10-Q 1 a20170930-10q.htm 10-Q Document

 
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, 2017

Commission file number 001-33606
__________________________________________________
valirgbcroppeda12.jpg
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of October 31, 2017 there were 79,461,813 outstanding Common Shares, $0.175 par value per share, of the registrant.
 


INDEX
 


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2017 (unaudited) and December 31, 2016
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,421,546; 2016—$5,584,599)
$
5,419,966

 
$
5,543,030

Short-term investments trading, at fair value (amortized cost: 2017—$2,992,939; 2016—$2,796,358)
2,993,246

 
2,796,170

Other investments, at fair value (cost: 2017—$439,991; 2016—$380,130)
471,300

 
405,712

Investments in investment affiliates, equity method (cost: 2017—$60,228; 2016—$84,840)
92,079

 
100,431

Cash and cash equivalents
965,630

 
419,976

Restricted cash
89,403

 
70,956

Total investments and cash
10,031,624

 
9,336,275

Premiums receivable
1,569,374

 
725,390

Deferred acquisition costs
258,078

 
209,227

Prepaid reinsurance premiums
207,618

 
77,996

Securities lending collateral
2,115

 
9,779

Loss reserves recoverable
1,335,016

 
430,421

Paid losses recoverable
77,730

 
35,247

Income taxes recoverable
9,704

 
4,870

Deferred tax asset
52,228

 
43,529

Receivable for investments sold
37,493

 
3,901

Intangible assets
173,398

 
115,592

Goodwill
227,701

 
196,758

Accrued investment income
27,976

 
26,488

Other assets
591,185

 
134,282

Total assets
$
14,601,240

 
$
11,349,755

Liabilities
 
 
 
Reserve for losses and loss expenses
$
4,935,637

 
$
2,995,195

Unearned premiums
1,526,465

 
1,076,049

Reinsurance balances payable
527,881

 
54,781

Securities lending payable
2,581

 
10,245

Deferred tax liability
4,198

 
3,331

Payable for investments purchased
84,431

 
29,447

Accounts payable and accrued expenses
478,892

 
587,648

Notes payable to AlphaCat investors
1,107,618

 
278,202

Senior notes payable
245,513

 
245,362

Debentures payable
538,910

 
537,226

Total liabilities
9,452,126

 
5,817,486

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,133,880

 
1,528,001

Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000)
400,000

 
150,000

Common shares (Issued: 2017—161,956,886; 2016—161,279,976; Outstanding: 2017—79,457,253; 2016—79,132,252)
28,342

 
28,224

Treasury shares (2017—82,499,633; 2016—82,147,724)
(14,437
)
 
(14,376
)
Additional paid-in capital
812,266

 
821,023

Accumulated other comprehensive loss
(18,430
)
 
(23,216
)
Retained earnings
2,728,546

 
2,876,636

Total shareholders’ equity available to Validus
3,936,287

 
3,838,291

Noncontrolling interests
78,947

 
165,977

Total shareholders’ equity
4,015,234

 
4,004,268

Total liabilities, noncontrolling interests and shareholders’ equity
$
14,601,240

 
$
11,349,755

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

Validus Holdings, Ltd.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
For the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
523,856

 
$
372,418

 
$
2,507,615

 
$
2,309,251

Reinsurance premiums ceded
(116,860
)
 
(45,006
)
 
(373,188
)
 
(249,070
)
Net premiums written
406,996

 
327,412

 
2,134,427

 
2,060,181

Change in unearned premiums
316,212

 
236,363

 
(204,816
)
 
(351,415
)
Net premiums earned
723,208

 
563,775

 
1,929,611

 
1,708,766

Net investment income
44,458

 
43,514

 
128,913

 
112,232

Net realized gains on investments
906

 
4,397

 
2,016

 
6,537

Change in net unrealized (losses) gains on investments
(5,197
)
 
5,459

 
24,472

 
84,331

Income (loss) from investment affiliates
1,011

 
453

 
15,665

 
(4,249
)
Other insurance related income and other income (loss)
3,571

 
(610
)
 
6,240

 
1,627

Foreign exchange (losses) gains
(1,404
)
 
(766
)
 
(7,164
)
 
11,765

Total revenues
766,553

 
616,222

 
2,099,753

 
1,921,009

Expenses
 

 
 

 
 
 
 
Losses and loss expenses
1,254,602

 
258,394

 
1,820,336

 
789,971

Policy acquisition costs
115,590

 
113,434

 
344,486

 
328,593

General and administrative expenses
70,342

 
82,443

 
254,615

 
258,339

Share compensation expenses
9,443

 
10,501

 
30,080

 
32,465

Finance expenses
14,523

 
14,521

 
42,675

 
43,890

Transaction expenses
—

 
—

 
4,427

 
—

Total expenses
1,464,500

 
479,293

 
2,496,619

 
1,453,258

(Loss) income before taxes, (loss) from operating affiliate and loss (income) attributable to AlphaCat investors
(697,947
)
 
136,929

 
(396,866
)
 
467,751

Tax benefit (expense)
2,632

 
(1,830
)
 
7,168

 
(1,418
)
(Loss) from operating affiliate
—

 
—

 
—

 
(23
)
Loss (income) attributable to AlphaCat investors
74,130

 
(5,564
)
 
54,797

 
(16,278
)
Net (loss) income
(621,185
)
 
129,535

 
(334,901
)
 
450,032

Net loss (income) attributable to noncontrolling interests
376,366

 
(37,439
)
 
290,144

 
(96,163
)
Net (loss) income (attributable) available to Validus
(244,819
)
 
92,096

 
(44,757
)
 
353,869

Dividends on preferred shares
(5,627
)
 
(2,252
)
 
(10,033
)
 
(2,252
)
Net (loss) income (attributable) available to Validus common shareholders
$
(250,446
)
 
$
89,844

 
$
(54,790
)
 
$
351,617

 
 
 
 
 
 
 
 
Comprehensive (loss) income
 
 
 
 
 
 
 
Net (loss) income
$
(621,185
)
 
$
129,535

 
$
(334,901
)
 
$
450,032

Other comprehensive income (loss)
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
1,481

 
(1,370
)
 
3,567

 
(6,685
)
Change in minimum pension liability, net of tax
—

 
(1,101
)
 
1,252

 
(705
)
Change in fair value of cash flow hedge
13

 
(439
)
 
(33
)
 
(1,133
)
Other comprehensive income (loss)
1,494

 
(2,910
)
 
4,786

 
(8,523
)
Comprehensive loss (income) attributable to noncontrolling interests
376,366

 
(37,439
)
 
290,144

 
(96,163
)
Comprehensive (loss) income (attributable) available to Validus
$
(243,325
)
 
$
89,186

 
$
(39,971
)
 
$
345,346

 
 
 
 
 
 
 
 
Earnings per common share
 

 
 

 
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(3.17
)
 
$
1.12

 
$
(0.69
)
 
$
4.31

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(3.17
)
 
$
1.11

 
$
(0.69
)
 
$
4.24

Cash dividends declared per common share
$
0.38

 
$
0.35

 
$
1.14

 
$
1.05

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

 
 
 
 
Basic
78,994,335

 
80,134,394

 
79,132,856

 
81,635,496

Diluted
78,994,335

 
81,244,556

 
79,132,856

 
82,938,624

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Nine Months Ended September 30,
 
2017
 
2016
 
(unaudited)
Preferred shares
 
 
 
Balance, beginning of period
$
150,000

 
$
—

Preferred shares issued
250,000

 
150,000

Balance, end of period
$
400,000

 
$
150,000

 
 
 
 
Common shares
 

 
 

Balance, beginning of period
$
28,224

 
$
28,100

Common shares issued, net
118

 
123

Balance, end of period
$
28,342

 
$
28,223

 
 
 
 
Treasury shares
 

 
 

Balance, beginning of period
$
(14,376
)
 
$
(13,592
)
Repurchase of common shares
(61
)
 
(728
)
Balance, end of period
$
(14,437
)
 
$
(14,320
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance, beginning of period
$
821,023

 
$
1,002,980

Offering expenses on preferred shares
(8,314
)
 
(5,148
)
Common shares redeemed, net
(12,241
)
 
(7,754
)
Repurchase of common shares
(18,282
)
 
(195,287
)
Share compensation expenses
30,080

 
32,465

Balance, end of period
$
812,266

 
$
827,256

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance, beginning of period
$
(23,216
)
 
$
(12,569
)
Other comprehensive income (loss)
4,786

 
(8,523
)
Balance, end of period
$
(18,430
)
 
$
(21,092
)
 
 
 
 
Retained earnings
 

 
 

Balance, beginning of period
$
2,876,636

 
$
2,634,056

Net (loss) income
(334,901
)
 
450,032

Net loss (income) attributable to noncontrolling interests
290,144

 
(96,163
)
Dividends on preferred shares
(10,033
)
 
(2,252
)
Dividends on common shares
(93,300
)
 
(88,120
)
Balance, end of period
$
2,728,546

 
$
2,897,553

 
 
 
 
Total shareholders’ equity available to Validus
$
3,936,287

 
$
3,867,620

Noncontrolling interests
78,947

 
222,996

Total shareholders’ equity
$
4,015,234

 
$
4,090,616

The accompanying notes are an integral part of these unaudited consolidated financial statements.


5

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Nine Months Ended September 30,
 
2017
 
2016
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net (loss) income
$
(334,901
)
 
$
450,032

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Share compensation expenses
30,080

 
32,465

Loss on deconsolidation of AlphaCat ILS fund
402

 
—

Amortization of discount on senior notes
81

 
81

(Income) loss from investment affiliates
(15,665
)
 
4,249

Net realized and change in net unrealized gains on investments
(26,488
)
 
(90,868
)
Amortization of intangible assets
6,115

 
4,248

Loss from operating affiliate
—

 
23

Foreign exchange gains included in net income
(14,179
)
 
(4,585
)
Amortization of premium on fixed maturity investments
11,178

 
13,381

Change in:
 

 
 

Premiums receivable
(275,782
)
 
(288,048
)
Deferred acquisition costs
(52,967
)
 
(68,920
)
Prepaid reinsurance premiums
97,535

 
(41,813
)
Loss reserves recoverable
(847,186
)
 
(97,742
)
Paid losses recoverable
(24,598
)
 
(13,165
)
Reserve for losses and loss expenses
1,822,992

 
66,561

Unearned premiums
43,767

 
393,228

Reinsurance balances payable
177,798

 
2,726

Other operational balance sheet items, net
(294,300
)
 
(107,257
)
Net cash provided by operating activities
303,882

 
254,596

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of fixed maturity investments
2,533,122

 
2,047,496

Proceeds on maturities of fixed maturity investments
356,073

 
256,082

Purchases of fixed maturity investments
(2,746,360
)
 
(2,317,674
)
Purchases of short-term investments, net
(188,928
)
 
(540,102
)
Purchases of other investments, net
(53,617
)
 
(53,627
)
Decrease (increase) in securities lending collateral
7,664

 
(5,766
)
Redemption from operating affiliates
—

 
369

Distributions from (investments in) investment affiliates, net
24,017

 
(16,307
)
Increase in restricted cash
(18,447
)
 
(39,778
)
Purchase of subsidiary, net of cash acquired
(183,923
)
 
—

Net cash used in investing activities
(270,399
)
 
(669,307
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Net proceeds on issuance of notes payable to AlphaCat investors
310,548

 
296,527

Net proceeds on issuance of preferred shares
241,686

 
144,852

Redemption of common shares, net
(12,123
)
 
(7,631
)
Purchases of common shares under share repurchase program
(18,343
)
 
(196,015
)
Dividends paid on preferred shares
(10,033
)
 
(2,252
)
Dividends paid on common shares
(93,615
)
 
(87,901
)
(Decrease) increase in securities lending payable
(7,664
)
 
5,766

Third party investment in redeemable noncontrolling interests
237,199

 
381,950

Third party redemption of redeemable noncontrolling interests
(157,534
)
 
(17,284
)
Third party investment in noncontrolling interests
258,300

 
171,674

Third party distributions of noncontrolling interests
(197,250
)
 
(127,103
)
Third party subscriptions deployed in AlphaCat Funds and Sidecars
(57,452
)
 
(412,736
)
Net cash provided by financing activities
493,719

 
149,847

Effect of foreign currency rate changes on cash and cash equivalents
18,452

 
(14,253
)
Net increase (decrease) in cash and cash equivalents
545,654

 
(279,117
)
Cash and cash equivalents - beginning of period
419,976

 
723,109

Cash and cash equivalents - end of period
$
965,630

 
$
443,992

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the period
$
2,810

 
$
5,914

Interest paid during the period
$
46,388

 
$
46,072

The accompanying notes are an integral part of these unaudited consolidated financial statements.


6
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)



1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of all voting interest entities (“VOE”) in which the Company has a controlling financial interest and all variable interest entities (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ materially from those estimates. The Company’s principal estimates include:
•reserve for losses and loss expenses;
•premium estimates for business written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•reinsurance recoverable balances including the provision for uncollectible amounts; and
•investment valuation of financial assets.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).
2. Recent accounting pronouncements
Recently issued accounting standards not yet adopted
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815).” This ASU is directed at targeted improvements to accounting for hedging activities. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
3. Business combination
On May 1, 2017, Western World Insurance Group, Inc. (“Western World”), a wholly owned subsidiary of the Company acquired all of the outstanding capital stock of Crop Risk Services (“CRS”) for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford Insurance Company (“Stratford”), a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.

7
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Western World segment in the Consolidated Financial Statements from the date of acquisition.
On closing, the Company recorded intangible assets totaling $63,921 for Distribution Channels, Brand Name and Technology. Distribution Channels and Brand Name were estimated to have finite useful economic lives of ten years on acquisition and are being amortized on a straight line basis over such period. Technology was estimated to have a finite useful economic life of two years on acquisition and is being amortized on a straight line basis over such a period.
The purchase price was allocated to the acquired assets and liabilities of CRS based on estimated fair values on May 1, 2017, the date the transaction closed, as detailed below. The Company recognized goodwill of $30,943 primarily attributable to CRS’s assembled workforce and synergies expected to result upon the integration of CRS and its related book of business into the Company’s operations. The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses. The Company estimated the fair values of intangible assets acquired based on variations of the income and cost approaches. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.
The purchase of CRS was a taxable transaction and as such, goodwill and intangibles recorded at closing will be deductible for income tax purposes. The Company has recognized and recorded a deferred tax asset of $6,443 which results from the excess of tax-deductible goodwill over book value goodwill as recognized in the purchase price allocation.
The fair value of net assets acquired, including GAAP adjustments, are summarized as follows:
Total purchase price
 
$
185,576

Assets acquired
 
 
Cash and cash equivalents
$
1,653

 
Premiums receivable
564,453

 
Prepaid reinsurance premiums
227,157

 
Other assets
157,146

 
Assets acquired

950,409

 
 
 
Liabilities acquired
 
 
Reinsurance balances payable
$
294,201

 
Unearned premiums
406,649

 
Net loss reserves
42,575

 
Other liabilities
122,715

 
Liabilities acquired
 
866,140

Excess purchase price
 
$
101,307

 
 
 
Goodwill and other intangible assets acquired
 
 
Intangible asset - Distribution channels
$
52,898

 
Intangible asset - Brand name
9,568

 
Intangible asset - Technology
1,455

 
Total intangible assets
63,921


Goodwill
30,943

 
Deferred tax arising on Goodwill
6,443

 
Total goodwill and intangible assets
 
$
101,307

The Company also incurred transaction expenses related to the CRS acquisition of $4,427. Transaction expenses included legal, financial advisory and audit related services.

8
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables reconcile the carrying amount of goodwill and intangible assets from December 31, 2016 to September 30, 2017:
 
 
Goodwill
 
 
Nine Months Ended September 30, 2017
 
 
Talbot
 
Western World
 
Total
Balance at December 31, 2016
 
$
20,393

 
$
176,365

 
$
196,758

Additions
 
—

 
30,943

 
30,943

Balance at September 30, 2017
 
$
20,393

 
$
207,308

 
$
227,701

 
 
 
 
 
 
 
 
 
Intangible assets
 
 
Nine Months Ended September 30, 2017
 
 
Talbot
 
Western World
 
Total
Balance at December 31, 2016
 
$
93,924

 
$
21,668

 
$
115,592

Additions
 
—

 
63,921

 
63,921

Amortization
 
(2,081
)
 
(4,034
)
 
(6,115
)
Balance at September 30, 2017
 
$
91,843

 
$
81,555

 
$
173,398

 
 
Intangible assets
 
 
Nine Months Ended September 30, 2017
 
 
With a Finite Life
 
With an Indefinite Life
 
Total
Balance at December 31, 2016
 
$
11,424

 
$
104,168

 
$
115,592

Additions
 
63,921

 
—

 
63,921

Amortization
 
(6,115
)
 
—

 
(6,115
)
Balance at September 30, 2017
 
$
69,230

 
$
104,168

 
$
173,398

Operating results of CRS have been included in the Consolidated Financial Statements from the May 1, 2017 acquisition date.
The following selected unaudited information has been provided to present a summary of the results of CRS that have been included in the Consolidated Financial Statements for the three and nine months ended September 30, 2017.
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Net premiums written
$
32,852

 
$
39,840

Net premiums earned
$
98,757

 
$
148,801

Total underwriting deductions
$
84,826

 
$
129,606

Underwriting income, before general and administrative expenses
$
13,931

 
$
19,195


9
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


4. Investments
Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” for further details.
The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with ASC Topic 825 “Financial Instruments.” As such, all investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income for the period.
The amortized cost (or cost) and fair value of the Company’s investments as at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
 
Amortized 
Cost or Cost
 

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
598,607

 
$
595,694

 
$
809,392

 
$
804,126

Non-U.S. government and government agency
288,296

 
290,538

 
245,651

 
240,791

U.S. states, municipalities and political subdivisions
205,880

 
206,667

 
271,742

 
271,830

Agency residential mortgage-backed securities
830,542

 
828,400

 
684,490

 
679,595

Non-agency residential mortgage-backed securities
38,806

 
38,993

 
15,858

 
15,477

U.S. corporate
1,457,073

 
1,466,739

 
1,540,036

 
1,534,508

Non-U.S. corporate
390,519

 
392,242

 
418,520

 
410,227

Bank loans
471,855

 
464,464

 
579,121

 
570,399

Asset-backed securities
520,594

 
522,524

 
528,563

 
526,814

Commercial mortgage-backed securities
315,585

 
314,221

 
333,740

 
330,932

Total fixed maturities
5,117,757

 
5,120,482

 
5,427,113

 
5,384,699

Short-term investments
258,339

 
258,646

 
228,574

 
228,386

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,457

 
955

Hedge funds
11,292

 
19,233

 
11,292

 
17,381

Private equity investments
88,299

 
107,230

 
66,383

 
82,627

Fixed income investment funds
282,707

 
285,034

 
247,967

 
249,275

Overseas deposits
55,775

 
55,775

 
50,106

 
50,106

Mutual funds
1,918

 
4,028

 
2,925

 
5,368

Total other investments
439,991

 
471,300

 
380,130

 
405,712

Investments in investment affiliates (a)
60,228

 
92,079

 
84,840

 
100,431

Total managed investments
$
5,876,315

 
$
5,942,507

 
$
6,120,657

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
303,789

 
$
299,484

 
$
157,486

 
$
158,331

Short-term investments
2,734,600

 
2,734,600

 
2,567,784

 
2,567,784

Total non-managed investments
3,038,389

 
3,034,084

 
2,725,270

 
2,726,115

Total investments
$
8,914,704

 
$
8,976,591

 
$
8,845,927

 
$
8,845,343

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in
income as “Income (loss) from investment affiliates.”


10
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(a)
Fixed maturity investments
The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investments as at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,349,803

 
43.3
%
 
$
2,405,597

 
43.4
%
AA
437,215

 
8.1
%
 
538,289

 
9.7
%
A
1,060,849

 
19.6
%
 
1,081,949

 
19.5
%
BBB
752,808

 
13.9
%
 
740,861

 
13.4
%
Total investment grade managed fixed maturities
4,600,675

 
84.9
%
 
4,766,696

 
86.0
%
BB
177,667

 
3.2
%
 
213,568

 
3.9
%
B
156,590

 
2.9
%
 
177,737

 
3.2
%
CCC
5,286

 
0.1
%
 
13,371

 
0.2
%
NR
180,264

 
3.4
%
 
213,327

 
3.8
%
Total non-investment grade fixed maturities
519,807

 
9.6
%
 
618,003

 
11.1
%
Total managed fixed maturities
$
5,120,482

 
94.5
%
 
$
5,384,699

 
97.1
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
AAA
$
1,650

 
0.0
%
 
$
—

 
0.0
%
Total investment grade non-managed fixed maturities
1,650

 
0.0
%
 
—

 
0.0
%
BB
28,031

 
0.5
%
 
29,731

 
0.6
%
B
2,755

 
0.1
%
 
4,524

 
0.1
%
NR
267,048

 
4.9
%
 
124,076

 
2.2
%
Total non-investment grade non-managed fixed maturities
297,834

 
5.5
%
 
158,331

 
2.9
%
Total non-managed fixed maturities
299,484

 
5.5
%
 
158,331

 
2.9
%
Total fixed maturities
$
5,419,966

 
100.0
%
 
$
5,543,030

 
100.0
%

11
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The amortized cost and fair value amounts for the Company’s fixed maturity investments held at September 30, 2017 and December 31, 2016 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
September 30, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
279,069

 
$
278,118

 
$
350,733

 
$
346,161

Due after one year through five years
2,418,737

 
2,416,963

 
2,954,856

 
2,933,146

Due after five years through ten years
534,922

 
535,538

 
430,365

 
426,647

Due after ten years
179,502

 
185,725

 
128,508

 
125,927

 
3,412,230

 
3,416,344

 
3,864,462

 
3,831,881

Asset-backed and mortgage-backed securities
1,705,527

 
1,704,138

 
1,562,651

 
1,552,818

Total managed fixed maturities
$
5,117,757

 
$
5,120,482

 
$
5,427,113

 
$
5,384,699

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
88,949

 
$
88,202

 
$
43,664

 
$
45,418

Due after one year through five years
209,340

 
206,117

 
112,572

 
111,656

Due after five years through ten years
5,500

 
5,165

 
1,250

 
1,257

Total non-managed fixed maturities
303,789

 
299,484

 
157,486

 
158,331

Total fixed maturities
$
5,421,546

 
$
5,419,966

 
$
5,584,599

 
$
5,543,030

(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
19,233

 
19,233

 
—

 
 
 
 
Private equity investments
 
107,230

 
107,230

 
—

 
 
 
 
Fixed income investment funds
 
285,034

 
249,999

 
35,035

 
Daily
 
Daily to 2 days
Overseas deposits
 
55,775

 
55,775

 
—

 
 
 
 
Mutual funds
 
4,028

 
—

 
4,028

 
Daily
 
Daily
Total other investments
 
$
471,300

 
$
432,237

 
$
39,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
955

 
$
955

 
$
—

 
 
 
 
Hedge funds
 
17,381

 
17,381

 
—

 
 
 
 
Private equity investments
 
82,627

 
82,627

 
—

 
 
 
 
Fixed income investment funds
 
249,275

 
218,333

 
30,942

 
Daily
 
2 days
Overseas deposits
 
50,106

 
50,106

 
—

 
 
 
 
Mutual funds
 
5,368

 
—

 
5,368

 
Daily
 
Daily
Total other investments
 
$
405,712

 
$
369,402

 
$
36,310

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

12
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Other investments include alternative investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $274,651 are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $196,649 are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.
Certain securities included in other investments are subject to redemption restrictions and are unable to be redeemed from the funds. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments would liquidate over five to ten years from inception of the funds. In addition, one of the investment funds with a fair value of $195,903 (December 31, 2016: $184,749), has various lock-up periods of approximately two years or less as at September 30, 2017 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. The underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by an annual and quarterly funding and release process for Lloyd’s market participants.
The Company’s maximum exposure to any of these alternative investments is limited to the amount invested and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details. As at September 30, 2017, the Company does not have any plans to sell any of the other investments listed above.
(c)    Investments in investment affiliates
Included in the Company’s managed investment portfolio as at September 30, 2017 were investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”) and Aquiline Technology Growth Fund L.P. (“Aquiline Tech”).

Aquiline II and III

For further information regarding Aquiline II and III please refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. As at September 30, 2017, the Company’s total unfunded investment commitment to Aquiline II and III was $3,229 and $66,285, respectively (December 31, 2016: $2,040 and $62,031).

Aquiline Tech

On March 20, 2017, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Aquiline Technology Growth GP Ltd, (the “General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests in Aquiline Tech, a Cayman Islands exempted limited partnership, with a capital commitment in an amount equal to $20,000. The limited partnership interests are governed by the terms of an amended and restated exempted limited partnership agreement. As at September 30, 2017, the unfunded investment commitment to Aquiline Tech was $17,858.

The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Investments in investment affiliates, beginning of period
$
103,377

 
$
99,278

 
$
100,431

 
$
87,673

Net capital (distributions) contributions
(12,309
)
 
—

 
(24,017
)
 
16,307

Income (loss) from investment affiliates
1,011

 
453

 
15,665

 
(4,249
)
Investments in investment affiliates, end of period
$
92,079

 
$
99,731

 
$
92,079

 
$
99,731


13
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table presents the Company’s investments in investment affiliates as at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,349

 
—
%
 
8.1
%
 
$
50,695

Aquiline III
24,737

 
—
%
 
9.0
%
 
39,530

Aquiline Tech
2,142

 
—
%
 
10.6
%
 
1,854

Total investments in investment affiliates
$
60,228

 
 
 
 
 
$
92,079

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
46,871

 
—
%
 
8.1
%
 
$
61,999

Aquiline III
37,969

 
—
%
 
9.0
%
 
38,432

Total investments in investment affiliates
$
84,840

 
 
 
 
 
$
100,431

(d)    Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
30,823

 
$
30,572

 
$
93,706

 
$
89,210

Other investments
7,391

 
11,768

 
21,832

 
20,666

Cash and cash equivalents and restricted cash
1,230

 
891

 
2,556

 
2,136

Securities lending income
3

 
22

 
23

 
39

Total gross investment income
39,447

 
43,253

 
118,117

 
112,051

Investment expenses
(2,356
)
 
(2,182
)
 
(6,771
)
 
(6,208
)
Total managed net investment income
$
37,091

 
$
41,071

 
$
111,346

 
$
105,843

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
3,941

 
$
1,970

 
$
11,501

 
$
5,242

Restricted cash, cash and cash equivalents
3,426

 
473

 
6,066

 
1,147

Total non-managed net investment income
7,367

 
2,443

 
17,567

 
6,389

Total net investment income
$
44,458

 
$
43,514

 
$
128,913

 
$
112,232

Net investment income from other investments includes distributed and undistributed net income from hedge funds, overseas deposits and certain fixed income investment funds.

14
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(e)    Net realized and change in net unrealized (losses) gains on investments
The following table sets forth an analysis of net realized gains and the change in net unrealized (losses) gains on investments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Managed fixed maturities, short-term and other investments
 
 
 
 
 
 
 
Gross realized gains
$
5,170

 
$
4,544

 
$
13,035

 
$
11,067

Gross realized (losses)
(4,267
)
 
(464
)
 
(12,755
)
 
(5,553
)
Net realized gains on investments
903

 
4,080

 
280

 
5,514

Change in net unrealized gains on investments
941

 
4,652

 
31,232

 
81,782

Total net realized and change in net unrealized gains on managed investments
$
1,844

 
$
8,732

 
$
31,512

 
$
87,296

Non-managed fixed maturities and short-term investments
 
 
 
 
 
 
 
Gross realized gains
$
3

 
$
317

 
$
1,736

 
$
1,032

Gross realized (losses)
—

 
—

 
—

 
(9
)
Net realized gains on investments
3

 
317

 
1,736

 
1,023

Change in net unrealized (losses) gains on investments
(6,138
)
 
807

 
(6,760
)
 
2,549

Total net realized and change in net unrealized (losses) gains on non-managed investments
(6,135
)
 
1,124

 
(5,024
)
 
3,572

Total net realized and change in net unrealized (losses) gains on total investments
$
(4,291
)
 
$
9,856

 
$
26,488

 
$
90,868

(f)    Pledged cash and investments
As at September 30, 2017, the Company had $5,433,107 (December 31, 2016: $5,173,966) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $5,368,025 were held in trust (December 31, 2016: $5,068,092). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions and to facilitate the accreditation of Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Talbot as an alien Insurer/Reinsurer by certain regulators.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the total amount of $265,089 (December 31, 2016: $442,184). For further details on the credit facilities, please refer to Note 13, “Debt and financing arrangements.”

15
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


5. Fair value measurements
(a)
Classification within the fair value hierarchy
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.
 

16
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At September 30, 2017, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
595,694

 
$
—

 
$
—

 
$
595,694

Non-U.S. government and government agency
—

 
290,538

 
—

 
—

 
290,538

U.S. states, municipalities and political subdivisions
—

 
206,667

 
—

 
—

 
206,667

Agency residential mortgage-backed securities
—

 
828,400

 
—

 
—

 
828,400

Non-agency residential mortgage-backed securities
—

 
38,993

 
—

 
—

 
38,993

U.S. corporate
—

 
1,466,739

 
—

 
—

 
1,466,739

Non-U.S. corporate
—

 
392,242

 
—

 
—

 
392,242

Bank loans
—

 
240,563

 
223,901

 
—

 
464,464

Asset-backed securities
—

 
486,537

 
35,987

 
—

 
522,524

Commercial mortgage-backed securities
—

 
314,221

 
—

 
—

 
314,221

Total fixed maturities
—

 
4,860,594

 
259,888

 
—

 
5,120,482

Short-term investments
251,578

 
7,068

 
—

 
—

 
258,646

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds
—

 
—

 
—

 
19,233

 
19,233

Private equity investments
—

 
—

 
—

 
107,230

 
107,230

Fixed income investment funds
—

 
35,145

 
16,886

 
233,003

 
285,034

Overseas deposits
—

 
—

 
—

 
55,775

 
55,775

Mutual funds
—

 
4,028

 
—

 
—

 
4,028

Total other investments
—

 
39,173

 
16,886

 
415,241

 
471,300

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
92,079

Total managed investments
$
251,578

 
$
4,906,835

 
$
276,774

 
$
415,241

 
$
5,942,507

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
230,775

 
$
68,709

 
$
—

 
$
299,484

Short-term investments
2,734,600

 
—

 
—

 
—

 
2,734,600

Total non-managed investments
2,734,600

 
230,775

 
68,709

 
—

 
3,034,084

Total investments
$
2,986,178

 
$
5,137,610

 
$
345,483

 
$
415,241

 
$
8,976,591

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.

17
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At December 31, 2016, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
804,126

 
$
—

 
$
—

 
$
804,126

Non-U.S. government and government agency
—

 
240,791

 
—

 
—

 
240,791

U.S. states, municipalities and political subdivisions
—

 
271,830

 
—

 
—

 
271,830

Agency residential mortgage-backed securities
—

 
679,595

 
—

 
—

 
679,595

Non-agency residential mortgage-backed securities
—

 
15,477

 
—

 
—

 
15,477

U.S. corporate
—

 
1,534,508

 
—

 
—

 
1,534,508

Non-U.S. corporate
—

 
410,227

 
—

 
—

 
410,227

Bank loans
—

 
323,903

 
246,496

 
—

 
570,399

Asset-backed securities
—

 
502,883

 
23,931

 
—

 
526,814

Commercial mortgage-backed securities
—

 
330,932

 
—

 
—

 
330,932

Total fixed maturities
—

 
5,114,272

 
270,427

 
—

 
5,384,699

Short-term investments
209,651

 
18,735

 
—

 
—

 
228,386

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
—

 
955

 
955

Hedge funds
—

 
—

 
—

 
17,381

 
17,381

Private equity investments
—

 
—

 
—

 
82,627

 
82,627

Fixed income investment funds
—

 
30,941

 
12,168

 
206,166

 
249,275

Overseas deposits
—

 
—

 
—

 
50,106

 
50,106

Mutual funds
—

 
5,368

 
—

 
—

 
5,368

Total other investments
—

 
36,309

 
12,168

 
357,235

 
405,712

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
100,431

Total managed investments
$
209,651

 
$
5,169,316

 
$
282,595

 
$
357,235

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
109,956

 
$
48,375

 
$
—

 
$
158,331

Short-term investments
2,567,784

 
—

 
—

 
—

 
2,567,784

Total non-managed investments
2,567,784

 
109,956

 
48,375

 
—

 
2,726,115

Total investments
$
2,777,435

 
$
5,279,272

 
$
330,970

 
$
357,235

 
$
8,845,343

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At September 30, 2017, managed Level 3 investments totaled $276,774 (December 31, 2016: $282,595), representing 4.7% (December 31, 2016: 4.6%) of total managed investments.
(b)
Valuation techniques
There have been no material changes in the Company’s valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

18
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Fixed maturity investments
In general, valuation of the Company’s fixed maturity investment portfolio is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets. The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
U.S. states, municipalities and political subdivisions
The Company’s U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Agency residential mortgage-backed securities
The Company’s agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Non-agency residential mortgage-backed securities
The Company’s non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other

19
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
U.S. corporate
U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company’s non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Bank loans
The Company’s bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company’s bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair value of these investments are classified as Level 3.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.

20
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Catastrophe bonds
Catastrophe bonds are priced based on broker or underwriter bid indications. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. To the extent that these indications are based on significant unobservable inputs, the fair value of the relevant bonds will be classified as a Level 3.
Short-term investments
Short-term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair value of these investments are classified as Level 2.
Other investments
Fund of hedge funds
During the three months ended June 30, 2017, the Company’s investment in a fund of hedge funds was liquidated. Prior to liquidation, the fund’s administrator provided a monthly reported NAV with a three month delay in its valuation. The fund manager provided an estimate of the fund NAV at year end based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compared the fund administrator’s NAV to the fund manager’s estimated NAV that incorporates relevant valuation sources. Prior to liquidation, the fair value of these investments were measured using the NAV practical expedient and therefore were not categorized within the fair value hierarchy.
Hedge funds
The hedge fund’s administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Fixed income investment funds
The Company’s investment funds classified as Level 2 consist of a pooled investment fund. The pooled investment is invested in fixed income securities with high credit ratings and is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund and is traded on a daily basis.
Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure. Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.
The fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation.

21
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Overseas deposits
The Company’s share of a portfolio of Lloyd’s overseas deposits are managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd’s. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Mutual funds
Mutual funds consist of an investment fund which invests in various quoted investments. The fair value of units in the mutual fund is based on the NAV of the fund as reported by the fund manager. The mutual fund has daily liquidity which allows us to redeem our holdings at the applicable NAV in the near term. As such, the Company has classified this investment as Level 2.
(c)
Level 3 investments
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
224,172

 
$
68,025

 
$
16,400

 
$
35,921

 
$
344,518

Purchases
31,312

 
—

 
—

 
—

 
31,312

Sales
—

 
—

 
—

 
(71
)
 
(71
)
Settlements
(29,796
)
 
(1,000
)
 
486

 
—

 
(30,310
)
Change in net unrealized (losses) gains
(1,787
)
 
1,684

 
—

 
137

 
34

Level 3 investments, end of period
$
223,901

 
$
68,709

 
$
16,886

 
$
35,987

 
$
345,483

 
Three Months Ended September 30, 2016
 
Bank Loans
 
Catastrophe Bonds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
243,148

 
$
37,518

 
$
12,383

 
$
293,049

Purchases
21,256

 
—

 
11,513

 
32,769

Sales
(12,388
)
 
—

 
—

 
(12,388
)
Change in net unrealized gains
484

 
517

 
—

 
1,001

Level 3 investments, end of period
$
252,500

 
$
38,035

 
$
23,896

 
$
314,431

 
Nine Months Ended September 30, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments—beginning of period
$
246,496

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

Purchases
71,245

 
66,091

 
3,432

 
11,053

 
151,821

Sales
—

 
—

 
—

 
(124
)
 
(124
)
Settlements
(91,799
)
 
(49,996
)
 
1,286

 
—

 
(140,509
)
Net realized gains
—

 
3,350

 
—

 
—

 
3,350

Change in net unrealized (losses) gains
(2,041
)
 
889

 
—

 
1,127

 
(25
)
Level 3 investments—end of period
$
223,901

 
$
68,709

 
$
16,886

 
$
35,987

 
$
345,483


22
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2016
 
Bank Loans
 
Catastrophe Bonds
 
Asset Backed Securities
 
Total
Level 3 investments—beginning of period
$
232,337

 
$
13,500

 
$
—

 
$
245,837

Purchases
72,244

 
23,272

 
23,896

 
119,412

Sales
(14,777
)
 
—

 
—

 
(14,777
)
Settlements
(34,033
)
 
(125
)
 
—

 
(34,158
)
Change in net unrealized (losses) gains
(3,271
)
 
1,388

 
—

 
(1,883
)
Level 3 investments—end of period
$
252,500

 
$
38,035

 
$
23,896

 
$
314,431

There have not been any transfers into or out of Level 3 during the three and nine months ended September 30, 2017 or 2016.
(d)
Financial instruments not carried at fair value
ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of cash and cash equivalents, restricted cash, accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at September 30, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
6. Variable interest entities
The Company consolidates all VOEs in which it has a controlling financial interest and all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs are primarily entities in the AlphaCat segment.
(a)
Consolidated VIEs
AlphaCat sidecars
Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of sidecars for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities return capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company as the primary beneficiary. The Company’s maximum exposure to any of the sidecars is the amount of capital invested at any given time.
AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the expected loss of the fund. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7%, whereas higher risk ILS funds have a maximum permitted portfolio expected loss of greater than 7%. The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). All of the AlphaCat ILS funds are VIEs and were consolidated by the Company as the primary beneficiary through May 31, 2017. However, on June 1, 2017, the Company redeemed its investment in one of the lower risk AlphaCat ILS funds. As a result, the Company was no longer deemed to be the primary beneficiary and therefore this fund was deconsolidated effective June 1, 2017. The deconsolidation resulted in a loss of $402 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the nine months ended September 30, 2017. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details.
AlphaCat Re and AlphaCat Master Fund
The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “master funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the AlphaCat segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “feeder funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated

23
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


to the feeder funds and direct third party investors using variable funding notes. The master funds are VIEs and are consolidated by the Company as the primary beneficiary.
Notes Payable to AlphaCat Investors
The master funds issue variable funding notes to the feeder funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the feeder funds, together with investments made by third parties in the feeder funds and on a direct basis, are provided as consideration for the notes to the master funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months; however, the variable funding notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are subsequently redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the feeder funds and direct third party investors via the variable funding notes.
Any notes issued by the master funds to the consolidated feeder funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re to direct third party investors and non-consolidated feeder funds remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of Income and Comprehensive Income as (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
During 2017 and 2016, one of the AlphaCat ILS funds (the “Fund”) issued both common shares and structured notes to the Company and other third party investors in order to capitalize the fund. The Fund deploys its capital through AlphaCat Re; therefore, the structured notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares of the Fund and earn an interest rate of 7% (2016: 8%) per annum, payable on a cumulative basis in arrears.
As the Fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with any related interest included in the Consolidated Statements of Income and Comprehensive Income as (income) attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

24
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables present a reconciliation of the beginning and ending notes payable to AlphaCat investors for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
893,959

 
$
172,200

 
$
1,066,159

Issuance of notes payable to AlphaCat investors
59,530

 
—

 
59,530

Redemption of notes payable to AlphaCat investors
(18,627
)
 
—

 
(18,627
)
Foreign exchange losses
556

 
—

 
556

Notes payable to AlphaCat investors, end of period
$
935,418

 
$
172,200

 
$
1,107,618

 
Three Months Ended September 30, 2016
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
276,656

 
$
94,326

 
$
370,982

Issuance of notes payable to AlphaCat investors
13,808

 
—

 
13,808

Redemption of notes payable to AlphaCat investors
(12,028
)
 
—

 
(12,028
)
Foreign exchange gains
(32
)
 
—

 
(32
)
Notes payable to AlphaCat investors, end of period
$
278,404

 
$
94,326

 
$
372,730

 
Nine Months Ended September 30, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
278,202

 
$
—

 
$
278,202

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
423,269

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
601,407

 
172,200

 
773,607

Redemption of notes payable to AlphaCat investors
(367,733
)
 
—

 
(367,733
)
Foreign exchange losses
273

 
—

 
273

Notes payable to AlphaCat investors, end of period
$
935,418

 
$
172,200

 
$
1,107,618

 
Nine Months Ended September 30, 2016
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
75,493

 
$
—

 
$
75,493

Issuance of notes payable to AlphaCat investors
311,913

 
94,326

 
406,239

Redemption of notes payable to AlphaCat investors
(109,712
)
 
—

 
(109,712
)
Foreign exchange losses
710

 
—

 
710

Notes payable to AlphaCat investors, end of period
$
278,404

 
$
94,326

 
$
372,730

As at December 31, 2016, $1,000 of the structured notes redeemed during the year were payable to AlphaCat investors and included in accounts payable and accrued expenses.
The loss attributable to AlphaCat investors for the three and nine months ended September 30, 2017 was $74,130 and $54,797 (2016: income of $5,564 and $16,278), with $9,737 included in accounts payable and accrued expenses as at September 30, 2017 (December 31, 2016: $17,068).

25
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


BetaCat ILS funds
The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk and issued under Rule 144A of the Securities Act of 1933, as amended, following a passive buy-and-hold investment strategy. Two of the funds are VIEs, one of which is consolidated by the Company as the primary beneficiary. The remaining fund is a VOE and is consolidated by the Company as it owns all of the voting equity interests. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time.
The following table presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
30,598

 
$
3,708

 
$
40,041

 
$
3,206

AlphaCat ILS funds - Lower Risk (a)
1,019,072

 
234,192

 
1,498,276

 
42,457

AlphaCat ILS funds - Higher Risk (a)
947,135

 
541,466

 
972,633

 
381,332

AlphaCat Re and AlphaCat Master Fund
3,427,625

 
3,427,455

 
2,510,415

 
2,510,245

BetaCat ILS funds
144,766

 
291

 
82,471

 
30,663

(a)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 4, “Investments,” as non-managed investments.
(b)
Non-Consolidated VIEs
The Company invests in private equity and other investment vehicles as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company’s involvement in these entities is passive in nature. The Company’s maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs.

26
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


7. Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the three and nine months ended September 30, 2017 and 2016:
 
Redeemable noncontrolling interests
 
Noncontrolling interests
 
Total
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
1,251,660

 
$
1,532,283

 
$
415,658

 
$
212,154

 
$
1,667,318

 
$
1,744,437

Issuance of shares
26,999

 
700

 
—

 
—

 
26,999

 
700

(Loss) income attributable to noncontrolling interests
(140,781
)
 
26,597

 
(235,585
)
 
10,842

 
(376,366
)
 
37,439

Redemption of shares / distributions
(3,998
)
 
—

 
(101,126
)
 
—

 
(105,124
)
 
—

Balance, end of period
$
1,133,880

 
$
1,559,580

 
$
78,947

 
$
222,996

 
$
1,212,827

 
$
1,782,576

 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
Noncontrolling interests
 
Total
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
1,528,001

 
$
1,111,714

 
$
165,977

 
$
154,662

 
$
1,693,978

 
$
1,266,376

Issuance of shares
237,199

 
381,950

 
258,300

 
171,674

 
495,499

 
553,624

Adjustment to noncontrolling interests as a result of deconsolidation
(459,021
)
 
—

 
—

 
—

 
(459,021
)
 
—

(Loss) income attributable to noncontrolling interests
(86,296
)
 
72,400

 
(203,848
)
 
23,763

 
(290,144
)
 
96,163

Redemption of shares / distributions
(86,003
)
 
(6,484
)
 
(141,482
)
 
(127,103
)
 
(227,485
)
 
(133,587
)
Balance, end of period
$
1,133,880

 
$
1,559,580

 
$
78,947

 
$
222,996

 
$
1,212,827

 
$
1,782,576

As at September 30, 2017, redemptions of $nil and distributions of $nil (December 31, 2016: $71,530 and $16,144) were payable to redeemable noncontrolling interests and noncontrolling interests, respectively. These amounts are classified within accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets.

27
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


8. Derivative instruments
The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures, interest rate exposures and to shorten the duration of the Company’s fixed maturities portfolio.
(a)
Derivatives not designated as hedging instruments
The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments for accounting purposes within the Company’s Consolidated Balance Sheets as at September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
267,206

 
$
1,522

 
$
1,379

 
$
181,375

 
$
2,351

 
$
3,421

Interest rate swap contracts
 
$
200,000

 
$
440

 
$
1,607

 
$
—

 
$
—

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.
The following table summarizes information on the classification and net impact on earnings, recognized in the Company’s Consolidated Statements of Income and Comprehensive Income relating to the foreign currency forward and interest rate swap contracts that were not designated as hedging instruments for accounting purposes during the three and nine months ended September 30, 2017 and 2016:
Derivatives not designated as hedging instruments
Classification of (losses) gains recognized in earnings
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts
Foreign exchange (losses) gains
 
$
(1,927
)
 
$
1,326

 
$
(7,999
)
 
$
209

Foreign currency forward contracts
Other loss
 
$
—

 
$
(155
)
 
$
(979
)
 
$
(35
)
Interest rate swap contracts
Change in unrealized (losses) gains on investments
 
$
(848
)
 
$
566

 
$
(1,167
)
 
$
566

(b)
Derivatives designated as hedging instruments
The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments for accounting purposes on the Consolidated Balance Sheets as at September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Interest rate swap contracts
 
$
552,263

 
$
20

 
$
1,347

 
$
552,263

 
$
20

 
$
1,479

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.
Derivative instruments designated as a cash flow hedge
The Company designates its interest rate derivative instruments as cash flow hedges for accounting purposes and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items. The Company currently applies the long haul method when assessing the hedge’s effectiveness.


28
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table provides the total impact on other comprehensive income (loss) and earnings relating to the derivative instruments formally designated as cash flow hedges along with the impact of the related hedged items for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Interest rate swap contracts
 
2017
 
2016
 
2017
 
2016
Amount of effective portion recognized in other comprehensive income
 
$
1,918

 
$
3,155

 
$
6,294

 
$
9,505

Amount of effective portion subsequently reclassified to earnings
 
$
(1,931
)
 
$
(2,717
)
 
$
(6,261
)
 
$
(8,373
)
Amount of ineffective portion excluded from effectiveness testing
 
$
13

 
$
(438
)
 
$
(33
)
 
$
(1,132
)
The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Income and Comprehensive Income.
(c)
Classification within the fair value hierarchy
As described in Note 5, “Fair value measurements,” under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The assumptions used within the valuation of the Company’s derivative instruments are observable in the marketplace, can be derived from observable data or are supported by observable levels at which other similar transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.
(d)
Balance sheet offsetting
There was no balance sheet offsetting activity as at September 30, 2017 or December 31, 2016.
The Company currently provides cash collateral as security for interest rate swap contracts. The Company does not provide cash collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.
The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.
9. Reserve for losses and loss expenses
Reserves for losses and loss expenses are based in part upon the estimation of case reserves from broker, insured and ceding company reported data. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses, from which incurred but not reported losses (“IBNR”) can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to 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, 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 and adjusted 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 this estimate.
The following table summarizes the total reserve for losses and loss expenses as at September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
Case reserves
$
1,271,580

 
$
1,237,772

IBNR
3,664,057

 
1,757,423

Total reserve for losses and loss expenses
$
4,935,637

 
$
2,995,195


29
Validus Holdings, Ltd.
Notes to the 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 losses and loss expenses for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Reserve for losses and loss expenses, beginning of period
$
3,305,191

 
$
3,122,717

 
$
2,995,195

 
$
2,996,567

Loss reserves recoverable
(600,207
)
 
(442,987
)
 
(430,421
)
 
(350,586
)
Net reserves for losses and loss expenses, beginning of period
2,704,984

 
2,679,730

 
2,564,774

 
2,645,981

Net reserves acquired (a)
—

 
—

 
23,753

 
—

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
1,329,666

 
311,279

 
1,999,921

 
959,376

Prior years
(75,064
)
 
(52,885
)
 
(179,585
)
 
(169,405
)
Total net incurred losses and loss expenses
1,254,602

 
258,394

 
1,820,336

 
789,971

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
(191,612
)
 
(178,707
)
 
(242,068
)
 
(240,362
)
Prior years
(181,094
)
 
(166,539
)
 
(612,448
)
 
(596,618
)
Total net paid losses
(372,706
)
 
(345,246
)
 
(854,516
)
 
(836,980
)
Foreign exchange losses (gains)
13,741

 
(1,500
)
 
46,274

 
(7,594
)
Net reserve for losses and loss expenses, end of period
3,600,621

 
2,591,378

 
3,600,621

 
2,591,378

Loss reserves recoverable
1,335,016

 
444,609

 
1,335,016

 
444,609

Reserve for losses and loss expenses, end of period
$
4,935,637

 
$
3,035,987

 
$
4,935,637

 
$
3,035,987

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
Incurred losses and loss expenses comprise:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Gross losses and loss expenses
$
2,104,914

 
$
284,413

 
$
2,866,722

 
$
952,129

Reinsurance recoverable
(850,312
)
 
(26,019
)
 
(1,046,386
)
 
(162,158
)
Net incurred losses and loss expenses
$
1,254,602

 
$
258,394

 
$
1,820,336

 
$
789,971

The net favorable development on prior years by segment and line of business for the three and nine months ended September 30, 2017 and 2016 was as follows:
 
Three Months Ended September 30, 2017
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(26,372
)
 
$
(7,105
)
 
$
(14,660
)
 
$
—

 
$
(48,137
)
Talbot
(8,752
)
 
(2,737
)
 
(12,125
)
 
—

 
(23,614
)
Western World
464

 
—

 
—

 
(526
)
 
(62
)
AlphaCat
(1,471
)
 
—

 
(1,780
)
 
—

 
(3,251
)
Net favorable development
$
(36,131
)
 
$
(9,842
)
 
$
(28,565
)
 
$
(526
)
 
$
(75,064
)
The net favorable loss reserve development on prior accident years of $75.1 million during the three months ended September 30, 2017 included favorable development on loss events and attritional losses of $16.1 million and $58.9 million, respectively.


30
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Three Months Ended September 30, 2016
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(19,736
)
 
$
(8,504
)
 
$
(4,793
)
 
$
—

 
$
(33,033
)
Talbot
(2,429
)
 
(4,547
)
 
(11,715
)
 
—

 
(18,691
)
Western World
(553
)
 
—

 
—

 
(327
)
 
(880
)
AlphaCat
(265
)
 
—

 
(16
)
 
—

 
(281
)
Net favorable development
$
(22,983
)
 
$
(13,051
)
 
$
(16,524
)
 
$
(327
)
 
$
(52,885
)
The net favorable loss reserve development on prior accident years of $52.9 million during the three months ended September 30, 2016 included favorable development on loss events and attritional losses of $20.3 million and $32.6 million, respectively.
 
Nine Months Ended September 30, 2017
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(30,614
)
 
$
(38,847
)
 
$
(30,555
)
 
$
—

 
$
(100,016
)
Talbot
(19,980
)
 
(35,789
)
 
(12,535
)
 
—

 
(68,304
)
Western World
(2,838
)
 
—

 
—

 
2,094

 
(744
)
AlphaCat
(8,963
)
 
—

 
(1,558
)
 
—

 
(10,521
)
Net (favorable) adverse development
$
(62,395
)
 
$
(74,636
)
 
$
(44,648
)
 
$
2,094

 
$
(179,585
)

The net favorable loss reserve development on prior accident years of $179.6 million during the nine months ended September 30, 2017 included favorable development on loss events and attritional losses of $31.5 million and $148.0 million, respectively.
 
Nine Months Ended September 30, 2016
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(52,036
)
 
$
(14,967
)
 
$
(22,591
)
 
$
—

 
$
(89,594
)
Talbot
(30,969
)
 
(10,511
)
 
(28,259
)
 
—

 
(69,739
)
Western World
(2,576
)
 
—

 
—

 
(5,888
)
 
(8,464
)
AlphaCat
(742
)
 
—

 
(866
)
 
—

 
(1,608
)
Net favorable development
$
(86,323
)
 
$
(25,478
)
 
$
(51,716
)
 
$
(5,888
)
 
$
(169,405
)

The net favorable development on prior accident years of $169.4 million during the nine months ended September 30, 2016 included favorable development on loss events and attritional losses of $9.0 million and $160.4 million, respectively.
10. Reinsurance
The Company’s reinsurance balances recoverable at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
Loss reserves recoverable on unpaid:
 
 
 
Case reserves
$
207,368

 
$
165,328

IBNR
1,127,648

 
265,093

Total loss reserves recoverable
1,335,016

 
430,421

Paid losses recoverable
77,730

 
35,247

Total reinsurance balances recoverable
$
1,412,746

 
$
465,668

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.

31
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


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 as 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. As at September 30, 2017, $1,400,430 or 99.1% (December 31, 2016: $461,369 or 99.1%) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.
Reinsurance balances recoverable by reinsurer as at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
1,208,003

 
85.5
%
 
$
395,308

 
84.9
%
Other reinsurers’ balances > $1 million
198,774

 
14.1
%
 
66,944

 
14.4
%
Other reinsurers’ balances < $1 million
5,969

 
0.4
%
 
3,416

 
0.7
%
Total
$
1,412,746

 
100.0
%
 
$
465,668

 
100.0
%

The following tables show the reinsurance balances recoverable due from, and the ratings associated with, the Company’s top ten reinsurers as at September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Fully collateralized reinsurers
 
NR
 
$
564,714

 
40.0
%
Munich Re
 
AA-
 
164,131

 
11.6
%
Everest Re
 
A+
 
95,759

 
6.8
%
Lloyd's Syndicates
 
A+
 
94,845

 
6.7
%
Swiss Re
 
AA-
 
81,921

 
5.8
%
Hannover Re
 
AA-
 
62,715

 
4.4
%
Federal Crop Insurance Corporation
 
(a)
 
49,503

 
3.5
%
Qatar Insurance Company
 
A
 
38,061

 
2.7
%
Transatlantic Re
 
A+
 
29,795

 
2.1
%
XL Catlin
 
A+
 
26,559

 
1.9
%
Total
 
 
 
$
1,208,003

 
85.5
%
(a)
The Company participates in a crop reinsurance program sponsored by the U.S. federal government. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the agriculture line of business.


32
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
December 31, 2016
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Lloyd's Syndicates
 
A+
 
$
84,419

 
18.2
%
Swiss Re
 
AA-
 
84,044

 
18.1
%
Fully collateralized reinsurers
 
NR
 
83,088

 
17.8
%
Hannover Re
 
AA-
 
50,603

 
10.9
%
Everest Re
 
A+
 
36,912

 
7.9
%
Munich Re
 
AA-
 
18,214

 
3.9
%
Transatlantic Re
 
A+
 
10,593

 
2.3
%
Hamilton Re
 
A-
 
10,343

 
2.2
%
Toa Re
 
A+
 
9,510

 
2.0
%
National Indemnity Company
 
AA+
 
7,582

 
1.6
%
Total
 
 
 
$
395,308

 
84.9
%
At September 30, 2017 and December 31, 2016, the provision for uncollectible reinsurance relating to reinsurance balances recoverable was $8,326 and $5,153, respectively. To estimate this provision for uncollectible reinsurance, reinsurance balances recoverable are first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied, especially in relation to ceded IBNR. The Company then uses default factors to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined in part using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
11. Share capital
The Company is authorized to issue up to an aggregate of 571,428,571 common and preferred shares with a par value of $0.175 per share.
(a)
Preferred shares
On June 12, 2017, the Company issued 10,000 shares of its 5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”) (equivalent to 10,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series B Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series B Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $241,686 which was used for general corporate purposes.
The Depositary Shares, representing the Series B Preferred Shares, are traded on the New York Stock Exchange (“NYSE”) under the symbol “VRPRB.” The Series B Preferred Shares have no stated maturity date and are redeemable, in whole or in part, at the Company’s option on and after June 21, 2022, at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25 per Depository Share), plus declared and unpaid dividends. The Company may also redeem all, but not less than all, of the Series B Preferred Shares before the redemption date at a redemption price of $26,000 per share (equivalent to $26 per Depository Share), plus declared and unpaid dividends, if the Company is required to submit a proposal to the holders of the Series B Preferred Shares concerning an amalgamation, consolidation, merger or other similar corporate transaction or change in Bermuda law. The Series B Preferred Shares may also be redeemed before the redemption date at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25 per Depository Share), plus declared and unpaid dividends, in whole, if there is a certain change in tax law, or in whole or in part, in the case of a capital disqualification event. However, no redemption may occur prior to June 21, 2027 unless the Company has sufficient funds in order to meet the Bermuda Monetary Authority’s (“the BMA”) Enhanced Capital Requirements (“ECR”) and the BMA approves of the redemption, or the Company replaces the capital represented by the Series B Preferred Shares with capital having equal or better capital treatment as the Series B Preferred Shares under the ECR.
Dividends on the Series B Preferred Shares, when, as and if declared by the Company’s Board of Directors or a duly authorized committee thereof, will accrue and be payable on the liquidation preference amount from the original issue date, on a non-cumulative basis, quarterly in arrears on each dividend payment date at an annual rate of 5.800%. The Company will be restricted from paying dividends on and repurchasing its common shares, unless certain dividend payments are made on the Series B Preferred Shares.

33
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Shares and any parity shares are entitled to receive out of our assets available for distribution to shareholders, before any distribution is made to holders of common shares or other junior shares, a liquidating distribution in the amount of $25,000 per Series B Preferred Share (equivalent to $25 per Depositary Share) plus declared and unpaid dividends. Distributions will be made pro rata in accordance with the respective aggregate liquidation preferences of the Series B Preferred Shares and any parity shares and only to the extent of our assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
On June 13, 2016, the Company issued 6,000 shares of its 5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) (equivalent to 6,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series A Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
The following table is a summary of the preferred share activity during the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended September 30,
 
2017
 
2016
Preferred shares issued and outstanding, beginning of period
6,000

 
—

Preferred shares issued
10,000

 
6,000

Preferred shares issued and outstanding, end of period
16,000

 
6,000

The Company had 6,000 Series A Preferred Shares and 10,000 Series B Preferred Shares issued and outstanding as at September 30, 2017 and 6,000 Series A Preferred Shares issued and outstanding as at December 31, 2016.
(b)        Common Shares
The holders of common 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. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company’s common share repurchase authorization to $750,000. This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company has repurchased 80,860,661 common shares for an aggregate purchase price of $2,722,749 from the inception of its share repurchase program to September 30, 2017. The Company had $301,652 remaining under its authorized share repurchase program as of September 30, 2017.
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.

34
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table is a summary of the common share activity during the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended September 30,
 
2017
 
2016
Common shares issued, beginning of period
161,279,976

 
160,570,772

Restricted share awards vested, net of shares withheld
619,046

 
608,024

Restricted share units vested, net of shares withheld
15,454

 
18,486

Options exercised
—

 
27,983

Performance share awards vested, net of shares withheld
42,410

 
48,088

Common shares issued, end of period
161,956,886

 
161,273,353

Treasury shares, end of period
(82,499,633
)
 
(81,830,323
)
Common shares outstanding, end of period
79,457,253

 
79,443,030

(c)
Dividends
On August 9, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and cash dividends of $0.3671875 (2016: $0.3753472) and $0.3423611 per depositary share on its outstanding Series A and Series B Preferred Shares, respectively. The common share dividend was paid on September 29, 2017 to holders of record on September 15, 2017. The preferred share dividends were paid on September 15, 2017 to shareholders of record on September 1, 2017.
On May 10, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and a cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on June 30, 2017 to holders of record on June 15, 2017. The preferred share dividend was paid on June 15, 2017 to holders of record on June 1, 2017.
On February 9, 2017, the Company announced a quarterly cash dividend of $0.38 (2016: $0.35) per common share and a cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on March 31, 2017 to holders of record on March 15, 2017. The preferred share dividend was paid on March 15, 2017 to holders of record on March 1, 2017.
12. Stock plans
(a)
Long Term Incentive Plan
The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. The total number of shares reserved for issuance under the LTIP are 2,753,292 shares of which 701,617 shares remain available for issuance at September 30, 2017. The LTIP is administered by the Compensation Committee of the Board of Directors. No SARs 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. Outstanding options have a life of 10 years and vest either pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.
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.
The Company has not granted any stock option awards since September 4, 2009. These stock option awards were fully amortized during the year ended December 31, 2012.

35
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to options for the nine months ended September 30, 2017 and 2016 was as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, beginning of period
26,136

 
$
6.78

 
$
23.48

 
65,401

 
$
7.74

 
$
20.17

Options exercised
—

 
—

 
—

 
(35,351
)
 
8.16

 
17.82

Options outstanding, end of period
26,136

 
$
6.78

 
$
23.48

 
30,050

 
$
7.24

 
$
22.93

ii.
Restricted share awards
Restricted shares granted under the LTIP vest either pro rata or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses in respect of restricted share awards during the three and nine months ended September 30, 2017 of $7,814 (2016: $9,159) and $26,603 (2016: $27,805), respectively. 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 awards for the nine months ended September 30, 2017 and 2016 was as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, beginning of period
2,469,982

 
$
40.89

 
2,739,446

 
$
38.25

Restricted share awards granted
508,186

 
53.25

 
559,516

 
48.78

Restricted share awards vested
(828,800
)
 
41.25

 
(789,547
)
 
37.36

Restricted share awards forfeited
(53,775
)
 
43.38

 
(33,070
)
 
40.25

Restricted share awards outstanding, end of period
2,095,593

 
$
43.69

 
2,476,345

 
$
40.88

At September 30, 2017, there were $57,065 (December 31, 2016: $58,804) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.4 years (December 31, 2016: 2.3 years).
iii.
Restricted share units
Restricted share units under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses in respect of restricted share units during the three and nine months ended September 30, 2017 of $340 (2016: $290) and $982 (2016: $978), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

36
Validus Holdings, Ltd.
Notes to the 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, 2017 and 2016 was as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, beginning of period
112,808

 
$
40.95

 
114,337

 
$
38.47

Restricted share units granted
12,236

 
53.40

 
21,609

 
48.83

Restricted share units vested
(18,748
)
 
41.91

 
(23,982
)
 
38.18

Restricted share units issued in lieu of cash dividends
2,260

 
41.42

 
2,436

 
39.10

Restricted share units forfeited
—

 
—

 
(8,338
)
 
44.34

Restricted share units outstanding, end of period
108,556

 
$
42.20

 
106,062

 
$
40.20

At September 30, 2017, there were $2,233 (December 31, 2016: $2,542) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.5 years (December 31, 2016: 2.6 years).
iv.
Performance share awards
The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share (“DBVPS”) over a three-year period relative to the Company’s peer group. For performance share awards granted during the period, the grant date DBVPS is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the Consolidated Statements of Income and Comprehensive Income in the period in which they are determined.
The Company recognized share compensation expenses in respect of performance share awards during the three and nine months ended September 30, 2017 of $1,289 (2016: $1,052) and $2,495 (2016: $3,682), respectively.
Activity with respect to unvested performance share awards for the nine months ended September 30, 2017 and 2016 was as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, beginning of period
285,820

 
$
44.53

 
172,594

 
$
40.70

Performance share awards granted
107,209

 
53.40

 
125,290

 
48.75

Performance share awards vested
(52,639
)
 
37.33

 
(57,581
)
 
36.11

Performance share awards conversion adjustment
(26,322
)
 
36.82

 
45,517

 
36.82

Performance share awards outstanding, end of period
314,068

 
$
49.37

 
285,820

 
$
44.53

At September 30, 2017, there were $9,031 (December 31, 2016: $6,902) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.1 years (December 31, 2016: 2.1 years).

37
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Restricted share awards
 
$
7,814

 
$
9,159

 
$
26,603

 
$
27,805

Restricted share units
 
340

 
290

 
982

 
978

Performance share awards
 
1,289

 
1,052

 
2,495

 
3,682

Total
 
$
9,443

 
$
10,501

 
$
30,080

 
$
32,465

 
13. Debt and financing arrangements
The Company’s financing structure is comprised of debentures and senior notes payable along with credit and other facilities.
(a)
Senior notes and junior subordinated deferrable debentures
The Company’s outstanding debentures and senior notes payable as at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
Deferrable debentures
 
 
 
2006 Junior Subordinated
$
150,000

 
$
150,000

2007 Junior Subordinated
139,800

 
139,800

Flagstone 2006 Junior Subordinated
135,360

 
133,676

Flagstone 2007 Junior Subordinated
113,750

 
113,750

Total debentures payable
538,910

 
537,226

2010 Senior notes payable
250,000

 
250,000

Less: Unamortized debt issuance costs
(4,487
)
 
(4,638
)
Total senior notes payable
245,513

 
245,362

Total debentures and senior notes payable
$
784,423

 
$
782,588


38
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table summarizes the key terms of the Company’s senior notes and junior subordinated deferrable debentures:
Description
 
Issuance date
 
Issued
 
Maturity date
 
Interest Rate as at
 
Interest payments due
 
Issuance Date
 
September 30, 2017
 
2006 Junior Subordinated Deferrable Debentures
 
June 15, 2006
 
$
150,000

 
June 15, 2036
 
9.069
%
(a) 
 
5.831
%
(e) 
 
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
 
August 23, 2006
 
$
135,360

 
September 15, 2036
 
3.540
%
(b) 
 
6.463
%
(e) 
 
Quarterly
2007 Junior Subordinated Deferrable Debentures
 
June 21, 2007
 
$
200,000

 
June 15, 2037
 
8.480
%
(c) 
 
5.180
%
(e) 
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
June 8, 2007
 
$
100,000

 
July 30, 2037
 
3.000
%
(b) 
 
5.900
%
(e) 
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
September 20, 2007
 
$
25,000

 
September 15, 2037
 
3.100
%
(b) 
 
5.983
%
(e) 
 
Quarterly
2010 Senior Notes due 2040
 
January 26, 2010
 
$
250,000

 
January 26, 2040
 
8.875
%
(d) 
 
8.875
%
(d) 
 
Semi-annually in arrears
(a)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 3.550% thereafter, reset quarterly.
(b)
Floating interest rate of three-month LIBOR plus amount stated, reset quarterly.
(c)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 2.950% thereafter, reset quarterly.
(d)
Fixed interest rate.
(e)
Fixed interest rate as a result of interest rate swap contracts entered into by the Company.
Future payments of principal of $250,000 and $538,910 on the 2010 Senior Notes and the debentures, respectively, are expected to be made after 2022.
(b)
Credit and other facilities
The Company’s outstanding credit facilities as at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
Credit facilities
 
 
 
 
 
 
 
$85,000 syndicated unsecured letter of credit facility
$
85,000

 
$
—

 
$
—

 
$
—

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

 
89,449

 
—

 
108,265

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

 
5,767

 
—

 
22,342

$25,000 IPC bi-lateral facility
25,000

 
7,755

 
—

 
—

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

 
90,390

 
—

 
134,482

$65,000 unsecured revolving credit facility
65,000

 
65,000

 
65,000

 
—

$100,000 unsecured revolving credit facility
100,000

 
100,000

 
100,000

 
—

Total credit facilities
$
835,000

 
$
358,361

 
$
165,000

 
$
265,089

(a)
Indicates utilization of commitment amount, not drawn borrowings.
(b)
Represents drawn borrowings included in accounts payable and accrued expenses.


39
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
December 31, 2016
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
Credit facilities
 
 
 
 
 
 
 
$85,000 syndicated unsecured letter of credit facility
$
85,000

 
$
—

 
$
—

 
$
—

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

 
121,428

 
—

 
157,597

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

 
4,553

 
—

 
48,097

$20,000 AlphaCat Re secured letter of credit facility (c)
20,000

 
20,000

 
—

 
20,032

$25,000 IPC bi-lateral facility
25,000

 
8,807

 
—

 
—

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

 
156,375

 
—

 
216,458

Total credit facilities
$
690,000

 
$
311,163

 
$
—

 
$
442,184

(a)
Indicates utilization of commitment amount, not drawn borrowings.
(b)
Represents drawn borrowings.
(c)
The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.
On August 7, 2017, the Company and Validus Reinsurance, Ltd. entered into a $65,000 unsecured revolving credit facility with Barclays Bank PLC, as the lender (the “Barclays Unsecured Revolving Facility”) expiring August 6, 2018. Loans under the Barclays Unsecured Revolving Facility will be available for the general corporate and working capital purposes of the Company. Borrowings under the Barclays Unsecured Revolving Facility bear interest at the base rate (the higher of (i) the prime rate quoted in the Wall Street Journal, (ii) the federal reserve bank effective rate plus 0.50%, and (iii) the adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate applicable to such loans, plus an applicable rate.
Also on August 7, 2017, the Company and Validus Reinsurance, Ltd. entered into a $100,000 unsecured revolving credit facility with HSBC Bank USA, National Association, as the lender (the “HSBC Unsecured Revolving Facility” and together with the Barclays Unsecured Revolving Facility, the “Credit Facilities”) expiring December 31, 2019. Loans under the HSBC Unsecured Revolving Facility will be available for the general corporate and working capital purposes of the Company. Borrowings under the HSBC Unsecured Revolving Facility bear interest at the base rate (the higher of (i) the prime rate announced by HSBC Bank USA, National Association, (ii) the higher of the federal reserve bank effective rate the overnight bank funding rate plus 0.50%, or (iii) the adjusted LIBOR rate plus 1.0%).
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 $2,789,131 and, commencing with the end of the fiscal quarter ending September 30, 2017, to be increased quarterly by an amount equal to 25% of the Company’s consolidated net income (if positive) for such quarter plus 50% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Reinsurance, Ltd. and any certain other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair).  In addition, the Credit Facilities contain customary negative covenants applicable to the Company and its subsidiaries, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type.
As of September 30, 2017 and December 31, 2016, the Company was in compliance with all covenants and restrictions under its credit and other facilities.

40
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(c)
Finance expenses
Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facility fees, bank charges, AlphaCat financing fees and other charges as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
2006 Junior Subordinated Deferrable Debentures
$
2,235

 
$
2,135

 
$
6,633

 
$
6,557

2007 Junior Subordinated Deferrable Debentures
1,851

 
1,851

 
5,492

 
5,512

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,272

 
2,271

 
6,741

 
6,760

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,775

 
1,784

 
5,249

 
5,317

2010 Senior Notes due 2040
5,597

 
5,597

 
16,792

 
16,791

Credit facilities
575

 
463

 
1,196

 
1,359

Bank and other charges
183

 
276

 
465

 
489

AlphaCat fees (a)
35

 
144

 
107

 
1,105

Total finance expenses
$
14,523

 
$
14,521

 
$
42,675

 
$
43,890

(a)
Includes finance expenses incurred by AlphaCat Managers Ltd. in relation to fund raising for the AlphaCat sidecars, the AlphaCat ILS funds and AlphaCat direct.

41
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


14. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three and nine months ended September 30, 2017 and 2016 was as follows:
 
Three Months Ended September 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(20,188
)
 
$
1,102

 
$
(838
)
 
$
(19,924
)
Other comprehensive income, net of tax
1,481

 
—

 
13

 
1,494

Balance, net of tax, end of period
$
(18,707
)
 
$
1,102

 
$
(825
)
 
$
(18,430
)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(17,149
)
 
$
730

 
$
(1,763
)
 
$
(18,182
)
Other comprehensive loss, net of tax
(1,370
)
 
(1,101
)
 
(439
)
 
(2,910
)
Balance, net of tax, end of period
$
(18,519
)
 
$
(371
)
 
$
(2,202
)
 
$
(21,092
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(22,274
)
 
$
(150
)
 
$
(792
)
 
$
(23,216
)
Other comprehensive income (loss), net of tax
3,567

 
1,252

 
(33
)
 
4,786

Balance, net of tax, end of period
$
(18,707
)
 
$
1,102

 
$
(825
)
 
$
(18,430
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(11,834
)
 
$
334

 
$
(1,069
)
 
$
(12,569
)
Other comprehensive loss, net of tax
(6,685
)
 
(705
)
 
(1,133
)
 
(8,523
)
Balance, net of tax, end of period
$
(18,519
)
 
$
(371
)
 
$
(2,202
)
 
$
(21,092
)




42
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


15. Commitments and contingencies
(a)
Funds at Lloyd’s
Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment and 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 and investments. The Company provided FAL in the amount of $583,600 for the 2017 underwriting year (2016 underwriting year: $617,000).
The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.
(b)
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. 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 2017 underwriting capacity at Lloyd’s of £600,000, at the September 30, 2017 exchange rate of £1 equals $1.34 and assuming the maximum 3% assessment, the Company would be assessed approximately $24,120.
(c)
Marketing Services Agreement (“MSA”)
On May 1, 2017, the Company entered into a MSA with Archer Daniels Midland (“ADM”). Under this agreement, ADM agrees to provide marketing services via its own distribution channels for an annual fee of $2,000 for a period of seven years, with an option for the Company to extend for an additional three years. For the three and nine months ended September 30, 2017, the Company had incurred fees in relation to the MSA of $500 and $833, respectively.
(d)    Unfunded investment commitments
As at September 30, 2017 and December 31, 2016, the Company had total unfunded investment commitments related to the following:
 
 
Unfunded investment commitments
 
 
September 30, 2017
 
December 31, 2016
Fixed maturity investments (a)
 
$
21,959

 
$
28,499

Other investments (b)
 
101,082

 
156,134

Investments in investment affiliates (c)
 
87,372

 
64,071

AlphaCat ILS Fund
 
—

 
10,000

Total unfunded investment commitments
 
$
210,413

 
$
258,704

(a)
The Company has an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator.
(b)
The Company’s total capital commitments related to other investments as at September 30, 2017 was $313,000 (December 31, 2016: $308,000).
(c)
Refer to Note 4(c), “Investments in Investment Affiliates.”



43
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


16. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counterparty are members of the Company’s board of directors.
(a)
Aquiline Capital Partners LLC (“Aquiline Capital”)
Group Ark Insurance
Subsequent to July 2016, Aquiline Capital ceased to be shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, continues to serve 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, 2016 of $1,096 and $3,067, respectively. The Company also recognized reinsurance premiums ceded during the three and nine months ended September 30, 2016 of $41 and $41, respectively. Earned premium adjustments were recorded during the three and nine months ended September 30, 2016 of $1,276 and $2,275, respectively. As at December 31, 2016 the Company had recorded premiums receivable and loss reserves recoverable of $292 and $798, respectively.
Wellington
Pursuant to reinsurance agreements with a subsidiary of Wellington Insurance Company (“Wellington”), during the three and nine months ended September 30, 2017 the Company recognized gross premiums written of $78 and $4,196 (2016: $nil and $nil), respectively, and earned premium adjustments of $943 and $3,480 (2016: $nil and $nil), respectively. As at September 30, 2017 and December 31, 2016 the Company had recorded premiums receivable of $468 and $666, respectively. Aquiline Capital are shareholders of Wellington and Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, serves as a director of Wellington.
Aquiline II, Aquiline III and Aquiline Tech
The Company had, as of September 30, 2017 and December 31, 2016, investments in Aquiline II, III and Tech with a total value of $92,079 and $100,431 and outstanding unfunded commitments of $87,372 and $64,071, respectively. For the three and nine months ended September 30, 2017, the Company incurred $106 and $592 (2016: $520 and $1,535), respectively, in partnership fees associated with these investments. Jeffrey W. Greenberg and Christopher E. Watson, directors of the Company, serve as managing principal and senior principal, respectively, of Aquiline Capital. Additional information related to Aquiline II, III and Tech is disclosed in Note 4(c), “Investments in Investment Affiliates.”
(b)
Other
Certain shareholders of the Company and their affiliates, as well as employers of entities associated with directors or officers have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company believes these transactions were settled for arm’s length consideration.

44
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


17. Earnings per common share
The following table sets forth the computation of basic earnings per common share and earnings per diluted common share for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic (loss) earnings per common share
 
 
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
$
(250,446
)
 
$
89,844

 
$
(54,790
)
 
$
351,617

Weighted average number of common shares outstanding
78,994,335

 
80,134,394

 
79,132,856

 
81,635,496

Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(3.17
)
 
$
1.12

 
$
(0.69
)
 
$
4.31

 
 
 
 
 
 
 
 
(Loss) earnings per diluted common share
 
 
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
$
(250,446
)
 
$
89,844

 
$
(54,790
)
 
$
351,617

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
78,994,335

 
80,134,394

 
79,132,856

 
81,635,496

Share equivalents:
 
 
 
 
 
 
 
Stock options
—

 
26,705

 
—

 
32,126

Unvested restricted shares
—

 
1,083,457

 
—

 
1,271,002

Weighted average number of diluted common shares outstanding
78,994,335

 
81,244,556

 
79,132,856

 
82,938,624

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(3.17
)
 
$
1.11

 
$
(0.69
)
 
$
4.24

Earnings per diluted common share assumes the exercise of all dilutive stock options and restricted stock grants. Due to the net loss incurred during the three and nine months ended September 30, 2017, share equivalents were not included in the computation of diluted loss per share due to their anti-dilutive effect. Share equivalents that would result in the issuance of common shares of 19,808 and 175,690 were outstanding for the three and nine months ended September 30, 2016, respectively, but were not included in the computation of earnings per diluted common share because the effect would be anti-dilutive.

45
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


18. Segment information
The Company conducts its operations worldwide through four operating segments, which have been determined under ASC Topic 280 “Segment Reporting” to be Validus Re, Talbot, Western World and AlphaCat. For segmental reporting purposes, the results of CRS have been included in the results of the Western World segment as of May 1, 2017, the date of acquisition. 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 segment undertakes different strategies.
A description of each of the Company’s operating segments and its Corporate and Investments function is as follows:
Validus Re Segment
The Validus Re segment is focused primarily on treaty reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers’ compensation, crisis management, contingency, technical lines, composite, trade credit and casualty.
Talbot Segment
The Talbot segment is focused on a wide range of marine and energy, political lines, commercial property, financial lines, contingency, accident & health and aviation classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Western World Segment
The Western World segment is focused on providing commercial insurance products on a surplus lines and specialty admitted basis. Western World specializes in underwriting classes of business that are not easily placed in the standard insurance market due to their complexity, high hazard, or unusual nature; including general liability, property and professional liability, homeowners, commercial package and agriculture classes of business.
AlphaCat Segment
The AlphaCat segment leverages the Company’s underwriting and analytical expertise and earns management and performance fees from the Company and other third party investors primarily through the AlphaCat ILS funds and sidecars.
Corporate and Investments
The Company has a corporate and investments function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Transaction expenses are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of certain inter segment revenues and expenses and other items that are not allocated to the operating segments.


46
Validus Holdings, Ltd.
Notes to the 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 and Investments”:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Validus Re Segment Information
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
153,890

 
$
94,741

 
$
1,071,409

 
$
1,072,219

Reinsurance premiums ceded
 
(40,988
)
 
(15,967
)
 
(161,188
)
 
(111,658
)
Net premiums written
 
112,902

 
78,774

 
910,221

 
960,561

Change in unearned premiums
 
154,145

 
149,705

 
(184,155
)
 
(241,129
)
Net premiums earned
 
267,047

 
228,479

 
726,066

 
719,432

Other insurance related income (loss)
 
68

 
58

 
204

 
(107
)
Total underwriting revenues
 
267,115

 
228,537

 
726,270

 
719,325

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
347,484

 
98,425

 
538,323

 
313,432

Policy acquisition costs
 
45,422

 
42,837

 
133,836

 
127,660

General and administrative expenses
 
12,444

 
17,528

 
48,550

 
52,579

Share compensation expenses
 
2,606

 
2,695

 
7,746

 
8,371

Total underwriting deductions
 
407,956

 
161,485

 
728,455

 
502,042

Underwriting (loss) income
 
$
(140,841
)
 
$
67,052

 
$
(2,185
)
 
$
217,283

 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
73.4
%
 
83.1
%
 
85.0
%
 
89.6
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
130.1
%
 
43.1
%
 
74.1
%
 
43.6
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
17.0
%
 
18.7
%
 
18.4
%
 
17.7
%
General and administrative expense ratio (a)
 
5.7
%
 
8.9
%
 
7.8
%
 
8.5
%
Expense ratio
 
22.7
%
 
27.6
%
 
26.2
%
 
26.2
%
Combined ratio
 
152.8
%
 
70.7
%
 
100.3
%
 
69.8
%
(a)
The general and administrative expense ratio includes share compensation expenses.

47
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Talbot Segment Information
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
192,883

 
$
189,674

 
$
702,535

 
$
752,058

Reinsurance premiums ceded
 
(36,462
)
 
(22,877
)
 
(154,263
)
 
(137,496
)
Net premiums written
 
156,421

 
166,797

 
548,272

 
614,562

Change in unearned premiums
 
23,191

 
32,258

 
18,279

 
(7,166
)
Net premiums earned
 
179,612

 
199,055

 
566,551

 
607,396

Other insurance related income
 
692

 
99

 
1,512

 
389

Total underwriting revenues
 
180,304

 
199,154

 
568,063

 
607,785

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
178,440

 
109,860

 
378,241

 
319,271

Policy acquisition costs
 
41,493

 
46,488

 
129,074

 
134,444

General and administrative expenses
 
23,069

 
32,333

 
97,094

 
109,929

Share compensation expenses
 
2,310

 
3,163

 
8,292

 
9,955

Total underwriting deductions
 
245,312

 
191,844

 
612,701

 
573,599

Underwriting (loss) income
 
$
(65,008
)
 
$
7,310

 
$
(44,638
)
 
$
34,186

 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
81.1
%
 
87.9
%
 
78.0
%
 
81.7
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
99.3
%
 
55.2
%
 
66.8
%
 
52.6
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
23.1
%
 
23.4
%
 
22.8
%
 
22.1
%
General and administrative expense ratio (a)
 
14.2
%
 
17.8
%
 
18.5
%
 
19.7
%
Expense ratio
 
37.3
%
 
41.2
%
 
41.3
%
 
41.8
%
Combined ratio
 
136.6
%
 
96.4
%
 
108.1
%
 
94.4
%
(a)
The general and administrative expense ratio includes share compensation expenses.

48
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Western World Segment Information
 
2017
 
2016
 
2017
 
2016
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
156,517

 
$
85,260

 
$
459,628

 
$
236,190

Reinsurance premiums ceded
 
(43,207
)
 
(6,202
)
 
(72,005
)
 
(15,347
)
Net premiums written
 
113,310

 
79,058

 
387,623

 
220,843

Change in unearned premiums
 
61,603

 
(8,260
)
 
15,256

 
(22,890
)
Net premiums earned
 
174,913

 
70,798

 
402,879

 
197,953

Other insurance related income
 
662

 
219

 
1,566

 
696

Total underwriting revenues
 
175,575

 
71,017

 
404,445

 
198,649

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
157,709

 
45,748

 
329,642

 
129,623

Policy acquisition costs
 
20,721

 
17,094

 
60,187

 
46,704

General and administrative expenses
 
21,553

 
10,171

 
50,623

 
33,704

Share compensation expenses
 
354

 
702

 
1,655

 
1,825

Total underwriting deductions
 
200,337

 
73,715

 
442,107

 
211,856

Underwriting (loss)
 
$
(24,762
)
 
$
(2,698
)
 
$
(37,662
)
 
$
(13,207
)
 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
72.4
%
 
92.7
%
 
84.3
%
 
93.5
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
90.2
%
 
64.6
%
 
81.8
%
 
65.5
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
11.8
%
 
24.1
%
 
14.9
%
 
23.6
%
General and administrative expense ratio (a)
 
12.5
%
 
15.4
%
 
13.0
%
 
17.9
%
Expense ratio
 
24.3
%
 
39.5
%
 
27.9
%
 
41.5
%
Combined ratio
 
114.5
%
 
104.1
%
 
109.7
%
 
107.0
%
(a)
The general and administrative expense ratio includes share compensation expenses.

49
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
AlphaCat Segment Information
 
2017
 
2016
 
2017
 
2016
Fee revenues
 
 
 
 
 
 
 
 
Third party
 
$
5,095

 
$
7,025

 
$
15,288

 
$
14,843

Related party
 
457

 
1,373

 
1,732

 
2,592

Total fee revenues
 
5,552

 
8,398

 
17,020

 
17,435

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
2,929

 
3,324

 
10,322

 
7,557

Share compensation expenses
 
183

 
(107
)
 
348

 
167

Finance expenses
 
32

 
31

 
107

 
914

Tax (benefit) expense
 
(65
)
 
—

 
69

 
—

Foreign exchange losses
 
7

 
5

 
7

 
17

Total expenses
 
3,086

 
3,253

 
10,853

 
8,655

Income before investments from AlphaCat Funds and Sidecars
 
2,466

 
5,145

 
6,167

 
8,780

 
 
 
 
 
 
 
 
 
Investment (loss) income from AlphaCat Funds and Sidecars (a)
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
201

 
(72
)
 
68

 
593

AlphaCat ILS Funds - Lower Risk (b)
 
(7,553
)
 
2,321

 
(4,063
)
 
6,903

AlphaCat ILS Funds - Higher Risk (b)
 
(21,816
)
 
2,479

 
(16,849
)
 
5,607

BetaCat ILS Funds
 
(922
)
 
1,303

 
(291
)
 
2,979

PaCRe
 
—

 
—

 
—

 
(23
)
Validus’ share of investment (loss) income from AlphaCat Funds and Sidecars
 
(30,090
)
 
6,031

 
(21,135
)
 
16,059

Validus’ share of AlphaCat segment (loss) income
 
$
(27,624
)
 
$
11,176

 
$
(14,968
)
 
$
24,839

 
 
 
 
 
 
 
 
 
Supplemental information
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
$
—

 
$
(112
)
 
$
66

 
$
(178
)
AlphaCat ILS Funds - Lower Risk (b)
 
10,979

 
2,049

 
117,519

 
112,241

AlphaCat ILS Funds - Higher Risk (b)
 
16,275

 
1,797

 
153,483

 
140,127

AlphaCat Direct (c)
 
(41
)
 
679

 
26,753

 
18,476

Total gross premiums written
 
$
27,213

 
$
4,413

 
$
297,821

 
$
270,666

(a)
The investment (loss) income from the AlphaCat funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

50
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Corporate and Investments
 
2017
 
2016
 
2017
 
2016
Managed investments
 
 
 
 
 
 
 
 
Managed net investment income (a)
 
$
37,091

 
$
41,071

 
$
111,346

 
$
105,843

Net realized gains on managed investments (a)
 
903

 
4,080

 
280

 
5,514

Change in net unrealized gains on managed investments (a)
 
941

 
4,652

 
31,232

 
81,782

Income (loss) from investment affiliates
 
1,011

 
453

 
15,665

 
(4,249
)
Total managed investment return
 
39,946

 
50,256

 
158,523

 
188,890

 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
9,539

 
18,221

 
45,563

 
52,276

Share compensation expenses
 
3,990

 
4,048

 
12,039

 
12,147

Finance expenses (a)
 
14,449

 
14,317

 
42,462

 
42,637

Dividends on preferred shares
 
5,627

 
2,252

 
10,033

 
2,252

Tax (benefit) expense (a)
 
(2,567
)
 
1,830

 
(7,237
)
 
1,418

Total Corporate expenses
 
31,038

 
40,668

 
102,860

 
110,730

 
 
 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
 
 
Foreign exchange (losses) (a)
 
(1,495
)
 
(1,067
)
 
(7,715
)
 
11,628

Other income (loss)
 
35

 
(1,529
)
 
303

 
(773
)
Transaction expenses
 
—

 
—

 
(4,427
)
 
—

Total other items
 
(1,460
)
 
(2,596
)
 
(11,839
)
 
10,855

Total Corporate and Investments
 
$
7,448

 
$
6,992

 
$
43,824

 
$
89,015

(a)
These items exclude the components which are included in Validus’ share of AlphaCat and amounts which are consolidated from VIEs.

51
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables reconcile the results of our operating segments along with our corporate and investments function to the Consolidated results of the Company for the periods indicated:
 
Three Months Ended September 30, 2017
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
153,890

 
$
192,883

 
$
156,517

 
$
27,213

 
$
—

 
$
(6,647
)
 
$
523,856

Reinsurance premiums ceded
(40,988
)
 
(36,462
)
 
(43,207
)
 
(2,850
)
 
—

 
6,647

 
(116,860
)
Net premiums written
112,902

 
156,421

 
113,310

 
24,363

 
—

 
—

 
406,996

Change in unearned premiums
154,145

 
23,191

 
61,603

 
77,273

 
—

 
—

 
316,212

Net premiums earned
267,047

 
179,612

 
174,913

 
101,636

 
—

 
—

 
723,208

Other insurance related income
68

 
692

 
662

 
6,083

 
—

 
(3,969
)
 
3,536

Total underwriting revenues
267,115

 
180,304

 
175,575

 
107,719

 
—

 
(3,969
)
 
726,744

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
347,484

 
178,440

 
157,709

 
570,969

 
—

 
—

 
1,254,602

Policy acquisition costs
45,422

 
41,493

 
20,721

 
8,314

 
—

 
(360
)
 
115,590

General and administrative expenses
12,444

 
23,069

 
21,553

 
7,687

 
9,539

 
(3,950
)
 
70,342

Share compensation expenses
2,606

 
2,310

 
354

 
183

 
3,990

 
—

 
9,443

Total underwriting deductions
407,956

 
245,312

 
200,337

 
587,153

 
13,529

 
(4,310
)
 
1,449,977

Underwriting (loss)
$
(140,841
)
 
$
(65,008
)
 
$
(24,762
)
 
$
(479,434
)
 
$
(13,529
)
 
$
341

 
$
(723,233
)
Net investment return (a)
—

 
—

 
—

 
1,232

 
39,946

 
—

 
41,178

Other items (b)
—

 
—

 
—

 
82

 
(18,969
)
 
—

 
(18,887
)
Loss attributable to AlphaCat investors
—

 
—

 
—

 
74,130

 
—

 
—

 
74,130

Net loss attributable to noncontrolling interest
—

 
—

 
—

 
376,366

 
—

 
—

 
376,366

Segmental (loss)
$
(140,841
)
 
$
(65,008
)
 
$
(24,762
)
 
$
(27,624
)
 
$
7,448

 
$
341

 
 
Net loss attributable to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
(250,446
)
(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).

52
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Three Months Ended September 30, 2016
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
94,741

 
$
189,674

 
$
85,260

 
$
4,413

 
$
—

 
$
(1,670
)
 
$
372,418

Reinsurance premiums ceded
(15,967
)
 
(22,877
)
 
(6,202
)
 
(1,630
)
 
—

 
1,670

 
(45,006
)
Net premiums written
78,774

 
166,797

 
79,058

 
2,783

 
—

 
—

 
327,412

Change in unearned premiums
149,705

 
32,258

 
(8,260
)
 
62,660

 
—

 
—

 
236,363

Net premiums earned
228,479

 
199,055

 
70,798

 
65,443

 
—

 
—

 
563,775

Other insurance related income
58

 
99

 
219

 
8,656

 
—

 
(8,113
)
 
919

Total underwriting revenues
228,537

 
199,154

 
71,017

 
74,099

 
—

 
(8,113
)
 
564,694

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
98,425

 
109,860

 
45,748

 
4,361

 
—

 
—

 
258,394

Policy acquisition costs
42,837

 
46,488

 
17,094

 
7,075

 
—

 
(60
)
 
113,434

General and administrative expenses
17,528

 
32,333

 
10,171

 
12,255

 
18,221

 
(8,065
)
 
82,443

Share compensation expenses
2,695

 
3,163

 
702

 
(107
)
 
4,048

 
—

 
10,501

Total underwriting deductions
161,485

 
191,844

 
73,715

 
23,584

 
22,269

 
(8,125
)
 
464,772

Underwriting income (loss)
$
67,052

 
$
7,310

 
$
(2,698
)
 
$
50,515

 
$
(22,269
)
 
$
12

 
$
99,922

Net investment return (a)
—

 
—

 
—

 
3,567

 
50,256

 
—

 
53,823

Other items (b)
—

 
—

 
—

 
97

 
(20,995
)
 
—

 
(20,898
)
(Income) attributable to AlphaCat investors
—

 
—

 
—

 
(5,564
)
 
—

 
—

 
(5,564
)
Net (income) attributable to noncontrolling interest
—

 
—

 
—

 
(37,439
)
 
—

 
—

 
(37,439
)
Segmental income (loss)
$
67,052

 
$
7,310

 
$
(2,698
)
 
$
11,176

 
$
6,992

 
$
12

 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
89,844

(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).


53
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2017
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,071,409

 
$
702,535

 
$
459,628

 
$
297,821

 
$
—

 
$
(23,778
)
 
$
2,507,615

Reinsurance premiums ceded
(161,188
)
 
(154,263
)
 
(72,005
)
 
(9,510
)
 
—

 
23,778

 
(373,188
)
Net premiums written
910,221

 
548,272

 
387,623

 
288,311

 
—

 
—

 
2,134,427

Change in unearned premiums
(184,155
)
 
18,279

 
15,256

 
(54,196
)
 
—

 
—

 
(204,816
)
Net premiums earned
726,066

 
566,551

 
402,879

 
234,115

 
—

 
—

 
1,929,611

Other insurance related income
204

 
1,512

 
1,566

 
17,118

 
—

 
(14,463
)
 
5,937

Total underwriting revenues
726,270

 
568,063

 
404,445

 
251,233

 
—

 
(14,463
)
 
1,935,548

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
538,323

 
378,241

 
329,642

 
574,130

 
—

 
—

 
1,820,336

Policy acquisition costs
133,836

 
129,074

 
60,187

 
22,380

 
—

 
(991
)
 
344,486

General and administrative expenses
48,550

 
97,094

 
50,623

 
27,096

 
45,563

 
(14,311
)
 
254,615

Share compensation expenses
7,746

 
8,292

 
1,655

 
348

 
12,039

 
—

 
30,080

Total underwriting deductions
728,455

 
612,701

 
442,107

 
623,954

 
57,602

 
(15,302
)
 
2,449,517

Underwriting (loss)
$
(2,185
)
 
$
(44,638
)
 
$
(37,662
)
 
$
(372,721
)
 
$
(57,602
)
 
$
839

 
$
(513,969
)
Net investment return (a)
—

 
—

 
—

 
12,543

 
158,523

 
—

 
171,066

Other items (b)
—

 
—

 
—

 
269

 
(57,097
)
 
—

 
(56,828
)
Loss attributable to AlphaCat investors
—

 
—

 
—

 
54,797

 
—

 
—

 
54,797

Net loss attributable to noncontrolling interest
—

 
—

 
—

 
290,144

 
—

 
—

 
290,144

Segmental (loss)
$
(2,185
)
 
$
(44,638
)
 
$
(37,662
)
 
$
(14,968
)
 
$
43,824

 
$
839

 
 
Net loss attributable to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
(54,790
)
(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).


54
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2016
 
Validus Re Segment
 
 Talbot Segment
 
Western World Segment
 
AlphaCat Segment and Consolidated VIEs
 
Corporate and Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,072,219

 
$
752,058

 
$
236,190

 
$
270,666

 
$
—

 
$
(21,882
)
 
$
2,309,251

Reinsurance premiums ceded
(111,658
)
 
(137,496
)
 
(15,347
)
 
(6,451
)
 
—

 
21,882

 
(249,070
)
Net premiums written
960,561

 
614,562

 
220,843

 
264,215

 
—

 
—

 
2,060,181

Change in unearned premiums
(241,129
)
 
(7,166
)
 
(22,890
)
 
(80,230
)
 
—

 
—

 
(351,415
)
Net premiums earned
719,432

 
607,396

 
197,953

 
183,985

 
—

 
—

 
1,708,766

Other insurance related (loss) income
(107
)
 
389

 
696

 
17,722

 
—

 
(16,300
)
 
2,400

Total underwriting revenues
719,325

 
607,785

 
198,649

 
201,707

 
—

 
(16,300
)
 
1,711,166

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
313,432

 
319,271

 
129,623

 
27,645

 
—

 
—

 
789,971

Policy acquisition costs
127,660

 
134,444

 
46,704

 
19,762

 
—

 
23

 
328,593

General and administrative expenses
52,579

 
109,929

 
33,704

 
26,272

 
52,276

 
(16,421
)
 
258,339

Share compensation expenses
8,371

 
9,955

 
1,825

 
167

 
12,147

 
—

 
32,465

Total underwriting deductions
502,042

 
573,599

 
211,856

 
73,846

 
64,423

 
(16,398
)
 
1,409,368

Underwriting income (loss)
$
217,283

 
$
34,186

 
$
(13,207
)
 
$
127,861

 
$
(64,423
)
 
$
98

 
$
301,798

Net investment return (a)
—

 
—

 
—

 
10,558

 
188,890

 
(597
)
 
198,851

Other items (b)
—

 
—

 
—

 
(1,139
)
 
(35,452
)
 
—

 
(36,591
)
(Income) attributable to AlphaCat investors
—

 
—

 
—

 
(16,278
)
 
—

 
—

 
(16,278
)
Net (income) attributable to noncontrolling interest
—

 
—

 
—

 
(96,163
)
 
—

 
—

 
(96,163
)
Segmental income (loss)
$
217,283

 
$
34,186

 
$
(13,207
)
 
$
24,839

 
$
89,015

 
$
(499
)
 
 
Net income available to Validus common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
$
351,617

(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).



55
Validus Holdings, Ltd.
Notes to the 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 by operating segment allocated to the territory of coverage exposure for the periods indicated:
 
Gross Premiums Written
 
Three Months Ended September 30, 2017
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
59,838

 
$
24,584

 
$
156,517

 
$
18,440

 
$
(6,300
)
 
$
253,079

 
48.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
7,198

 
43,136

 
—

 
712

 
76

 
51,122

 
9.8
%
Australia and New Zealand
(450
)
 
3,696

 
—

 
—

 
9

 
3,255

 
0.6
%
Europe
4,744

 
5,372

 
—

 
149

 
62

 
10,327

 
2.0
%
Latin America and Caribbean
19,430

 
20,726

 
—

 
—

 
(454
)
 
39,702

 
7.6
%
Japan
436

 
1,165

 
—

 
—

 
—

 
1,601

 
0.3
%
Canada
24

 
1,820

 
—

 
458

 
(6
)
 
2,296

 
0.4
%
Rest of the world (b)
1,447

 
21,478

 
—

 
—

 
57

 
22,982

 
4.4
%
Sub-total, non United States
32,829

 
97,393

 
—

 
1,319

 
(256
)
 
131,285

 
25.1
%
Worldwide including United States (a)
33,724

 
16,293

 
—

 
4,993

 
(91
)
 
54,919

 
10.5
%
Other locations non-specific (c)
27,499

 
54,613

 
—

 
2,461

 
—

 
84,573

 
16.1
%
Total
$
153,890

 
$
192,883

 
$
156,517

 
$
27,213

 
$
(6,647
)
 
$
523,856

 
100.0
%
 
Gross Premiums Written
 
Three Months Ended September 30, 2016
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
31,345

 
$
19,937

 
$
85,260

 
$
1,837

 
$
(76
)
 
$
138,303

 
37.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
4,145

 
40,058

 
—

 
(288
)
 
(39
)
 
43,876

 
11.7
%
Australia and New Zealand
57

 
3,238

 
—

 
—

 
6

 
3,301

 
0.9
%
Europe
4,536

 
4,957

 
—

 
—

 
40

 
9,533

 
2.6
%
Latin America and Caribbean
17,036

 
25,173

 
—

 
—

 
(793
)
 
41,416

 
11.1
%
Japan
(33
)
 
997

 
—

 
—

 
7

 
971

 
0.3
%
Canada
149

 
2,015

 
—

 
—

 
(42
)
 
2,122

 
0.6
%
Rest of the world (b)
2,360

 
19,166

 
—

 
—

 
66

 
21,592

 
5.8
%
Sub-total, non United States
28,250

 
95,604

 
—

 
(288
)
 
(755
)
 
122,811

 
33.0
%
Worldwide including United States (a)
22,399

 
12,771

 
—

 
2,872

 
(838
)
 
37,204

 
10.0
%
Other locations non-specific (c)
12,747

 
61,362

 
—

 
(8
)
 
(1
)
 
74,100

 
19.9
%
Total
$
94,741

 
$
189,674

 
$
85,260

 
$
4,413

 
$
(1,670
)
 
$
372,418

 
100.0
%



56
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Gross Premiums Written
 
Nine Months Ended September 30, 2017
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
374,018

 
$
88,139

 
$
459,628

 
$
116,691

 
$
(10,623
)
 
$
1,027,853

 
41.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
45,803

 
110,094

 
—

 
8,617

 
(463
)
 
164,051

 
6.6
%
Australia and New Zealand
3,745

 
8,726

 
—

 
2,003

 
(101
)
 
14,373

 
0.6
%
Europe
35,108

 
22,944

 
—

 
600

 
(368
)
 
58,284

 
2.2
%
Latin America and Caribbean
40,646

 
69,703

 
—

 
46

 
(4,737
)
 
105,658

 
4.2
%
Japan
40,902

 
6,371

 
—

 
3,855

 
(36
)
 
51,092

 
2.0
%
Canada
4,894

 
4,068

 
—

 
588

 
(55
)
 
9,495

 
0.4
%
Rest of the world (b)
20,229

 
67,918

 
—

 
—

 
(1,520
)
 
86,627

 
3.5
%
Sub-total, non United States
191,327

 
289,824

 
—

 
15,709

 
(7,280
)
 
489,580

 
19.5
%
Worldwide including United States (a)
189,669

 
74,385

 
—

 
158,239

 
(5,875
)
 
416,418

 
16.6
%
Other locations non-specific (c)
316,395

 
250,187

 
—

 
7,182

 
—

 
573,764

 
22.9
%
Total
$
1,071,409

 
$
702,535

 
$
459,628

 
$
297,821

 
$
(23,778
)
 
$
2,507,615

 
100.0
%
 
Gross Premiums Written
 
Nine Months Ended September 30, 2016
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
 
%
United States
$
455,826

 
$
85,182

 
$
236,190

 
$
64,566

 
$
(1,631
)
 
$
840,133

 
36.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
51,384

 
105,590

 
—

 
22,219

 
(650
)
 
178,543

 
7.8
%
Australia and New Zealand
6,906

 
7,613

 
—

 
4,949

 
(107
)
 
19,361

 
0.8
%
Europe
30,270

 
25,673

 
—

 
3,306

 
(668
)
 
58,581

 
2.5
%
Latin America and Caribbean
36,610

 
76,577

 
—

 
—

 
(6,330
)
 
106,857

 
4.6
%
Japan
39,892

 
5,579

 
—

 
3,221

 
(24
)
 
48,668

 
2.1
%
Canada
3,646

 
5,577

 
—

 
223

 
(129
)
 
9,317

 
0.4
%
Rest of the world (b)
22,307

 
76,456

 
—

 
—

 
(2,276
)
 
96,487

 
4.2
%
Sub-total, non United States
191,015

 
303,065

 
—

 
33,918

 
(10,184
)
 
517,814

 
22.4
%
Worldwide including United States (a)
169,737

 
75,423

 
—

 
170,639

 
(10,052
)
 
405,747

 
17.6
%
Other locations non-specific (c)
255,641

 
288,388

 
—

 
1,543

 
(15
)
 
545,557

 
23.6
%
Total
$
1,072,219

 
$
752,058

 
$
236,190

 
$
270,666

 
$
(21,882
)
 
$
2,309,251

 
100.1
%
(a)
Represents risks in two or more geographic zones.
(b)
Represents risks in one geographic zone.
(c)
The Other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.


57
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


19. Subsequent events
California Wildfires
The California Wildfires were a series of wildfires that burned across Northern California in October 2017 causing widespread residential and commercial property damage across a number of counties. The Company is presently reviewing its exposure based on in-force contracts and preliminary loss information from clients and anticipates that the California Wildfires will likely be a notable loss event.
Dividends
On November 1, 2017, the Company announced a quarterly cash dividend of $0.38 per common share, payable on December 29, 2017 to shareholders of record on December 15, 2017. The Company also announced a quarterly cash dividend of $0.3671875 and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The Series A and Series B Preferred Share dividends are payable on December 15, 2017 to shareholders of record on December 1, 2017.



58

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 unaudited consolidated results of operations for the three and nine months ended September 30, 2017 and 2016 and the Company’s consolidated financial condition, liquidity and capital resources as at September 30, 2017 and December 31, 2016. This discussion and analysis should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company’s audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2016, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
For a number 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 Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 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.


59

Executive Overview
The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, Talbot, Western World, and AlphaCat. On May 1, 2017, the Company acquired all of the outstanding capital stock of CRS and its related agriculture book of business. For segmental reporting purposes, the results of CRS have been included in the results of the Western World segment as of May 1, 2017, the date of acquisition.
In addition, the Company has a corporate and investment function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment. The Company’s corporate expenses, capital servicing and debt costs and investment results are presented separately within the corporate and investments discussion.
The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes 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 a function of net earned 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.
Potential Change to Reportable Segments
The Company continually monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments. As a result of the evolution of the Company’s operations, the global nature of the industry and synergies obtained through the acquisition and integration of Talbot, Western World and CRS, the Company’s current reportable segments have been becoming progressively more integrated such that it is likely that we will change our reportable segments to “Insurance,” “Reinsurance” and “Asset Management." The Company expects that the finalization of this new segment structure will occur in the fourth quarter of 2017. As such, the Company expects that it will present its full year results for 2017, and revise all prior periods presented, in conformity with this new segment structure.
Business Outlook and Trends
We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital and the absence of significant catastrophic events resulted in a softening of rates on most lines. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy; however, the impact of these events in the aggregate were not severe enough to increase rates. As such, the Company continues to see increased competition and decreased premium rates in most classes of business.
During the Validus Re and AlphaCat mid year 2017 renewal period, the U.S. property market saw a continuation of the rate trend observed at the January 1 renewals where rate declines were in the low single-digits, with terms and conditions generally unchanged. However, the rate environment in the international property market proved to be more challenging with average rate reductions ranging between 4% and 5%.
Business written by the Talbot and Western World segments is distributed more evenly throughout the year. Through September 30, 2017, the Talbot segment experienced a whole account rate decrease of approximately 4.0% driven primarily by decreases in the downstream and upstream energy classes. The Western World segment experienced a modest whole account rate increase of approximately 0.2% through September 30, 2017.

60

Following the significant catastrophic events of the third quarter 2017: Hurricanes Harvey, Irma and Maria, the Company expects the industry to see meaningful rate increases across all loss affected classes. The Company expects rate changes to be driven by the retrocession market, with reinsurers and insurers following accordingly. However, the full extent of rate increases will not likely be realized until mid year 2018.
Non-GAAP Financial Measures
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
Book value financial indicators
In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.
The following table presents reconciliations of book value per common share to book value per diluted common share plus accumulated dividends and other non-GAAP book value financial indicators:
 
September 30, 2017
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,536,287

 
79,457,253

 
$
44.51

Non-GAAP Adjustments:
 
 
 
 
 
Assumed exercise of outstanding stock options (c)(d)
614

 
26,136

 
 
Unvested restricted shares
—

 
2,518,217

 
 
Book value per diluted common share (e)
3,536,901

 
82,001,606

 
$
43.13

Goodwill
(227,701
)
 
—

 
 
Intangible assets
(173,398
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,135,802

 
82,001,606

 
$
38.24

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
43.13

Accumulated dividends
 
 
 
 
12.70

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
55.83

 
December 31, 2016
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,688,291

 
79,132,252

 
$
46.61

Non-GAAP Adjustments:
 
 
 
 
 
Assumed exercise of outstanding stock options (c)(d)
614

 
26,136

 
 
Unvested restricted shares
—

 
2,868,610

 
 
Book value per diluted common share (e)
3,688,905

 
82,026,998

 
$
44.97

Goodwill
(196,758
)
 
—

 
 
Intangible assets
(115,592
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,376,555

 
82,026,998

 
$
41.16

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
44.97

Accumulated dividends
 
 
 
 
11.56

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
56.53

(a)
Per share amounts are calculated by dividing the equity amount by the common shares.
(b)
The equity amount used in the calculation of book value per common share represents total shareholders’ equity available to Validus excluding the liquidation value of the preferred shares.
(c)
Using the “as-if-converted” method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
(d)
At September 30, 2017, the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $23.48 (December 31, 2016: $23.48).
(e)
Non-GAAP financial measure.

61

Book value per common share, a GAAP financial measure, decreased by $2.10, or 4.5%, from $46.61 at December 31, 2016 to $44.51 at September 30, 2017.
Book value per diluted common share plus accumulated dividends, a non-GAAP financial measure, is considered by management to be the key financial indicator of performance, as the Company believes growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends decreased by $0.70, or 1.2%, from $56.53 at December 31, 2016 to $55.83 at September 30, 2017. Cash dividends per common share are an integral part of the value created for shareholders. During the nine months ended September 30, 2017, the Company paid cash dividends of $1.14 (2016: $1.05) per common share.
Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid decreased by $1.84, or 4.1%, from $44.97 at December 31, 2016 to $43.13 at September 30, 2017. The change in book value per diluted common share inclusive of dividends paid was (1.6)% and 9.2% for the nine months ended September 30, 2017 and 2016, respectively.
Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share decreased by $2.92, or 7.1%, from $41.16 at December 31, 2016 to $38.24 at September 30, 2017.
Other financial indicators
In addition to presenting net (loss) income (attributable) available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating (loss) income (attributable) available to Validus common shareholders, a non-GAAP financial measure, provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.
Net operating (loss) income (attributable) available to Validus common shareholders is calculated by the addition or subtraction of certain Consolidated Statement of (Loss) Income and Comprehensive (Loss) Income line items from net (loss) income (attributable) available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Net (loss) income (attributable) available to Validus common shareholders
 
$
(250,446
)
 
$
89,844

 
$
(54,790
)
 
$
351,617

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
Net realized gains on investments
 
(906
)
 
(4,397
)
 
(2,016
)
 
(6,537
)
Change in net unrealized losses (gains) on investments
 
5,197

 
(5,459
)
 
(24,472
)
 
(84,331
)
(Income) loss from investment affiliates
 
(1,011
)
 
(453
)
 
(15,665
)
 
4,249

Foreign exchange losses (gains)
 
1,404

 
766

 
7,164

 
(11,765
)
Other (income) loss
 
(35
)
 
1,529

 
(303
)
 
773

Transaction expenses
 
—

 
—

 
4,427

 
—

Net (loss) income attributable to noncontrolling interests
 
(8,194
)
 
767

 
(5,364
)
 
869

Tax (benefit) expense (a)
 
(468
)
 
443

 
1,860

 
7,550

Net operating (loss) income (attributable) available to Validus common shareholders (b)
 
$
(254,459
)
 
$
83,040

 
$
(89,159
)
 
$
262,425

 
 
 
 
 
 
 
 
 
Average shareholders’ equity available to Validus common shareholders (c)
 
$
3,673,859

 
$
3,716,938

 
$
3,699,471

 
$
3,699,319

 
 
 
 
 
 
 
 
 
Annualized return on average equity
 
(27.3
%)
 
9.7
%
 
(2.0
%)
 
12.7
%
Annualized net operating return on average equity (b)
 
(27.7
%)
 
8.9
%
 
(3.2
%)
 
9.5
%
(a)
Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
(b)
Non-GAAP financial measure.
(c)
Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares.

62

Net operating (loss) income (attributable) available to Validus common shareholders, a non-GAAP financial measure, measures the performance of the Company’s operations without the influence of gains or losses on investments and foreign currencies and other items as noted in the table above. The Company excludes these items from its calculation of net operating (loss) income (attributable) available to Validus common shareholders because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities and other factors. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. The Company believes the reporting of net operating (loss) income (attributable) available to Validus common shareholders enhances the understanding of results by highlighting the underlying profitability of the Company’s core (re)insurance operations. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing, as well as loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.
Return on average equity, a GAAP financial measure, and net operating return on average equity, a non-GAAP financial measure, represents the returns generated on common shareholders’ equity during the year. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed.
For further discussion of the components driving the Company’s financial indicators refer to the “Results of Operations” sections.

63

Third Quarter 2017 Results of Operations - Consolidated
The following table presents the results of operations for the three months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
2017
 
2016
Revenues
 

 
 

Gross premiums written
$
523,856

 
$
372,418

Reinsurance premiums ceded
(116,860
)
 
(45,006
)
Net premiums written
406,996

 
327,412

Change in unearned premiums
316,212

 
236,363

Net premiums earned
723,208

 
563,775

Net investment income
44,458

 
43,514

Net realized gains on investments
906

 
4,397

Change in net unrealized (losses) gains on investments
(5,197
)
 
5,459

Income from investment affiliates
1,011

 
453

Other insurance related income and other income (loss)
3,571

 
(610
)
Foreign exchange (losses)
(1,404
)
 
(766
)
Total revenues
766,553

 
616,222

Expenses
 

 
 

Losses and loss expenses
1,254,602

 
258,394

Policy acquisition costs
115,590

 
113,434

General and administrative expenses
70,342

 
82,443

Share compensation expenses
9,443

 
10,501

Finance expenses
14,523

 
14,521

Transaction expenses
—

 
—

Total expenses
1,464,500

 
479,293

(Loss) income before taxes and loss (income) attributable to AlphaCat investors
(697,947
)
 
136,929

Tax benefit (expense)
2,632

 
(1,830
)
Loss (income) attributable to AlphaCat investors
74,130

 
(5,564
)
Net (loss) income
$
(621,185
)
 
$
129,535

Net loss (income) attributable to noncontrolling interests
376,366

 
(37,439
)
Net (loss) income (attributable) available to Validus
(244,819
)
 
92,096

Dividends on preferred shares
(5,627
)
 
(2,252
)
Net (loss) income (attributable) available to Validus common shareholders
$
(250,446
)
 
$
89,844

 
 
 
 
Supplemental information:
 
 
 
Losses and loss expenses:
 
 
 
Current period excluding items below
$
403,491

 
$
288,650

Current period—notable loss events
926,175

 
986

Current period—non-notable loss events
—

 
21,643

Change in prior accident years
(75,064
)
 
(52,885
)
Total losses and loss expenses
$
1,254,602

 
$
258,394

Selected ratios:
 
 
 
Ratio of net to gross premiums written
77.7
 %
 
87.9
 %
Losses and loss expense ratio:
 
 
 
Current period excluding items below
55.8
 %
 
51.2
 %
Current period—notable loss events
128.1
 %
 
0.2
 %
Current period—non-notable loss events
—
 %
 
3.8
 %
Change in prior accident years
(10.4
)%
 
(9.4
)%
Losses and loss expense ratio
173.5
 %
 
45.8
 %
Policy acquisition cost ratio
16.0
 %
 
20.1
 %
General and administrative expense ratio (a)
11.0
 %
 
16.5
 %
Expense ratio
27.0
 %
 
36.6
 %
Combined ratio
200.5
 %
 
82.4
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

64

Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended September 30, 2017 were $523.9 million compared to $372.4 million for the three months ended September 30, 2016, an increase of $151.4 million, or 40.7%. The increase was primarily driven by increases in the Validus Re, Western World and AlphaCat segments.
•
Reinsurance premiums ceded for the three months ended September 30, 2017 were $116.9 million compared to $45.0 million for the three months ended September 30, 2016, an increase of $71.9 million, or 159.7%. The increase was primarily driven by an increase in the Validus Re, Western World and Talbot segments.
•
Net premiums earned for the three months ended September 30, 2017 were $723.2 million compared to $563.8 million for the three months ended September 30, 2016, an increase of $159.4 million, or 28.3%. The increase was primarily driven by an increase in the Validus Re, Western World and AlphaCat segments and was partially offset by a decrease in the Talbot segment.
•
Losses and loss expenses for the three months ended September 30, 2017 were $1,254.6 million compared to $258.4 million for the three months ended September 30, 2016, an increase of $996.2 million. The increase was primarily driven by an increase in losses from notable loss events during the three months ended September 30, 2017 and was partially offset by higher favorable development on prior accident years and a decrease in non-notable loss events.
Notable and Non-notable Loss Events
◦
The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million. The term “events” refers to aggregate notable and non-notable losses incurred.
Notable Loss Events
◦
Losses and loss expenses incurred during the three months ended September 30, 2017 from three notable loss events were $926.2 million, or 128.1 percentage points of the loss ratio during the three months ended September 30, 2017. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, notable losses for the three months ended September 30, 2017 were $365.1 million, or 58.7 percentage points of the loss ratio excluding the AlphaCat segment. Including Validus’ share of AlphaCat net losses and loss expenses of $35.7 million and the net impact of reinstatement premiums and acceleration of unearned premiums of $33.5 million, the net loss attributable to Validus from third quarter 2017 notable loss events was $367.3 million and was incurred by event as follows:
 
 
Three Months Ended September 30, 2017
 
 
Total Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Total
Gross losses and loss expenses excluding the Alphacat segment
 
$
439,319

 
$
419,916

 
$
143,053

 
$
1,002,288

Less: Reinsurance recoveries
 
(292,315
)
 
(254,973
)
 
(89,862
)
 
(637,150
)
Net losses and loss expenses excluding the AlphaCat segment
 
147,004

 
164,943

 
53,191

 
365,138

Validus’ share of AlphaCat losses and loss expenses
 
7,298

 
20,992

 
7,360

 
35,650

Validus’ share of net losses and loss expenses
 
154,302

 
185,935

 
60,551

 
400,788

Less: Net impact on premiums earned (a)
 
(7,941
)
 
(22,686
)
 
(2,865
)
 
(33,492
)
Net loss attributable to Validus
 
$
146,361

 
$
163,249

 
$
57,686

 
$
367,296

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded, and the net impact of accelerating unearned premiums assumed and ceded.
◦
During the three months ended September 30, 2016, the Company incurred losses and loss expenses of $1.0 million, or 0.2 percentage points of the loss ratio relating to the second quarter 2016 Canadian Wildfires notable loss event, reflecting an increase in the industry loss estimate during the three months ended September 30, 2016.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended September 30, 2017.

65

◦
Losses and loss expenses incurred during the three months ended September 30, 2016 from two non-notable loss events were as follows:
 
 
Three Months Ended September 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
SpaceX
 
Validus’ share of net losses and loss expenses
 
$
1,400

 
$
20,243

 
$
21,643

Less: Reinstatement premiums, net
 
—

 
(1,240
)
 
(1,240
)
Net loss attributable to Validus
 
$
1,400

 
$
19,003

 
$
20,403

Losses and loss expenses from two non-notable loss events were $21.6 million, or 3.8 percentage points of the loss ratio. Losses and loss expenses related to SpaceX, the September 1st rocket explosion at Cape Canaveral, Florida, were $20.2 million, or 3.6 percentage points of the loss ratio. Net of reinstatement premiums of $1.2 million, the net loss attributable to the Company from this event was $19.0 million. In addition, losses and loss expenses of $1.4 million, or 0.2 percentage points of the loss ratio, related to the Texas Hailstorms second quarter 2016 non-notable loss event.
Change in prior accident years
◦
Loss reserve development for the three months ended September 30, 2017 and 2016 was as follows:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
(Favorable) development on event losses
 
$
(16,142
)
 
$
(20,314
)
(Favorable) development on attritional losses
 
(58,922
)
 
(32,571
)
Change in prior accident years
 
$
(75,064
)
 
$
(52,885
)
The favorable development for the three months ended September 30, 2017 was primarily driven by favorable development on attritional losses and multiple loss events. The favorable development for the three months ended September 30, 2016 was primarily driven by favorable development on attritional losses and the 2015 Tianjin port explosion and Chilean earthquake loss events.
Loss Ratio
◦
The loss ratio for the three months ended September 30, 2017 and September 30, 2016 was 173.5% and 45.8%, respectively, an increase of 127.7 percentage points. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, the loss ratio for the three months ended September 30, 2017 was 110.0%.
◦
Loss ratios by line of business for the three months ended September 30, 2017 and 2016 were as follows:
 
Three Months Ended September 30,
 
2017
 
2016
Property
318.4
%
 
27.5
%
Marine
123.4
%
 
60.1
%
Specialty
62.5
%
 
55.6
%
Liability
71.2
%
 
66.8
%
All lines
173.5
%
 
45.8
%
•
Policy acquisition cost ratio for the three months ended September 30, 2017 was 16.0% compared to 20.1% for the three months ended September 30, 2016, a decrease of 4.1 percentage points. The decrease was primarily driven by new agriculture business written in the Western World segment which carries lower acquisition costs and the net impact of the third quarter 2017 notable loss events on net premiums earned.

66

•
General and administrative (“G&A”) expenses for the three months ended September 30, 2017 were $70.3 million compared to $82.4 million for the three months ended September 30, 2016, a decrease of $12.1 million or 14.7%. The decrease was primarily driven by a reduction in the bonus accrual during the three months ended September 30, 2017 and was partially offset by an increase in G&A expenses in the Western World segment, which included $12.0 million of CRS expenses, of which $1.7 million related to the amortization of intangible assets acquired.
•
Combined ratio for the three months ended September 30, 2017 and 2016 was 200.5% and 82.4%, respectively, an increase of 118.1 percentage points. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, the combined ratio for the three months ended September 30, 2017 was 138.8%.

67

Third Quarter 2017 Results of Operations - Validus Re Segment
The following table presents underwriting (loss) income by line of business for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
117,657

 
$
1,226

 
$
35,007

 
$153,890
 
$
53,761

 
$
(4,533
)
 
$
45,513

 
$
94,741

Reinsurance premiums ceded
 
(20,455
)
 
(3,824
)
 
(16,709
)
 
(40,988
)
 
(5,357
)
 
(6,021
)
 
(4,589
)
 
(15,967
)
Net premiums written
 
97,202

 
(2,598
)
 
18,298

 
112,902

 
48,404

 
(10,554
)
 
40,924

 
78,774

Change in unearned premiums
 
37,307

 
27,555

 
89,283

 
154,145

 
45,290

 
31,711

 
72,704

 
149,705

Net premiums earned
 
134,509

 
24,957

 
107,581

 
267,047

 
93,694

 
21,157

 
113,628

 
228,479

Other insurance related income
 
 
 
 
 
 
 
68

 
 
 
 
 
 
 
58

Total underwriting revenues
 
 
 
 
 
 
 
267,115

 
 
 
 
 
 
 
228,537

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
248,984

 
41,953

 
56,547

 
347,484

 
10,024

 
13,229

 
75,172

 
98,425

Policy acquisition costs
 
18,783

 
3,551

 
23,088

 
45,422

 
18,138

 
3,744

 
20,955

 
42,837

Total underwriting deductions before G&A
 
267,767

 
45,504

 
79,635

 
392,906

 
28,162

 
16,973

 
96,127

 
141,262

Underwriting (loss) income before G&A
 
$
(133,258
)
 
$
(20,547
)
 
$
27,946

 
$
(125,791
)
 
$
65,532

 
$
4,184

 
$
17,501

 
$
87,275

General and administrative expenses
 
 
 
 
 
 
 
12,444

 
 
 
 
 
 
 
17,528

Share compensation expenses
 
 
 
 
 
 
 
2,606

 
 
 
 
 
 
 
2,695

Total underwriting deductions
 
 
 
 
 
 
 
407,956

 
 
 
 
 
 
 
161,485

Underwriting (loss) income
 
 
 
 
 
 
 
$
(140,841
)
 
 
 
 
 
 
 
$
67,052

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
39,265

 
$
11,792

 
$
71,207

 
$
122,264

 
$
29,754

 
$
11,384

 
$
79,965

 
$
121,103

Current period—notable loss events
 
236,091

 
37,266

 
—

 
273,357

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
6

 
10,349

 
—

 
10,355

Change in prior accident years
 
(26,372
)
 
(7,105
)
 
(14,660
)
 
(48,137
)
 
(19,736
)
 
(8,504
)
 
(4,793
)
 
(33,033
)
Total losses and loss expenses
 
$
248,984

 
$
41,953

 
$
56,547

 
$
347,484

 
$
10,024

 
$
13,229

 
$
75,172

 
$
98,425

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
82.6
 %
 
(211.9
)%
 
52.3
 %
 
73.4
 %
 
90.0
 %
 
232.8
 %
 
89.9
 %
 
83.1
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
29.2
 %
 
47.3
 %
 
66.2
 %
 
45.7
 %
 
31.8
 %
 
53.8
 %
 
70.4
 %
 
53.1
 %
Current period—notable loss events
 
175.5
 %
 
149.3
 %
 
—
 %
 
102.4
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
48.9
 %
 
—
 %
 
4.5
 %
Change in prior accident years
 
(19.6
)%
 
(28.5
)%
 
(13.6
)%
 
(18.0
)%
 
(21.1
)%
 
(40.2
)%
 
(4.2
)%
 
(14.5
)%
Losses and loss expense ratio
 
185.1
 %
 
168.1
 %
 
52.6
 %
 
130.1
 %
 
10.7
 %
 
62.5
 %
 
66.2
 %
 
43.1
 %
Policy acquisition cost ratio
 
14.0
 %
 
14.2
 %
 
21.5
 %
 
17.0
 %
 
19.4
 %
 
17.7
 %
 
18.4
 %
 
18.7
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
5.7
 %
 
 
 
 
 
 
 
8.9
 %
Expense ratio
 
 
 
 
 
 
 
22.7
 %
 
 
 
 
 
 
 
27.6
 %
Combined ratio
 
 
 
 
 
 
 
152.8
 %
 
 
 
 
 
 
 
70.7
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

68

Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended September 30, 2017 were $153.9 million compared to $94.7 million for the three months ended September 30, 2016, an increase of $59.1 million, or 62.4%. Excluding the impact of reinstatement premiums from third quarter 2017 notable loss events which impacted the property and marine lines by $59.1 million and $6.7 million, respectively, gross premiums written for the three months ended September 30, 2017 were $88.1 million, a decrease of $6.6 million, or 7.0% compared to the three months ended September 30, 2016.The decrease in gross premiums written was driven by:
◦
A decrease in the specialty lines of $10.5 million, primarily due to the timing of renewals on certain programs and adjustments to existing business; partially offset by
◦
An increase in the property lines of $4.8 million.
•
Reinsurance premiums ceded for the three months ended September 30, 2017 were $41.0 million compared to $16.0 million for the three months ended September 30, 2016, an increase of $25.0 million or 156.7%. The increase was primarily driven by an increase in the property lines of $15.1 million as a result of new retrocession coverage purchased following third quarter 2017 notable loss events and an increase in the specialty lines of $12.1 million relating to a new casualty and mortgage quota share retrocession program.
•
Net premiums earned for the three months ended September 30, 2017 were $267.0 million compared to $228.5 million for the three months ended September 30, 2016, an increase of $38.6 million, or 16.9%. Excluding the net impact of reinstatement premiums assumed and the acceleration of net unearned premiums ceded from third quarter 2017 notable loss events of $50.2 million, net premiums earned were $216.9 million, a decrease of $11.6 million, or 5.1% compared to the three months ended September 30, 2016.
•
Losses and loss expenses for the three months ended September 30, 2017 were $347.5 million compared to $98.4 million for the three months ended September 30, 2016, an increase of $249.1 million or 253.0%. The increase was primarily driven by an increase in notable loss events and was partially offset by higher favorable development on prior accident years and a decrease in non-notable loss events.
Notable Loss Events
◦
Losses and loss expenses incurred during the three months ended September 30, 2017 from three notable loss events were as follows:
 
 
Three Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Gross losses and loss expenses
 
$
277,643

 
$
334,583

 
$
114,178

 
$
726,404

Less: Reinsurance recoveries
 
(170,018
)
 
(206,637
)
 
(76,392
)
 
(453,047
)
Validus Re’s share of net losses and loss expenses
 
107,625

 
127,946

 
37,786

 
273,357

Less: Net impact on premiums earned (a)
 
(18,602
)
 
(27,309
)
 
(4,254
)
 
(50,165
)
Net loss attributable to Validus Re
 
$
89,023

 
$
100,637

 
$
33,532

 
$
223,192

(a)
Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Validus Re’s share of net losses and loss expenses from Hurricanes Harvey, Irma and Maria was $273.4 million, or 102.4 percentage points of the loss ratio. Net of reinstatement premiums assumed and the impact of accelerating net unearned premiums ceded of $50.2 million, the net loss attributable to Validus Re from notable loss events was $223.2 million. The net losses and loss expenses from the notable loss events by line of business were as follows:
◦
Hurricane Harvey - property and marine lines of $89.2 million and $18.4 million, respectively;
◦
Hurricane Irma - property and marine lines of $113.7 million and $14.3 million, respectively; and
◦
Hurricane Maria - property and marine lines of $33.2 million and $4.6 million, respectively.
◦
There were no notable loss events occurring during the three months ended September 30, 2016.

69

Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended September 30, 2017.
◦
Losses and loss expenses from a single non-notable loss event occurring during the three months ended September 30, 2016, SpaceX, were $10.4 million, or 4.5 percentage points of the loss ratio, and related solely to the marine lines. Net of reinstatement premiums, the net loss attributable to Validus Re was $8.2 million.
Change in prior accident years
◦
Loss reserve development by line of business for the three months ended September 30, 2017 and 2016 was as follows:
 
 
Three Months Ended September 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) development on event losses
 
$
(16,703
)
 
$
(960
)
 
$
—

 
$
(17,663
)
(Favorable) development on attritional losses
 
(9,669
)
 
(6,145
)
 
(14,660
)
 
(30,474
)
Change in prior accident years
 
$
(26,372
)
 
$
(7,105
)
 
$
(14,660
)
 
$
(48,137
)
The favorable development on event losses in the property lines was driven by favorable development across multiple loss events. The net favorable development across the marine and specialty lines was primarily driven by favorable development on attritional losses.
 
 
Three Months Ended September 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(18,269
)
 
$
(504
)
 
$
295

 
$
(18,478
)
(Favorable) development on attritional losses
 
(1,467
)
 
(8,000
)
 
(5,088
)
 
(14,555
)
Change in prior accident years
 
$
(19,736
)
 
$
(8,504
)
 
$
(4,793
)
 
$
(33,033
)
The net favorable development in the property lines was primarily driven by favorable development on the 2015 Tianjin port explosion and Chilean earthquake loss events. The net favorable development across the marine and specialty lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the three months ended September 30, 2017 and 2016 was 130.1% and 43.1%, respectively, an increase of 87.0 percentage points.
•
Policy acquisition cost ratio for the three months ended September 30, 2017 was 17.0% compared to 18.7% for the three months ended September 30, 2016, a decrease of 1.7 percentage points. Excluding the net impact of reinstatement premiums assumed and the acceleration of net unearned premiums ceded from third quarter 2017 notable loss events, the policy acquisition cost ratio for the three months ended September 30, 2017 was 20.9%, an increase of 2.2 percentage points compared to the three months ended September 30, 2016. The increase primarily related to an increase in the specialty lines as a result of a change in business mix, notably an increase in casualty business which carries higher acquisition costs and was partially offset by a decrease in agriculture business which carries lower acquisition costs.
•
General and administration expenses for the three months ended September 30, 2017 were $12.4 million compared to $17.5 million for the three months ended September 30, 2016, a decrease of $5.1 million, or 29.0%. The decrease was primarily driven by a reduction in the bonus accrual during the three months ended September 30, 2017.


70

Third Quarter 2017 Results of Operations - Talbot Segment
The following table presents underwriting (loss) income by line of business for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
68,848

 
$
39,167

 
$
84,868

 
$192,883
 
$
64,301

 
$
48,093

 
$
77,280

 
$
189,674

Reinsurance premiums ceded
 
(25,972
)
 
(2,626
)
 
(7,864
)
 
(36,462
)
 
(12,497
)
 
(352
)
 
(10,028
)
 
(22,877
)
Net premiums written
 
42,876

 
36,541

 
77,004

 
156,421

 
51,804

 
47,741

 
67,252

 
166,797

Change in unearned premiums
 
5,005

 
15,017

 
3,169

 
23,191

 
5,465

 
16,495

 
10,298

 
32,258

Net premiums earned
 
47,881

 
51,558

 
80,173

 
179,612

 
57,269

 
64,236

 
77,550

 
199,055

Other insurance related income
 
 
 
 
 
 
 
692

 
 
 
 
 
 
 
99

Total underwriting revenues
 
 
 
 
 
 
 
180,304

 
 
 
 
 
 
 
199,154

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
99,156

 
52,474

 
26,810

 
178,440

 
40,330

 
38,076

 
31,454

 
109,860

Policy acquisition costs
 
9,520

 
12,346

 
19,627

 
41,493

 
10,476

 
17,680

 
18,332

 
46,488

Total underwriting deductions before G&A
 
108,676

 
64,820

 
46,437

 
219,933

 
50,806

 
55,756

 
49,786

 
156,348

Underwriting (loss) income before G&A
 
$
(60,795
)
 
$
(13,262
)
 
$
33,736

 
$
(39,629
)
 
$
6,463

 
$
8,480

 
$
27,764

 
$
42,806

General and administrative expenses
 
 
 
 
 
 
 
23,069

 
 
 
 
 
 
 
32,333

Share compensation expenses
 
 
 
 
 
 
 
2,310

 
 
 
 
 
 
 
3,163

Total underwriting deductions
 
 
 
 
 
 
 
245,312

 
 
 
 
 
 
 
191,844

Underwriting (loss) income
 
 
 
 
 
 
 
$
(65,008
)
 
 
 
 
 
 
 
$
7,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
54,098

 
$
32,926

 
$
33,249

 
$
120,273

 
$
41,384

 
$
32,729

 
$
43,169

 
$
117,282

Current period—notable loss events
 
53,810

 
22,285

 
5,686

 
81,781

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
1,375

 
9,894

 
—

 
11,269

Change in prior accident years
 
(8,752
)
 
(2,737
)
 
(12,125
)
 
(23,614
)
 
(2,429
)
 
(4,547
)
 
(11,715
)
 
(18,691
)
Total losses and loss expenses
 
$
99,156

 
$
52,474

 
$
26,810

 
$
178,440

 
$
40,330

 
$
38,076

 
$
31,454

 
$
109,860

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
62.3
 %
 
93.3
 %
 
90.7
 %
 
81.1
 %
 
80.6
 %
 
99.3
 %
 
87.0
 %
 
87.9
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
113.0
 %
 
63.9
 %
 
41.4
 %
 
66.9
 %
 
72.3
 %
 
51.0
 %
 
55.7
 %
 
58.9
 %
Current period—notable loss events
 
112.4
 %
 
43.2
 %
 
7.1
 %
 
45.5
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
2.4
 %
 
15.4
 %
 
—
 %
 
5.7
 %
Change in prior accident years
 
(18.3
)%
 
(5.3
)%
 
(15.1
)%
 
(13.1
)%
 
(4.3
)%
 
(7.1
)%
 
(15.1
)%
 
(9.4
)%
Losses and loss expense ratio
 
207.1
 %
 
101.8
 %
 
33.4
 %
 
99.3
 %
 
70.4
 %
 
59.3
 %
 
40.6
 %
 
55.2
 %
Policy acquisition cost ratio
 
19.9
 %
 
23.9
 %
 
24.5
 %
 
23.1
 %
 
18.3
 %
 
27.5
 %
 
23.6
 %
 
23.4
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
14.2
 %
 
 
 
 
 
 
 
17.8
 %
Expense ratio
 
 
 
 
 
 
 
37.3
 %
 
 
 
 
 
 
 
41.2
 %
Combined ratio
 
 
 
 
 
 
 
136.6
 %
 
 
 
 
 
 
 
96.4
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

71

Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended September 30, 2017 were $192.9 million compared to $189.7 million for the three months ended September 30, 2016, an increase of $3.2 million, or 1.7%. Excluding the impact of reinstatement premiums from third quarter 2017 notable loss events of $3.0 million which impacted the property lines, gross premiums written for the three months ended September 30, 2017 were $189.9 million, an increase of $0.2 million, or 0.1% compared to the three months ended September 30, 2016.
•
Reinsurance premiums ceded for the three months ended September 30, 2017 were $36.5 million compared to $22.9 million for the three months ended September 30, 2016, an increase of $13.6 million, or 59.4%. Excluding the impact of reinstatement premiums ceded from third quarter 2017 notable loss events of $9.8 million, reinsurance premiums ceded for the three months ended September 30, 2017 were $26.7 million, an increase of $3.8 million, or 16.5% compared to the three months ended September 30, 2016. The increase was primarily driven by new reinsurance coverage purchased following third quarter 2017 notable loss events.
•
Net premiums earned for the three months ended September 30, 2017 were $179.6 million compared to $199.1 million for the three months ended September 30, 2016, a decrease of $19.4 million, or 9.8%. Excluding the impact of net reinstatement premiums ceded from third quarter 2017 notable loss events of $6.8 million, net premiums earned were $186.4 million, a decrease of $12.6 million, or 6.4% compared to the three months ended September 30, 2016.
•
Losses and loss expenses for the three months ended September 30, 2017 were $178.4 million compared to $109.9 million for the three months ended September 30, 2016, an increase of $68.6 million or 62.4%. The increase was primarily driven by an increase in notable loss events and losses of $10.8 million, or 6.0 percentage points of the loss ratio, arising from the Mexico City Earthquake and was partially offset by a decrease in non-notable loss events.
Notable Loss Events
◦
Losses and loss expenses incurred during the three months ended September 30, 2017 from three notable loss events were as follows:
 
 
Three Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Gross losses and loss expenses
 
$
61,426

 
$
74,301

 
$
29,713

 
$
165,440

Less: Reinsurance recoveries
 
(27,047
)
 
(42,304
)
 
(14,308
)
 
(83,659
)
Talbot’s share of net losses and loss expenses
 
34,379

 
31,997

 
15,405

 
81,781

Plus: Net impact on premiums earned (a)
 
789

 
4,623

 
1,389

 
6,801

Net loss attributable to Talbot
 
$
35,168

 
$
36,620

 
$
16,794

 
$
88,582

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded.
Talbot’s share of net losses and loss expenses from Hurricanes Harvey, Irma and Maria was $81.8 million, or 45.5 percentage points of the loss ratio. Inclusive of net reinstatement premiums ceded of $6.8 million, the net loss attributable to Talbot from notable loss events was $88.6 million. The net losses and loss expenses from the notable loss events by line of business were as follows:
◦
Hurricane Harvey - property, marine and specialty lines of $21.8 million, $10.4 million and $2.2 million, respectively;
◦
Hurricane Irma - property, marine and specialty lines of $17.5 million, $11.2 million and $3.3 million, respectively; and
◦
Hurricane Maria - property, marine and specialty lines of $14.5 million, $0.7 million and $0.2 million, respectively;
◦
There were no notable loss events occurring during the three months ended September 30, 2016.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended September 30, 2017.

72

◦
Losses and loss expenses incurred during the three months ended September 30, 2016 from two non-notable loss events were as follows:
 
 
Three Months Ended September 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
SpaceX
 
Talbot’s share of net losses and loss expenses
 
1,375

 
9,894

 
11,269

Plus: Reinstatement premiums ceded
 
—

 
919

 
919

Net loss attributable to Talbot
 
$
1,375

 
$
10,813

 
$
12,188

Losses and loss expenses from two non-notable loss events were $11.3 million, or 5.7 percentage points of the loss ratio. Losses and loss expenses related to SpaceX were $9.9 million, or 5.0 percentage points of the loss ratio, and related solely to the marine lines. Inclusive of reinstatement premiums ceded, the net loss attributable to Talbot was a reduction of $10.8 million. Losses and loss expenses from the Texas Hailstorms non-notable loss event were $1.4 million, or 0.7 percentage points of the loss ratio, and related solely to the property lines.
Change in prior accident years
◦
Loss reserve development by line of business for the three months ended September 30, 2017 and 2016 was as follows:
 
 
Three Months Ended September 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(177
)
 
$
1,277

 
$
(470
)
 
$
630

(Favorable) development on attritional losses
 
(8,575
)
 
(4,014
)
 
(11,655
)
 
(24,244
)
Change in prior accident years
 
$
(8,752
)
 
$
(2,737
)
 
$
(12,125
)
 
$
(23,614
)
The adverse development on event losses in the marine lines was driven by adverse development on the 2016 Jubilee Oil non-notable loss event. The favorable development across the property and specialty lines was driven by favorable development on attritional losses.
 
 
Three Months Ended September 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) development on event losses
 
$
(478
)
 
$
(526
)
 
$
(833
)
 
$
(1,837
)
(Favorable) development on attritional losses
 
(1,951
)
 
(4,021
)
 
(10,882
)
 
(16,854
)
Change in prior accident years
 
$
(2,429
)
 
$
(4,547
)
 
$
(11,715
)
 
$
(18,691
)
The net favorable development across all lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the three months ended September 30, 2017 and 2016 was 99.3% and 55.2%, respectively, an increase of 44.1 percentage points.
•
Policy acquisition cost ratio for the three months ended September 30, 2017 was 23.1% compared to 23.4% for the three months ended September 30, 2016, a decrease of 0.3 percentage points.
•
General and administration expenses for the three months ended September 30, 2017 were $23.1 million compared to $32.3 million for the three months ended September 30, 2016, a decrease of $9.3 million, or 28.7%. The decrease was primarily driven by a reduction in the bonus accrual during the three months ended September 30, 2017.

73

Third Quarter 2017 Results of Operations - Western World Segment
The following table presents underwriting (loss) by line of business for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
Liability
 
Specialty
 
 Total
 
 Property
 
Liability
 
Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
36,359

 
$
68,358

 
$
51,800

 
$156,517
 
$
23,757

 
$
61,503

 
$
—

 
$
85,260

Reinsurance premiums ceded
 
(22,466
)
 
(1,793
)
 
(18,948
)
 
(43,207
)
 
(2,688
)
 
(3,514
)
 
—

 
(6,202
)
Net premiums written
 
13,893

 
66,565

 
32,852

 
113,310

 
21,069

 
57,989

 
—

 
79,058

Change in unearned premiums
 
800

 
(5,102
)
 
65,905

 
61,603

 
(4,371
)
 
(3,889
)
 
—

 
(8,260
)
Net premiums earned
 
14,693

 
61,463

 
98,757

 
174,913

 
16,698

 
54,100

 
—

 
70,798

Other insurance related income
 
 
 
 
 
 
 
662

 
 
 
 
 
 
 
219

Total underwriting revenues
 
 
 
 
 
 
 
175,575

 
 
 
 
 
 
 
71,017

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
29,086

 
43,784

 
84,839

 
157,709

 
9,604

 
36,144

 
—

 
45,748

Policy acquisition costs
 
6,672

 
14,062

 
(13
)
 
20,721

 
4,382

 
12,712

 
—

 
17,094

Total underwriting deductions before G&A
 
35,758

 
57,846

 
84,826

 
178,430

 
13,986

 
48,856

 
—

 
62,842

Underwriting (loss) income before G&A
 
$
(21,065
)
 
$
3,617

 
$
13,931

 
$
(2,855
)
 
$
2,712

 
$
5,244

 
$
—

 
$
8,175

General and administrative expenses
 
 
 
 
 
 
 
21,553

 
 
 
 
 
 
 
10,171

Share compensation expenses
 
 
 
 
 
 
 
354

 
 
 
 
 
 
 
702

Total underwriting deductions
 
 
 
 
 
 
 
200,337

 
 
 
 
 
 
 
73,715

Underwriting (loss)
 
 
 
 
 
 
 
$
(24,762
)
 
 
 
 
 
 
 
$
(2,698
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
18,622

 
$
44,310

 
$
84,839

 
$
147,771

 
$
10,139

 
$
36,471

 
$
—

 
$
46,610

Current period—notable loss events
 
10,000

 
—

 
—

 
10,000

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
18

 
—

 
—

 
18

Change in prior accident years
 
464

 
(526
)
 
—

 
(62
)
 
(553
)
 
(327
)
 
—

 
(880
)
Total losses and loss expenses
 
$
29,086

 
$
43,784

 
$
84,839

 
$
157,709

 
$
9,604

 
$
36,144

 
$
—

 
$
45,748

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
38.2
%
 
97.4
 %
 
63.4
 %
 
72.4
%
 
88.7
 %
 
94.3
 %
 
—
%
 
92.7
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
126.7
%
 
72.1
 %
 
85.9
 %
 
84.5
%
 
60.7
 %
 
67.4
 %
 
—
%
 
65.8
 %
Current period—notable loss events
 
68.1
%
 
—
 %
 
—
 %
 
5.7
%
 
—
 %
 
—
 %
 
—
%
 
—
 %
Current period—non-notable loss events
 
—
%
 
—
 %
 
—
 %
 
—
%
 
0.1
 %
 
—
 %
 
—
%
 
—
 %
Change in prior accident years
 
3.2
%
 
(0.9
)%
 
—
 %
 
—
%
 
(3.3
)%
 
(0.6
)%
 
—
%
 
(1.2
)%
Losses and loss expense ratio
 
198.0
%
 
71.2
 %
 
85.9
 %
 
90.2
%
 
57.5
 %
 
66.8
 %
 
—
%
 
64.6
 %
Policy acquisition cost ratio
 
45.4
%
 
22.9
 %
 
—
 %
 
11.8
%
 
26.2
 %
 
23.5
 %
 
—
%
 
24.1
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
12.5
%
 
 
 
 
 
 
 
15.4
 %
Expense ratio
 
 
 
 
 
 
 
24.3
%
 
 
 
 
 
 
 
39.5
 %
Combined ratio
 
 
 
 
 
 
 
114.5
%
 
 
 
 
 
 
 
104.1
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

74

Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
Gross premiums written for the three months ended September 30, 2017 were $156.5 million compared to $85.3 million for the three months ended September 30, 2016, an increase of $71.3 million, or 83.6%. The increase in gross premiums written was driven by:
◦
An increase in gross premiums written in specialty lines of $51.8 million due to new agriculture business written through CRS; and
◦
An increase in the property and liability lines of $12.6 million and $6.9 million, respectively, primarily due to the continued build out of product offerings in the short-tail property lines. The increase in the liability lines was due to an increase in the programs and contract liability lines which was partially offset by decreases resulting from the discontinuation of other underperforming general liability lines.
•
Reinsurance premiums ceded for the three months ended September 30, 2017 were $43.2 million compared to $6.2 million for the three months ended September 30, 2016, an increase of $37.0 million. The increase was primarily driven by an increase in ceded agriculture premiums of $18.9 million relating to new business written through CRS, reinstatement premiums ceded of $9.9 million from third quarter 2017 notable loss events and new reinsurance coverage purchased following third quarter 2017 notable loss events.
•
Net premiums earned for the three months ended September 30, 2017 were $174.9 million compared to $70.8 million for the three months ended September 30, 2016, an increase of $104.1 million, or 147.1%. The increase was primarily driven by an increase in agriculture net premiums earned of $98.8 million relating to new business written through CRS and was partially offset by the impact of reinstatement premiums ceded from the third quarter 2017 notable loss events.
•
Losses and loss expenses for the three months ended September 30, 2017 were $157.7 million compared to $45.7 million for the three months ended September 30, 2016, an increase of $112.0 million or 244.7%. The increase was primarily driven by an increase in the specialty lines due to new agriculture business written through CRS, losses and loss expenses from the third quarter 2017 notable loss events and an increase in attritional losses in the property lines as a result of an increase in fire losses of $2.9 million and several large losses reported in the brokerage professional lines totaling $1.4 million.
Notable Loss Events
◦
Losses and loss expenses incurred during the three months ended September 30, 2017 from two notable loss events were as follows:
 
 
Three Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Gross losses and loss expenses
 
$
100,725

 
$
12,200

 
$
112,925

Less: Reinsurance recoveries
 
(95,725
)
 
(7,200
)
 
(102,925
)
Western World’s share of net losses and loss expenses
 
5,000

 
5,000

 
10,000

Plus: Net impact on premiums earned (a)
 
9,872

 
—

 
9,872

Net loss attributable to Western World
 
$
14,872

 
$
5,000

 
$
19,872

(a)
Net impact on premiums earned includes reinstatement premiums ceded.
Western World’s share of net losses and loss expenses from Hurricanes Harvey and Irma was $10.0 million, or 5.7 percentage points of the loss ratio and related solely to the property lines. Inclusive of reinstatement premiums ceded of $9.9 million, the net loss attributable to Western World from notable loss events was $19.9 million.
◦
There were no notable loss events occurring during the three months ended September 30, 2016.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the three months ended September 30, 2017 and 2016.

75

Loss Ratio
◦
The loss ratio for the three months ended September 30, 2017 and 2016 was 90.2% and 64.6%, respectively, an increase of 25.6 percentage points. The loss ratio for the three months ended September 30, 2017 included specialty losses of $84.8 million arising from new agriculture business written through CRS which is booked at a 85.9% loss ratio and other U.S.-based weather losses of $1.3 million, or 0.7 percentage points of the loss ratio, compared to $3.0 million, or 4.3 percentage points of the loss ratio during the three months ended September 30, 2016.
•
Policy acquisition cost ratio for the three months ended September 30, 2017 was 11.8% compared to 24.1% for the three months ended September 30, 2016, a decrease of 12.3 percentage points. The decrease was primarily driven by new agriculture business written during the three months ended September 30, 2017 which carries lower acquisition costs.
•
General and administration expenses for the three months ended September 30, 2017 were $21.6 million compared to $10.2 million for the three months ended September 30, 2016, an increase of $11.4 million, or 111.9%. General and administrative expenses for the three months ended September 30, 2017 included $12.0 million of CRS expenses, of which $1.7 million related to the amortization of intangible assets acquired and was partially offset by a reduction in the bonus accrual during the three months ended September 30, 2017.


76

Third Quarter 2017 Results of Operations - AlphaCat Segment
The following table presents Validus’ share of the AlphaCat (loss) income on an asset manager basis for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
Fee revenues
 
 
 
 
Third party
 
$
5,095

 
$
7,025

Related party
 
457

 
1,373

Total fee revenues
 
5,552

 
8,398

 
 
 
 
 
Expenses
 
 
 
 
General and administrative expenses
 
2,929

 
3,324

Share compensation expenses
 
183

 
(107
)
Finance expenses
 
32

 
31

Tax (benefit)
 
(65
)
 
—

Foreign exchange losses
 
7

 
5

Total expenses
 
3,086

 
3,253

Income before investment (loss) income from AlphaCat Funds and Sidecars
 
$
2,466

 
$
5,145

 
 
 
 
 
Investment (loss) income from AlphaCat Funds and Sidecars (a)
 
 
 
 
AlphaCat Sidecars
 
201

 
(72
)
AlphaCat ILS Funds - Lower Risk (b)
 
(7,553
)
 
2,321

AlphaCat ILS Funds - Higher Risk (b)
 
(21,816
)
 
2,479

BetaCat ILS Funds
 
(922
)
 
1,303

PaCRe
 
—

 
—

Validus' share of investment (loss) income from AlphaCat Funds and Sidecars
 
(30,090
)
 
6,031

Validus' share of AlphaCat (loss) income
 
$
(27,624
)
 
$
11,176

 
 
 
 
 
Supplemental information:
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
—

 
$
(112
)
AlphaCat ILS Funds - Lower Risk (b)
 
10,979

 
2,049

AlphaCat ILS Funds - Higher Risk (b)
 
16,275

 
1,797

AlphaCat Direct (c)
 
(41
)
 
679

Total
 
$
27,213

 
$
4,413

(a)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

77

Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
Fee revenues earned for the three months ended September 30, 2017 were $5.6 million compared to $8.4 million during the three months ended September 30, 2016, a decrease of $2.8 million or 33.9%. Third party fee revenues earned during the three months ended September 30, 2017 were $5.1 million compared to $7.0 million, a decrease of $1.9 million or 27.5%. The decrease in fee revenues earned from third parties of $1.9 million was driven by a decrease in performance fees as a result of the third quarter 2017 notable loss events and was partially offset by an increase in management fees as a result of an increase in assets under management over the last twelve months.
•
Total expenses for the three months ended September 30, 2017 were $3.1 million compared to $3.3 million during the three months ended September 30, 2016, a decrease of $0.2 million, or 5.1%. The decrease was driven by a reduction in the bonus accrual during the three months ended September 30, 2017.
•
Validus’ share of investment (loss) income from AlphaCat Funds and Sidecars for the three months ended September 30, 2017 was a loss $30.1 million compared to income of $6.0 million during the three months ended September 30, 2016, a decrease of $36.1 million. The decrease was driven by the third quarter 2017 notable loss events.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
October 1, 2017
 
July 1, 2017
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
5,608

 
$
5,686

AlphaCat ILS Funds - Lower Risk
 
75,492

 
79,808

AlphaCat ILS Funds - Higher Risk
 
62,566

 
84,663

AlphaCat Direct (b)
 
—

 
—

BetaCat ILS Funds
 
24,084

 
25,000

Total
 
$
167,750

 
$
195,157

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
20,459

 
$
20,590

AlphaCat ILS Funds - Lower Risk
 
1,317,417

 
1,309,377

AlphaCat ILS Funds - Higher Risk
 
687,674

 
896,639

AlphaCat Direct (b)
 
546,226

 
534,555

BetaCat ILS Funds
 
120,391

 
118,493

Total
 
2,692,167

 
2,879,654

Total Assets Under Management
 
$
2,859,917

 
$
3,074,811

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat’s assets under management were $2.9 billion as at October 1, 2017, compared to $3.1 billion as at July 1, 2017, of which third party assets under management were $2.7 billion as at October 1, 2017, compared to $2.9 billion as at July 1, 2017. The decrease in assets under management was driven by the impact of the third quarter 2017 notable loss events.
During the three months ended October 1, 2017, a total of $176.5 million of capital was raised, all of which was raised from third parties. During the three months ended October 1, 2017, $90.5 million was returned to investors, of which $83.2 million was returned to third party investors.


78

Third Quarter 2017 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
Managed investments
 
 
 
 
Managed net investment income (a)
 
$
37,091

 
$
41,071

Net realized gains on managed investments (a)
 
903

 
4,080

Change in net unrealized gains on managed investments (a)
 
941

 
4,652

Income from investment affiliates
 
1,011

 
453

Total managed investment return
 
$
39,946

 
$
50,256

 
 
 
 
 
Corporate expenses
 
 
 
 
General and administrative expenses
 
$
9,539

 
$
18,221

Share compensation expenses
 
3,990

 
4,048

Finance expenses (a)
 
14,449

 
14,317

Dividends on preferred shares
 
5,627

 
2,252

Tax (benefit) expense (a)
 
(2,567
)
 
1,830

Total Corporate expenses
 
$
31,038

 
$
40,668

 
 
 
 
 
Other items
 
 
 
 
Foreign exchange losses (a)
 
(1,495
)
 
(1,067
)
Other income (loss)
 
35

 
(1,529
)
Total other items
 
$
(1,460
)
 
$
(2,596
)
Total Corporate and Investments
 
$
7,448

 
$
6,992

(a)
These items exclude the components which are included in the Company’s share of AlphaCat and amounts which are consolidated from VIEs.
Investments
Highlights of our managed investment portfolio for the third quarter 2017 as compared to 2016 were as follows:
•
Managed net investment income for the three months ended September 30, 2017 was $37.1 million compared to $41.1 million for the three months ended September 30, 2016, a decrease of $4.0 million, or 9.7%. The decrease was primarily due to an outsized gain in one of the Company’s fixed income funds during the three months ended September 30, 2016.
•
Annualized effective yield for the three months ended September 30, 2017 was 2.23%, compared to 2.58% for the three months ended September 30, 2016, a decrease of 35 basis points.
•
Net realized gains on managed investments for the three months ended September 30, 2017 were $0.9 million compared to $4.1 million for the three months ended September 30, 2016, an unfavorable movement of $3.2 million or 77.9%.
•
The change in net unrealized gains on managed investments for the three months ended September 30, 2017 was $0.9 million compared to $4.7 million for the three months ended September 30, 2016, an unfavorable movement of $3.7 million, or 79.8%.
Corporate Expenses and Other Items
Highlights for the third quarter 2017 as compared to 2016 were as follows:
•
General and administrative expenses for the three months ended September 30, 2017 were $9.5 million compared to $18.2 million for the three months ended September 30, 2016, a decrease of $8.7 million or 47.6%. The decrease was driven by a reduction in the bonus accrual during the three months ended September 30, 2017.
•
Share compensation expenses for the three months ended September 30, 2017 were $4.0 million compared to $4.0 million for the three months ended September 30, 2016.

79

•
Finance expenses, excluding the Company's share of AlphaCat finance expenses from consolidated VIEs, for the three months ended September 30, 2017 were $14.4 million compared to $14.3 million for the three months ended September 30, 2016, an increase of $0.1 million or 0.9%.
•
Dividends paid on preferred shares during the three months ended September 30, 2017 were $5.6 million compared to $2.3 million during the three months ended September 30, 2016, an increase of $3.4 million, or 149.9% due to $250.0 million of new preferred shares being issued during the second quarter of 2017.
•
Foreign exchange losses for the three months ended September 30, 2017 were $1.5 million compared to $1.1 million for the three months ended September 30, 2016, an increase of $0.4 million, or 40.1%.

80

Year to Date Results of Operations - Consolidated
The following table presents the results of operations for the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended September 30,
 
2017
 
2016
Revenues
 

 
 

Gross premiums written
$
2,507,615

 
$
2,309,251

Reinsurance premiums ceded
(373,188
)
 
(249,070
)
Net premiums written
2,134,427

 
2,060,181

Change in unearned premiums
(204,816
)
 
(351,415
)
Net premiums earned
1,929,611

 
1,708,766

Net investment income
128,913

 
112,232

Net realized gains on investments
2,016

 
6,537

Change in net unrealized gains on investments
24,472

 
84,331

Income (loss) from investment affiliates
15,665

 
(4,249
)
Other insurance related income and other income
6,240

 
1,627

Foreign exchange (losses) gains
(7,164
)
 
11,765

Total revenues
2,099,753

 
1,921,009

Expenses
 
 
 
Losses and loss expenses
1,820,336

 
789,971

Policy acquisition costs
344,486

 
328,593

General and administrative expenses
254,615

 
258,339

Share compensation expenses
30,080

 
32,465

Finance expenses
42,675

 
43,890

Transaction expenses
4,427

 
—

Total expenses
2,496,619

 
1,453,258

(Loss) income before taxes, (loss) from operating affiliate and (income) attributable to AlphaCat investors
(396,866
)
 
467,751

Tax benefit (expense)
7,168

 
(1,418
)
(Loss) from operating affiliate
—

 
(23
)
Loss (income) attributable to AlphaCat investors
54,797

 
(16,278
)
Net (loss) income
$
(334,901
)
 
$
450,032

Net loss (income) attributable to noncontrolling interests
290,144

 
(96,163
)
Net (loss) income (attributable) available to Validus
(44,757
)
 
353,869

Dividends on preferred shares
(10,033
)
 
(2,252
)
Net (loss) income (attributable) available to Validus common shareholders
$
(54,790
)
 
$
351,617

 
 
 
 
Supplemental information:
 
 
 
Losses and loss expenses:
 
 
 
Current period excluding items below
$
1,046,416

 
$
851,540

Current period—notable loss events
926,175

 
37,901

Current period—non-notable loss events
27,330

 
69,935

Change in prior accident years
(179,585
)
 
(169,405
)
Total losses and loss expenses
$
1,820,336

 
$
789,971

Selected ratios:
 
 
 
Ratio of net to gross premiums written
85.1
 %
 
89.2
 %
Losses and loss expense ratio:
 
 
 
Current period excluding items below
54.2
 %
 
49.8
 %
Current period—notable loss events
48.0
 %
 
2.2
 %
Current period—non-notable loss events
1.4
 %
 
4.1
 %
Change in prior accident years
(9.3
)%
 
(9.9
)%
Losses and loss expense ratio
94.3
 %
 
46.2
 %
Policy acquisition cost ratio
17.9
 %
 
19.2
 %
General and administrative expense ratio (a)
14.7
 %
 
17.1
 %
Expense ratio
32.6
 %
 
36.3
 %
Combined ratio
126.9
 %
 
82.5
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

81

Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the nine months ended September 30, 2017 were $2,507.6 million compared to $2,309.3 million for the nine months ended September 30, 2016, an increase of $198.4 million, or 8.6%. The increase was primarily driven by an increase in the Western World and AlphaCat segments and was partially offset by a decrease in the Talbot segment.
•
Reinsurance premiums ceded for the nine months ended September 30, 2017 were $373.2 million compared to $249.1 million for the nine months ended September 30, 2016, an increase of $124.1 million, or 49.8% and was across all segments.
•
Net premiums earned for the nine months ended September 30, 2017 were $1,929.6 million compared to $1,708.8 million for the nine months ended September 30, 2016, an increase of $220.8 million, or 12.9%. The increase was primarily driven by an increase in the Western World, Validus Re and AlphaCat segments and was partially offset by a decrease in the Talbot segment.
•
Losses and loss expenses for the nine months ended September 30, 2017 were $1,820.3 million compared to $790.0 million for the nine months ended September 30, 2016, an increase of $1,030.4 million or 130.4%. The increase was driven by an increase in losses from notable loss events and $148.4 million of losses relating to new agriculture business written through CRS. The increase was partially offset by higher favorable development on prior accident years and a reduction in losses from non-notable loss events.
Notable Loss Events
◦
Losses and loss expenses incurred during the nine months ended September 30, 2017 from three notable loss events were $926.2 million, or 48.0 percentage points of the loss ratio during the three months ended September 30, 2017. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, notable losses for the nine months ended September 30, 2017 were $365.1 million, or 21.5 percentage points of the loss ratio excluding the AlphaCat segment. Including Validus’ share of AlphaCat losses and loss expenses of $35.7 million and the net impact of reinstatement premiums and acceleration of unearned premiums of $33.5 million, the net loss attributable to Validus from 2017 notable loss events was $367.3 million and was incurred by event as follows:
 
 
Nine Months Ended September 30, 2017
 
 
Total Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Total
Gross losses and loss expenses excluding the Alphacat segment
 
$
439,319

 
$
419,916

 
$
143,053

 
$
1,002,288

Less: Reinsurance recoveries
 
(292,315
)
 
(254,973
)
 
(89,862
)
 
(637,150
)
Net losses and loss expenses excluding the AlphaCat segment
 
147,004

 
164,943

 
53,191

 
365,138

Validus’ share of AlphaCat losses and loss expenses
 
7,298

 
20,992

 
7,360

 
35,650

Validus’ share of net losses and loss expenses
 
154,302

 
185,935

 
60,551

 
400,788

Less: Net impact on premiums earned (a)
 
(7,941
)
 
(22,686
)
 
(2,865
)
 
(33,492
)
Net loss attributable to Validus
 
$
146,361

 
$
163,249

 
$
57,686

 
$
367,296

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded, and the net impact of accelerating unearned premiums assumed and ceded.
◦
Losses and loss expenses incurred from a single notable loss event occurring during the nine months ended September 30, 2016, the Canadian Wildfires, were $37.9 million, or 2.2 percentage points of the loss ratio. Net of reinstatement premiums of $3.6 million, the net loss attributable to the Company was $34.3 million.
Non-notable Loss Events
◦
Losses and loss expenses from a single energy non-notable loss event occurring during the nine months ended September 30, 2017 were $27.3 million, or 1.4 percentage points of the loss ratio. Net of reinstatement premiums of $0.6 million, the net loss attributable to the Company was $26.8 million.

82

◦
Losses and loss expenses from four non-notable loss events occurring during the nine months ended September 30, 2016 were as follows:
 
 
Nine Months Ended September 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Validus’ share of net losses and loss expenses
 
19,160

 
15,318

 
15,214

 
20,243

 
69,935

Less: Reinstatement premiums, net
 
(1,967
)
 
—

 
(7,667
)
 
(1,240
)
 
(10,874
)
Net loss attributable to Validus
 
$
17,193

 
$
15,318

 
$
7,547

 
$
19,003

 
$
59,061

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake, Jubilee Oil and SpaceX non-notable loss events were $69.9 million, or 4.1 percentage points of the loss ratio. Net of reinstatement premiums of $10.9 million, the net loss attributable to the Company from these non-notable loss events was $59.1 million.
Change in prior accident years
◦
Loss reserve development for the nine months ended September 30, 2017 and 2016 was as follows:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
(Favorable) development on event losses
 
$
(31,545
)
 
$
(9,049
)
(Favorable) development on attritional losses
 
(148,040
)
 
(160,356
)
Change in prior accident years
 
$
(179,585
)
 
$
(169,405
)
The favorable development on event losses during the nine months ended September 30, 2017 primarily related to the 2015 Pemex oil refinery explosion. The favorable development on event losses for the nine months ended September 30, 2016 primarily related to the 2015 Tianjin port explosion and Chilean earthquake loss events.
Loss Ratio
◦
The loss ratio for the nine months ended September 30, 2017 and 2016 was 94.3% and 46.2%, respectively, an increase of 48.1 percentage points. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, the loss ratio for the nine months ended September 30, 2017 was 73.5%.
•
Loss ratios by line of business for the nine months ended September 30, 2017 and 2016 were as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
Property
143.0
%
 
30.2
%
Marine
50.1
%
 
52.4
%
Specialty
64.2
%
 
57.6
%
Liability
71.6
%
 
65.1
%
All lines
94.3
%
 
46.2
%
•
Policy acquisition cost ratio for the nine months ended September 30, 2017 was 17.9% compared to 19.2% for the nine months ended September 30, 2016, a decrease of 1.3 percentage points.
•
General and administrative expenses for the nine months ended September 30, 2017 were $254.6 million compared to $258.3 million for the nine months ended September 30, 2016, a decrease of $3.7 million or 1.4%. The decrease was primarily driven by a reduction in the bonus accrual during the nine months ended September 30, 2017 and was partially offset by an increase in G&A expenses in the Western World segment, which included $18.8 million of CRS expenses, of which $2.9 million related to the amortization of intangible assets acquired.
•
Combined ratio for the nine months ended September 30, 2017 and 2016 was 126.9% and 82.5%, respectively, an increase of 44.4 percentage points. Excluding the AlphaCat segment, which includes results attributable to AlphaCat’s third party investors and noncontrolling interests, the combined ratio for the nine months ended September 30, 2017 was 107.7%.

83

Year to Date Results of Operations - Validus Re Segment
The following table presents underwriting (loss) income by line of business for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
496,120

 
$
116,331

 
$
458,958

 
$
1,071,409

 
$
462,432

 
$
109,876

 
$
499,911

 
$
1,072,219

Reinsurance premiums ceded
 
(108,496
)
 
(18,295
)
 
(34,397
)
 
(161,188
)
 
(86,745
)
 
(12,568
)
 
(12,345
)
 
(111,658
)
Net premiums written
 
387,624

 
98,036

 
424,561

 
910,221

 
375,687

 
97,308

 
487,566

 
960,561

Change in unearned premiums
 
(59,990
)
 
(19,410
)
 
(104,755
)
 
(184,155
)
 
(74,613
)
 
(10,183
)
 
(156,333
)
 
(241,129
)
Net premiums earned
 
327,634

 
78,626

 
319,806

 
726,066

 
301,074

 
87,125

 
331,233

 
719,432

Other insurance related income (loss)
 
 
 
 
 
 
 
204

 
 
 
 
 
 
 
(107
)
Total underwriting revenues
 
 
 
 
 
 
 
726,270

 
 
 
 
 
 
 
719,325

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
306,021

 
41,192

 
191,110

 
538,323

 
58,638

 
40,561

 
214,233

 
313,432

Policy acquisition costs
 
53,607

 
13,785

 
66,444

 
133,836

 
55,351

 
13,937

 
58,372

 
127,660

Total underwriting deductions before G&A
 
359,628

 
54,977

 
257,554

 
672,159

 
113,989

 
54,498

 
272,605

 
441,092

Underwriting (loss) income before G&A
 
$
(31,994
)
 
$
23,649

 
$
62,252

 
$
54,111

 
$
187,085

 
$
32,627

 
$
58,628

 
$
278,233

General and administrative expenses
 
 
 
 
 
 
 
48,550

 
 
 
 
 
 
 
52,579

Share compensation expenses
 
 
 
 
 
 
 
7,746

 
 
 
 
 
 
 
8,371

Total underwriting deductions
 
 
 
 
 
 
 
728,455

 
 
 
 
 
 
 
502,042

Underwriting (loss) income
 
 
 
 
 
 
 
$
(2,185
)
 
 
 
 
 
 
 
$
217,283

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
89,189

 
$
42,773

 
$
214,440

 
$
346,402

 
$
70,705

 
$
44,509

 
$
227,117

 
$
342,331

Current period—notable loss events
 
236,091

 
37,266

 
—

 
273,357

 
17,884

 
—

 
—

 
17,884

Current period—non-notable loss events
 
11,355

 
—

 
7,225

 
18,580

 
22,085

 
11,019

 
9,707

 
42,811

Change in prior accident years
 
(30,614
)
 
(38,847
)
 
(30,555
)
 
(100,016
)
 
(52,036
)
 
(14,967
)
 
(22,591
)
 
(89,594
)
Total losses and loss expenses
 
$
306,021

 
$
41,192

 
$
191,110

 
$
538,323

 
$
58,638

 
$
40,561

 
$
214,233

 
$
313,432

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
78.1
 %
 
84.3
 %
 
92.5
 %
 
85.0
 %
 
81.2
 %
 
88.6
 %
 
97.5
 %
 
89.6
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
27.1
 %
 
54.4
 %
 
67.0
 %
 
47.7
 %
 
23.6
 %
 
51.1
 %
 
68.6
 %
 
47.6
 %
Current period—notable loss events
 
72.1
 %
 
47.4
 %
 
—
 %
 
37.6
 %
 
5.9
 %
 
—
 %
 
—
 %
 
2.5
 %
Current period—non-notable loss events
 
3.5
 %
 
—
 %
 
2.3
 %
 
2.6
 %
 
7.3
 %
 
12.6
 %
 
2.9
 %
 
6.0
 %
Change in prior accident years
 
(9.3
)%
 
(49.4
)%
 
(9.5
)%
 
(13.8
)%
 
(17.3
)%
 
(17.1
)%
 
(6.8
)%
 
(12.5
)%
Losses and loss expense ratio
 
93.4
 %
 
52.4
 %
 
59.8
 %
 
74.1
 %
 
19.5
 %
 
46.6
 %
 
64.7
 %
 
43.6
 %
Policy acquisition cost ratio
 
16.4
 %
 
17.5
 %
 
20.8
 %
 
18.4
 %
 
18.4
 %
 
16.0
 %
 
17.6
 %
 
17.7
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
7.8
 %
 
 
 
 
 
 
 
8.5
 %
Expense ratio
 
 
 
 
 
 
 
26.2
 %
 
 
 
 
 
 
 
26.2
 %
Combined ratio
 
 
 
 
 
 
 
100.3
 %
 
 
 
 
 
 
 
69.8
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

84

Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the nine months ended September 30, 2017 were $1,071.4 million compared to $1,072.2 million for the nine months ended September 30, 2016, a decrease of $0.8 million, or 0.1%. Excluding the impact of reinstatement premiums from 2017 notable loss events which impacted the property and marine lines by $59.1 million and $6.7 million, respectively, gross premiums written for the nine months ended September 30, 2017 were $1,005.6 million, a decrease of $66.6 million, or 6.2% compared to the nine months ended September 30, 2016. The decrease in gross premiums written was primarily driven by:
◦
A decrease in the specialty lines of $41.0 million, primarily driven by a decline in agriculture premiums and was partially offset by an increase in casualty business written; and
◦
A decrease in the property lines of $25.5 million, primarily driven by reductions in participation and the non-renewal of various catastrophe excess of loss programs due to market conditions.
•
Reinsurance premiums ceded for the nine months ended September 30, 2017 were $161.2 million compared to $111.7 million for the nine months ended September 30, 2016, an increase of $49.5 million, or 44.4%. The increase was primarily driven by an increase in the property lines of $21.8 million as a result of a new proportional retro program, adjustments to existing business and new retrocession coverage purchased following 2017 notable loss events and an increase in the specialty lines of $22.1 million relating to new non-proportional retro coverage, proportional agriculture retro cover and a new casualty and mortgage quota share retrocession program.
•
Net premiums earned for the nine months ended September 30, 2017 were $726.1 million compared to $719.4 million for the nine months ended September 30, 2016, an increase of $6.6 million, or 0.9%. Excluding the net impact of reinstatement premiums assumed and the acceleration of net unearned premiums ceded from 2017 notable loss events of $50.2 million, net premiums earned were $675.9 million, a decrease of $43.5 million, or 6.1% compared to the nine months ended September 30, 2016.
•
Losses and loss expenses for the nine months ended September 30, 2017 were $538.3 million compared to $313.4 million for the nine months ended September 30, 2016, an increase of $224.9 million or 71.8%. The increase was driven by an increase in notable loss events and was partially offset by higher favorable development on prior accident years and a reduction in losses from non-notable loss events.
Notable Loss Events
◦
Losses and loss expenses incurred during the nine months ended September 30, 2017 from three notable loss events were as follows:
 
 
Nine Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Gross losses and loss expenses
 
$
277,643

 
$
334,583

 
$
114,178

 
$
726,404

Less: Reinsurance recoveries
 
(170,018
)
 
(206,637
)
 
(76,392
)
 
(453,047
)
Validus Re’s share of net losses and loss expenses
 
$
107,625

 
$
127,946

 
$
37,786

 
$
273,357

Less: Net impact on premiums earned (a)
 
(18,602
)
 
(27,309
)
 
(4,254
)
 
(50,165
)
Net loss attributable to Validus Re
 
$
89,023

 
$
100,637

 
$
33,532

 
$
223,192

(a)
Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Validus Re’s share of net losses and loss expenses from Hurricanes Harvey, Irma and Maria was $273.4 million, or 37.6 percentage points of the loss ratio. Net of reinstatement premiums assumed and the impact of accelerating net unearned premiums of $50.2 million, the net loss attributable to Validus Re from notable loss events was $223.2 million. The net losses and loss expenses from the notable loss events by line of business were as follows:
◦
Hurricane Harvey - property and marine lines of $89.2 million and $18.4 million, respectively;
◦
Hurricane Irma - property and marine lines of $113.7 million and $14.3 million, respectively; and
◦
Hurricane Maria - property and marine lines of $33.2 million and $4.6 million, respectively.
◦
Losses and loss expenses incurred from a single notable loss event occurring during the nine months ended September 30, 2016, the Canadian Wildfires, were $17.9 million, or 2.5 percentage points of the loss ratio and related solely to the property lines. Net of reinstatement premiums of $3.1 million, the net loss attributable to Validus Re was $14.8 million.

85

Non-notable Loss Events
◦
Losses and loss expenses from a single energy non-notable loss event occurring during the nine months ended September 30, 2017 were $18.6 million, or 2.6 percentage points of the loss ratio. Net of reinstatement premiums of $0.6 million, the net loss attributable to Validus Re was $18.0 million.
◦
Losses and loss expenses from four non-notable loss events occurring during the nine months ended September 30, 2016 were as follows:
 
 
Nine Months Ended September 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Validus Re’s share of net losses and loss expenses
 
$
6,890

 
$
15,195

 
$
10,377

 
$
10,349

 
$
42,811

Less: Reinstatement premiums, net
 
(1,836
)
 
—

 
(6,706
)
 
(2,159
)
 
(10,701
)
Net loss attributable to Validus Re
 
$
5,054

 
$
15,195

 
$
3,671

 
$
8,190

 
$
32,110

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake, Jubilee Oil and SpaceX non-notable loss events were $42.8 million, or 6.0 percentage points of the loss ratio. Net of reinstatement premiums of $10.7 million, the net loss attributable to Validus Re from these events was $32.1 million. The losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $22.1 million;
▪Jubilee Oil - marine and specialty lines of $0.7 million and $9.7 million, respectively; and
▪SpaceX - marine lines of $10.3 million
Change in prior accident years
•
Loss reserve development by line of business for the nine months ended September 30, 2017 and 2016 was as follows:
 
 
Nine Months Ended September 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(14,595
)
 
$
(18,834
)
 
$
6,235

 
$
(27,194
)
(Favorable) development on attritional losses
 
(16,019
)
 
(20,013
)
 
(36,790
)
 
(72,822
)
Change in prior accident years
 
$
(30,614
)
 
$
(38,847
)
 
$
(30,555
)
 
$
(100,016
)
The adverse development on event losses in the specialty lines was driven by additional reserves established on the second quarter 2016 non-notable loss event, Jubilee Oil, as a result of an increased industry loss estimate and was fully offset with favorable development in the marine lines relating to losses retroceded on the same event. The favorable development on event losses in the marine lines primarily related to the second quarter 2015 Pemex oil refinery explosion loss event and retrocession recoveries on the second quarter 2016 Jubilee Oil non-notable loss event as noted above.
 
 
Nine Months Ended September 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(29,110
)
 
$
11,576

 
$
1,156

 
$
(16,378
)
(Favorable) development on attritional losses
 
(22,926
)
 
(26,543
)
 
(23,747
)
 
(73,216
)
Change in prior accident years
 
$
(52,036
)
 
$
(14,967
)
 
$
(22,591
)
 
$
(89,594
)
The favorable development on event losses in the property lines was primarily driven by favorable development on the 2015 Tianjin port explosion and Chilean earthquake loss events. The adverse development on event losses in the marine lines was driven by reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015. The net favorable development in the specialty lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the nine months ended September 30, 2017 and 2016 was 74.1% and 43.6%, respectively, an increase of 30.5 percentage points.

86

•
Policy acquisition cost ratio for the nine months ended September 30, 2017 was 18.4% compared to 17.7% for the nine months ended September 30, 2016, an increase of 0.7 percentage points. Excluding the net impact of reinstatement premiums assumed and the acceleration of net unearned premiums ceded from 2017 notable loss events, the policy acquisition cost ratio for the nine months ended September 30, 2017 was 19.8%, an increase of 2.1 percentage points compared to the nine months ended September 30, 2016. The increase primarily related to an increase in the specialty lines as a result of a change in business mix, notably an increase in casualty business which carries higher acquisition costs and was partially offset by a decrease in agriculture business which carries lower acquisition costs.
•
General and administration expenses for the nine months ended September 30, 2017 were $48.6 million compared to $52.6 million for the nine months ended September 30, 2016, a decrease of $4.0 million, or 7.7%. The decrease was primarily driven by a reduction in the bonus accrual during the nine months ended September 30, 2017.

87

Year to Date Results of Operations - Talbot Segment
The following table presents underwriting (loss) income by line of business for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
 
 Property
 
 Marine
 
 Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
230,633

 
$
190,793

 
$
281,109

 
$702,535
 
$
245,714

 
$
222,305

 
$
284,039

 
$
752,058

Reinsurance premiums ceded
 
(80,129
)
 
(22,752
)
 
(51,382
)
 
(154,263
)
 
(66,286
)
 
(26,453
)
 
(44,757
)
 
(137,496
)
Net premiums written
 
150,504

 
168,041

 
229,727

 
548,272

 
179,428

 
195,852

 
239,282

 
614,562

Change in unearned premiums
 
7,967

 
951

 
9,361

 
18,279

 
(6,304
)
 
12,177

 
(13,039
)
 
(7,166
)
Net premiums earned
 
158,471

 
168,992

 
239,088

 
566,551

 
173,124

 
208,029

 
226,243

 
607,396

Other insurance related income
 
 
 
 
 
 
 
1,512

 
 
 
 
 
 
 
389

Total underwriting revenues
 
 
 
 
 
 
 
568,063

 
 
 
 
 
 
 
607,785

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
176,290

 
82,791

 
119,160

 
378,241

 
96,641

 
114,105

 
108,525

 
319,271

Policy acquisition costs
 
28,694

 
41,610

 
58,770

 
129,074

 
27,950

 
53,777

 
52,717

 
134,444

Total underwriting deductions before G&A
 
204,984

 
124,401

 
177,930

 
507,315

 
124,591

 
167,882

 
161,242

 
453,715

Underwriting (loss) income before G&A
 
$
(46,513
)
 
$
44,591

 
$
61,158

 
$
60,748

 
$
48,533

 
$
40,147

 
$
65,001

 
$
154,070

General and administrative expenses
 
 
 
 
 
 
 
97,094

 
 
 
 
 
 
 
109,929

Share compensation expenses
 
 
 
 
 
 
 
8,292

 
 
 
 
 
 
 
9,955

Total underwriting deductions
 
 
 
 
 
 
 
612,701

 
 
 
 
 
 
 
573,599

Underwriting (loss) income
 
 
 
 
 
 
 
$
(44,638
)
 
 
 
 
 
 
 
$
34,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
133,710

 
$
96,295

 
$
126,009

 
$
356,014

 
$
110,258

 
$
109,885

 
$
136,784

 
$
356,927

Current period—notable loss events
 
53,810

 
22,285

 
5,686

 
81,781

 
11,703

 
—

 
—

 
11,703

Current period—non-notable loss events
 
8,750

 
—

 
—

 
8,750

 
5,649

 
14,731

 
—

 
20,380

Change in prior accident years
 
(19,980
)
 
(35,789
)
 
(12,535
)
 
(68,304
)
 
(30,969
)
 
(10,511
)
 
(28,259
)
 
(69,739
)
Total losses and loss expenses
 
$
176,290

 
$
82,791

 
$
119,160

 
$
378,241

 
$
96,641

 
$
114,105

 
$
108,525

 
$
319,271

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
65.3
 %
 
88.1
 %
 
81.7
 %
 
78.0
 %
 
73.0
 %
 
88.1
 %
 
84.2
 %
 
81.7
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
84.3
 %
 
57.0
 %
 
52.6
 %
 
63.0
 %
 
63.6
 %
 
52.8
 %
 
60.5
 %
 
58.8
 %
Current period—notable loss events
 
34.0
 %
 
13.2
 %
 
2.4
 %
 
14.4
 %
 
6.8
 %
 
—
 %
 
—
 %
 
1.9
 %
Current period—non-notable loss events
 
5.5
 %
 
—
 %
 
—
 %
 
1.5
 %
 
3.3
 %
 
7.1
 %
 
—
 %
 
3.4
 %
Change in prior accident years
 
(12.6
)%
 
(21.2
)%
 
(5.2
)%
 
(12.1
)%
 
(17.9
)%
 
(5.0
)%
 
(12.5
)%
 
(11.5
)%
Losses and loss expense ratio
 
111.2
 %
 
49.0
 %
 
49.8
 %
 
66.8
 %
 
55.8
 %
 
54.9
 %
 
48.0
 %
 
52.6
 %
Policy acquisition cost ratio
 
18.1
 %
 
24.6
 %
 
24.6
 %
 
22.8
 %
 
16.1
 %
 
25.9
 %
 
23.3
 %
 
22.1
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
18.5
 %
 
 
 
 
 
 
 
19.7
 %
Expense ratio
 
 
 
 
 
 
 
41.3
 %
 
 
 
 
 
 
 
41.8
 %
Combined ratio
 
 
 
 
 
 
 
108.1
 %
 
 
 
 
 
 
 
94.4
 %
(a)
The general and administrative expense ratio includes share compensation expenses.


88

Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the nine months ended September 30, 2017 were $702.5 million compared to $752.1 million for the nine months ended September 30, 2016, a decrease of $49.5 million, or 6.6%. The decrease in gross premiums written was primarily driven by:
◦
A decrease in the marine lines of $31.5 million, primarily driven by decreases across all classes as a result of reductions in participation and non-renewals on various programs due to the current rate environment;
◦
A decrease in the property lines of $15.1 million, driven by reductions in participation and non-renewals on various programs in the construction and downstream energy and power classes due to the current rate environment; partially offset by new treaty business written; and
◦
A decrease in the specialty lines of $2.9 million, driven by decreases in the contingency and accident and health classes due to adjustments on existing business and the non-renewal of various programs. The decrease was partially offset by an increase in the political and financial lines which was driven by new business written and the timing of renewals.
•
Reinsurance premiums ceded for the nine months ended September 30, 2017 were $154.3 million compared to $137.5 million for the nine months ended September 30, 2016, an increase of $16.8 million, or 12.2%. Excluding the impact of reinstatement premiums ceded from 2017 notable loss events of $9.8 million, reinsurance premiums ceded for the nine months ended September 30, 2017 were $144.5 million, an increase of $7.0 million, or 5.1% compared to the nine months ended September 30, 2016. The increase was primarily driven by new reinsurance coverage purchased following 2017 notable loss events.
•
Net premiums earned for the nine months ended September 30, 2017 were $566.6 million compared to $607.4 million for the nine months ended September 30, 2016, a decrease of $40.8 million, or 6.7%. Excluding the impact of net reinstatement premiums ceded from 2017 notable loss events of $6.8 million, net premiums earned were $573.4 million, a decrease of $34.0 million, or 5.6% compared to the nine months ended September 30, 2016.
•
Losses and loss expenses for the nine months ended September 30, 2017 were $378.2 million compared to $319.3 million for the nine months ended September 30, 2016, an increase of $59.0 million or 18.5%. The increase was driven by an increase in notable loss events and was partially offset by a reduction in losses from non-notable loss events.
Notable Loss Events
◦
Losses and loss expenses incurred during the nine months ended September 30, 2017 from three notable loss events were as follows:
 
 
Nine Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Hurricane
Maria
 
Gross losses and loss expenses
 
$
61,426

 
$
74,301

 
$
29,713

 
$
165,440

Less: Reinsurance recoveries
 
(27,047
)
 
(42,304
)
 
(14,308
)
 
(83,659
)
Talbot’s share of net losses and loss expenses
 
$
34,379

 
$
31,997

 
$
15,405

 
$
81,781

Plus: Net impact on premiums earned (a)
 
789

 
4,623

 
1,389

 
6,801

Net loss attributable to Talbot
 
$
35,168

 
$
36,620

 
$
16,794

 
$
88,582

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded.
Talbot’s share of net losses and loss expenses from Hurricanes Harvey, Irma and Maria was $81.8 million, or 14.4 percentage points of the loss ratio. Inclusive of net reinstatement premiums ceded of $6.8 million, the net loss attributable to Talbot from notable loss events was $88.6 million. The net losses and loss expenses from the notable loss events by line of business were as follows:
◦
Hurricane Harvey - property, marine and specialty lines of $21.8 million, $10.4 million and $2.2 million, respectively;
◦
Hurricane Irma - property, marine and specialty lines of $17.5 million, $11.2 million and $3.3 million, respectively; and
◦
Hurricane Maria - property, marine and specialty lines of $14.5 million, $0.7 million and $0.2 million, respectively;
◦
Losses and loss expenses incurred from a single notable loss event occurring during the nine months ended September 30, 2016, the Canadian Wildfires, were $11.7 million, or 1.9 percentage points of the loss ratio. Net of reinstatement premiums of $0.5 million, the net loss attributable to Talbot was $11.2 million.

89

Non-notable Loss Events
◦
Losses and loss expenses from a single energy non-notable loss event occurring during the nine months ended September 30, 2017 were $8.8 million, or 1.5 percentage points of the loss ratio. Including reinstatement premiums ceded of $1.6 million, the net loss attributable to Talbot was $10.4 million.
◦
Losses and loss expenses from four non-notable loss events occurring during the nine months ended September 30, 2016 were as follows:
 
 
Nine Months Ended September 30, 2016
 
 
Non-notable Loss Events
 
Total
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Talbot’s share of net losses and loss expenses
 
$
5,516

 
$
133

 
$
4,837

 
$
9,894

 
$
20,380

Less: Reinstatement premiums, net
 
(131
)
 
—

 
(961
)
 
919

 
(173
)
Net loss attributable to Talbot
 
$
5,385

 
$
133

 
$
3,876

 
$
10,813

 
$
20,207

Losses and loss expenses from the Texas Hailstorms, Kumamoto Earthquake, Jubilee Oil and SpaceX non-notable loss events were $20.4 million, or 3.4 percentage points of the loss ratio. Net of reinstatement premiums of $0.2 million, the net loss attributable to Talbot from these events was $20.2 million. The losses and loss expenses of the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $5.7 million; and
▪Jubilee Oil and SpaceX - marine lines of $14.7 million.
Change in prior accident years
•
Loss reserve development by line of business for the nine months ended September 30, 2017 and 2016 was as follows:
 
 
Nine Months Ended September 30, 2017
(Dollars in thousands)
 
 Property
 
 Marine
 
Specialty
 
 Total
(Favorable) development on event losses
 
$
(610
)
 
$
(1,342
)
 
$
(932
)
 
$
(2,884
)
(Favorable) development on attritional losses
 
(19,370
)
 
(34,447
)
 
(11,603
)
 
(65,420
)
Change in prior accident years
 
$
(19,980
)
 
$
(35,789
)
 
$
(12,535
)
 
$
(68,304
)
The net favorable development across all lines was primarily driven by favorable development on attritional losses.
 
 
Nine Months Ended September 30, 2016
(Dollars in thousands)
 
 Property
 
 Marine
 
 Specialty
 
 Total
(Favorable) adverse development on event losses
 
$
(9,203
)
 
$
18,597

 
$
(2,066
)
 
$
7,328

(Favorable) development on attritional losses
 
(21,766
)
 
(29,108
)
 
(26,193
)
 
(77,067
)
Change in prior accident years
 
$
(30,969
)
 
$
(10,511
)
 
$
(28,259
)
 
$
(69,739
)
The adverse development on event losses in the marine lines was driven by reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015. The net favorable development across all lines was primarily driven by favorable development on attritional losses.
Loss Ratio
◦
The loss ratio for the nine months ended September 30, 2017 and 2016 was 66.8% and 52.6%, respectively, an increase of 14.2 percentage points.
•
Policy acquisition cost ratio for the nine months ended September 30, 2017 was 22.8% compared to 22.1% for the nine months ended September 30, 2016, an increase of 0.7 percentage points. Excluding the net impact of reinstatement premiums and the acceleration of net unearned premiums ceded from 2017 notable loss events, the policy acquisition cost ratio for the nine months ended September 30, 2017 was 22.5%, an increase of 0.4 percentage points compared to the nine months ended September 30, 2016.
•
General and administration expenses for the nine months ended September 30, 2017 were $97.1 million compared to $109.9 million for the nine months ended September 30, 2016, a decrease of $12.8 million, or 11.7%. The decrease was primarily driven by a reduction in the bonus accrual during the nine months ended September 30, 2017.

90

Year to Date Results of Operations - Western World Segment
The following table presents underwriting (loss) by line of business for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
(Dollars in thousands)
 
 Property
 
Liability
 
Specialty
 
 Total
 
 Property
 
Liability
 
Specialty
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
103,462

 
$
196,128

 
$
160,038

 
$
459,628

 
$
65,401

 
$
170,789

 
$
—

 
$
236,190

Reinsurance premiums ceded
 
(32,821
)
 
(3,285
)
 
(35,899
)
 
(72,005
)
 
(6,395
)
 
(8,952
)
 
—

 
(15,347
)
Net premiums written
 
70,641

 
192,843

 
124,139

 
387,623

 
59,006

 
161,837

 
—

 
220,843

Change in unearned premiums
 
(12,756
)
 
(17,436
)
 
45,448

 
15,256

 
(15,936
)
 
(6,954
)
 
—

 
(22,890
)
Net premiums earned
 
57,885

 
175,407

 
169,587

 
402,879

 
43,070

 
154,883

 
—

 
197,953

Other insurance related income
 
 
 
 
 
 
 
1,566

 
 
 
 
 
 
 
696

Total underwriting revenues
 
 
 
 
 
 
 
404,445

 
 
 
 
 
 
 
198,649

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
55,665

 
125,536

 
148,441

 
329,642

 
28,835

 
100,788

 
—

 
129,623

Policy acquisition costs
 
18,714

 
39,522

 
1,951

 
60,187

 
10,665

 
36,039

 
—

 
46,704

Total underwriting deductions before G&A
 
74,379

 
165,058

 
150,392

 
389,829

 
39,500

 
136,827

 
—

 
176,327

Underwriting (loss) income before G&A
 
$
(16,494
)
 
$
10,349

 
$
19,195

 
$
14,616

 
$
3,570

 
$
18,056

 
$
—

 
$
22,322

General and administrative expenses
 
 
 
 
 
 
 
50,623

 
 
 
 
 
 
 
33,704

Share compensation expenses
 
 
 
 
 
 
 
1,655

 
 
 
 
 
 
 
1,825

Total underwriting deductions
 
 
 
 
 
 
 
442,107

 
 
 
 
 
 
 
211,856

Underwriting (loss)
 
 
 
 
 
 
 
$
(37,662
)
 
 
 
 
 
 
 
$
(13,207
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
48,503

 
$
123,442

 
$
148,441

 
$
320,386

 
$
30,768

 
$
106,676

 
$
—

 
$
137,444

Current period—notable loss events
 
10,000

 
—

 
—

 
10,000

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
—

 
—

 
—

 
—

 
643

 
—

 
—

 
643

Change in prior accident years
 
(2,838
)
 
2,094

 
—

 
(744
)
 
(2,576
)
 
(5,888
)
 
—

 
(8,464
)
Total losses and loss expenses
 
$
55,665

 
$
125,536

 
$
148,441

 
$
329,642

 
$
28,835

 
$
100,788

 
$
—

 
$
129,623

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
68.3
 %
 
98.3
%
 
77.6
%
 
84.3
 %
 
90.2
 %
 
94.8
 %
 
—
%
 
93.5
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
83.8
 %
 
70.4
%
 
87.5
%
 
79.5
 %
 
71.4
 %
 
68.9
 %
 
—
%
 
69.5
 %
Current period—notable loss events
 
17.3
 %
 
—
%
 
—
%
 
2.5
 %
 
—
 %
 
—
 %
 
—
%
 
—
 %
Current period—non-notable loss events
 
—
 %
 
—
%
 
—
%
 
—
 %
 
1.5
 %
 
—
 %
 
—
%
 
0.3
 %
Change in prior accident years
 
(4.9
)%
 
1.2
%
 
—
%
 
(0.2
)%
 
(6.0
)%
 
(3.8
)%
 
—
%
 
(4.3
)%
Losses and loss expense ratio
 
96.2
 %
 
71.6
%
 
87.5
%
 
81.8
 %
 
66.9
 %
 
65.1
 %
 
—
%
 
65.5
 %
Policy acquisition cost ratio
 
32.3
 %
 
22.5
%
 
1.2
%
 
14.9
 %
 
24.8
 %
 
23.3
 %
 
—
%
 
23.6
 %
General and administrative expense ratio (a)
 
 
 
 
 
 
 
13.0
 %
 
 
 
 
 
 
 
17.9
 %
Expense ratio
 
 
 
 
 
 
 
27.9
 %
 
 
 
 
 
 
 
41.5
 %
Combined ratio
 
 
 
 
 
 
 
109.7
 %
 
 
 
 
 
 
 
107.0
 %
(a)
The general and administrative expense ratio includes share compensation expenses.

91

Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Gross premiums written for the nine months ended September 30, 2017 were $459.6 million compared to $236.2 million for the nine months ended September 30, 2016, an increase of $223.4 million, or 94.6%. The increase in gross premiums written was driven by:
◦
An increase in gross premiums written in specialty lines of $160.0 million due to new agriculture business written through and in relation to CRS; and
◦
An increase in the property and liability lines of $38.1 million and $25.3 million, respectively, primarily due to the continued build out of product offerings in the short-tail property lines. The increase in the liability lines was due to an increase in the contract and programs liability lines which was partially offset by decreases resulting from the discontinuation of other underperforming general liability lines.
•
Reinsurance premiums ceded for the nine months ended September 30, 2017 were $72.0 million compared to $15.3 million for the nine months ended September 30, 2016, an increase of $56.7 million. The increase was primarily driven by an increase in ceded agriculture premiums of $35.9 million relating to new business written through CRS, reinstatement premiums ceded of $9.9 million from 2017 notable loss events and new reinsurance coverage purchased following the 2017 notable loss events.
•
Net premiums earned for the nine months ended September 30, 2017 were $402.9 million compared to $198.0 million for the nine months ended September 30, 2016, an increase of $204.9 million, or 103.5%. The increase was primarily driven by the increases in gross premiums written as noted above and was partially offset by an increase in reinsurance premiums ceded which included the impact of reinstatement premiums ceded from 2017 notable loss events.
•
Losses and loss expenses for the nine months ended September 30, 2017 were $329.6 million compared to $129.6 million for the nine months ended September 30, 2016, an increase of $200.0 million or 154.3%. The increase was driven by an increase in the specialty lines due to new agriculture business written through CRS, losses and loss expenses from 2017 notable loss events, an increase in attritional losses and lower favorable development on prior accident years.
Notable Loss Events
◦
Losses and loss expenses incurred during the nine months ended September 30, 2017 from two notable loss events were as follows:
 
 
Nine Months Ended September 30, 2017
 
 
Notable Loss Events
 
Total
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane
Irma
 
Gross losses and loss expenses
 
$
100,725

 
$
12,200

 
$
112,925

Less: Reinsurance recoveries
 
(95,725
)
 
(7,200
)
 
(102,925
)
Western World’s share of net losses and loss expenses
 
$
5,000

 
$
5,000

 
$
10,000

Plus: Net impact on premiums earned (a)
 
9,872

 
—

 
9,872

Net loss attributable to Western World
 
$
14,872

 
$
5,000

 
$
19,872

(a)
Net impact on premiums earned includes reinstatement premiums ceded
Western World’s share of net losses and loss expenses from Hurricanes Harvey and Irma was $10.0 million, or 2.5 percentage points of the loss ratio and related solely to the property lines. Inclusive of reinstatement premiums ceded of $9.9 million, the net loss attributable to Western World from notable loss events was $19.9 million.
Non-notable Loss Events
◦
There were no non-notable loss events occurring during the nine months ended September 30, 2017.
◦
Losses and loss expenses incurred from the Texas Hailstorms non-notable loss event were $0.6 million, or 0.3 percentage points of the loss ratio during the nine months ended September 30, 2016.
Loss Ratio
◦
The loss ratio for the nine months ended September 30, 2017 and 2016 was 81.8% and 65.5%, respectively, an increase of 16.3 percentage points. The loss ratio for the nine months ended September 30, 2017 included notable losses of $10.0 million, specialty losses of $148.4 million arising from new agriculture business written through CRS which is booked at an 87.5% loss ratio and U.S.-based weather losses of $12.4 million, or 3.1 percentage points of the loss ratio, compared to $11.5 million, or 5.8 percentage points of the loss ratio during the nine months ended September 30, 2016.

92

•
Policy acquisition cost ratio for the nine months ended September 30, 2017 was 14.9% compared to 23.6% for the nine months ended September 30, 2016, a decrease of 8.7 percentage points. The decrease was primarily driven by new agriculture business written during the nine months ended September 30, 2017 which carries lower acquisition costs.
•
General and administration expenses for the nine months ended September 30, 2017 were $50.6 million compared to $33.7 million for the nine months ended September 30, 2016, an increase of $16.9 million, or 50.2%. General and administrative expenses for the nine months ended September 30, 2017 included $18.8 million of CRS expenses, of which $2.9 million related to the amortization of intangible assets acquired and was partially offset by a reduction in the bonus accrual during the nine months ended September 30, 2017.

93

Year to Date 2017 Results of Operations - AlphaCat Segment
The following table presents Validus’ share of the AlphaCat segment (loss) income on an asset manager basis for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
Fee revenues
 
 
 
 
Third party
 
$
15,288

 
$
14,843

Related party
 
1,732

 
2,592

Total fee revenues
 
17,020

 
17,435

 
 
 
 
 
Expenses
 
 
 
 
General and administrative expenses
 
10,322

 
7,557

Share compensation expenses
 
348

 
167

Finance expenses
 
107

 
914

Tax expense
 
69

 
—

Foreign exchange losses
 
7

 
17

Total expenses
 
10,853

 
8,655

Income before investment (loss) income from AlphaCat Funds and Sidecars
 
$
6,167

 
$
8,780

 
 
 
 
 
Investment income (loss) from AlphaCat Funds and Sidecars (a)
 
 
AlphaCat Sidecars
 
68

 
593

AlphaCat ILS Funds - Lower Risk (b)
 
(4,063
)
 
6,903

AlphaCat ILS Funds - Higher Risk (b)
 
(16,849
)
 
5,607

BetaCat ILS Funds
 
(291
)
 
2,979

PaCRe
 
—

 
(23
)
Validus' share of investment (loss) income from AlphaCat Funds and Sidecars
 
(21,135
)
 
16,059

Validus' share of AlphaCat (loss) income
 
$
(14,968
)
 
$
24,839

 
 
 
 
 
Supplemental information:
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
66

 
$
(178
)
AlphaCat ILS Funds - Lower Risk (b)
 
117,519

 
112,241

AlphaCat ILS Funds - Higher Risk (b)
 
153,483

 
140,127

AlphaCat Direct (c)
 
26,753

 
18,476

Total
 
$
297,821

 
$
270,666

(a)
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

94

Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Fee revenues earned for the nine months ended September 30, 2017 were $17.0 million compared to $17.4 million during the nine months ended September 30, 2016, a decrease of $0.4 million or 2.4%. Third party fee revenues earned during the nine months ended September 30, 2017 were $15.3 million, compared to $14.8 million, an increase of $0.4 million or 3.0%. The increase in third party fee revenues was primarily driven by an increase in assets under management and was partially offset by a decrease in performance fees as a result of the impact of notable loss events during the nine months ended September 30, 2017.
•
Total expenses for the nine months ended September 30, 2017 were $10.9 million, compared to $8.7 million for the nine months ended September 30, 2016, an increase of $2.2 million or 25.4% The increase was primarily driven by a higher allocation of costs to the AlphaCat segment and a was partially offset by a reduction in the bonus accrual during the nine months ended September 30, 2017.
•
Validus’ share of investment (loss) income from AlphaCat Funds and Sidecars was a loss of $21.1 million for the nine months ended September 30, 2017 compared to income $16.1 million for the nine months ended September 30, 2016, a decrease of $37.2 million or 231.6%. The decrease was driven by the 2017 notable loss events.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
October 1, 2017
 
January 1, 2017
Assets Under Management - Related Party
 
 
 
 
AlphaCat Sidecars
 
$
5,608

 
$
7,729

AlphaCat ILS Funds - Lower Risk
 
75,492

 
124,297

AlphaCat ILS Funds - Higher Risk
 
62,566

 
83,881

AlphaCat Direct (b)
 
—

 
—

BetaCat ILS Funds
 
24,084

 
26,808

Total
 
$
167,750

 
$
242,715

 
 
 
 
 
Assets Under Management - Third Party
 
 
 
 
AlphaCat Sidecars
 
$
20,459

 
$
28,829

AlphaCat ILS Funds - Lower Risk
 
1,317,417

 
1,257,287

AlphaCat ILS Funds - Higher Risk
 
687,674

 
738,813

AlphaCat Direct (b)
 
546,226

 
444,668

BetaCat ILS Funds
 
120,391

 
29,000

Total
 
2,692,167

 
2,498,597

Total Assets Under Management
 
$
2,859,917

 
$
2,741,312

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
AlphaCat’s assets under management were $2.9 billion as at October 1, 2017, compared to $2.7 billion as at January 1, 2017. Third party assets under management were $2.7 billion as at October 1, 2017, compared to $2.5 billion as at January 1, 2017.
During the nine months ended October 1, 2017, a total of $655.2 million of capital was raised, of which $645.2 million was raised from third parties. During the nine months ended October 1, 2017, $298.5 million was returned to investors, of which $229.6 million was returned to third party investors.

95

Year to Date Results of Operations - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
Managed investments
 
 
 
 
Managed net investment income (a)
 
$
111,346

 
$
105,843

Net realized gains on managed investments (a)
 
280

 
5,514

Change in net unrealized gains on managed investments (a)
 
31,232

 
81,782

Income (loss) from investment affiliates
 
15,665

 
(4,249
)
Total managed investment return
 
$
158,523

 
$
188,890

 
 
 
 
 
Corporate expenses
 
 
 
 
General and administrative expenses
 
$
45,563

 
$
52,276

Share compensation expenses
 
12,039

 
12,147

Finance expenses (a)
 
42,462

 
42,637

Dividends on preferred shares
 
10,033

 
2,252

Tax (benefit) expense (a)
 
(7,237
)
 
1,418

Total Corporate expenses
 
$
102,860

 
$
110,730

 
 
 
 
 
Other items
 
 
 
 
Foreign exchange (losses) gains (a)
 
(7,715
)
 
11,628

Other income (loss)
 
303

 
(773
)
Transaction expenses
 
(4,427
)
 
—

Total other items
 
$
(11,839
)
 
$
10,855

Total Corporate and Investments
 
$
43,824

 
$
89,015

(a)
These items exclude the components which are included in the Company’s share of AlphaCat and amounts which are consolidated from VIEs.
Investments
Highlights of our managed investment portfolio for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
Managed net investment income for the nine months ended September 30, 2017 was $111.3 million compared to $105.8 million for the nine months ended September 30, 2016, an increase of $5.5 million, or 5.2%. The increase was primarily driven by a strong performance from the Company’s fixed income funds.
•
Annualized effective yield for the nine months ended September 30, 2017 was 2.28% compared to 2.24% for the nine months ended September 30, 2016, an increase of 4 basis points.
•
Net realized gains on managed investments for the nine months ended September 30, 2017 were $0.3 million compared to $5.5 million for the nine months ended September 30, 2016, an unfavorable movement of $5.2 million or 94.9%.
•
The change in net unrealized gains on managed investments for the nine months ended September 30, 2017 was $31.2 million compared to $81.8 million for the nine months ended September 30, 2016, an unfavorable movement of $50.6 million, or 61.8%. The unfavorable movement was primarily driven by changes in interest rates having less of an impact on the Company’s managed fixed maturity investment portfolio during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
•
Income from investment affiliates for the nine months ended September 30, 2017 was $15.7 million compared to a loss of $4.2 million for the nine months ended September 30, 2016, an increase of $19.9 million. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

96

Corporate Expenses and Other Items
Highlights for the nine months ended September 30, 2017 as compared to 2016 were as follows:
•
General and administrative expenses for the nine months ended September 30, 2017 were $45.6 million compared to $52.3 million for the nine months ended September 30, 2016, a decrease of $6.7 million or 12.8%. The decrease was driven by a reduction in the bonus accrual during the nine months ended September 30, 2017.
•
Share compensation expenses for the nine months ended September 30, 2017 were $12.0 million compared to $12.1 million for the nine months ended September 30, 2016, a decrease of $0.1 million or 0.9%.
•
Finance expenses, excluding the Company’s share of AlphaCat finance expenses from consolidated VIEs, for the nine months ended September 30, 2017 were $42.5 million compared to $42.6 million for the nine months ended September 30, 2016, a decrease of $0.2 million or 0.4%.
•
The Company issued $250.0 million of preferred shares during the nine months ended September 30, 2017 and $150.0 million of preferred shares during the nine months ended September 30, 2016. Dividends paid on preferred shares during the nine months ended September 30, 2017 were $10.0 million compared to $2.3 million during the nine months ended September 30, 2016, an increase of $7.8 million.
•
Tax benefit for the nine months ended September 30, 2017 was $7.2 million compared to tax expense of $1.4 million for the nine months ended September 30, 2016, a favorable movement of $8.7 million. The favorable movement was driven by tax benefits relating to the Company’s U.S. domiciled subsidiaries.
•
Foreign exchange losses for the nine months ended September 30, 2017 were $7.7 million compared to gains of $11.6 million for the nine months ended September 30, 2016, an unfavorable movement of $19.3 million. The unfavorable movement was primarily driven by the Euro and British pound strengthening against the U.S. dollar during the nine months ended September 30, 2017.
•
Transaction expenses for the nine months ended September 30, 2017 were $4.4 million compared to $nil for the nine months ended September 30, 2016 and are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS, which was completed on May 1, 2017.

97

Liquidity and Capital Resources
Investments
Managed investments represent assets governed by the Company’s Investment Policy Statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” to the Consolidated Financial Statements in Part I, Item 1 for further details.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at September 30, 2017 and December 31, 2016 was as follows:
 
Fair Value
 
September 30, 2017
 
December 31, 2016
Managed investments, cash and cash equivalents and restricted cash
 
 
 
Fixed maturities
 
 
 
U.S. government and government agency
$
595,694

 
$
804,126

Non-U.S. government and government agency
290,538

 
240,791

U.S. states, municipalities and political subdivisions
206,667

 
271,830

Agency residential mortgage-backed securities
828,400

 
679,595

Non-agency residential mortgage-backed securities
38,993

 
15,477

U.S. corporate
1,466,739

 
1,534,508

Non-U.S. corporate
392,242

 
410,227

Bank loans
464,464

 
570,399

Asset-backed securities
522,524

 
526,814

Commercial mortgage-backed securities
314,221

 
330,932

Total fixed maturities
5,120,482

 
5,384,699

Short-term investments
258,646

 
228,386

Other investments
 
 
 
Fund of hedge funds
—

 
955

Hedge funds
19,233

 
17,381

Private equity investments
107,230

 
82,627

Fixed income investment funds
285,034

 
249,275

Overseas deposits
55,775

 
50,106

Mutual funds
4,028

 
5,368

Total other investments
471,300

 
405,712

Investment in investment affiliate
92,079

 
100,431

Cash and cash equivalents
961,539

 
415,419

Restricted cash
51,585

 
15,000

Total managed investments, cash and cash equivalents and restricted cash
$
6,955,631

 
$
6,549,647

 
 
 
 
Non-managed investments, cash and cash equivalents and restricted cash
 
 
 
Catastrophe bonds
$
299,484

 
$
158,331

Short-term investments
2,734,600

 
2,567,784

Cash and cash equivalents
4,091

 
4,557

Restricted cash
37,818

 
55,956

Total non-managed investments, cash and cash equivalents and restricted cash
3,075,993

 
2,786,628

Total investments and cash
$
10,031,624

 
$
9,336,275

As at September 30, 2017, the Company’s managed cash and investment portfolio totaled $7.0 billion (December 31, 2016: $6.5 billion). Refer to Note 4, “Investments,” to the Consolidated Financial Statements in Part I, Item 1 for further details related to the Company’s managed investments.
A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s IPS specifically requires

98

certain minimum amounts of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of loss scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.25 years. At September 30, 2017, the average duration of the Company’s managed investment portfolio was 2.04 years (December 31, 2016: 2.26 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and general market conditions.
The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities with ratings. Further limits on asset classes and security types are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At September 30, 2017, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- (December 31, 2016: AA-). For further details related to the investment ratings of the Company’s fixed maturity portfolio, refer to Note 4(a) to the Consolidated Financial Statements, “Investments,” in Part I, Item 1.
The value of the Company’s managed fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, investment funds and private equity investments. For further details on market risks, refer to
Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s managed fixed maturity portfolio:
 
 
September 30, 2017
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
70,805

 
10.4
%
Supranational
 
56,119

 
8.2
%
Province of Ontario
 
32,865

 
4.8
%
Canada
 
24,032

 
3.5
%
United Kingdom
 
23,897

 
3.5
%
Jordan
 
10,044

 
1.5
%
Other (individual jurisdictions below $10,000)
 
72,776

 
10.7
%
Total Managed Non-U.S. Government Securities
 
290,538

 
42.6
%
European Corporate Securities
 
146,835

 
21.5
%
United Kingdom Corporate Securities
 
110,601

 
16.2
%
Other Non-U.S. Corporate Securities
 
134,806

 
19.7
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
682,780

 
100.0
%

99

 
 
December 31, 2016
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
66,886

 
10.3
%
Supranational
 
41,502

 
6.4
%
United Kingdom
 
36,178

 
5.6
%
Canada
 
15,836

 
2.4
%
Province of Ontario
 
12,387

 
1.9
%
Norway
 
12,085

 
1.9
%
France
 
10,360

 
1.6
%
Jordan
 
10,080

 
1.5
%
Other (individual jurisdictions below $10,000)
 
35,477

 
5.4
%
Total Managed Non-U.S. Government Securities
 
240,791

 
37.0
%
European Corporate Securities
 
173,326

 
26.6
%
United Kingdom Corporate Securities
 
96,425

 
14.8
%
Other Non-U.S. Corporate Securities
 
140,476

 
21.6
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
651,018

 
100.0
%
At September 30, 2017, the Company did not have an aggregate exposure to any single issuer of more than 0.9% (December 31, 2016: 1.0%) of total managed investments and cash, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at September 30, 2017 were as follows:
 
 
September 30, 2017
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Managed Investments and Cash
JPMorgan Chase & Co.
 
$
59,650

 
BBB+
 
0.9
%
Citigroup Inc.
 
58,171

 
BBB+
 
0.8
%
Morgan Stanley
 
56,445

 
BBB+
 
0.7
%
Bank of America Corp.
 
50,634

 
BBB+
 
0.7
%
Wells Fargo & Company
 
49,373

 
A
 
0.7
%
Goldman Sachs Group
 
45,835

 
BBB+
 
0.7
%
Bank of New York Mellon Corp.
 
33,147

 
A
 
0.5
%
AT&T Inc.
 
31,882

 
BBB+
 
0.5
%
British American Tobacco Plc.
 
28,416

 
BBB
 
0.4
%
Anheuser-Busch Inbev NV
 
27,761

 
A-
 
0.4
%
Total
 
$
441,314

 
 
 
6.3
%
 
 
December 31, 2016
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Managed Investments and Cash
JPMorgan Chase & Co
 
$
66,827

 
BBB+
 
1.0
%
Citigroup Inc
 
52,737

 
BBB
 
0.8
%
Bank of America Corp
 
50,280

 
BBB+
 
0.8
%
Morgan Stanley
 
48,273

 
BBB+
 
0.7
%
Goldman Sachs Group
 
46,261

 
BBB+
 
0.7
%
Wells Fargo & Company
 
44,596

 
A
 
0.7
%
Anheuser-Busch Inbev NV
 
39,674

 
A-
 
0.6
%
Bank of New York Mellon Corp
 
34,619

 
A
 
0.5
%
HSBC Holdings plc
 
29,411

 
A
 
0.4
%
US Bancorp
 
28,175

 
AA-
 
0.4
%
Total
 
$
440,853

 
 
 
6.6
%
(a)
Issuers exclude government-backed, government-sponsored enterprises and cash and cash equivalents.
(b)
Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.
(c)
Investment ratings are the median of Moody’s, Standard & Poor’s and Fitch. For investments where three ratings are unavailable, the lower of the ratings shall apply. All investment ratings are presented as the Standard & Poor’s equivalent rating.

100

Reserve for Losses and Loss Expenses
At September 30, 2017, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
September 30, 2017
 
December 31, 2016
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
Property
 
$
464,050

 
$
1,946,555

 
$
2,410,605

 
$
390,141

 
$
440,531

 
$
830,672

Marine
 
341,920

 
500,471

 
842,391

 
389,614

 
471,845

 
861,459

Specialty
 
276,713

 
842,250

 
1,118,963

 
259,251

 
473,656

 
732,907

Liability
 
188,897

 
374,781

 
563,678

 
198,766

 
371,391

 
570,157

Total
 
$
1,271,580

 
$
3,664,057

 
$
4,935,637

 
$
1,237,772

 
$
1,757,423

 
$
2,995,195

 
 
September 30, 2017
 
December 31, 2016
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
Property
 
$
370,957

 
$
1,207,268

 
$
1,578,225

 
$
330,213

 
$
392,886

 
$
723,099

Marine
 
279,067

 
378,178

 
657,245

 
337,550

 
369,908

 
707,458

Specialty
 
239,559

 
640,692

 
880,251

 
222,496

 
428,864

 
651,360

Liability
 
174,629

 
310,271

 
484,900

 
182,185

 
300,672

 
482,857

Total
 
$
1,064,212

 
$
2,536,409

 
$
3,600,621

 
$
1,072,444

 
$
1,492,330

 
$
2,564,774






101

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the three months ended September 30, 2017.
 
 
Three Months Ended September 30, 2017
(Dollars in thousands)
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,139,401

 
$
1,393,639

 
$
788,063

 
$
46,483

 
$
(62,395
)
 
$
3,305,191

Loss reserves recoverable
 
(101,926
)
 
(364,658
)
 
(196,018
)
 
—

 
62,395

 
(600,207
)
Net reserves for losses and loss expenses, beginning of period
 
1,037,475

 
1,028,981

 
592,045

 
46,483

 
—

 
2,704,984

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
395,621

 
202,054

 
157,771

 
574,220

 
—

 
1,329,666

Prior years
 
(48,137
)
 
(23,614
)
 
(62
)
 
(3,251
)
 
—

 
(75,064
)
Total net incurred losses and loss expenses
 
347,484

 
178,440

 
157,709

 
570,969

 
—

 
1,254,602

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
 
7,140

 
6,309

 
—

 
292

 
—

 
13,741

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
(74,457
)
 
(37,318
)
 
(79,779
)
 
(58
)
 
—

 
(191,612
)
Prior years
 
(60,532
)
 
(77,476
)
 
(41,615
)
 
(1,471
)
 
—

 
(181,094
)
Total net paid losses
 
(134,989
)
 
(114,794
)
 
(121,394
)
 
(1,529
)
 
—

 
(372,706
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net reserve for losses and loss expenses, end of period
 
1,257,110

 
1,098,936

 
628,360

 
616,215

 
—

 
3,600,621

Loss reserves recoverable
 
589,963

 
430,399

 
317,489

 
60,000

 
(62,835
)
 
1,335,016

Reserve for losses and loss expenses, end of period
 
$
1,847,073

 
$
1,529,335

 
$
945,849

 
$
676,215

 
$
(62,835
)
 
$
4,935,637

For the three months ended September 30, 2017, favorable loss reserve development on prior accident years was $75.1 million, of which $48.1 million related to the Validus Re segment, $23.6 million related to the Talbot segment, $0.1 million related to the Western World segment and $3.3 million related to the AlphaCat segment.


102

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the nine months ended September 30, 2017:

 
 
Nine Months Ended September 30, 2017
(Dollars in thousands)
 
Validus Re
 
Talbot
 
Western World
 
AlphaCat
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,116,753

 
$
1,301,517

 
$
589,500

 
$
48,534

 
$
(61,109
)
 
$
2,995,195

Loss reserves recoverable
 
(98,005
)
 
(306,038
)
 
(87,487
)
 
—

 
61,109

 
(430,421
)
Net reserves for losses and loss expenses, beginning of period
 
1,018,748

 
995,479

 
502,013

 
48,534

 
—

 
2,564,774

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves acquired (a)
 
—

 
—

 
23,753

 
—

 
—

 
23,753

 
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
638,339

 
446,545

 
330,386

 
584,651

 
—

 
1,999,921

Prior years
 
(100,016
)
 
(68,304
)
 
(744
)
 
(10,521
)
 
—

 
(179,585
)
Total net incurred losses and loss expenses
 
538,323

 
378,241

 
329,642

 
574,130

 
—

 
1,820,336

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
 
27,734

 
17,467

 
—

 
1,073

 
—

 
46,274

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
(84,683
)
 
(59,824
)
 
(97,503
)
 
(58
)
 
—

 
(242,068
)
Prior years
 
(243,012
)
 
(232,427
)
 
(129,545
)
 
(7,464
)
 
—

 
(612,448
)
Total net paid losses
 
(327,695
)
 
(292,251
)
 
(227,048
)
 
(7,522
)
 
—

 
(854,516
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net reserves for losses and loss expenses, end of period
 
1,257,110

 
1,098,936

 
628,360

 
616,215

 
—

 
3,600,621

Loss reserves recoverable
 
589,963

 
430,399

 
317,489

 
60,000

 
(62,835
)
 
1,335,016

Reserve for losses and loss expenses, end of period
 
$
1,847,073

 
$
1,529,335

 
$
945,849

 
$
676,215

 
$
(62,835
)
 
$
4,935,637

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
For the nine months ended September 30, 2017, favorable loss reserve development on prior accident years was $179.6 million, of which $100.0 million related to the Validus Re segment, $68.3 million related to the Talbot segment, $0.7 million related to the Western World segment and $10.5 million related to the AlphaCat segment.
For further information regarding the Company’s reserves for losses and loss expenses refer to Note 9, “Reserve for losses and loss expenses,” to the Consolidated Financial Statements in Part I, Item 1. The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned.
The management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company’s actual ultimate net loss may vary materially from these estimates. 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 may be reserved for in the reserve for potential development on notable loss events (“RDE”) and would be included as part of the Company’s overall reserves. As at September 30, 2017 and December 31, 2016 the Company had no RDE.

103

For disclosure purposes, only those notable loss events which have an ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, RDE may be established for a specific accident year.
 
 
 
 
Year Ended December 31, 2016
 
Nine Months Ended September 30, 2017
2016 Notable Loss Events
 
Initial estimate (a)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Canadian Wildfires
 
$
36,915

 
$
(17,265
)
 
$
19,650

 
$
(162
)
 
$
19,488

Hurricane Matthew
 
39,140

 
—

 
39,140

 
5,997

 
45,137

2016 New Zealand Earthquake
 
31,421

 
—

 
31,421

 
—

 
31,421

Total
 
$
107,476

 
$
(17,265
)
 
$
90,211

 
$
5,835

 
$
96,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing
Reserve (c)
 
Paid Loss
 
Closing
Reserve (c)
Canadian Wildfires
 
 
 
$
5,676

 
$
13,974

 
$
3,805

 
$
10,007

Hurricane Matthew
 
 
 
6,712

 
32,428

 
19,743

 
18,682

2016 New Zealand Earthquake
 
 
 
—

 
31,421

 
811

 
30,610

Total
 
 
 
$
12,388

 
$
77,823

 
$
24,359

 
$
59,299

 
 
 
 
 
 
 
 
 
 
 
2017 Notable Loss Events
 
Initial estimate (a)
 
 
 
 
 
 
 
Closing
Estimate (b)
Hurricane Harvey
 
$
247,409

 
 
 


 
 
 
$
247,409

Hurricane Irma
 
518,559

 
 
 
 
 
 
 
518,559

Hurricane Maria
 
160,207

 
 
 


 
 
 
160,207

Total
 
$
926,175

 


 


 


 
$
926,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing Reserve (c)
Hurricane Harvey
 
 
 
 
 


 
$
7,781

 
$
239,628

Hurricane Irma
 
 
 
 
 
 
 
4,543

 
514,016

Hurricane Maria
 
 
 
 
 


 
—

 
160,207

Total
 
 
 


 


 
$
12,324

 
$
913,851

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Excludes impact of movements in foreign exchange rates.
(c)
Closing Reserve for the period equals Closing Estimate for the period less cumulative paid losses (recovery).

Sources of Liquidity
Holding Company Liquidity
Validus Holdings is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Validus Re, Talbot, Western World and AlphaCat segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet its short and long-term objectives.

104

The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Validus Reinsurance, Ltd. (excluding capital supporting FAL) (a) (b)
 
$
3,976,449

 
$
3,720,595

Talbot Holdings, Ltd. (including capital supporting FAL) (b)
 
835,212

 
914,442

Other, net
 
(90,951
)
 
(14,158
)
Redeemable noncontrolling interests in AlphaCat
 
1,133,880

 
1,528,001

Noncontrolling interests in AlphaCat
 
78,947

 
165,977

Total consolidated capitalization
 
5,933,537

 
6,314,857

Senior notes payable
 
(245,513
)
 
(245,362
)
Debentures payable
 
(538,910
)
 
(537,226
)
Redeemable noncontrolling interests in AlphaCat
 
(1,133,880
)
 
(1,528,001
)
Total shareholders’ equity
 
4,015,234

 
4,004,268

Preferred shares (c)
 
(400,000
)
 
(150,000
)
Noncontrolling interests in AlphaCat
 
(78,947
)
 
(165,977
)
Total shareholders’ equity available to Validus common shareholders (c)
 
$
3,536,287

 
$
3,688,291

(a)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $726,268 (December 31, 2016: $639,113) relating to Western World Insurance Group, Inc.
(b)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $618,125 (December 31, 2016: $723,888) which supports Talbot’s FAL. This capital was included in Talbot Holdings, Ltd. (including capital supporting FAL).
(c)
Total shareholders’ equity available to Validus common shareholders excludes the liquidation value of the preferred shares.
Sources and Uses of Cash
The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.
In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.
There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the nine months ended September 30, 2017 and 2016 is provided in the following table:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
Net cash provided by operating activities
 
$
303,882

 
$
254,596

Net cash used in investing activities
 
(270,399
)
 
(669,307
)
Net cash provided by financing activities
 
493,719

 
149,847

Effect of foreign currency rate changes on cash and cash equivalents
 
18,452

 
(14,253
)
Net increase (decrease) in cash and cash equivalents
 
$
545,654

 
$
(279,117
)
Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash provided by operating activities during the nine months ended September 30, 2017 was $303.9 million compared to $254.6 million during the nine months ended September 30, 2016, a favorable movement of $49.3 million. This favorable movement

105

was primarily due to the timing of cash receipts and payments, notably with regard to premiums receivable and losses payable, respectively.
We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.
Investing Activities
Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s investment portfolio. As at September 30, 2017, the Company’s portfolio was composed of fixed income, short-term and other investments and investments in investment affiliates amounting to $9.0 billion or 89.5% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 4, “Investments,” to the Consolidated Financial Statements in Part I, Item 1.
Net cash used in investing activities during the nine months ended September 30, 2017 was $270.4 million compared to $669.3 million for the nine months ended September 30, 2016, a decrease of $398.9 million. The decrease was primarily driven by lower investment purchases and was partially offset by cash used to fund the Company’s acquisition of CRS during the nine months ended September 30, 2017.
Financing Activities
Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, including third party investments in the AlphaCat ILS funds and sidecars, as well as the issuance of notes payable to AlphaCat investors.
Net cash provided by financing activities during the nine months ended September 30, 2017 was $493.7 million compared to $149.8 million during the nine months ended September 30, 2016, an increase of $343.9 million. The increase during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was primarily driven by a decrease in share repurchases of $177.7 million, an increase in net proceeds received on the issuance of preferred shares of $96.8 million and an increase in net third party investments from AlphaCat investors of $86.8 million.

106

Capital Resources
The following table details the Company’s capital position as at September 30, 2017 and December 31, 2016.
(Dollars in thousands)
September 30, 2017
 
December 31, 2016
Senior Notes (a)
$
245,513

 
$
245,362

Junior Subordinated Deferrable Debentures (JSDs) (a)
289,800

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (a)
249,110

 
247,426

Total debt
$
784,423

 
$
782,588

 
 
 
 
Redeemable noncontrolling interests
$
1,133,880

 
$
1,528,001

 
 
 
 
Preferred shares, liquidation value (b)
$
400,000

 
$
150,000

Ordinary shares, capital and surplus available to Validus common shareholders
3,554,717

 
3,711,507

Accumulated other comprehensive loss
(18,430
)
 
(23,216
)
Noncontrolling interests
78,947

 
165,977

Total shareholders’ equity
$
4,015,234

 
$
4,004,268

 
 
 
 
Total capitalization (c)
$
5,933,537

 
$
6,314,857

 
 
 
 
Total capitalization available to Validus (d)
$
4,720,710

 
$
4,620,879

 
 
 
 
Debt to total capitalization
13.2
%
 
12.4
%
Debt (excluding JSDs) to total capitalization
4.1
%
 
3.9
%
Debt and preferred shares to total capitalization
20.0
%
 
14.8
%
 
 
 
 
Debt to total capitalization available to Validus
16.6
%
 
16.9
%
Debt (excluding JSDs) to total capitalization available to Validus
5.2
%
 
5.3
%
Debt and preferred shares to total capitalization available to Validus
25.1
%
 
20.2
%
(a)
Refer to Part I, Item 1, Note 13 to the Consolidated Financial Statements, “Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.
(b)
Refer to Part I, Item 1, Note 11 to the Consolidated Financial Statements, “Share capital,” for further details and discussion on the Company’s preferred shares.
(c)
Total capitalization equals total shareholders’ equity plus redeemable noncontrolling interests and total debt.
(d)
Total capitalization available to Validus equals total capitalization as per (c) less redeemable noncontrolling interests and noncontrolling interests.
Shareholders’ Equity
Shareholders’ equity available to Validus common shareholders at September 30, 2017 was $3.5 billion, compared to $3.7 billion at December 31, 2016. Including $400.0 million of preferred shares at September 30, 2017 (December 31, 2016: $150.0 million), shareholders’ equity available to Validus at September 30, 2017 was $3.9 billion, compared to $3.8 billion at December 31, 2016.
On November 1, 2017, the Company announced a quarterly cash dividend of $0.38 per common share, payable on December 29, 2017 to shareholders of record on December 15, 2017. The Company also announced a quarterly cash dividend of $0.3671875 and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The Series A and Series B Preferred Share dividends are payable on December 15, 2017 to shareholders of record on December 1, 2017.
The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash flows, the Company’s financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. The Company has repurchased 80,860,661 common shares for an aggregate purchase price of $2.7 billion from the inception of the share repurchase program to October 31, 2017. The Company had $301.7 million remaining under its authorized share repurchase program as of October 31, 2017.

107

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.
Debt and Financing Arrangements
For additional information about our debt, including the terms of our financing arrangements, basis for interest rates and debt covenants, refer to Part I, Item 1, Note 13 to the Consolidated Financial Statements, “Debt and financing arrangements” and Part I, Item 1, Note 20 to the Consolidated Financial Statements, “Debt and financing arrangements,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability. As at September 30, 2017 and December 31, 2016, the amount of the Company’s total capitalization owed to third parties as redeemable noncontrolling interests was $1.1 billion and $1.5 billion, respectively.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests. As at September 30, 2017 and December 31, 2016, the amount of the Company’s total capitalization owed to third parties as noncontrolling interests was $78.9 million and $166.0 million, respectively. Refer to Part I, Item I, Notes 6 and 7 to the Consolidated Financial Statements, “Variable Interest Entities,” and “Noncontrolling interests,” respectively, for further details.
Ratings
The following table summarizes the financial strength ratings of the Company and its principal reinsurance and insurance subsidiaries from internationally recognized rating agencies as of November 2, 2017:
 
A.M. Best
 
S&P
 
Moody’s
 
Fitch
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa1
 
A-
Senior debt
bbb
 
BBB+
 
Baa1
 
BBB+
Subordinated debt
bbb-
 
—
 
Baa2
 
BBB
Preferred stock
bb+
 
BBB-
 
Baa3
 
BBB
Outlook on ratings
Positive
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A2
 
A
Outlook on ratings
Stable
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Lloyd’s of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd’s syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Stable
 
Negative
 
—
 
Negative
 
 
 
 
 
 
 
 
Validus Reinsurance (Switzerland) Ltd
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
—
 
—
Outlook on ratings
Stable
 
Stable
 
—
 
—
 
 
 
 
 
 
 
 
Western World Insurance Company
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Stable
 
—
 
—
 
—

108

Recent Accounting Pronouncements
For information relating to relevant recent accounting pronouncements, refer to Part I, Item 1, Note 2 to the Consolidated Financial Statements, “Recent accounting pronouncements,” for further details.
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 the Company’s Consolidated Financial Statements:
•
reserve for losses and loss expenses;
•
premium estimates for business written on a line slip or proportional basis;
•
the valuation of goodwill and intangible assets;
•
reinsurance recoverable balances including the provision for uncollectible amounts; and
•
investment valuation of financial assets.
Critical accounting policies and estimates are discussed further in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. Statements that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, “may”, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statement.
The Company believes that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the insurance and reinsurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;

109

•
the Company’s ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements;
•
general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate;
•
the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to these new businesses;
•
accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;
•
the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;
•
acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;
•
availability and cost of reinsurance and retrocession coverage;
•
the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;
•
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•
changes in domestic or foreign laws or regulations, or their interpretations;
•
changes in accounting principles or the application of such principles by regulators;
•
statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers;
•
termination of or changes in the terms of the U.S. multiple peril crop insurance program and termination or changes to the U.S. Farm Bill, including modifications to the Standard Reinsurance Agreement put in place by the Risk Management Agency of the U.S. Department of Agriculture; and
•
the other factors set forth under Part I Item 1A “Risk Factors” and under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as well as the risk and other factors set forth in the Company’s other filings with the SEC, as well as management’s response to any of the aforementioned factors.
In addition, other general factors could affect the Company’s results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company or our business or operations. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company’s exposure to market risks has not changed materially since December 31, 2016.

110

ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined and in pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.
Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
As at September 30, 2017, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
ITEM 1A. RISK FACTORS
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Quarterly Report on Form 10-Q for the three and six months ended June 30, 2017.

111

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company, from time to time, repurchases its shares in the open market, or in privately negotiated transactions, under its share repurchase program. 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. Share repurchases may also include repurchases by the Company of shares from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. The Company repurchases these shares at their fair market value, as determined by reference to the closing price of its common shares on the day the restricted shares vested. The Company’s share repurchase program may be modified, extended or terminated by its Board of Directors at any time.
The Company repurchased 83,859 common shares during the three months ended September 30, 2017. The Company has, from the inception of its share repurchase program to October 31, 2017, repurchased 80,860,661 common shares for an aggregate purchase price of $2.7 billion. As of October 31, 2017, the Company had $301.7 million remaining under its authorized share repurchase program.
The table below details the following repurchases that were made under the Program through to October 31, 2017:
 
 
Total shares repurchased under publicly announced repurchase program
(Dollars in thousands, except share and per share amounts)
 
Total number of shares repurchased
 
Aggregate Purchase
Price (a)
 
Average Price per Share (a)
 
Approximate dollar value of shares that may yet be purchased under the Program
Cumulative inception-to-date to December 31, 2016
 
80,508,849

 
$
2,704,406

 
$
33.59

 
$
319,995

 
 
 
 
 
 
 
 
 
Cumulative for the three months ended March 31, 2017
 
—

 
—

 
$
—

 
$
319,995

Cumulative for the three months ended June 30, 2017
 
267,953

 
13,996

 
$
52.23

 
$
305,999

 
 
 
 
 
 
 
 
 
July 2017
 
52,721

 
2,737

 
$
51.91

 
$
303,262

August 2017
 
31,138

 
1,610

 
$
51.71

 
$
301,652

September 2017
 
—

 
—

 
$
—

 
$
301,652

Cumulative for the three months ended September 30, 2017
 
83,859

 
4,347

 
$
51.84

 
 
Cumulative inception-to-date to September 30, 2017
 
80,860,661

 
$
2,722,749

 
$
33.67

 
$
301,652

 
 
 
 
 
 
 
 
 
Repurchases made subsequent to quarter-end:
 
 
 
 
 
 
 
 
October 1 - October 31, 2017
 
—

 
$
—

 
$
—

 
$
301,652

(a)
Share transactions are on a trade date basis through October 31, 2017 and are inclusive of commissions. Average share price is rounded to two decimal places.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.

112

ITEM 5. OTHER INFORMATION
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.
Certain of the Company’s non-U.S. subsidiaries provide global marine hull, war, cargo and liability policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that certain of its policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Since these policies insure multiple voyages and fleets containing multiple ships, the Company is unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.
Certain of the Company’s other non-U.S. subsidiaries have policies that provide excess of loss reinsurance coverage for various risks worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified by certain of its cedants that they either provide or intend to provide aviation spare parts coverage or marine and hull, war and related coverage for certain risks involving Iran. As the reinsurance coverage provided to these cedants covers multiple global risks and multiple insureds, the Company is unable to attribute gross revenues and net profits from such policy to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.


113

ITEM 6. EXHIBITS
Exhibit
Description
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 101.1 INS*
XBRL Instance Document
 
 
Exhibit 101.SCH*
XBRL Taxonomy Extension Schema Document
 
 
Exhibit 101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
Exhibit 101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
 
 
Exhibit 101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
Exhibit 101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
*Filed herewith

114

SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VALIDUS HOLDINGS, LTD.
 
 
(Registrant)
 
 
 
Date:
November 2, 2017
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
November 2, 2017
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

115