrants to purchase 1,067,187 shares and during a portion of 2009 had an employee on the Company’s Board of Directors who did not receive compensation from the Company.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
For the three and nine months ended September 30, 2010, BlackRock was no longer a related party. Investment management fees earned by Blackrock for the three and nine months ended September 30, 2009 were $576 and $1,554, respectively. Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties.
     b) On December 8, 2005, the Company entered into agreements with Goldman Sachs Asset Management and its affiliates (“GSAM”) under which GSAM provides investment management services for a portion of the Company’s investment portfolio. Goldman Sachs entities, 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 Company’s Board of Directors who does not receive compensation from the Company. Sumit Rajpal, a director of the Company, serves as Managing Director of Goldman, Sachs and Co., GSAM’s parent company. Investment management fees earned by GSAM for the three and nine months ended September 30, 2010 were $370 (2009: $373), and $1,397 (2009: $1,099), respectively, of which $390 was included in accounts payable and accrued expenses at September 30, 2010 (December 31, 2009: $371). Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties.
     c) Vestar Capital entities own 8,571,427 shares in the Company, hold warrants to purchase 972,810 shares and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. Sander M. Levy, a director of the Company, serves as Managing Director of Vestar Capital Partners. During 2009, Vestar Capital entities were shareholders of PARIS RE Holdings, Limited (“Paris Re”). On July 4, 2009, PartnerRe Ltd. (“PartnerRe”) acquired the outstanding shares of Paris Re and as a result Paris Re was not a related party of the Company during the three and nine months ended September 30, 2010. However, for the three and nine months ended September 30, 2009, pursuant to reinsurance agreements with Paris Re, the Company recognized gross premiums written of $nil and $6,634, and earned premium adjustments of $1,710 and $5,101, respectively.
     d) Aquiline Capital Partners, LLC and its related companies (“Aquiline”), which own 6,886,342 shares in the Company, hold warrants to purchase 3,043,246 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”). Christopher E. Watson, a director of the Company, also serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the three and nine months ended September 30, 2010 of $nil (2009: $nil) and $1,341 (2009: $nil), respectively, of which $1,778 was included in premiums receivable at September 30, 2010 (December 31, 2009: $nil). The Company also recognized reinsurance premiums ceded during the three and nine months ended September 30, 2010 of $nil (2009: $158) and $606 (2009: $953), respectively, of which $161 was included in reinsurance balances payable at September 30, 2010 (December 31, 2009: $nil). Earned premium adjustments of $(237) and $645 were incurred during the three and nine months ended September 30, 2010.
     Aquiline is also a shareholder of Tiger Risk Partners LLC (“Tiger Risk”). Christopher E. Watson, a director of the Company serves as a director of Tiger Risk. Pursuant to certain reinsurance contracts, the Company recognized brokerage expenses paid to Tiger Risk during the three and nine months ended September 30, 2010 of $(11) (2009: $nil) and $1,458 (2009: $nil), respectively, of which $1,042 was included in accounts payable and accrued expenses at September 30, 2010 (December 31, 2009: $643).
     On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. (“Conning”) to manage a portion of the Company’s investment portfolio. Aquiline acquired Conning on June 16, 2009. John J. Hendrickson and Jeffrey W. Greenberg, directors of the Company, each serve as a director of Conning Holdings Corp., the parent company of Conning and Michael Carpenter, the Chairman of Talbot Holdings, Ltd. serves as a director of a subsidiary of Conning Holdings Corp. Investment management fees earned by Conning for the three and nine months ended September 30, 2010 were $100 and $286, respectively, of which $100 was included in accounts payable and accrued expenses at September 30, 2010.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
12. Earnings per share
     The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009:
                                                   
    Three Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
Basic earnings per share
                               
Income
  $ 238,473     $ 499,178     $ 299,877     $ 731,647  
 
                               
less: Dividends and distributions declared on outstanding warrants
    (1,747 )     (1,591 )     (5,245 )     (4,917 )
 
                       
Income available to common shareholders
  $ 236,726     $ 497,587     $ 294,632     $ 726,730  
 
                       
 
                               
Weighted average number of common shares outstanding
    110,601,888       92,492,373       119,414,906       81,458,329  
 
                       
 
                               
Basic earnings per share
  $ 2.14     $ 5.38     $ 2.47     $ 8.92  
 
                       
 
                               
Diluted earnings per share
                               
Income
  $ 238,473     $ 499,178     $ 299,877     $ 731,647  
 
                               
less: Dividends and distributions declared on outstanding warrants
                       
 
                       
Income available to common shareholders
  $ 238,473     $ 499,178     $ 299,877     $ 731,647  
 
                       
 
                               
Weighted average number of common shares outstanding
    110,601,888       92,492,373       119,414,906       81,458,329  
Share equivalents:
                               
Warrants
    2,442,095       2,146,172       2,494,322       2,086,546  
Stock options
    867,429       466,525       849,187       378,144  
Unvested restricted shares
    931,330       729,739       977,268       703,486  
 
                       
 
                               
Weighted average number of common shares outstanding
    114,842,742       95,834,809       123,735,683       84,626,505  
 
                       
 
                               
Diluted earnings per share
  $ 2.08     $ 5.21     $ 2.42     $ 8.65  
 
                       
     Share equivalents that would result in the issuance of common shares of 168,670 and 175,994 were outstanding for three months ended September 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Share equivalents that would result in the issuance of common shares of 152,765 and 178,473 were outstanding for nine months ended September 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
13. Subsequent events
     On October 19, 2010, Talbot and Markel have entered into a quota share reinsurance treaty under which Markel, as the reinsured, agrees to cede various percentages of risks to Talbot in respect of bloodstock, livestock and aquaculture accounts for all such business with inception dates during the period January 1, 2011 through and including December 31, 2011. This will not have a material impact on the Company’s financial statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     On November 3, 2010, the Company announced a quarterly cash dividend of $0.22 per each common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on December 31, 2010 to holders of record on December 15, 2010.
Self-Tender Offer and Share Repurchases
     On November 4, 2010 the Company announced that its Board of Directors had approved share repurchase transactions aggregating $300,000. These repurchases will be effected by a tender offer which the Company intends to commence on Monday November 8, 2010, for up to 7,945,400 of its common shares at a price of $30.00 per share. In addition, the Company has entered into separate repurchase agreements with funds affiliated with or managed by each of Aquiline Capital Partners LLC, New Mountain Capital, LLC and Vestar Capital Partners to purchase 2,054,600 common shares in the aggregate at the same price per share as the tender offer, for an aggregate purchase price of approximately $61,638, subject to completion of the tender offer. The tender offer and share repurchases are part of the Company’s ongoing program to return capital to shareholders through share repurchases or other means. As a result of these transactions, the Company expects to repurchase an aggregate of 10.0 million common shares. This amount is in addition to the $629,023 of common shares repurchased by the Company through November 3, 2010 under its previously authorized share repurchase program announced in February 2010.
     Tendering shareholders will receive the purchase price in cash, without interest, for common shares properly tendered in the tender offer and not properly withdrawn, subject to the conditions of the tender offer, including the provisions relating to proration, “odd lot” priority and conditional tender in the event that more than 7,945,400 common shares are properly tendered in the tender offer and not properly withdrawn. These provisions will be described in the Offer to Purchase relating to the tender offer that will be distributed to shareholders. If the tender offer is fully subscribed, the completion of the tender offer and the share repurchases will result in the repurchase by Validus of $300,000 of its common shares in the aggregate.
14. 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 have been determined under U.S. GAAP segment reporting. 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 are property, marine and specialty which includes agriculture, aerospace, nuclear, terrorism, life and accident & health and workers’ compensation catastrophe.
Talbot
     The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial institutions, contingency, bloodstock & livestock, accident & health and aerospace classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Corporate and other reconciling items
     The Company has a “Corporate” function, which includes the activities of the parent company, and which carries out certain functions for the group. “Corporate” includes ‘non-core’ underwriting expenses, predominantly general and administrative and stock compensation expenses. “Corporate” also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, “Corporate” is reflected separately, however “Corporate” is not considered an operating segment under these circumstances. 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following tables summarize the results of our operating segments and corporate segment:
                                 
                    Corporate &        
Three Months Ended September 30, 2010   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 142,630     $ 218,722     $ (17,312 )   $ 344,040  
Reinsurance premiums ceded
    (8,463 )     (44,490 )     17,312       (35,641 )
 
                       
Net premiums written
    134,167       174,232             308,399  
Change in unearned premiums
    124,747       (472 )           124,275  
 
                       
Net premiums earned
    258,914       173,760             432,674  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    79,098       79,838             158,936  
Policy acquisition costs
    39,818       32,451       (5,195 )     67,074  
General and administrative expenses
    5,663       33,201       9,967       48,831  
Share compensation expenses
    1,869       1,754       3,995       7,618  
 
                       
Total underwriting deductions
    126,448       147,244       8,767       282,459  
 
                       
 
                               
Underwriting income (loss)
  $ 132,466     $ 26,516     $ (8,767 )   $ 150,215  
 
                       
 
                               
Net investment income
    28,683       7,614       (2,264 )     34,033  
Other income
    891       3,291       (3,100 )     1,082  
Finance expenses
    (1,505 )           (12,210 )     (13,715 )
 
                       
Operating income (loss) before taxes
    160,535       37,421       (26,341 )     171,615  
Tax benefit (expense)
          1,544       (122 )     1,422  
 
                       
Net operating income (loss)
  $ 160,535     $ 38,965     $ (26,463 )   $ 173,037  
Net realized gains on investments
    20,297       2,761             23,058  
Net unrealized gains on investments
    25,505       6,083             31,588  
Foreign exchange gains
    2,895       7,595       300       10,790  
 
                       
Net income (loss)
  $ 209,232     $ 55,404     $ (26,163 )   $ 238,473  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    94.1 %     79.7 %             89.6 %
 
                               
Losses and loss expenses
    30.5 %     45.9 %             36.7 %
Policy acquisition costs
    15.4 %     18.7 %             15.5 %
General and administrative expenses (1)
    2.9 %     20.1 %             13.0 %
 
                         
Expense ratio
    18.3 %     38.8 %             28.5 %
 
                         
Combined ratio
    48.8 %     84.7 %             65.2 %
 
                         
 
                               
Total assets
  $ 4,884,520     $ 2,558,598     $ 60,124     $ 7,503,242  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation 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 information)
                                 
                    Corporate &        
Three months ended September 30, 2009   Validus Re (2)     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 124,704     $ 227,325     $ (21,001 )   $ 331,028  
Reinsurance premiums ceded
    (38,435 )     (50,253 )     21,001       (67,687 )
 
                       
Net premiums written
    86,269       177,072             263,341  
Change in unearned premiums
    113,499       (2,123 )           111,376  
 
                       
Net premiums earned
    199,768       174,949             374,717  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    45,987       88,165             134,152  
Policy acquisition costs
    32,648       33,106       (1,518 )     64,236  
General and administrative expenses
    17,987       23,424       4,625       46,036  
Share compensation expenses
    1,766       1,371       2,725       5,862  
 
                       
Total underwriting deductions
    98,388       146,066       5,832       250,286  
 
                       
 
                               
Underwriting income (loss)
  $ 101,380     $ 28,883     $ (5,832 )   $ 124,431  
 
                       
 
                               
Net investment income
    23,420       7,629       (1,517 )     29,532  
Other income
    1,847       772       (1,518 )     1,101  
Finance expenses
    (393 )     (3,926 )     (6,938 )     (11,257 )
 
                       
Operating income (loss) before taxes
    126,254       33,358       (15,805 )     143,807  
Tax (expense) benefit
    (41 )     1,840             1,799  
 
                       
Net operating income (loss)
  $ 126,213     $ 35,198     $ (15,805 )   $ 145,606  
Gain on bargain purchase, net of expenses
                302,950       302,950  
Net realized gains on investments
    5,397       32             5,429  
Net unrealized gains on investments
    40,893       9,544             50,437  
Foreign exchange gains (losses)
    739       (5,983 )           (5,244 )
 
                       
Net income
  $ 173,242     $ 38,791     $ 287,145     $ 499,178  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    69.2 %     77.9 %             79.6 %
Losses and loss expenses
    23.0 %     50.4 %             35.8 %
Policy acquisition costs
    16.3 %     18.9 %             17.1 %
General and administrative expenses (1)
    9.9 %     14.2 %             13.8 %
 
                         
Expense ratio
    26.2 %     33.1 %             30.9 %
 
                         
Combined ratio
    49.2 %     83.5 %             66.7 %
 
                         
 
                               
Total assets
  $ 5,087,544     $ 2,049,647     $ 39,880     $ 7,177,071  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.
 
(2)   Operating results of IPC have been included from the date of acquisition, September 4, 2009.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Nine Months Ended September 30, 2010   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 1,067,253     $ 742,973     $ (78,391 )   $ 1,731,835  
Reinsurance premiums ceded
    (62,748 )     (209,749 )     78,391       (194,106 )
 
                       
Net premiums written
    1,004,505       533,224             1,537,729  
Change in unearned premiums
    (199,629 )     (9,788 )           (209,417 )
 
                       
Net premiums earned
    804,876       523,436             1,328,312  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    551,811       280,550             832,361  
Policy acquisition costs
    121,300       106,043       (9,967 )     217,376  
General and administrative expenses
    32,958       83,709       38,112       154,779  
Share compensation expenses
    5,247       4,781       11,012       21,040  
 
                       
Total underwriting deductions
    711,316       475,083       39,157       1,225,556  
 
                       
 
                               
Underwriting income (loss)
  $ 93,560     $ 48,353     $ (39,157 )   $ 102,756  
 
                       
 
                               
Net investment income
    87,842       22,185       (6,886 )     103,141  
Other income
    3,446       8,350       (7,129 )     4,667  
Finance expenses
    (3,905 )     (3,140 )     (35,039 )     (42,084 )
 
                       
Operating income (loss) before taxes
    180,943       75,748       (88,211 )     168,480  
Tax (expense)
    (185 )     (1,755 )     (128 )     (2,068 )
 
                       
Net operating income (loss)
  $ 180,758     $ 73,993     $ (88,339 )   $ 166,412  
Net realized gains on investments
    40,439       6,458             46,897  
Net unrealized gains on investments
    73,397       15,244             88,641  
Foreign exchange (losses) gains
    (3,087 )     753       261       (2,073 )
 
                       
Net income (loss)
  $ 291,507     $ 96,448     $ (88,078 )   $ 299,877  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    94.1 %     71.8 %             88.8 %
Losses and loss expenses
    68.6 %     53.6 %             62.7 %
Policy acquisition costs
    15.1 %     20.3 %             16.4 %
General and administrative expenses (1)
    4.7 %     16.9 %             13.2 %
 
                         
Expense ratio
    19.8 %     37.2 %             29.6 %
 
                         
Combined ratio
    88.4 %     90.8 %             92.3 %
 
                         
 
                               
Total assets
  $ 4,884,520     $ 2,558,598     $ 60,124     $ 7,503,242  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation 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 information)
                                 
                    Corporate &        
Nine Months Ended September 30, 2009   Validus Re (2)     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 734,390     $ 690,357     $ (58,796 )   $ 1,365,951  
Reinsurance premiums ceded
    (94,794 )     (166,491 )     58,796       (202,489 )
 
                       
Net premiums written
    639,596       523,866             1,163,462  
Change in unearned premiums
    (101,684 )     (40,102 )           (141,786 )
 
                       
Net premiums earned
    537,912       483,764             1,021,676  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    142,570       248,166             390,736  
Policy acquisition costs
    90,346       102,378       (2,599 )     190,125  
General and administrative expenses
    45,928       65,565       13,822       125,315  
Share compensation expenses
    4,986       5,804       8,058       18,848  
 
                       
Total underwriting deductions
    283,830       421,913       19,281       725,024  
 
                       
 
                               
Underwriting income (loss)
  $ 254,082     $ 61,851     $ (19,281 )   $ 296,652  
 
                       
 
                               
Net investment income
    64,989       22,816       (4,538 )     83,267  
Other income
    3,034       2,440       (2,599 )     2,875  
Finance expenses
    (1,233 )     (7,688 )     (20,811 )     (29,732 )
 
                       
Operating income (loss) before taxes
    320,872       79,419       (47,229 )     353,062  
Tax (expense) benefit
    (107 )     3,408             3,301  
 
                       
Net operating income (loss)
  $ 320,765     $ 82,827     $ (47,229 )   $ 356,363  
Gain on bargain purchase, net of expenses
                287,099       287,099  
Net realized (losses) on investments
    (14,282 )     (6,360 )           (20,642 )
Net unrealized gains on investments
    95,693       14,146             109,839  
Foreign exchange (losses) gains
    (641 )     (427 )     56       (1,012 )
 
                       
Net income
  $ 401,535     $ 90,186     $ 239,926     $ 731,647  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    87.1 %     75.9 %             85.2 %
Losses and loss expenses
    26.5 %     51.3 %             38.2 %
Policy acquisition costs
    16.8 %     21.2 %             18.6 %
General and administrative expenses (1)
    9.5 %     14.8 %             14.1 %
 
                         
Expense ratio
    26.3 %     36.0 %             32.7 %
 
                         
Combined ratio
    52.8 %     87.3 %             70.9 %
 
                         
 
                               
Total assets
  $ 5,087,544     $ 2,049,647     $ 39,880     $ 7,177,071  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.
 
(2)   Operating results of IPC have been included from the date of acquisition, September 4, 2009.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The 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, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 67,097     $ 19,639     $ (995 )   $ 85,741       24.9 %
Worldwide excluding United States (1)
    6,243       60,500       (594 )     66,149       19.2 %
Europe
    7,163       9,688       (146 )     16,705       4.9 %
Latin America and Caribbean
    17,340       29,033       (14,336 )     32,037       9.3 %
Japan
    3,125       1,556       (21 )     4,660       1.4 %
Canada
    21       1,808       (21 )     1,808       0.5 %
Rest of the world (2)
    (372 )                 (372 )     (0.1 )%
 
                             
Sub-total, non United States
    33,520       102,585       (15,118 )     120,987       35.2 %
Worldwide including United States (1)
    4,635       13,317       (135 )     17,817       5.2 %
Marine and Aerospace (3)
    37,378       83,181       (1,064 )     119,495       34.7 %
 
                             
Total
  $ 142,630     $ 218,722     $ (17,312 )   $ 344,040       100.0 %
 
                             
                                         
    Three Months Ended September 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 54,524     $ 15,204     $ (1,113 )   $ 68,615       20.7 %
Worldwide excluding United States (1)
    4,322       70,954       (2,330 )     72,946       22.1 %
Europe
    3,092       14,525       140       17,757       5.4 %
Latin America and Caribbean
    17,229       30,074       (16,833 )     30,470       9.2 %
Japan
    2,363       947       (273 )     3,037       0.9 %
Canada
    (183 )     1,619       183       1,619       0.5 %
Rest of the world (2)
    804                   804       0.2 %
 
                             
Sub-total, non United States
    27,627       118,119       (19,113 )     126,633       38.3 %
Worldwide including United States (1)
    9,946       18,152       (597 )     27,501       8.3 %
Marine and Aerospace (3)
    32,607       75,850       (178 )     108,279       32.7 %
 
                             
Total
  $ 124,704     $ 227,325     $ (21,001 )   $ 331,028       100.0 %
 
                             
 
(1)   Represents risks in two or more geographic zones.
 
(2)   Represents risks in one geographic zone.
 
(3)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The 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:
                                         
    Nine Months Ended September 30, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 487,317     $ 74,613     $ (6,486 )   $ 555,444       32.1 %
Worldwide excluding United States (1)
    50,837       195,324       (6,512 )     239,649       13.8 %
Europe
    98,396       38,058       (1,107 )     135,347       7.8 %
Latin America and Caribbean
    61,115       75,628       (42,889 )     93,854       5.4 %
Japan
    23,025       5,165       (158 )     28,032       1.6 %
Canada
    158       8,811       (158 )     8,811       0.5 %
Rest of the world (2)
    24,796                   24,796       1.4 %
 
                             
Sub-total, non United States
    258,327       322,986       (50,824 )     530,489       30.5 %
Worldwide including United States (1)
    82,902       42,004       (2,369 )     122,537       7.2 %
Marine and Aerospace (3)
    238,707       303,370       (18,712 )     523,365       30.2 %
 
                             
Total
  $ 1,067,253     $ 742,973     $ (78,391 )   $ 1,731,835       100.0 %
 
                             
                                         
    Nine Months Ended September 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 352,523     $ 62,096     $ (6,200 )   $ 408,419       29.9 %
Worldwide excluding United States (1)
    38,264       198,145       (11,612 )     224,797       16.3 %
Europe
    49,674       52,434       (3,073 )     99,035       7.3 %
Latin America and Caribbean
    35,685       62,670       (31,726 )     66,629       4.9 %
Japan
    17,170       4,654       (273 )     21,551       1.6 %
Canada
    469       7,998       (469 )     7,998       0.6 %
Rest of the world (2)
    21,679                   21,679       1.6 %
 
                             
Sub-total, non United States
    162,941       325,901       (47,153 )     441,689       32.3 %
Worldwide including United States (1)
    46,652       49,214       (2,884 )     92,982       6.8 %
Marine and Aerospace (3)
    172,274       253,146       (2,559 )     422,861       31.0 %
 
                             
Total
  $ 734,390     $ 690,357     $ (58,796 )   $ 1,365,951       100.0 %
 
                             
 
(1)   Represents risks in two or more geographic zones.
 
(2)   Represents risks in one geographic zone.
 
(3)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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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, 2010 and 2009 and the Company’s consolidated financial condition, liquidity and capital resources at September 30, 2010 and December 31, 2009. 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, 2009, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
     The Company was formed on October 19, 2005 and completed the acquisitions of Talbot Holdings Ltd. (“Talbot”) and IPC Holdings, Ltd. (“IPC”) on July 2, 2007 and September 4, 2009, respectively. For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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 segments, Validus Reinsurance, Ltd. (“Validus Re”) and Talbot. Validus Re, the Company’s principal reinsurance operating segment, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating segment, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd’s of London (“Lloyd’s”) and which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yacht and onshore energy 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.
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”) in exchange for common shares and cash. IPC’s operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to increase the Company’s capital base and gain a strategic advantage in the then current reinsurance market. This acquisition created a leading Bermuda carrier in the short-tail reinsurance market that facilitates stronger relationships with major reinsurance intermediaries.
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 years ended December 31, 2007 and 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 increased the supply of insurance and reinsurance which resulted in a softening of rates in most lines. However, during 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 January 2009 renewal season saw decreased competition and increased premium rates due to relatively scarce capital and increased demand. During 2009, the Company observed reinsurance demand stabilization and industry capital recovery from investment portfolio gains.

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In 2009, there were few notable large losses affecting the worldwide (re)insurance industry and no major hurricanes making landfall in the United States.
     The January 2010 renewal period saw business being withdrawn from the market, notably catastrophe excess of loss, resulting in the Company writing less business in these lines and reducing the Company’s aggregate loss exposure. Despite the elevated level of catastrophe activity during the first quarter of 2010, principally the Chilean earthquake which stands among the most costly industry losses in history outside of the United States, the Company continues to see increased competition and decreased premium rates in most classes of business. During the July 2010 renewal period, Validus Re experienced rate decreases in the property and specialty portfolios. The Talbot segment, has also experienced pricing pressures in most classes of business, with the exception of the offshore energy, financial institution and political risk lines, which have been experiencing favorable renewal terms and conditions following recent losses. During the nine months ended September 30, 2010, Validus Re experienced rate decreases in most classes of business with the exception of offshore energy and Latin America. The Talbot segment has also experienced pricing pressure in most classes of business, with the exception of the offshore energy, financial institution and political risk lines.
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 return on average equity represents the level of net income available to shareholders generated from the average shareholders’ equity during the period. Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. Percentages for the quarter and interim periods are annualized. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.
                 
    Three Months Ended
    September 30,
    2010   2009
Annualized return on average equity
    25.9 %     65.3 %
 
               
     The decrease in annualized return on average equity for the three months ended September 30, 2010 was driven primarily by the absence of the $303.0 million gain on bargain purchase, net of expenses relating to the IPC Acquisition. Net operating income for the three months ended September 30, 2010 increased by $27.4 million, or 18.8% compared to the three months ended September 30, 2009.
     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 increased by $1.72, or 5.7%, from $30.30 at June 30, 2010 to $32.02 at September 30, 2010. The increase was substantially due to the earnings generated in the three months ended September 30, 2010, partially offset by dividends of $0.22 per share and per share equivalent paid in the period. Diluted book value per common share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book value per common share. Diluted book value per common share is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise). A reconciliation of diluted book value per common share to book value per common share is presented below in the section entitled “Non-GAAP Financial Measures.”
     Cash dividends per common share are an integral part of the value created for shareholders. On November 3, 2010, the Company announced a quarterly cash dividend of $0.22 per each common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on December 31, 2010 to holders of record on December 15, 2010.

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     Underwriting 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, foreign exchange gains (losses) and gain on bargain purchase, net of expenses. 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 operations. Underwriting income for the three months ended September 30, 2010 and 2009 was $150.2 million and $124.4 million, respectively. Underwriting income is a Non-GAAP financial measure as described in detail and reconciled 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;
 
    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, 2009.
Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two significant operating segments are Validus Re and Talbot.
Results of Operations
     Validus Re commenced operations on December 16, 2005. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information.

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The following table presents results of operations for the three and nine months ended September 30, 2010 and 2009:
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(Dollars in thousands)   2010     2009 (a)     Pro Forma 2009 (c)     2010     2009 (a)     Pro Forma 2009 (c)  
Gross premiums written
  $ 344,040     $ 331,028     $ 356,471     $ 1,731,835     $ 1,365,951     $ 1,753,288  
Reinsurance premiums ceded
    (35,641 )     (67,687 )     (67,866 )     (194,106 )     (202,489 )     (209,018 )
 
                                   
Net premiums written
    308,399       263,341       288,605       1,537,729       1,163,462       1,544,270  
Change in unearned premiums
    124,275       111,376       153,457       (209,417 )     (141,786 )     (260,343 )
 
                                   
Net premiums earned
    432,674       374,717       442,062       1,328,312       1,021,676       1,283,927  
 
                                               
Losses and loss expenses
    158,936       134,152       136,253       832,361       390,736       423,529  
Policy acquisition costs
    67,074       64,236       71,126       217,376       190,125       216,759  
General and administrative expenses
    48,831       46,036       49,916       154,779       125,315       149,257  
Share compensation expenses
    7,618       5,862       7,612       21,040       18,848       25,562  
 
                                   
Total underwriting deductions
    282,459       250,286       264,907       1,225,556       725,024       815,107  
 
                                               
Underwriting income (b)
    150,215       124,431       177,155       102,756       296,652       468,820  
 
                                               
Net investment income
    34,033       29,532       39,451       103,141       83,267       128,438  
Other income
    1,082       1,101       1,044       4,667       2,875       2,844  
Finance expenses
    (13,715 )     (11,257 )     (11,257 )     (42,084 )     (29,732 )     (30,115 )
 
                                   
Operating income before taxes (b)
    171,615       143,807       206,393       168,480       353,062       569,987  
Tax benefit (expense)
    1,422       1,799       1,799       (2,068 )     3,301       3,301  
 
                                   
Net operating income (b)
    173,037       145,606       208,192       166,412       356,363       573,288  
 
                                               
Gain on bargain purchase, net of expenses
          302,950                     287,099          
Net realized gains (losses) on investments
    23,058       5,429       11,093       46,897       (20,642 )     (13,816 )
Net unrealized gains on investments
    31,588       50,437       114,779       88,641       109,839       214,832  
Foreign exchange gains (losses)
    10,790       (5,244 )     1,191       (2,073 )     (1,012 )     3,956  
 
                                   
Net income
  $ 238,473     $ 499,178     $ 335,255     $ 299,877     $ 731,647     $ 778,260  
 
                                   
Selected ratios:
                                               
Net premiums written / Gross premiums written
    89.6 %     79.6 %     81.0 %     88.8 %     85.2 %     88.1 %
 
                                               
Losses and loss expenses
    36.7 %     35.8 %     30.8 %     62.7 %     38.2 %     33.0 %
Policy acquisition costs
    15.5 %     17.1 %     16.1 %     16.4 %     18.6 %     16.9 %
General and administrative expenses (d)
    13.0 %     13.8 %     13.0 %     13.2 %     14.1 %     13.6 %
 
                                   
Expense ratio
    28.5 %     30.9 %     29.1 %     29.6 %     32.7 %     30.5 %
 
                                   
Combined ratio
    65.2 %     66.7 %     59.9 %     92.3 %     70.9 %     63.5 %
 
                                   
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are 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.”
 
c)   Pro Forma combined Validus Holdings, Ltd. and IPC Holdings Ltd. income statement for the three months and nine months ended September 30, 2009.
 
d)   The general and administrative ratio includes share compensation expenses.

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    Three Months Ended September 30,     Nine Months Ended September 30,  
(Dollars in thousands)   2010     2009 (a)     Pro Forma 2009 (c)     2010     2009 (a)     Pro Forma 2009 (c)  
Validus Re
                                               
Gross premiums written
  $ 142,630     $ 124,704     $ 150,147     $ 1,067,253     $ 734,390     $ 1,121,727  
Reinsurance premiums ceded
    (8,463 )     (38,435 )     (38,614 )     (62,748 )     (94,794 )     (101,323 )
 
                                   
Net premiums written
    134,167       86,269       111,533       1,004,505       639,596       1,020,404  
Change in unearned premiums
    124,747       113,499       155,580       (199,629 )     (101,684 )     (220,241 )
 
                                   
Net premiums earned
    258,914       199,768       267,113       804,876       537,912       800,163  
 
                                               
Losses and loss expenses
    79,098       45,987       48,088       551,811       142,570       175,363  
Policy acquisition costs
    39,818       32,648       39,538       121,300       90,346       116,980  
General and administrative expenses
    5,663       17,987       21,867       32,958       45,928       69,870  
Share compensation expenses
    1,869       1,766       3,516       5,247       4,986       11,700  
 
                                   
Total underwriting deductions
    126,448       98,388       113,009       711,316       283,830       373,913  
 
                                   
Underwriting income (b)
    132,466       101,380       154,104       93,560       254,082       426,250  
 
                                   
 
                                               
Talbot
                                               
Gross premiums written
  $ 218,722     $ 227,325     $ 227,325     $ 742,973     $ 690,357     $ 690,357  
Reinsurance premiums ceded
    (44,490 )     (50,253 )     (50,253 )     (209,749 )     (166,491 )     (166,491 )
 
                                   
Net premiums written
    174,232       177,072       177,072       533,224       523,866       523,866  
Change in unearned premiums
    (472 )     (2,123 )     (2,123 )     (9,788 )     (40,102 )     (40,102 )
 
                                   
Net premiums earned
    173,760       174,949       174,949       523,436       483,764       483,764  
Losses and loss expenses
    79,838       88,165       88,165       280,550       248,166       248,166  
Policy acquisition costs
    32,451       33,106       33,106       106,043       102,378       102,378  
General and administrative expenses
    33,201       23,424       23,424       83,709       65,565       65,565  
Share compensation expenses
    1,754       1,371       1,371       4,781       5,804       5,804  
 
                                   
Total underwriting deductions
    147,244       146,066       146,066       475,083       421,913       421,913  
 
                                   
Underwriting income (b)
    26,516       28,883       28,883       48,353       61,851       61,851  
 
                                   
 
                                               
Corporate & Eliminations
                                               
Gross premiums written
  $ (17,312 )   $ (21,001 )   $ (21,001 )   $ (78,391 )   $ (58,796 )   $ (58,796 )
Reinsurance premiums ceded
    17,312       21,001       21,001       78,391       58,796       58,796  
 
                                   
Net premiums written
                                   
Change in unearned premiums
                                   
 
                                   
Net premiums earned
                                   
 
                                               
Losses and loss expenses
                                   
Policy acquisition costs
    (5,195 )     (1,518 )     (1,518 )     (9,967 )     (2,599 )     (2,599 )
General and administrative expenses
    9,967       4,625       4,625       38,112       13,822       13,822  
Share compensation expenses
    3,995       2,725       2,725       11,012       8,058       8,058  
 
                                   
Total underwriting deductions
    8,767       5,832       5,832       39,157       19,281       19,281  
 
                                   
Underwriting (loss) (b)
    (8,767 )     (5,832 )     (5,832 )     (39,157 )     (19,281 )     (19,281 )
 
                                   
 
                                               
 
                                   
Total underwriting income (b)
  $ 150,215     $ 124,431     $ 177,155     $ 102,756     $ 296,652     $ 468,820  
 
                                   
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income 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.”
 
c)   Pro Forma combined Validus Holdings, Ltd. and IPC Holdings Ltd. income statement for the three and nine months ended September 30, 2009.

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Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009
     Net income for the three months ended September 30, 2010 was $238.5 million compared to net income of $499.2 million for the three months ended September 30, 2009, a decrease of $260.7 million or 52.2%. The primary factors driving the decrease in net income were:
  The significant non-recurring gain on bargain purchase, net of expenses of $303.0 million in the third quarter of 2009 relating to the IPC Acquisition; and
 
  Decrease in net unrealized gains on investments of $18.8 million.
The above items were partially offset by the following factors:
  Increase in underwriting income of $25.8 million due primarily to an increase in net premiums earned of $58.0 million, partially offset by an increase in underwriting deductions of $32.2 million including $47.7 million of notable loss events included in loss and loss expenses. Underwriting deductions also include policy acquisition costs, general and administrative expenses and share compensation expenses;
 
  Increase in net investment income and net realized gains on investments of $4.5 million and $17.6 million, respectively; and
 
  A favorable movement in foreign exchange of $16.0 million.
The change in net income for the three months ended September 30, 2010 of $260.7 million as compared to the three months ended September 30, 2009 is described in the following table:
                                 
    Three Months Ended September 30, 2010  
    Increase (Decrease) Over the Three Months Ended September 30, 2009  
                    Corporate and        
(Dollars in thousands)   Validus Re (a)     Talbot     Eliminations     Total (a)  
Notable losses — net loss and loss expenses (b)
  $ (36,451 )   $ (11,224 )   $     $ (47,675 )
Notable losses — net reinstatement premiums (b)
    815       (265 )           550  
Other underwriting income (loss)
    66,722       9,122       (2,935 )     72,909  
 
                       
Underwriting income (loss) (c)
    31,086       (2,367 )     (2,935 )     25,784  
Net investment income
    5,263       (15 )     (747 )     4,501  
Other income
    (956 )     2,519       (1,582 )     (19 )
Finance expenses
    (1,112 )     3,926       (5,272 )     (2,458 )
 
                       
 
    34,281       4,063       (10,536 )     27,808  
Taxes
    41       (296 )     (122 )     (377 )
 
                       
 
    34,322       3,767       (10,658 )     27,431  
 
                               
Gain on bargain purchase, net of expenses
                (302,950 )     (302,950 )
Net realized gains on investments
    14,900       2,729             17,629  
Net unrealized gains on investments
    (15,388 )     (3,461 )           (18,849 )
Net foreign exchange gains
    2,156       13,578       300       16,034  
 
                       
 
                               
Net income (loss)
  $ 35,990     $ 16,613     $ (313,308 )   $ (260,705 )
 
                       
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
(b)   Notable losses for the three months ended September 30, 2010 include: New Zealand earthquake, Oklahoma windstorm, a Political risk loss and Hurricane Karl. Excludes the reserve for potential development on 2010 notable loss events.
 
(c)   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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Gross Premiums Written
     Gross premiums written for the three months ended September 30, 2010 were $344.0 million compared to $331.0 million for the three months ended September 30, 2009, an increase of $13.0 million or 3.9%. The property and marine lines increased by $14.9 million and $5.0 million, respectively, while the specialty lines decreased by $6.9 million. Details of gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 156,381       45.4 %   $ 141,480       42.7 %     10.5 %
Marine
    100,746       29.3 %     95,772       29.0 %     5.2 %
Specialty
    86,913       25.3 %     93,776       28.3 %     (7.3 )%
 
                               
Total
  $ 344,040       100.0 %   $ 331,028       100.0 %     3.9 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re gross premiums written for the three months ended September 30, 2010 were $142.6 million compared to $124.7 million for the three months ended September 30, 2009, an increase of $17.9 million or 14.4%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 99,313       69.6 %   $ 80,578       64.6 %     23.3 %
Marine
    37,495       26.3 %     28,408       22.8 %     32.0 %
Specialty
    5,822       4.1 %     15,718       12.6 %     (63.0 )%
 
                               
Total
  $ 142,630       100.0 %   $ 124,704       100.0 %     14.4 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     During the three months ended September 30, 2010, Validus Re wrote new business and increased lines on renewing business by $115.3 million compared to $106.5 million in the three months ended September 30, 2009, an increase of $8.8 million. In addition, there was a $13.5 million net increase in premium adjustments and reinstatement premiums, partially offset by a $3.7 million decrease in inter-company premiums written with Talbot which are eliminated upon consolidation.
     The increase in gross premiums written in the property lines of $18.7 million was due primarily to an $18.2 million increase in premium adjustments and reinstatement premiums. In addition, there was a $3.2 million increase in new and renewing business in the property lines. The increase in gross premiums written of $9.1 million in the marine lines was due primarily to a $10.5 million increase in lines on renewing business and new business. The decrease in gross premiums written in the specialty lines of $9.9 million was primarily due to a $4.9 million decrease in new and renewing business due to unfavorable pricing conditions in certain specialty lines. In addition, the impact of premium adjustments and reinstatement premiums in the specialty lines for the three months ended September 30, 2010 was $4.4 million lower than for the three months ended September 30, 2009.

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     Gross premiums written under the quota share, surplus treaty and excess of loss contracts between Validus Re and Talbot decreased by $2.1 million in the property lines, $1.1 million in the marine lines and $0.5 million in the specialty lines as compared to the three months ended September 30, 2009. These reinsurance agreements with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended September 30, 2010 were $218.7 million compared to $227.3 million for the three months ended September 30, 2009, a decrease of $8.6 million or 3.8%. The $218.7 million of gross premiums written translated at 2009 rates of exchange would have been $221.5 million during the three months ended September 30, 2010, an increase of $2.8 million. Details of Talbot gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 73,201       33.4 %   $ 79,155       34.8 %     (7.5 )%
Marine
    64,422       29.5 %     69,621       30.6 %     (7.5 )%
Specialty
    81,099       37.1 %     78,549       34.6 %     3.2 %
 
                               
Total
  $ 218,722       100.0 %   $ 227,325       100.0 %     (3.8 )%
 
                               
     The decrease in gross premiums written in the property lines of $6.0 million was primarily due to a $7.6 million reduction of gross premiums written in the onshore energy lines. This reduction related to the change in timing of certain renewals from the third quarter of 2009 to the second quarter of 2010. In addition, there was a decrease of $5.2 million in the marine lines and an increase of $2.6 million in the specialty lines for the three months ended September 30, 2010.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended September 30, 2010 were $35.6 million compared to $67.7 million for the three months ended September 30, 2009, a decrease of $32.0 million or 47.3%. Reinsurance premiums ceded in the property lines decreased by $42.8 million, partially offset by an increase in the marine and specialty lines of $3.9 million and $6.9 million, respectively. Details of reinsurance premiums ceded by line of business are described below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 13,662       38.3 %   $ 56,466       83.4 %     (75.8 )%
Marine
    10,377       29.1 %     6,504       9.6 %     59.5 %
Specialty
    11,602       32.6 %     4,717       7.0 %     146.0 %
 
                               
Total
  $ 35,641       100.0 %   $ 67,687       100.0 %     (47.3 )%
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re reinsurance premiums ceded for the three months ended September 30, 2010 were $8.5 million compared to $38.4 million for the three months ended September 30, 2009, a decrease of $30.0 million or 78.0%. Details of Validus Re reinsurance premiums ceded by line of business are described below.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 178       2.1 %   $ 33,991       88.4 %     (99.5 )%
Marine
    8,035       94.9 %     4,444       11.6 %     80.8 %
Specialty
    250       3.0 %           0.0 %   NM
 
                             
Total
  $ 8,463       100.0 %   $ 38,435       100.0 %     (78.0 )%
 
                             
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
NM: Not meaningful
     Reinsurance premiums ceded in the property lines decreased by $33.8 million, primarily due the prior year purchase of $34.0 million in catastrophe retrocessional coverage for IPC’s U.S. property exposures. Reinsurance premiums ceded in the marine lines increased by $3.6 million, due primarily to a change in the timing of purchases of $3.4 million in certain reinsurance contracts.
Talbot. Talbot reinsurance premiums ceded for the three months ended September 30, 2010 were $44.5 million compared to $50.3 million for the three months ended September 30, 2009, a decrease of $5.8 million or 11.5%. This decrease was primarily due to lower amounts ceded under the quota share following the decrease in premiums written in the onshore energy lines and a lower quota share percentage for 2010 as compared to 2009. Details of Talbot reinsurance premiums ceded by line of business are described below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 29,617       66.6 %   $ 40,728       81.0 %     (27.3 )%
Marine
    3,513       7.9 %     4,317       8.6 %     (18.6 )%
Specialty
    11,360       25.5 %     5,208       10.4 %     118.1 %
 
                               
Total
  $ 44,490       100.0 %   $ 50,253       100.0 %     (11.5 )%
 
                               
     Reinsurance premiums ceded in the property lines decreased by $11.1 million. The decrease was due primarily to the reduction in premiums written in the onshore energy lines. Reinsurance premiums ceded in the specialty lines increased by $6.2 million due to an additional purchase of reinsurance under the excess of loss program and higher reinstatement premiums in the direct aviation and financial institutions lines. Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re for the three months ended September 30, 2010 were $17.3 million compared to $21.0 million for the three months ended September 30, 2009, a decrease of $3.7 million. These reinsurance agreements with Validus Re are eliminated upon consolidation.
Net Premiums Written
     Net premiums written for the three months ended September 30, 2010 were $308.4 million compared to $263.3 million for the three months ended September 30, 2009, an increase of $45.1 million, or 17.1%. The ratios of net premiums written to gross premiums written for the three months ended September 30, 2010 and 2009 were 89.6% and 79.6%, respectively. Details of net premiums written by line of business are provided below.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 142,719       46.3 %   $ 85,014       32.3 %     67.9 %
Marine
    90,369       29.3 %     89,268       33.9 %     1.2 %
Specialty
    75,311       24.4 %     89,059       33.8 %     (15.4 )%
 
                               
Total
  $ 308,399       100.0 %   $ 263,341       100.0 %     17.1 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re net premiums written for the three months ended September 30, 2010 were $134.2 million compared to $86.3 million for the three months ended September 30, 2009, an increase of $47.9 million or 55.5%. Details of Validus Re net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 99,135       73.8 %   $ 46,587       54.0 %     112.8 %
Marine
    29,460       22.0 %     23,964       27.8 %     22.9 %
Specialty
    5,572       4.2 %     15,718       18.2 %     (64.6 )%
 
                               
Total
  $ 134,167       100.0 %   $ 86,269       100.0 %     55.5 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The increase in Validus Re 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 were 94.1% and 69.2% for the three months ended September 30, 2010 and 2009, respectively, reflecting the decrease in reinsurance premiums ceded relating to the purchase of the $34.0 million retrocessional coverage arising from the IPC Acquisition.
Talbot. Talbot net premiums written for the three months ended September 30, 2010 were $174.2 million compared to $177.1 million for the three months ended September 30, 2009, a decrease of $2.8 million or 1.6%. Details of Talbot net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 43,584       25.0 %   $ 38,427       21.7 %     13.4 %
Marine
    60,909       35.0 %     65,304       36.9 %     (6.7 )%
Specialty
    69,739       40.0 %     73,341       41.4 %     (4.9 )%
 
                               
Total
  $ 174,232       100.0 %   $ 177,072       100.0 %     (1.6 )%
 
                               
     The decrease in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded, in particular the lower net premium resulting from lower premiums written in the three months ended September 30, 2010. The ratios of net premiums written to gross premiums written for the three months ended September 30, 2010 and 2009 were 79.7% and 77.9%, respectively, reflecting the lower gross premiums written.
Change in Unearned Premiums
     Change in unearned premiums for the three months ended September 30, 2010 was $124.3 million compared to $111.4 million for the three months ended September 30, 2009, a change of $12.9 million or 11.6%.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ 150,298     $ 95,638       57.2 %
Change in prepaid reinsurance premium
    (26,023 )     15,738       (265.4 )%
 
                   
Net change in unearned premium
  $ 124,275     $ 111,376       11.6 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re’s net change in unearned premiums for the three months ended September 30, 2010 were $124.7 million compared to $113.5 million for the three months ended September 30, 2009, a change of $11.2 million or 9.9%. The rate of change in unearned premiums has increased due primarily to the earnings effect of the increased net premiums written and has been impacted by timing factors on added premiums.
                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ 131,794     $ 99,768       32.1 %
Change in prepaid reinsurance premium
    (7,047 )     13,731       (151.3 )%
 
                   
Net change in unearned premium
  $ 124,747     $ 113,499       9.9 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Talbot. The Talbot net change in unearned premiums for the three months ended September 30, 2010 was ($0.5) million compared to ($2.1) million for the three months ended September 30, 2009, a change of $1.7 million, or 77.8%.
                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ 18,504     $ (4,130 )     548.0 %
Change in prepaid reinsurance premium
    (18,976 )     2,007         NM
 
                   
Net change in unearned premium
  $ (472 )   $ (2,123 )     77.8 %
 
                   
     
 
NM: Not meaningful
     The Talbot net change in unearned premium has decreased for the three months ended September 30, 2010 primarily due to the seasonality of earnings of gross premiums written compared to the current quarter premiums written.
Net Premiums Earned
     Net premiums earned for the three months ended September 30, 2010 were $432.7 million compared to $374.7 million for the three months ended September 30, 2009, an increase of $58.0 million or 15.5%. The increase in net premiums earned was driven by increased premiums earned of $59.1 million in the Validus Re segment, partially offset by a decrease of $1.2 million in the Talbot segment. Details of net premiums earned by line of business are provided below.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30 , 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 232,117       53.6 %   $ 177,916       47.4 %     30.5 %
Marine
    109,904       25.4 %     114,114       30.5 %     (3.7 )%
Specialty
    90,653       21.0 %     82,687       22.1 %     9.6 %
 
                               
Total
  $ 432,674       100.0 %   $ 374,717       100.0 %     15.5 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re net premiums earned for the three months ended September 30, 2010 were $258.9 million compared to $199.8 million for the three months ended September 30, 2009, an increase of $59.1 million or 29.6%. Details of Validus Re net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 191,027       73.8 %   $ 141,547       70.9 %     35.0 %
Marine
    41,894       16.2 %     35,397       17.7 %     18.4 %
Specialty
    25,993       10.0 %     22,824       11.4 %     13.9 %
 
                               
Total
  $ 258,914       100.0 %   $ 199,768       100.0 %     29.6 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     The increase in net premiums earned was due primarily to an increase of $59.2 million of premiums earned on contracts incepting in the first half of the year which is consistent with the increase in new and renewing premiums compared to the three months ended September 30, 2009.
Talbot. Talbot net premiums earned for the three months ended September 30, 2010 were $173.8 million compared to $174.9 million for the three months ended September 30, 2009, a decrease of $1.2 million or 0.7%. Details of Talbot net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 41,090       23.6 %   $ 36,369       20.8 %     13.0 %
Marine
    68,010       39.2 %     78,717       45.0 %     (13.6 )%
Specialty
    64,660       37.2 %     59,863       34.2 %     8.0 %
 
                               
Total
  $ 173,760       100.0 %   $ 174,949       100.0 %     (0.7 )%
 
                               
     The decrease in net premiums earned is due primarily to the lower levels of gross premiums written by the onshore energy team, over the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, as discussed above.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended September 30, 2010 were $158.9 million compared to $134.2 million for the three months ended September 30, 2009, an increase of $24.8 million or 18.5%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended September 30, 2010 and 2009 were 36.7% and 35.8%, respectively. Details of loss ratios by line of business are provided below.

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    Three Months Ended   Three Months Ended    
    September 30, 2010   September 30, 2009 (a)   % Change
Property
    25.8 %     13.5 %     12.3  
Marine
    44.0 %     65.5 %     (21.5 )
Specialty
    55.9 %     42.7 %     13.2  
All lines
    36.7 %     35.8 %     0.9  
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     At September 30, 2010 and 2009, 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, 2009. The Company did not make any significant changes in the assumptions or methodology used in its reserving process for the three months ended September 30, 2010.
                         
    As at September 30, 2010  
                    Total Gross Reserve for  
(Dollars in thousands)   Gross Case Reserves     Gross IBNR     Losses and Loss Expenses  
Property
  $ 511,831     $ 418,457     $ 930,288  
Marine
    322,300       316,790       639,090  
Specialty
    194,428       257,039       451,467  
 
                 
Total
  $ 1,028,559     $ 992,286     $ 2,020,845  
 
                 
                         
    As at September 30, 2010  
                    Total Net Reserve for  
(Dollars in thousands)   Net Case Reserves     Net IBNR     Losses and Loss Expenses  
Property
  $ 477,683     $ 391,877     $ 869,560  
Marine
    260,079       256,371       516,450  
Specialty
    154,288       211,726       366,014  
 
                 
Total
  $ 892,050     $ 859,974     $ 1,752,024  
 
                 
     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, 2010:
                                 
    Three Months Ended September 30, 2010  
(Dollars in thousands)   Validus Re     Talbot     Eliminations     Total  
Gross reserves at period beginning
  $ 1,029,478     $ 1,142,715     $ (194,063 )   $ 1,978,130  
Losses recoverable at period beginning
    (60,145 )     (327,522 )     194,063       (193,604 )
 
                       
Net reserves at period beginning
    969,333       815,193             1,784,526  
 
                       
 
                               
Incurred losses — current period
    98,295       110,394             208,689  
Incurred losses — change in prior accident years
    (19,197 )     (30,556 )           (49,753 )
 
                       
Incurred losses
    79,098       79,838             158,936  
 
                       
 
                               
Foreign exchange
    13,812       8,596             22,408  
Paid losses
    (108,384 )     (105,462 )           (213,846 )
 
                       
Net reserves at period end
    953,859       798,165             1,752,024  
 
                       
Losses recoverable
    81,368       355,778       (168,325 )     268,821  
 
                       
Gross reserves at period end
    1,035,227       1,153,943       (168,325 )     2,020,845  
 
                       

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     The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. Favorable loss development on prior years totaled $49.8 million of this, $19.2 million related to the Validus Re segment and $30.6 million related to the Talbot segment. Favorable loss reserve development benefited the Company’s loss ratio by 11.5 percentage points for the three months ended September 30, 2010. For the three months ended September 30, 2010, the Company incurred $47.7 million from notable loss events described below, which represented 11.0 percentage points of the loss ratio, excluding reserve for potential development on 2010 notable loss events, as described below. Net of $0.6 million of reinstatement premiums, the effect of these events on net income was $47.1 million. For the three months ended September 30, 2009, the Company did not experience any notable loss events. The Company’s loss ratio, excluding prior year development and notable loss events for the three months ended September 30, 2010 and 2009 were 37.2% and 44.3%, respectively.
     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 notable loss events. The Company’s actual ultimate net loss may vary materially from estimates. Validus Re ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review are reserved for in the reserve for potential development on notable loss events. Therefore, during the three months ended September 30, 2010, the Company incurred a further $30.0 million reserve for potential development on 2010 notable loss events which is in excess of the $47.7 million cited above and which represented 6.9 percentage points on the loss ratio.
                                                     
  Three months ended September 30, 2010  
Third Quarter 2010 Notable Loss Events (1)   Validus Re     Talbot     Total  
        Losses and             Losses and             Losses and        
      Loss             Loss             Loss        
(Dollars in thousands)   Description   Expenses (2)     % of NPE     Expenses (2)     % of NPE     Expenses (2)     % of NPE  
New Zealand earthquake
  Earthquake   $ 25,285       9.8 %   $ 3,400       2.0 %   $ 28,685       6.6 %
Oklahoma windstorm
  Windstorm     7,500       2.9 %     177       0.1 %     7,677       1.8 %
Political risk
  Contract frustration                 5,000       2.9 %     5,000       1.1 %
Hurricane Karl
  Windstorm     3,666       1.4 %     2,647       1.5 %     6,313       1.5 %
 
                                       
Total
      $ 36,451       14.1 %   $ 11,224       6.5 %   $ 47,675       11.0 %
 
                                       
 
(1)   These 2010 notable loss event amounts are based on management’s estimates following a review of the Company’s potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events may vary materially from these estimates.
 
(2)   Net of reinsurance but not net of reinstatement premiums. Reinstatement premiums were $0.6 million for the three months ended September 30, 2010.
Validus Re. Validus Re losses and loss expenses for the three months ended September 30, 2010 were $79.1 million compared to $46.0 million for the three months ended September 30, 2009, an increase of $33.1 million or 72.0%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 30.5% and 23.0% for the three months ended September 30, 2010 and 2009, respectively. Favorable loss development on prior years totaled $19.2 million and benefited the Validus Re loss ratio by 7.5 percentage points. For the three months ended

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September 30, 2010, Validus Re incurred notable loss events as identified above of $36.5 million, which represented 14.1 percentage points of the loss ratio, excluding the reserve for potential development on 2010 notable loss events. For the three months ended September 30, 2009, Validus Re did not experience any notable loss events. Validus Re segment loss ratios, excluding prior year development and notable loss events identified above, for the three months ended September 30, 2010 and 2009 were 23.9% and 32.6%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended September 30,  
 
    2010     2009 (a)     % Change  
Property — current year
    30.5 %     28.2 %     2.3  
Property — change in prior accident years
    (9.0 )%     (23.3 )%     14.3  
 
                 
Property — loss ratio
    21.5 %     4.9 %     16.6  
 
                       
Marine — current year
    90.3 %     32.7 %     57.6  
Marine — change in prior accident years
    (1.7 )%     47.8 %     (49.5 )
 
                 
Marine — loss ratio
    88.6 %     80.5 %     8.1  
 
                       
Specialty — current year
    8.5 %     60.3 %     (51.8 )
Specialty — change in prior accident years
    (5.3 )%     (13.8 )%     8.5  
 
                 
Specialty – loss ratio
    3.2 %     46.5 %     (43.3 )
 
                       
All lines — current year
    38.0 %     32.6 %     5.4  
All lines — change in prior accident years
    (7.5 )%     (9.6 )%     2.1  
 
                 
All lines — loss ratio
    30.5 %     23.0 %     7.5  
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     For the three months ended September 30, 2010, Validus Re property lines include $58.3 million related to current year losses and $17.1 million of favorable development relating to prior accident years. This favorable development is attributable to lower than expected claim development. For the three months ended September 30, 2010, Validus Re’s property lines incurred $36.5 million of notable losses, which represented 19.1 percentage points of the property line loss ratio, excluding reserve for potential development on 2010 notable loss events. For the three months ended September 30, 2009, Validus Re’s property lines did not experience any notable loss events. Validus Re property lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended September 30, 2010 and 2009 were 11.4% and 28.2%, respectively.
     For the three months ended September 30, 2010, Validus Re marine lines include $37.8 million related to current year losses and $0.7 million of favorable development relating to prior accident years. For the three months ended September 30, 2010 and three months ended September 30, 2009, Validus Re’s marine lines did not experience any notable loss events. Validus Re marine line loss ratios, excluding prior year development, for the three months ended September 30, 2010 and 2009 were 90.3% and 32.7%, respectively.
     For the three months ended September 30, 2010, Validus Re specialty lines include $2.2 million related to current year losses and $1.4 million of favorable development relating to prior accident years. For the three months ended September 30, 2010 and three months ended September 30, 2009, Validus Re’s specialty lines did not experience any notable loss events. Validus Re specialty lines loss ratios, excluding prior year development, for the three months ended September 30, 2010 and 2009 were 8.5% and 60.3%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended September 30, 2010 were $79.8 million compared to $88.2 million for the three months ended September 30, 2009, a decrease of $8.3 million, or 9.4%. The Talbot loss ratio was 45.9% and 50.4% for the three months ended September 30, 2010 and 2009, respectively. For the three months ended September 30, 2010, Talbot incurred losses of $110.4 million related to current year losses and $30.6 million in favorable development relating to prior accident years. For the three months ended September 30, 2010, Talbot incurred $11.2 million of notable losses, which represented 6.5 percentage points of the loss ratio.

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For the three months ended September 30, 2009, Talbot did not experience any notable loss events. Talbot loss ratios, excluding prior year loss development and notable loss events identified above, for the three months ended September 30, 2010 and three months ended September 30, 2009 were 57.0% and 57.7%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended September 30,  
 
    2010     2009     % Change  
Property — current year
    60.1 %     56.1 %     4.0  
Property — change in prior accident years
    (14.3 )%     (8.9 )%     (5.4 )
 
                 
Property — loss ratio
    45.8 %     47.2 %     (1.4 )
 
                       
Marine — current year
    53.1 %     58.7 %     (5.6 )
Marine — change in prior accident years
    (36.6 )%     0.1 %     (36.7 )
 
                 
Marine — loss ratio
    16.5 %     58.8 %     (42.3 )
 
                       
Specialty — current year
    76.7 %     57.3 %     19.4  
Specialty — change in prior accident years
    0.3 %     (16.0 )%     16.3  
 
                 
Specialty – loss ratio
    77.0 %     41.3 %     35.7  
 
                       
All lines — current year
    63.5 %     57.7 %     5.8  
All lines — change in prior accident years
    (17.6 )%     (7.3 )%     (10.3 )
 
                 
All lines — loss ratio
    45.9 %     50.4 %     (4.5 )
     For the three months ended September 30, 2010, Talbot property lines include $24.7 million related to current year losses and $5.9 million of favorable development relating to prior accident years. The favorable development is attributable to lower than expected claims development on the property facultative and binder accounts. For the three months ended September 30, 2010, Talbot’s property lines incurred $6.2 million of notable losses, which represented 15.1 percentage points of the property lines loss ratio. For the three months ended September 30, 2009, Talbot’s property lines did not experience any notable loss events. Talbot property line loss ratio, excluding prior year development and loss events noted above for the three months ended September 30, 2010 and 2009 were 45.0% and 56.1%, respectively.
     For the three months ended September 30, 2010, Talbot marine lines include $36.1 million related to current year losses and $24.9 million of favorable development relating to prior accident years. The prior year favorable development is primarily due to lower than expected loss development across a number of lines but most notably on the offshore energy lines. Talbot marine lines loss ratios, excluding prior year development, for the three months ended September 30, 2010 and 2009 were 53.1% and 58.7%, respectively.
     For the three months ended September 30, 2010, Talbot specialty lines include $49.6 million relating to current year losses and $0.2 million of adverse development on prior accident years. For the three months ended September 30, 2010, Talbot’s specialty lines incurred $5.0 million of notable losses, which represented 7.7 percentage points of the specialty lines loss ratio. For the three months ended September 30, 2009, Talbot’s specialty lines did not experience any notable loss events. Talbot specialty lines loss ratios, excluding prior year development for the three months ended September 30, 2010 and 2009 were 69.0% and 57.3%, respectively.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended September 30, 2010 were $67.1 million compared to $64.2 million for the three months ended September 30, 2009, an increase of $2.8 million or 4.4%. Policy acquisition costs as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 15.5% and 17.1%, respectively. The changes in policy acquisition costs are due to the factors described below.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 22,690       33.8 %     9.8 %   $ 24,919       38.8 %     14.0 %     (8.9 )%
Marine
    24,361       36.3 %     22.2 %     21,586       33.6 %     18.9 %     12.9 %
Specialty
    20,023       29.9 %     22.1 %     17,731       27.6 %     21.4 %     12.9 %
 
                                           
Total
  $ 67,074       100.0 %     15.5 %   $ 64,236       100.0 %     17.1 %     4.4 %
 
                                           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
Validus Re. Validus Re policy acquisition costs for the three months ended September 30, 2010 were $39.8 million compared to $32.6 million for the three months ended September 30, 2009, an increase of $7.2 million or 22.0%.
                                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 27,335       68.6 %     14.3 %   $ 22,884       70.1 %     16.2 %     19.5 %
Marine
    9,113       22.9 %     21.8 %     6,392       19.6 %     18.1 %     42.6 %
Specialty
    3,370       8.5 %     13.0 %     3,372       10.3 %     14.8 %     (0.1 )%
 
                                           
Total
  $ 39,818       100.0 %     15.4 %   $ 32,648       100.0 %     16.3 %     22.0 %
 
                                           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     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. Validus Re policy acquisition costs as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 15.4% and 16.3%, respectively. The Validus Re policy acquisition ratio has remained relatively stable for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. Items such as ceded premium, earned premium adjustments and reinstatement premiums that are recognized in the period have the effect of distorting the policy acquisition costs.
Talbot. Talbot policy acquisition costs for the three months ended September 30, 2010 were $32.5 million compared to $33.1 million for the three months ended September 30, 2009, a decrease of $0.7 million or 2.0%.
                                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 433       1.3 %     1.1 %   $ 3,553       10.7 %     9.8 %     (87.8 )%
Marine
    15,302       47.2 %     22.5 %     15,194       45.9 %     19.3 %     0.7 %
Specialty
    16,716       51.5 %     25.9 %     14,359       43.4 %     24.0 %     16.4 %
 
                                           
Total
  $ 32,451       100.0 %     18.7 %   $ 33,106       100.0 %     18.9 %     (2.0 )%
 
                                           
     Policy acquisition costs as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 18.7% and 18.9%, respectively.

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General and Administrative Expenses
     General and administrative expenses for the three months ended September 30, 2010 were $48.8 million compared to $46.0 million for the three months ended September 30, 2009, an increase of $2.8 million or 6.1%. The increase was a result of increased expenses in the Talbot and Corporate segments, offset by a decrease in the Validus Re segment.
                                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    General and     General and     General and     General and        
    Administrative     Administrative     Administrative     Administrative        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 5,663       11.6 %   $ 17,987       39.1 %     (68.5 )%
Talbot
    33,201       68.0 %     23,424       50.9 %     41.7 %
Corporate & Eliminations
    9,967       20.4 %     4,625       10.0 %     115.5 %
 
                               
Total
  $ 48,831       100.0 %   $ 46,036       100.0 %     6.1 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     General and administrative expenses of $48.8 million in the three months ended September 30, 2010 represents 11.3 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, 2010 were $5.7 million compared to $18.0 million for the three months ended September 30, 2009, a decrease of $12.3 million or 68.5%. General and administrative expenses have decreased primarily as a result of a decrease in salaries and benefits driven by the reallocation of staff, starting in the first quarter of 2010, into the Corporate segment from the Validus Re segment compared to the three months ended September 30, 2009. In addition, there was a reduction of performance bonus accrual during the quarter and a reduction in employee severance costs relating to the IPC Acquisition compared to the prior year. General and administrative expenses include 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 months ended September 30, 2010 and 2009 were 2.2% and 9.0%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended September 30, 2010 were $33.2 million compared to $23.4 million for the three months ended September 30, 2009, an increase of $9.8 million or 41.7%. General and administrative expenses have increased primarily as a result of an increase in staff costs and performance bonus accruals. There was an increase in staff from 223 at September 30, 2009 to 268 at September 30, 2010. Talbot’s general and administrative expenses as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 19.1% and 13.4%, respectively.
     Corporate & Eliminations. Corporate general and administrative expenses for the three months ended September 30, 2010 were $10.0 million compared to $4.6 million for the three months ended September 30, 2009, an increase of $5.3 million or 115.5%. During the first quarter of 2010, to better align the Company’s operating and reporting structure with its current strategy, there was a change in segment structure. This change was to allocate all ‘non-core underwriting’ expenses, predominantly general and administration and stock compensation expenses to the Corporate segment. Prior periods have not been restated as the change is immaterial to the Consolidated Financial Statements. Corporate general and administrative expenses include executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole. In addition, general and administrative expenses have increased as a result of an increase in staff from 61 at September 30, 2009, on a comparative basis, to 78 at September 30, 2010.
Share Compensation Expenses
     Share compensation expenses for the three months ended September 30, 2010 were $7.6 million compared to $5.9 million for the three months ended September 30, 2009, an increase of $1.8 million or 30.0%. 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.

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    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)        
    Share     Share     Share     Share        
    Compensation     Compensation     Compensation     Compensation        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 1,869       24.6 %   $ 1,766       30.1 %     5.8 %
Talbot
    1,754       23.0 %     1,371       23.4 %     27.9 %
Corporate & Eliminations
    3,995       52.4 %     2,725       46.5 %     46.6 %
 
                               
Total
  $ 7,618       100.0 %   $ 5,862       100.0 %     30.0 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
     Share compensation expenses of $7.6 million in the three months ended September 30, 2010 represents 1.7 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expenses for the three months ended September 30, 2010 were $1.9 million compared to $1.8 million for the three months ended September 30, 2009 an increase of $0.1 million or 5.8%. Share compensation expense as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 0.7% and 0.9%, respectively.
Talbot. Talbot share compensation expenses for the three months ended September 30, 2010 was $1.8 million compared to $1.4 million for the three months ended September 30, 2009 an increase of $0.4 million or 27.9%. Share compensation expense as a percent of net premiums earned for the three months ended September 30, 2010 and 2009 were 1.0% and 0.8%, respectively.
Corporate & Eliminations. Corporate share compensation expenses for the three months ended September 30, 2010 were $4.0 million compared to $2.7 million for the three months ended September 30, 2009, an increase of $1.3 million or 46.6%.
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 (including share compensation 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, 2010 and 2009.
                         
    Three Months Ended     Three Months Ended        
    September 30, 2010     September 30, 2009 (a)     % Change  
Losses and loss expense ratio
    36.7 %     35.8 %     0.9  
Policy acquisition cost ratio
    15.5 %     17.1 %     (1.6 )
General and administrative expense ratio (b)
    13.0 %     13.8 %     (0.8 )
 
                 
Expense ratio
    28.5 %     30.9 %     (2.4 )
 
                 
Combined ratio
    65.2 %     66.7 %     (1.5 )
 
                 
 
    Three Months Ended     Three Months Ended        
Validus Re   September 30, 2010     September 30, 2009 (a)     % Change  
Losses and loss expense ratio
    30.5 %     23.0 %     7.5  
Policy acquisition cost ratio
    15.4 %     16.3 %     (0.9 )
General and administrative expense ratio (b)
    2.9 %     9.9 %     (7.0 )
 
                 
Expense ratio
    18.3 %     26.2 %     (7.9 )
 
                 
Combined ratio
    48.8 %     49.2 %     (0.4 )
 
                 

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Table of Contents

                         
    Three Months Ended     Three Months Ended        
Talbot   September 30, 2010     September 30, 2009 (a)     % Change  
Losses and loss expense ratio
    45.9 %     50.4 %     (4.5 )
Policy acquisition cost ratio
    18.7 %     18.9 %     (0.2 )
General and administrative expense ratio (b)
    20.1 %     14.2 %     5.9  
 
                 
Expense ratio
    38.8 %     33.1 %     5.7  
 
                 
Combined ratio
    84.7 %     83.5 %     1.2  
 
                 
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition.
 
(b)   Includes general and administrative expenses and share compensation expenses.
     General and administrative expense ratios for the three months ended September 30, 2010 and 2009 were 13.0% and 13.8%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.